EXHIBIT 13

Rule 14a-3

Annual Report

PRESIDENT’S MESSAGE

To Our Shareholders:

The year of 2011 was marked by progress and improved levels of profitability, tempered by continuing high levels of loan losses and credit-related expenses, declining real estate values, and a Michigan economy that continues to struggle despite some notable improvements.  I would like to briefly review our 2011 earnings results, outline the principal factors that will impact 2012 earnings, provide our view regarding capital and future cash dividends, and discuss the bank regulatory environment which is having a substantial impact on our industry.

2011 Earnings

Net income available to our common shareholders improved from $2.1 million in 2010 to over $3.9 million in 2011, an increase of over 85%.  However, our most important measure of financial success is our Return on Average Shareholders' Equity which was 3.75% in 2011 - a level well below both acceptable and our historical rate of return.  High levels of loan losses, legal fees, and expenses related to collecting, securing, maintaining, and disposing of collateral obtained in satisfaction of borrower's obligations continue to heavily impact earnings.  On a positive note, the level of non-performing assets appears to have stabilized, and if so, many of these costs should decline in the future.

Despite the low level of interest rates we have focused on building our core deposit base throughout the company, and we are pleased to report that deposits which we consider core now provide over 98% of our funding.  Core deposits through most interest rate cycles are provided at lower cost to the company than wholesale funding sources, but more importantly are stable and provide us with opportunities to expand our banking relationship with customers who live and work in our local communities.  This lower cost funding improved our net interest margin to 4.06% in 2011 versus the 2010 margin of 3.87%.

Our banks all remain very well capitalized with ample funding and human resources to expand lending.  However, our loan portfolios have continued to shrink due to limited good quality lending opportunities within our markets combined with the desire of many of our customers to reduce debt.  We are well-positioned to expand our lending as the Michigan economy improves.

2012 Outlook

The Michigan economy appears to be improving: unemployment rates are still high but have been declining; our level of problem loans appears to be stabilizing; low interest rates on home mortgages continue to drive re-financing activity which is very profitable for us; and even though our net interest margin may decline until loan demand improves, the margin has been stable and strong.  All of these factors bode well for our ability to post improved earnings in 2012.  However, we remain concerned that real estate values have continued to fall; that increased energy prices may severely dampen Michigan's economic recovery; and that pending regulatory changes will impact both our revenue sources and our cost structure.  Overall, we are cautiously optimistic about 2012, but recognize that we will need to remain vigilant on all of these issues to be successful.

Capital and Dividends

Our capital ratios continue to build as earnings improve, all of our banks maintain capital well above the regulatory minimum, and we have begun to share our improved performance with our shareholders through the additional dividend declared in January based on 2011 full year earnings. Our intention is to continue to build capital to the point that we will be able to redeem at least half of the outstanding preferred shares by the time the dividend on our preferred stock increases from 5% to 9%, which will occur in early 2014. Doing so will negate any drag on net income available to common shareholders that otherwise would have resulted from an increased preferred dividend.   We intend to maintain our quarterly cash dividend on common stock at $0.01 during 2012, and will again consider a special dividend when the full year 2012 results are available.

Regulatory Issues

The federal government’s Dodd-Frank banking reform legislation, which contains the "Durbin Amendment", will profoundly impact the banking business in the future.  While the target of that law was to protect the system from the "too big to fail" financial providers, there will be substantial new regulations to which the community banking industry will be subject.  These new, and yet to be implemented, regulations will place new compliance demands and costs on our company - which we anticipate will most likely offset the savings on FDIC insurance we achieved through Dodd-Frank.  Additionally, the "Durbin Amendment" is altering the methodology by which fees for electronic services are shared between merchants and banks, which will most likely reduce our future income and place more stress on our cost structure.  These issues, combined with a more stringent inspection process from banking examiners, have led us to re-evaluate the value of maintaining each separate bank charter.  In 2011, we merged our smallest unit, Firstbank - St. Johns, into Firstbank - Alma, which reduced overhead, but perhaps more importantly, eliminated five (5) annual regulatory examinations.   Effective regulation is important to our industry, but regulatory issues are playing a much larger role today.  I want to assure our shareholders that we actively assess the risks and costs of our multi-bank structure to ensure that we are representing all of our shareholders, customers, communities, and staff members to the best of our abilities.

In Conclusion

Our company is really a reflection of all of the team members who comprise our staff.  We are fortunate to have so many fine and capable individuals who have devoted their time, efforts, and careers to our company, our customers, our communities and our shareholders.  I thank each and every one of them for their hard work, dedication, and commitment to Firstbank Corporation.

Finally, I would like to thank our customers and communities for entrusting us with their business and for allowing us to serve them.  We stand strong and ready to serve their future needs.  Additionally, the confidence and patience displayed by our shareholders as we have worked through difficult times has been very reassuring.  Your support, encouragement, and investment in Firstbank Corporation are greatly appreciated.

Sincerely,

Thomas R. Sullivan

President & Chief Executive Officer

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2011

Annual Report

This 2011 Annual Report contains audited financial statements and a detailed financial review.  This is Firstbank Corporation’s 2011 Annual Report to Shareholders.

The report presents information concerning the business and financial results of Firstbank Corporation in a format and level of detail that we believe shareholders will find useful and informative.  Shareholders who would like to receive even more detailed information than that contained in this 2011 Annual Report are invited to request our Annual Report on Form 10-K.

Firstbank Corporation’s Form 10-K Annual Report filed with the Securities and Exchange Commission will be provided to any shareholder, without charge, upon written request.  Requests should be addressed to Samuel G. Stone, Chief Financial Officer, Firstbank Corporation, 311 Woodworth Avenue, P.O. Box 1029, Alma, Michigan 48801-6029.  Firstbank Corporation's Form 10-K Annual Report may also be accessed through our website www.firstbankmi.com

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FINANCIAL HIGHLIGHTS Firstbank Corporation
(In Thousands of Dollars, Except per Share Data)
For the year:	2011			2010			2009			2008			2007
Interest income		$67,644			$72,382			$74,686			$82,191			$80,862
Net interest income		54,672			51,492			48,747			46,838			42,645
Provision for loan losses		13,337			13,344			14,671			8,256			2,014
Non-interest income		9,675			11,829			15,409			3,990			9,720
Non-interest expense		43,553			44,702			45,750			42,915			39,074
Net income		5,623			3,763			2,691			719			8,386
Net income available to common		3,944			2,084			1,151			719			8,386
At year end:
Total assets		1,485,299			1,458,343			1,482,356			1,425,340			1,365,739
Total earning assets		1,351,099			1,332,662			1,342,530			1,292,647			1,229,564
Loans		984,258			1,032,975			1,122,185			1,159,632			1,123,654
Deposits		1,220,542			1,183,783			1,149,063			1,046,914			1,011,392
Other borrowings		102,325			118,070			175,756			251,275			217,910
Common shareholders’ equity		122,585			115,665			114,173			114,983			118,611
Total shareholders’ equity		155,377			148,428			146,880			114,983			118,611
Average balances:
Total assets		1,489,737			1,488,673			1,433,555			1,396,357			1,223,470
Total earning assets		1,364,139			1,351,872			1,300,354			1,264,425			1,118,569
Loans		1,004,599			1,077,718			1,135,868			1,145,849			1,010,863
Deposits		1,224,638			1,170,195			1,064,567			1,024,305			915,077
Other borrowings		104,010			160,547			207,614			236,095			182,740
Common shareholders’ equity		117,287			114,207			114,424			118,494			107,537
Total shareholders’ equity		150,065			146,948			144,583			118,494			107,537
Per common share: (1)
Basic earnings		$0.50			$0.27			$0.15			$0.10			$1.21
Diluted earnings		$0.50			$0.27			$0.15			$0.10			$1.21
Cash dividends		$0.04			$0.08			$0.40			$0.90			$0.90
Common shareholders’ equity		$15.53			$14.82			$14.77			$15.44			$16.01
Financial ratios:
Return on average assets		0.38	%		0.25	%		0.19	%		0.05	%		0.69	%
Return on average total equity		3.75	%		2.56	%		1.86	%		0.61	%		7.80	%
Average equity to average assets		10.07	%		9.87	%		10.09	%		8.38	%		8.79	%
Average common equity to average assets		7.87	%		7.67	%		7.98	%		8.38	%		8.79	%
Dividend payout ratio on common stock		5.58	%		16.47	%		113.80	%		935.73	%		74.49	%

(1) All per share amounts are adjusted for stock dividends.

The Company’s Form 10-K Annual Report filed with the Securities and Exchange Commission will be provided to any shareholder, without charge, upon written request. Requests should be addressed to: Samuel G. Stone, Chief Financial Officer, Firstbank Corporation, 311 Woodworth Avenue, P.O. Box 1029, Alma, Michigan 48801-6029 The Company’s Form 10-K may also be viewed through our web site at www.firstbankmi.com.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The purpose of this section of the annual report is to provide a narrative discussion about Firstbank Corporation’s financial condition and results of operations. Please refer to the consolidated financial statements and the selected financial data presented in this report in addition to the following discussion and analysis. We also encourage you to read our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission.

RESULTS OF OPERATIONS

Highlights

Firstbank Corporation (“”We” or the Company”) had net income of $5.6 million for 2011 compared with $3.8 million in 2010, an increase of $1.8 million, or 49%. After payment of dividends on preferred stock, net income available to common shareholders was $3.9 million for 2011 compared with $2.1 million in 2010, an increase of $1.8 million or 86%. Core banking activities continued to provide a solid basis for earnings as net interest income increased $3.2 million from 2010. Our loan loss provision was unchanged from 2010 at $13.3 million in 2011.

Mortgage gains decreased $2.2 million from the prior year as changes in regulations and higher rates slowed originations in the first half of the year, then, as rates fell to record lows in the second half of the year volume increased providing a higher level of gain on sale in the second half of the year.  Gains on the sale of mortgage loans were $3.7 million in 2011 compared with $5.9 million in 2010.

We achieved a return on average assets of 0.38%, 0.25%, and 0.19% for 2011, 2010, and 2009, respectively. Total average assets increased $1.1 million in 2011, $55 million in 2010, and $37 million in 2009. Basic and diluted earnings per share were $0.50, $0.27, and $.15 for the same time periods. Return on equity was 3.8% in 2011, 2.56% in 2010, and 1.86% in 2009. While these profitability measures do not meet with our expectations, the industry as a whole and the Michigan banking industry in particular are experiencing similar and even more substantial impacts on their performance.

Net Interest Income

Our core business is earning interest on loans and securities while paying interest on deposits and borrowings. In response to an economic recession in the United States, the Federal Reserve maintained overnight interest rates at historically low levels of 0.00% to 0.25% for a third consecutive year. While these low short term rates allowed us to lower the rates we pay on certain deposit products, it also reduces the rates we are able to earn on variable rate loan products and rates charged on renewing fixed rate loans. The net interest spread, the difference between the interest rates charged on earning assets and the rate paid on interest bearing liabilities, grew steadily in each quarter of the year from 3.69% in the fourth quarter of 2010 to 3.88% in the fourth quarter of 2011. As a result, our net interest margin increased, ending the year with a net interest margin of 4.06% compared with 3.87% in 2010, and 3.82% in 2009. During 2011, our average loan to average deposit ratio was 82%, lower than the 92% in 2010 and 117% in 2009. The decreasing ratio is a result of both our efforts in attracting core deposits and shrinking loan balances. We maintain capital and funding capacity and a desire to expand lending; however, demand for quality loans is in our local economies remains very soft at this time.

Net interest income increased in 2011 by $3.2 million as a combination of the higher net interest margin and a higher level of average earning assets improved earnings. Average interest earning assets increased $12 million from 2010 levels. The increase in interest earning assets was largely a result of higher balances in the investment portfolio, which rose by $84 million on average, more than offsetting a $65 million decrease in average loan balances. A critical task of management is to price assets and liabilities so that the spread between the interest earned on assets and the interest paid on liabilities is maximized while maintaining acceptable levels of risk. While interest rates on earning assets and interest bearing liabilities are subject to market forces, in general and in the short run, we can exert more control over deposit rates than earning asset rates. However, competitive forces and the need to retain and grow deposits as a funding source place limitations on the degree of control over deposit rates. Average interest bearing liabilities decreased $31 million during the year, and the average rate paid on these liabilities fell by 65 basis points resulting in a decrease to interest expense of $7.9 million.

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The following table presents a summary of net interest income for 2011, 2010, and 2009.

Summary of Consolidated Net Interest Income

	Year Ended December 31, 2011								Year Ended December 31, 2010								Year Ended December 31, 2009
(In Thousands of Dollars)	Average Balance			Interest		Average Rate			Average Balance			Interest		Average Rate			Average Balance			Interest		Average Rate
Average Assets
Interest Earning Assets:
Taxable securities		$264,657			$4,808		1.82	%		$190,114			$3,647		1.92	%		$98,413			$2,743		2.79	%
Tax exempt securities(1)		40,273			1,719		4.27	%		30,249			1,751		5.79	%		31,700			2,010		6.34	%
Total Securities		304,930			6,527		2.14	%		220,363			5,398		2.45	%		130,113			4,753		3.66	%
Loans(1) (2)		981,976			61,545		6.27	%		1,047,149			67,545		6.45	%		1,112,810			70,696		6.35	%
Federal funds sold		642			1		0.16	%		451			1		0.23	%		134			0		0.25	%
Interest bearing deposits		76,591			253		0.33	%		83,909			205		0.25	%		57,297			136		0.24	%
Total Earning Assets		1,364,139			68,326		5.01	%		1,351,872			73,149		5.41	%		1,300,354			75,585		5.82	%
Nonaccrual loans		22,623								30,569								23,057
Less allowance for loan loss		(21,650	)							(20,952	)							(15,481	)
Cash and due from banks		26,867								26,342								25,060
Other non-earning assets		97,758								100,842								100,565
Total Assets		$1,489,737								$1,488,673								$1,433,555
Average Liabilities
Interest Bearing Liabilities:
Demand		$319,053			$1,306		0.41	%		$274,570			$1,736		0.64	%		$236,087			1,660		0.71	%
Savings		235,422			1,032		0.44	%		194,855			1,122		0.58	%		163,249			974		0.60	%
Time		470,314			8,554		1.82	%		529,947			12,877		2.43	%		511,269			16,208		3.17	%
Total Deposits		1,024,789			10,892		1.06	%		999,372			15,735		1.58	%		910,605			18,842		2.07	%
Federal funds purchased and repurchase agreements		43,848			83		0.19	%		40,341			96		0.24	%		45,070			136		0.31	%
FHLB advances and notes payable		24,078			802		3.33	%		84,122			3,562		4.24	%		126,460			5,350		4.23	%
Subordinated debentures		36,084			1,197		3.32	%		36,084			1,497		4.15	%		36,084			1,611		4.47	%
Total Interest Bearing Liabilities		1,128,799			12,974		1.15	%		1,159,919			20,890		1.80	%		1,118,219			25,939		2.32	%
Demand Deposits		199,849								170,823								153,962
Total Funds		1,328,648								1,330,742								1,272,181
Other Non-Interest Bearing
Liabilities		11,024								10,983								16,791
Total Liabilities		1,339,672								1,341,725								1,288,972
Average Shareholders’ Equity		150,065								146,948								144,583
Total Liabilities and Shareholders’ Equity		$1,489,737								$1,488,673								$1,433,555
Net Interest Income(1)					$55,352								$52,259								$49,646
Rate Spread(1)							3.86	%							3.61	%							3.50	%
Net Interest Margin (percent of Average earning assets) (1)							4.06	%							3.87	%							3.82	%

(1)  Presented on a fully taxable equivalent basis using a federal income tax rate of 35% for all periods presented.

(2)  Interest income includes amortization of loan fees of $1.8 million, $1.9 million, and $1.8 million for 2011, 2010, and 2009, respectively. Uncollected interest on nonaccrual loans is not included.

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The table below provides an analysis of the changes in interest income and interest expense due to volume and rate:

	2010/2011 Change in Interest Due to: (1)									2009/2010 Change in Interest Due to: (1)
	Average Volume			Average Rate			Net Change			Average Volume			Average Rate			Net Change
	(In Thousands of Dollars)
Interest Income:
Securities
Taxable Securities(2)		$1,465			$(223	)		$1,242			$1,948			$(1,014	)		$934
Tax-exempt Securities		495			(527	)		(32	)		(62	)		507			445
Total Securities		1,960			(750	)		1,210			1,886			(507	)		1,379
Loans(2)		(4,122	)		(1,878	)		(6,000	)		(4,218	)		1,233			(2,985	)
Federal Funds Sold		0			0			0			1			0			1
Interest Bearing Deposits		(32	)		(1	)		(33	)		65			4			69
Total Interest Income on Earning Assets		(2,194	)		(2,629	)		(4,823	)		(2,266	)		730			(1,536	)
Interest Expense:
Deposits
Interest Paying Demand		250			(680	)		(430	)		254			(178	)		76
Savings		208			(298	)		(90	)		183			(35	)		148
Time		(1,336	)		(2,987	)		(4,323	)		573			(3,904	)		(3,331	)
Total Deposits		(878	)		(3,965	)		(4,843	)		1,010			(4,117	)		(3,107	)
Federal Funds Purchased and Securities
Sold under Agreements to Repurchase		8			(21	)		(13	)		(13	)		(27	)		(40	)
FHLB and Other Notes Payable		(2,125	)		(635	)		(2,760	)		(1,793	)		5			(1,788	)
Subordinated Debentures		0			(300	)		(300	)		0			(114	)		(114	)
Total Interest Expense on Liabilities		(2,995	)		(4,921	)		(7,916	)		(796	)		(4,253	)		(5,049	)
Net Interest Income		$801			$2,292			$3,093			$(1,470	)		$4,983			$3,513

(1) Changes in volume/rate have been allocated between the volume and rate variances on the basis of the ratio that the volume and rate variances bear to each other.

(2) Interest is presented on a fully taxable equivalent basis using a federal income tax rate of 35%.

In 2011, the average rate realized on earning assets was 5.01%, a decrease of 40 basis points from the 2010 results of 5.41%, and 81 basis points lower than the 5.82% realized in 2009. In 2008, in reaction to a weakening economy and a credit crisis in the financial markets, the Federal Reserve aggressively lowered rates by 2.25% between January and April bringing the prime rate down to 5.00%. After a six month pause in the rate reduction strategy, the Federal Reserve then lowered rates by another 1.75% in the fourth quarter with the prime rate settling in at 3.25% at year end 2008, where it has remained through the end of 2011. Current language from the Federal Reserve indicates their intention to maintain this level of rates until late 2014. In addition, the Federal Reserve has also begun its announced strategy to purchase longer term bonds in the open market in an effort to keep longer term rates low.

Average loans outstanding decreased $65 million in 2011 when compared with 2010. As of December 31, 2011, approximately 23% of the loan portfolio was comprised of variable rate instruments, the same mix as the end of 2010. The remaining 77% of the loan portfolio is made up of fixed rate loans that do not re-price until maturity. Of the fixed rate loans approximately $102 million, or 13% of the fixed rate loan portfolio, matures within twelve months and are subject to rate adjustments at maturity. At year end 2011, 89% of our variable rate commercial loan portfolio was protected by a floor compared with 85% at the end of 2010.

During 2010 and 2011 maturing securities in the investment portfolio were replaced with securities of comparable quality bearing generally lower yields. As a result, maturing securities ran off from the investment portfolio at higher rates than comparable current offerings, decreasing the overall investment portfolio yield from 3.66% in 2009 to 2.45% in 2010 and 2.14% in 2011.

Average total interest bearing deposits for the year increased $25 million. The average rate paid on interest bearing liabilities was 1.15% in 2011, compared to 1.80% in 2010, and 2.32% in 2009. Deposit rates decreased during 2010 and 2011 with the soft economy. Average rates paid on time deposits decreased 61 basis points in 2011 compared with 2010 and 135 basis points compared with 2009, as new and renewing deposits re-priced to lower rates. Rates on checking and savings deposits also decreased in 2011, falling 23 basis points and 14 basis points, respectively. These same rates were seven basis points and two basis points lower in 2010 than they had been in 2009.

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Brokered CDs are more sensitive to changes in the interest rate than CDs offered in local markets and have been issued with original maturities ranging from three months to two years. The average balance of brokered CDs in 2011 was $15 million, compared with $11 million in 2010 and $19 million in 2009. These CDs carried an average interest rate of 0.88% in 2011 compared with 1.05% in 2010, and 2.18% in 2009.

We fund a portion of our loan portfolio with borrowings from the Federal Home Loan Bank (FHLB) and notes payable. During 2011, the average outstanding balance of FHLB advances and notes payable decreased $60 million and the year-end balance decreased $21 million when compared with 2010 balances. While FHLB borrowings are one method of funding loans when core deposits are not available, the cost is typically higher than our core deposit costs. As core deposit funding has increased and loan demand decreased, we have been able to reduce our reliance on this source of funding. The 2011 average rate paid for Federal Home Loan Bank advances and notes payable was 3.33% , 90 basis points lower than 2010’s rate of 4.24%. Borrowings from the Federal Home Loan Bank carry significant prepayment penalties that act as a deterrent to early repayment.

In July of 2007, we issued $15.5 million in subordinated debentures to fund a portion of the ICNB acquisition. That issuance was split evenly between debentures that carry a fixed rate of 6.566% for five years, at which time they will convert to a variable interest rate of 90 day LIBOR plus 1.35%, and variable rate debentures that carry a rate of 90 day LIBOR plus 1.35%. The variable rate debentures re-price quarterly. In January of 2006, we issued $10.3 million in subordinated debentures that carried a fixed rate of 6.049% for five years. During 2011 this issuance converted to a variable interest rate of 90 day LIBOR plus 1.27%. In October of 2004, we issued $10.3 million in subordinated debentures, at a variable interest rate of 90 day LIBOR plus 1.99% which re-price on a quarterly basis. The average rate paid on all subordinated debentures during 2011 was 3.32% compared with 4.15% and 4.47% in 2010 and 2009, respectively.

We utilize short term borrowing, made up of Federal Funds Purchased and Repurchase Agreements as a source of liquidity and to balance our daily cash needs. Average short term borrowed funds increased by $3.5 million when 2011 is compared with 2010.

The 2011 interest rate spread of 3.86% is 25 basis points higher than the 2010 spread of 3.61%, and 36 basis points higher than the 2009 spread of 3.50%. Tax equivalent net interest income increased $3 million in 2011 as an increase in total average earning assets of $12 million and a 19 basis point improvement in the net interest margin spurred the increase. The net interest margin of 4.06% for 2011 was 19 basis points above 2010 and 24 basis points better than in 2009. The increase in the rate spread in 2011 was the result of rates on average earning assets decreasing 40 basis points while the average cost of interest bearing liabilities decreased 65 basis points. The 19 basis point increase in the net interest margin was a result of a higher percentage of earning assets being funded by non interest bearing liabilities and equity as well as the management of rates on both loans and deposits during the year. Average earning assets represented 91% of total average assets in all three years 2009 through 2011.

Provision for Loan Losses

In accordance with accounting standards, we allocate a portion of the allowance to loans that we determine to be impaired. We analyze other loans and current market conditions on a pool basis in order to arrive at the appropriate allowance for loan losses. If a loan for which allocations had been established pays off, or the risk of loss is otherwise reduced, we reverse those specific allocations. The methodology described above resulted in a provision for loan losses in 2011 of $13.3 million, compared with $13.4 million in 2010, and $14.7 million in 2009. These provision charges, which exceed historical norms, were incurred as the struggling Michigan economy resulted in new problem loans for which either allocated reserves were established for probable losses, or loans were charged off during the year.

During 2011, we had recoveries of previously charged off loans totaling $1.2 million, and favorable outcomes on certain previously identified problem loans, reducing the amount of provision expense needed, while deterioration of certain loans to problem status and charge offs of $14.9 million increased the amount of provision expense needed. In 2010, we had recoveries of previously charged off loans totaling $0.9 million and favorable outcomes on certain previously identified problem loans, reducing the amount of provision expense needed, while deterioration of certain loans to problem status and charge offs of $12.0 million increased the amount of provision expense needed.

At December 31, 2011, the allowance for loan losses as a percent of total loans was 2.14% compared to 2.06% and 1.70% at December 31, 2010, and December 31, 2009, respectively. Total nonperforming loans were 4.27% of ending loans at December 31, 2011, compared to 3.60% and 3.65% at the two previous year ends. The increase in the ratio in 2011 was due to an increase of $9 million in restructured loans, a decrease in nonaccrual loans of $3 million and a decrease in 90 day past due loans of $0.2 million. All loans reported as restructured are current or less than 90 days past due and conforming to the agreed upon restructured terms of the loan. The decrease in the nonperforming ratio in 2010 was due to an decrease in nonaccrual loans of $4.3 million, a reduction in 90 day past due loans of $2.6 million, net of an increase in restructured loans of $3.1 million.

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Net charged off loans totaled $13.7 million in 2011 compared to $11.0 million in 2010, and $10.2 million in 2009. Net charged off loans as a percent of average loans were 1.37% in 2011, 1.02% in 2010, and 0.90% in 2009. Charge offs of $3.9 million in 2011 had specific reserves established in a prior year, while in 2010 and 2009, $2.4 million and $2.9 million, respectively; of specific allowance allocations had been set aside at the end of the prior year. Provision expense did not need to be increased to cover those previously identified losses.

Non-interest Income

Non-interest income decreased by $2.2 million when 2011 is compared with 2010. Affecting the results in 2011 were gains on the sale of mortgages, which were down $2.2 million, and decreased revenue from our armored car business, which was down $174,000, (sold at the end of the first quarter of 2010). The sale of our armored car and title insurance businesses had negligible impact on net income. Other non-interest income increased $198,000 primarily due to improve results in the sale of other real estate owned properties during the year. Non-interest income decreased $3.6 million when 2010 is compared with 2009, as gains on the sale of mortgage loans decreased $1.6 million, securities gains were $1.3 million lower, revenue from our armored car business decreased by $577,000, and title insurance fees were lower by $626,000. The lower revenue from the armored car business was due to the sale of the business at the end of the first quarter of 2010, while the lower title insurance fees were due to a partial sale of the business that resulted in that revenue being excluded from our consolidated results.

In 2011 we recorded $48,000 in securities losses compared with a $7,000 gain in 2010. The losses resulted from routine securities transactions during the year. We recorded a charge of $150,000 for other than temporary impairment associated with the valuation of one trust preferred security in 2010 and $150,000 on two securities in 2009. In 2009, after the market recovered, we also sold several auction rate securities which had become impaired in the prior year after the market recovered, netting $1.8 million in gains on these securities. We recognized $11,000 of losses on valuation changes in our trading account securities portfolio during 2011 following losses of $3,000 in 2010 and $213,000 in losses in 2009.

Gains on the sale of mortgage loans decreased $2.2 million during 2011 after peaking at $7.6 million in 2009 and falling to $5.9 million in 2010. In 2009, a low rate environment spurred a mortgage re-finance boom that lasted most of the year, generating the higher gains, while allowing customers to reduce their monthly mortgage payments. In 2010, rates began the year at a level that did not result in very much refinance or purchase activity, but by mid-year rates had fallen again to a point where refinance activity picked up considerably. In 2011, new regulatory requirements and onerous conditions placed on the sale of loans in the secondary market resulted in lower gains on the sale of loans. By midyear, rates had fallen once again to the point where refinance activity picked up and the second half of the year generated higher gains.

When a mortgage is refinanced or pre-paid, capitalized mortgage servicing rights relating to that mortgage are written off, with the write off amounts included in the amortization cost of servicing rights. Refinance activity in 2011 was lower than 2010 which was also somewhat lower than in 2009, resulting in fewer mortgage loan prepayments, and therefore lower amortization cost of serving rights. Income from servicing loans sold in the secondary market increased by $173,000 over 2010 which had increase $182,000 from 2009, causing overall mortgage servicing income to be higher by $185,000 in 2011 when compared with 2010 and $375,000 when 2010 is compared with 2009. In 2011, mortgage servicing income (servicing income net of amortization of capitalized serving rights) was a positive $89,000 compared with a negative $96,000 in 2010 and a negative $471,000 in 2009.

Deposit account service charges were basically unchanged, holding in a range of $4.5 million to $4.6 million across the 2009 to 2011 time frame. Courier and cash delivery services income decreased $174,000 due to the sale of our armored car company at the end of the first quarter of 2010. This revenue line had been down $577,000 from 2009 due to the sale.

Gains and losses from securities activities resulted in a pre-tax loss of $48,000 in 2011 compared with $7,000 gain in 2010 and a $1.3 million gain in 2009. Trading account securities had a loss of $11,000 in the year, compared with a gain of $3,000 in 2010 and a loss of $213,000 loss in 2009. The available for sale portfolio had a loss of $37,000 in 2011 compared with a gain of $3,000 in 2010 and a gain of $1.5 million in 2009. The gains in 2009 were a result of recoveries of losses recorded in the prior year on money market preferred securities. At year end 2010, all of the money market preferred securities mentioned above were sold, except for 34,000 shares of Freddie Mac preferred stock, which we continue to hold.

We reduced our stake in the title insurance business, through a reorganization of our 100% owned 1st Title Insurance Agency, whereby we now have ownership of 48% in the business. As a result of the reduction to below 50% we no longer consolidate the results of this business into our financial statements beginning in November 2009. While we include our ownership percentage of net income, the full title insurance revenue and expense is no longer reflected in our results beginning in 2010. We also exited our courier and cash delivery services business through the sale of our 1st Armored subsidiary in March of 2010. This business had seen declining revenue in recent years due to increased market competition. As a result, revenue from this line item was reduced by $577,000 in 2010, but had minimal effect on our bottom line.

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Other non-interest income was $1.5 million, compared with $1.3 million in 2010 and $1.1 million in 2009. The improvement in this line from 2010 was primarily due to a $259,000 improvement in the gain or loss recognized when disposing of property acquired in foreclosure. Gains on the sale of Other Real Estate Owned were $95,000 in 2011, compared with losses of $354,000 in 2010, and $336,000 in 2009. The increase in this line item from 2009 levels was largely due to a negative impact on revenue of our deferred compensation plan, which was a negative $133,000 in 2009. Accounting rules required us to report the earnings or loss of the plan assets through non-interest income, with an offsetting entry to non-interest expense for the same amount. There is, therefore, no impact on net income.

Non-interest Expense

Salary and employee benefits expenses increased $374,000 or 1.8% when 2011 compared with 2010. Within the salary and benefit line, salaries declined $224,000 and benefits increased $598,000. The decline in salaries was in part due to a year over year reduction of $105,000 relating to the sale of our armored car business, with the remaining $119,000 coming from reductions in staffing within our banking business. The increase in benefits cost was driven by a $639,000 increase in group insurance. We maintain a self insured group insurance plan, for which our 2010 claims experience provided an unusually low cost. As 2011 claims returned to a more normal level we experienced a rebound in the expense associated with providing the plan. Salary and employee benefits expenses decreased $1.4 million or 6.3% when 2010 compared with 2009. Cost cutting efforts in the company, a reduction of $526,000 associated with the sale of the armored car business and no longer consolidating the title insurance business, and $690,000 lower costs associated with employee benefits, primarily group insurance costs, which declined $683,000 in 2010, all contributed to the lower overall cost. We employed 435 full time equivalent employees at year end of 2011 the same as year end of 2010, which had been down from 466 at year end 2009.

Occupancy and equipment costs decreased $244,000 in 2011 compared with 2010 primarily due to a $216,000 decrease in depreciation expense. Occupancy and equipment costs decreased $693,000 in 2010 compared with 2009 as several large assets reached full depreciation and were not replaced resulting in $397,000 lower depreciation expense, and a savings of $125,000 was realized from exiting the armored car and title insurance businesses.

FDIC expense decreased to $1.6 million in 2011, in part due to a new method of assessing premiums to banks that was instituted mid way through 2011. FDIC expense was $2.1 million in 2010 and $2.4 million in 2009. Based on the new assessment methodology, we estimate our annual cost for FDIC insurance to be $1.3 million to $1.4 million depending on asset growth.

Amortization of intangibles was $698,000 in 2011, compared with $796,000 in 2010, a reduction of $98,000. Amortization expense in 2009 was $934,000. The year over year reduction in the costs are primarily due to the accelerated amortization method used to expense core deposit premiums from recent acquisitions.

Expenses for outside professional services in 2011 increased $58,000 compared with 2010 after increasing $210,000 from 2009. A substantial portion of the increases in both 2011 and 2010, were due to the reclassification of armored car expense which was previously done in-house. Advertising and special promotion expense was $1.4 million, down $259,000, or15.4%, in 2011 following an increase in 2010 of $96,000 as we increased our marketing efforts. Although we have increased our marketing and advertising in 2011 and 2010, the changes in this expense category are dominated by special promotion expense which is related to mortgage refinance volumes.

Other real estate costs declined modestly, reaching $3.2 million in 2011 compared with $3.5 million in 2010 as the cost of carrying more properties for longer time frames and write downs due to decreasing property values cause the level of these expenses to be elevated in both 2011 and 2010. Other real estate costs were $2.4 million in 2009.

Other non-interest expense decreased to $8.9 million from $9.0 in 2010 and was $8.9 million in 2009. The most significant reason for the increase in 2010 was higher loan collection costs. Absent cost cutting efforts within the company, these costs would have risen more substantially.

Federal Income Tax

In 2011 we had federal tax expense of $1.8 million on pre-tax earnings of $7.5 million, resulting in an effective tax rate of 25%. In 2010 we had federal tax expense of $1.5 million on pre-tax earnings of $5.3 million, resulting in an effective tax rate of 29%. Included in the 2010 federal tax expense was $485,000 relating to a non-cash charge associated with deferred taxes on security losses realized in prior years that we do not expect to be able to claim. Excluding the deferred tax charge, the effective tax rate for 2010 would have been 19%. In 2009 we had federal tax expense of $1.0 million based on pre-tax earnings of $3.7 million, resulting in an effective tax rate of 28%. At year end we determined that we were unlikely to be able to claim certain deferred tax benefits associated with capital losses on securities recorded in 2008. As a result, we recorded a non-cash charge of $659,000 to our federal income tax expense and established a valuation allowance against our deferred tax assets. Absent this charge, our effective tax rate for 2009 would have been 10%. This level of effective tax rate was lower than normal due to a low level of earnings before taxes in relation to non-taxable earnings.

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Summary of significant costs relating to asset quality and deposit insurance

Management believes that understanding certain costs which it believes are elevated in the current business environment may benefit the readers of this report in evaluating potential changes to our future results. The following table illustrates certain costs which management believes are either currently at an elevated level and will return to historically lower levels once the economic environment improves, or are non-recurring and are not expected to continue.

(In Thousands of Dollars)
	2011			2010			2009			2008				2007*
Provision for loan losses	$	13,337		$	13,344		$	14,671		$	8,256		$	2,014
Securities (gains)/losses		48			(7	)		(1,321	)		5,917			751
Loss/(gain) on sale of OREO properties		95			354			336			184			(9	)
FDIC expense		698			2,098			2,430			562			562
Legal fees		814			822			734			412			233
Other real estate operating costs		894			1,206			1,116			613			193
Other real estate valuation write-downs		2,259			2,307			1,275			615			194
Tax benefit on items listed at 34%		(6,169	)		(6,842	)		(6,542	)		(5,630	)		(1,339	)
Total of items net of tax benefit		11,976			13,282			12,699			10,929			2,599
Deferred tax write off		0			484			659			0			0
Total	$	11,976		$	13,766		$	13,358		$	10,929		$	2,599

* ICNB was acquired July 1, 2007 so only expenses associated with the last six months of the year are included in the table.

FINANCIAL CONDITION

Total assets at December 31, 2011 were $1.485 billion, compared with December 31, 2010 total assets of $1.458 billion, an increase of $27 million, or 1.9%. A general lack of loan demand by qualified borrowers has resulted in an overall shrinking loan portfolio, while increases in core deposits have provided an opportunity to run off higher cost wholesale funds. Total portfolio loans decreased 4.6% at December 31, 2011 compared with the balance at the previous year end. Commercial loans decreased $8 million, or 4.8%. Residential mortgage loans decreased $13 million, or 3.6%, while commercial real estate loans decreased $9 million, or 2.4%. Construction loans were $21 million lower at December 31, 2011, decreasing 25.6%, from the previous year end. Mortgages serviced for others were reduced by $17 million, or 2.7%.

(In Thousands of Dollars)
	2011		2010		Change			% Change
Commercial	$	156,551	$	164,413	$	(7,862	)		(4.8	)%
Commercial real estate		365,029		373,996		(8,967	)		(2.4	)%
Residential real estate		340,060		352,652		(12,592	)		(3.6	)%
Construction		60,280		81,016		(20,736	)		(25.6	)%
Consumer		61,989		59,543		2,446			4.1	%
Total	$	983,909	$	1,031,620	$	(47,711	)		(4.6	)%
Mortgages serviced for others	$	605,628	$	622,700	$	(17,072	)		(2.74	)%

Total securities available for sale increased $86 million, or 34%. The increase was mainly due to investment of our excess available funds at better rates than is available in shorter term assets. Securities available for sale were 23% of total assets at year end 2011, compared with 18% at the end of 2010. As loan demand picks up in the future, it is expected that the securities portfolio will decline providing the funding for that growth.

Premises and equipment decreased $344,000 after recognized depreciation of $2.1 million. New investments in facilities in our Cadillac, Dewitt and Mt. Pleasant markets, along with routine updates in other facilities and equipment, offset most of the decline caused by depreciation in the year.

Total deposits increased at the end of 2011 to $1.221 billion, an increase of 3.1%, compared to $1.184 billion at year end 2010. Non-interest bearing demand deposit balances increased from the end of 2010, by $30 million to $215 million at year end 2011, an increase of 16.0%. Interest bearing demand deposits increased by $47 million, or 16.0%, and savings account balances increased $31 million, or 14.9%.

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At the end of 2011, we had $18 million of wholesale CDs on the balance sheet, compared with $8 million at the end of 2010. Wholesale CDs, which contain both brokered CDs and internet CDs, typically carry a higher interest rate than locally generated CDs of similar duration but are available in large dollar pools which results in lower operational cost than smaller dollar local deposits. Large dollar CDs which are generated internally and placed in our CDARS program to provide FDIC insurance for our customers are included in the wholesale CD total, but typically carry lower rates than other wholesale CDs. At the end of 2011, all $18 million of wholesale CDs were part of our CDARS program, compared with $7 million at the end of 2010. Including wholesale CDs, total time deposits decreased $71 million, or 14.4% compared with the end of 2010. Excluding the wholesale CDs, time deposits would have decreased from $487 million in 2010 to $405 million in 2011, a decrease of 16.7%. Time deposits were allowed to run off as we re-priced higher rate CD’s to the current low rate market because of reduced funding needs in the loan portfolio. Much of the declining balances in CDs moved to other deposit categories during the year as customers preferred the liquidity of these products over the marginal increase in rate that could be achieved from locking in their money for a longer term.

Securities sold under agreements to repurchase and federal funds purchased increased by $5 million due to normal balance fluctuations of our customers. Over the past two years, management has focused its branch network on increasing core deposit growth. As a result of the growth in these core deposits and a reduction in the size of our loan portfolio, we have been able to reduce our reliance on Federal Home Loan Bank advance funding to support the loan portfolio. Federal Home Loan Bank advances decreased by $21 million at December 31, 2011 compared with December 31, 2010. The decrease in Federal Home Loan Bank advances was possible due to core deposit growth exceeding loan demand.

Asset Quality

The Michigan and national economies began to show signs of recovery during 2010 and made additional progress in 2011. Michigan’s unemployment rate has improved from its low point and is heading in an improving direction. Most banks in our state have shown significant losses associated with bad loans and we were not immune from the impact that the economy had on businesses and consumers. Our net charged off loans increased in each of the three years 2009 through 2011, as customers that had been able to sustain their payments in better times succumbed to the economic conditions. Lack of sales within development projects and declines in the value of those developments caused us to increase both our charge offs and our nonaccrual loan balances during 2009 and 2010 before subsiding in 2011. Our nonaccrual loan balances remained elevated at year end, but were down 14% from year end 2010. The total of nonaccrual, restructured, and 90 day past due lines increased 14% from year end 2010 due to an increased number of restructured loans. The increase in restructured loans is due to our willingness to work with our customers who are experiencing financial difficulty to manage through the current downturn. While the restructured loan balance often is included in a nonperforming loans total, these loans might be better characterized as underperforming. All loans reported as restructured are in compliance with the renegotiated terms of the loan. Renegotiated terms on a loan may include such things as a reduced interest rate, extending the amortization period for the loan, or in some cases a partial forgiveness of the balance due on the loan. We continue to be vigilant at monitoring these loan relationships and working through these issues with our customers.

Loans are carried at an amount which management believes will be collected. A balance considered not collectible is charged against (reduction of) the allowance for loan losses. In 2011, net charged off loans were $13.7 million, compared with $11.0 million in 2010 and $10.2 million in 2009. Net charged off loans as a percentage of average loans were 1.37% in 2011 compared with 1.05% and 0.90% in 2010 and 2009. Charge offs continued to be a problem, most notably at our newest affiliate banks, however, charged off loans remain elevated in all five of our banks.

The total of nonaccrual loans, loans 90 days past due and any troubled loans where borrowers are under financial stress and the terms have been renegotiated to below normal market terms was $42.3 million and $37.1 million at December 31, 2011 and 2010, respectively. Total nonaccrual loans were $23.0 million at December 31, 2011, compared to $26.4 million at the end of 2010. The elevated level in nonaccrual loans for both years was largely due to economic stresses being felt in Michigan and across the nation. Borrowers which had previously been able to meet their loan obligations during better times have become unable to do so in the current environment. Loans past due 90 days or more decreased to $0.4 million at year end 2011 compared with $0.6 million at the end of 2010, in part because of loans moving to nonaccrual status during the year. Impaired loans are commercial loans for which we believe it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. The average investment in impaired loans was $34.1 million during 2011 compared to $30.9 million during 2010. At year end, impaired loans were $41.9 million compared with $36.4 million at December 31, 2010. In the current environment, we have deemed it necessary to work with some customers to restructure loans to reduce the probability of loss to the bank. At the end of the year, we had $18.9 million of restructured loans compared with $10.1 million at year end 2010.

The allowance for loan losses was $0.4 million, or 2%, lower at year end 2011 compared with 2010. This decrease was a result of provision expense of $13.3 million versus charged off loans of $14.9 million during the year, and recoveries of prior charged off loans of $1.2 million. Through our analysis process, we determined that it was not necessary to provide as much for future probable losses as we realized in net charge offs this year due to several factors. We record provision for loan loss expense when loans for which losses are likely, are identified. For loans which carry an allocated allowance, no expense is recognized at the time of charge off to the extent that allowance has been previously provided. See the discussion of loan loss provision expense previously presented for additional information. The allowance for loan losses represents 2.14% of outstanding loans at the end of 2011, compared with 2.08% at December 31, 2010.

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We maintain the allowance at a level which we believe adequately provides for losses inherent in the loan portfolio. Such losses are estimated by a variety of factors, including specific examination of certain borrowing relationships and consideration of historical losses incurred on certain types of credits. We focus on early identification of problem credits through ongoing reviews by management, loan personnel and an outside loan review specialist. Please refer to Note 6 of the Notes to Consolidated Financial Statements for more information on impaired loans.

LIQUIDITY AND INTEREST RATE SENSITIVITY

Asset liability management aids us in achieving reasonable and predictable earnings and liquidity while maintaining a balance between interest earning assets and interest bearing liabilities. We maintain a complex interest rate risk modeling system which assists management in understanding the impact of changes in rates, both in the past, and forecasted. This information allows management to make adjustment as to its view toward certain products with regard to rate and term in order to minimize our interest rate risk in a changing rate environment.

Cash provided from operations during the year was $28.9 million while investing activities used 46.1million in cash. Financing activities provided an additional $19.5 million in cash resulting in a total increase in our cash position of $2.3 million. For additional details on these activities see the Consolidated Statement of Cashflows on page 27 of this report.

Liquidity management involves the ability to meet the cash flow requirements of our customers. These customers may be either borrowers needing to meet their credit requirements or depositors wanting to withdraw funds. Management of interest rate sensitivity attempts to manage the level of varying net interest margins and to achieve consistent net interest income through periods of changing interest rates. The net interest margin was 4.06% in 2011 compared to 3.87% in 2010. The yield on the securities portfolio fell 121 basis points, from 2.45% in 2010 to 2.14% in 2011. Loan yields decreased 18 basis points, to 6.27% in 2011, from 6.45% in 2010. Deposit costs decreased 52 basis points from 1.58% in 2010 to 1.06% in 2011. Loan demand was muted through the year as customers were cautious about the economy, resulting in a decrease of $65 million in average loan balances. Average total earning assets increased $12 million as average securities investment increased $84 million and average interest bearing deposits with banks decreased $7 million. The interest bearing deposit balances at banks is primarily due to excess balances held at the Federal Reserve.

Full year average balances in time deposits decreased $60 million compared with the prior year, while average demand and savings balances increased $85 million. The use of Federal Home Loan Bank advances continued to become a less significant source of longer term funding, with average advances decreasing from the prior year by $60 million as we utilized increased core deposits to reduce these borrowings.

A decision to decrease deposit rates immediately affects most rates paid, other than time deposits, and has an immediate positive impact on net interest margin. With the exception of variable rate loans, an increase in loan rates does not affect the yield until a new loan is made or an existing loan is renewed. Likewise, an increase in deposit rates raises our cost of funds, and a decrease in loan rates only effects variable rate loans, until such time as a new fixed rate loan is generated, or re-finances. The prime rate is used to price virtually our entire variable rate loan portfolio. Therefore, reductions in the prime rate immediately have a negative effect on earnings, while an increase in prime rate has a positive effect on earnings.

The prime rate, was held constant at 3.25% throughout all of 2010 and 2011 as the Federal Reserve maintained its target fed funds rate at a range of 0 to 0.25% for both years in an effort to get the economy growing again. Prime rate began 2008 at 7.25%, was reduced seven times during the year, and once more in January of 2009 by a cumulative 4.00%. With the prime rate at 3.25%, the Federal Reserve has made no changes to the prime rate through the end of 2011 and has indicated that rates will remain at these levels through sometime in 2014.

The principal sources of liquidity for us are maturing securities, federal funds purchased or sold, loan payments by borrowers, investment securities, loans held for sale, deposit or deposit equivalent growth and Federal Home Loan Bank advances. Securities maturing or re-pricing within one year at December 31, 2011 were $151 million, compared to $92 million at December 31, 2010. Total investments available for sale were $342 million at year end 2011, an increase of $86 million from the prior year end.

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The table below shows the interest sensitivity gaps for five different intervals as of December 31, 2011. Deposits that do not have a fixed maturity date are shown as immediately re-pricing according to reporting conventions.

	Maturity or Re-Pricing Frequency
				(In Millions of Dollars)
	1 Day			2 Days through 3 Months			4 Months through 12 Months			13 Months through 5 Years		More than 5 Years
Interest Earning Assets:
Loans	$	220.8		$	48.8		$	135.6		$	480.7	$	98.7
Securities		12.8			46.0			92.2			164.2		27.6
Other earning assets		39.0			0.2			1.3			2.9		7.2
Total		272.6			95.0			229.1			647.8		133.5
Interest Bearing Liabilities:
Deposits		591.0			74.9			187.4			160.6		0
Other interest bearing liabilities		50 .0			34.9			12.6			4.7		3.4
Total		641.0			109.8			200.0			165.3		3.4
Interest Sensitivity Gap	$	(368.4	)	$	(14.8	)	$	29.1		$	482.5	$	130.1
Cumulative Gap	$	(368.4	)	$	(383.8	)	$	(354.7	)	$	127.8	$	257.9

For the one day interval, maturities of interest bearing liabilities exceed those of interest earning assets by $369 million. Included in the one day maturity classification are $591 million in savings and checking accounts which are contractually available to our customers immediately, but in practice, function as core deposits with considerably longer maturities. In the two day through the five year time frame, interest sensitive assets exceed interest sensitive liabilities by $497 million, resulting in a cumulative position of interest sensitive assets exceeding interest sensitive liabilities by $128 million through five years. For the time period greater than five years, the analysis shows an asset sensitive position, such that cumulatively, interest sensitive assets exceed interest sensitive liabilities by $258 million.

Showing a negative cumulative gap through the twelve month period does not necessarily result in a corresponding increase in net interest income during a falling rate environment. In practice, deposit rates do not change as rapidly as would be indicated by the contractual availability of deposit balances to customers. Also, changes in the steepness of the yield curve can cause differing effects on different products. Some of the benefit associated with lower deposit rates is mitigated by rate decreases on variable rate loans, renewals of fixed rate loans to lower rates, and customer prepayments. Conversely, showing a positive cumulative gap through the twelve month period does not necessarily result in a corresponding increase in net interest income during a rising rate environment for similar reasons.

Interest rate sensitivity varies with different types of interest earning assets and interest bearing liabilities. Overnight investments, on which rates change daily, and loans tied to the prime rate differ considerably from long term investment securities and fixed rate loans. Time deposits over $100,000 and money market accounts are more interest sensitive than regular savings accounts. Comparison of the re-pricing intervals of interest earning assets to interest bearing liabilities is a measure of the interest sensitivity gap, not interest rate risk. Balancing interest rate sensitivity is a continual challenge in a changing rate environment. We use a sophisticated computer program to perform analysis of interest rate risk, assist with our asset and liability management, and measure the expected impact of interest rate changes and our sensitivity to those changes.

CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABLILITES, AND OFF-BALANCE SHEET ARRANGEMENTS

We have various financial obligations, including contractual obligations and commitments that may require future cash payments.

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The following table presents, as of December 31, 2011, significant fixed and determinable contractual obligations to third parties by payment date.

(In Thousands of Dollars)
Contractual Obligation	One Year or less		1 - 3 Years		3 - 5 Years		More than 5 Years		Total
Time Deposits	$	261,196	$	116,974	$	44,874	$	49	$	423,093
Federal Funds Borrowed and
Repurchase Agreements		46,784		0		0		0		46,784
Long Term Debt		7,776		1,500		3,962		6,219		19,457
Subordinated Debt		0		0		0		36,084		36,084
Operating Leases		459		542		214		0		1,215

Further discussion of the nature of each obligation is included in Notes 7, 10, 11, 12, and 13 to the consolidated financial statements.

Our operating lease obligations represent short and long-term lease and rental payments, primarily for facilities, and to a lesser degree for certain software and data processing equipment.

The following table details the amounts and expected maturities of significant commitments as of December 31, 2011.

(In Thousands of Dollars)
	One Year		One to		Three to		Over
	Or Less		Three Years		Five Years		Five Years		Total
Credit:
Commercial real estate	$	76,266	$	8,144	$	8,963	$	4,125	$	97,498
Residential real estate		903		60		53		26,312		27,328
Construction loans		1,899		717		2,814		228		5,658
Revolving home equity and credit card lines		5,812		17,693		13,170		9,902		46,577
Other		10,520		3,296		4,261		855		18,932
Commercial standby letters of credit		14,265		2,541		0		3,080		19,886
Total Commitments	$	109,665	$	32,451	$	29,261	$	44,502	$	215,879

Commitments to extend credit, including loan commitments, standby letters of credit and commercial letters of credit, do not necessarily represent future cash requirements in that these commitments often expire without being drawn upon.  Further discussion of these commitments is included in Note 18 to the consolidated financial statements.

CRITICAL ACCOUNTING POLICIES

Certain of our accounting policies are important to the portrayal of our 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. Our significant accounting policies are discussed in detail in Note 1 of the Notes to the Consolidated Financial Statements.

We view critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. We believe that our critical accounting policies include determining the allowance for loan losses, determining the fair value of securities and other financial instruments, including possible impairment of goodwill and other assets, the valuation of mortgage servicing rights, determination of purchase accounting adjustments, determination of the fair value of other real estate owned, and estimating state and federal tax liabilities.

Allowance for Loan Losses The allowance for loan losses is a valuation allowance for probable incurred credit losses. We use a quantitative and qualitative methodology for analyzing 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 weightings and industry and regional factors and trends as they affect the banks’ portfolios. The consideration of exposures to industries potentially most affected by current risks in the economic and political environment, and the review of potential risks in certain credits that either are, or are not, considered part of the non-performing loan category contributed to the establishment of the allowance levels at each bank. Loan losses are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed.

14

Loans are reviewed on an ongoing basis for impairment. A loan is impaired when it is probable that we will be unable to collect all amounts due substantially in accordance with the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected cash flows discounted at the loan’s effective interest rate or, as a practical expedient, the fair value of collateral if the loan is collateral dependent. Loans considered to be impaired are reduced to the present value of expected future cash flow or to the fair value of collateral by allocating a portion of the allowance for loan losses to such loans. If these allocations cause an increase in the calculated allowance for loan losses, such increase is reported as provision for loan loss expense. Increases or decreases in carrying value due to changes in estimates of future payments or the passage of time are reported as reductions or increases in the provision for loan losses.

Smaller balance homogeneous loans such as residential first mortgage loans secured by one to four family residences, residential construction, automobile, home equity and second mortgage loans, are collectively evaluated for impairment. Commercial loans and first mortgage loans secured by other properties are evaluated individually for impairment. When credit analysis of the borrower’s operating results and financial condition indicates the underlying ability of the borrower’s business activity is not sufficient to generate adequate cash flow to service the business’ cash needs, including our loans to the borrower, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 90 days or less. Commercial loans are rated on a scale of 1 to 10, with grades 1 to 4 being satisfactory grades, 5 and 6 special attention or watch, 7 substandard, 8 impaired, 9 doubtful, and 10 loss. Loans graded 6 through 9 are considered for impairment. Loans are generally moved to nonaccrual status when 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Fair Value of Securities and Other Financial Instruments Securities available for sale consist of bonds and notes which might be sold prior to maturity due to changes in interest rate, prepayment risks, yield and availability of alternative investments, liquidity needs or other factors. Securities classified as available for sale are reported at their fair value. Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers: (1) the length of time and extent that fair value has been less than carrying value; (2) the financial condition and near term prospects of the issuer; and (3) our ability and intent to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.

Market values for securities available for sale are obtained from outside sources and applied to individual securities within the portfolio. The difference between the amortized cost and the current market value of securities is recorded as a valuation adjustment and reported in other comprehensive income.

Valuation of Mortgage Servicing Rights Mortgage servicing rights are recognized as assets for the allocated value of retained servicing rights on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues.

We utilize a discounted cash flow model to determine the value of our servicing rights. The valuation model utilizes mortgage prepayment speeds, the remaining life of the mortgage pool, delinquency rates, our cost to service loans, and other factors to determine the cash flow that we will receive from serving each grouping of loans. These cash flows are then discounted based on current interest rate assumptions to arrive at the fair value of the right to service those loans. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans classified by interest rates. Any impairment of a grouping is reported as a valuation allowance.

Acquisition Intangibles  Generally accepted accounting principles require us to determine the fair value of all of the assets and liabilities of an acquired entity, and record their fair value on the date of acquisition. We employ a variety of means in determination of the fair value, including the use of discounted cash flow analysis, market comparisons, and projected future revenue streams. For certain items that we believe we have the appropriate expertise to determine the fair value, we may choose to use our own calculation of the value. In other cases, where the value is not easily determined, we consult with outside parties to determine the fair value of the asset or liability. Once valuations have been adjusted, the net difference between the price paid for the acquired company and the value of its balance sheet is recorded as goodwill. Due to the unique market conditions this year and our lower level of earnings, we contracted to have a goodwill impairment analysis completed in the third quarter. The results of that analysis indicated that no impairment existed at that time. See Note 8 to the financial statements for further information on the valuation results.

Uncertain Tax Liabilities Uncertain tax liabilities, primarily Michigan business tax liabilities, are estimated based on our exposures to interpretation of the applicable tax codes. We estimate our contingent tax liabilities by determining the amount of income that may be at risk of an adverse interpretation by taxing authorities on specific issues, multiplied by our effective tax rate, to determine our gross exposure. Once this exposure is determined, an estimate of the probability of an adverse adjustment being required is determined and applied to the gross liability to determine the contingent tax reserve. While changes to Michigan business taxes are likely, they are not expected to affect tax liabilities relating to prior periods.

15

Recent Accounting Pronouncements

Troubled Debt Restructurings - In April 2011, the FASB issued ASU 2011-02 “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring”, which provides additional guidance to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The amendments in this update were effective for the Corporation for the year ended December 31, 2011. The impact of the adoption of this standard was resulted in additional loans being identified as restructured as disclosed in Footnote 8 - Loans.

Fair Value - In May 2011, the FASB issued ASU 2011-04 “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. “The standard clarifies existing fair value measurement and disclosure requirements and changes existing principles and disclosure guidance. Clarifications were made to the relevancy of the highest and best use valuation concept, measurement of an instrument classified in an entity’s shareholder’s equity and disclosure of quantitative information about the unobservable inputs for level 3 fair value measurements. Changes to existing principles and disclosures included measurement of financial instruments managed within a portfolio, the application of premiums and discounts in fair value measurement, and additional disclosures related to fair value measurements. The updated guidance and requirements are effective for financial statements issued for the first interim or annual period beginning after December 15, 2011, and should be applied prospectively. The adoption of this standard is not expected to have a material effect on the Company’s financial statement.

Comprehensive Income - In June 2011, the FASB issued ASU 2011-05 “Presentation of Comprehensive Income”. This standard requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but continuous statements.  This standard eliminates the option to present the components of other comprehensive income as part of the statement of equity. This standard is effective for fiscal years and interim periods with those years beginning after December 15, 2011. The implementation of this standard will only change the presentation of comprehensive income; it will not have an impact on the Company’s financial position or results of operations. In December 2011, the FASB issued ASU 2011-12. This standard defers the requirement to present reclassification adjustments for each component of OCI in both net income and OCI on the face of the financial statements.

Goodwill - In September 2011, the FASB issued ASU 2011-08 “Testing Goodwill for Impairment.”  This standard gives an entity the option to assess qualitative factors to determine if goodwill is impaired.  If the qualitative assessment indicates no impairment, a quantitative goodwill impairment test is not required.  The standard is effective for fiscal years beginning after December 15, 2011, and early adoption is permitted. The adoption of this standard is not expected to have a material effect on the Company’s financial statements.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We face market risk to the extent that both earnings and the fair market values of our financial instruments are affected by changes in interest rates and liquidity of markets. We manage this risk with static GAP analysis and simulation modeling.Our models indicate that we have maintained an overall liability sensitive position, whereby we should benefit as rates decline. These models do not fully incorporate customer preferences and changes in their behavior. As such, we believe we are somewhat less liability sensitive in a downward rate environment than the analysis indicates. In the short run, we expect our net interest margin to be stable to slightly rising as rates on our assets re-price downward at a slower pace than our liabilities. In the longer run as time deposits re-price to lower rates, we believe or net interest margin will be fairly stable, and maintain our overall profitability. As of the date of this annual 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.

Our market risk exposure is mainly comprised of our vulnerability to interest rate risk. We do not accept significant interest rate risk in our mortgage banking operations. To manage our interest rate risk in mortgage banking we generally lock in our sale price to the secondary market at the same time we make a rate commitment to the borrower. Prevailing interest rates and interest rate relationships in the future will be primarily determined by market 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” in this annual report for a discussion of the limitations on our responsibility for such statements.

The following tables provide information about our financial instruments that are sensitive to changes in interest rates as of December 31, 2011 and 2010. They show expected maturity date values for loans and securities which were calculated without adjusting the instruments’ contractual maturity dates for expected prepayments. Maturity date values for interest bearing core deposits were not based on estimates of the period over which the deposits would be outstanding, but rather, the opportunity for re-pricing. We believe that re-pricing dates, as opposed to expected maturity dates, may be more relevant in analyzing the value of such instruments and are reported as such in the following tables. Fair value is computed as the present value of expected cash flows at rates in effect at the date indicated.

POLICY REGARDING THE CONFIDENTIALITY OF REGULATORY EXAMINATIONS

Firstbank Corporation and its affiliate banks are subject to regular examination by government regulators, as are all other banks and bank holding companies. By law we are prohibited from disclosing the ratings and other information contained in those examination reports. These confidentiality requirements are designed to promote the integrity of the examination process and to avoid the results being used as a rating or endorsement of a particular financial institution.

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We sometimes receive inquiries about the contents and results of our regulatory examinations. Disclosing this information could violate the confidentiality requirements under federal law. In addition, even partial disclosure taken out of context could result in misunderstanding and misinterpretation. As a result, it is the policy of Firstbank Corporation and its affiliates not to comment on or disclose information regarding regulatory examination reports and related communications. Firstbank Corporation remains committed to disclosing detailed information through the United States Securities and Exchange Commission reporting process. In addition, the quarterly reports of condition reports for each of our banks are available at www.fdic.gov and information regarding our holding company is available at www.federalreserve.gov.

17

Principal/Notional Amounts Maturing or Re-pricing in:
(In Thousands of Dollars)
As of December 31, 2011																					Fair Value
	2012			2013			2014			2015			2016			Thereafter			Total		12/31/11
Rate Sensitive Assets:
Fixed interest rate loans	$	101,743		$	129,355		$	111,042		$	96,217		$	110,175		$	207,830		$	756,362	$	748,060
Average interest rate		6.77	%		6.48	%		6.58	%		6.45	%		5.78	%		6.15	%
Variable interest rate loans		114,846			26,292			24,878			13,914			21,926			26,040			227,896		217,864
Average interest rate		4.62	%		4.29	%		4.95	%		5.05	%		4.42	%		4.53	%
Fixed interest rate securities		26,343			36,086			58,787			60,012			13,492			133,909			328,629		328,629
Average interest rate		1.32	%		1.51	%		1.54	%		1.59	%		1.72	%		2.87	%
Variable interest rate
Securities																	13,555			13,555		13,555
Average interest rate																	2.73	%
Other interest bearing assets		37,154			1,997			450			496						7,266			47,363		47,363
Average interest rate		0.28	%		1.29	%		1.30	%		1.30	%
Rate Sensitive Liabilities:
Savings and interest bearing checking		582,545																		582,545		582,449
Average interest rate		0.27	%
Time deposits		261,196			91,785			25,188			25,363			19,512			49			423,093		426,509
Average interest rate		1.43	%		1.64	%		2.47	%		2.82	%		2.25	%		2.51	%
Fixed interest rate borrowings		7,776			1,500						849			3,113			13,951			27,189		29,450
Average interest rate		2.28	%		2.74	%					4.79	%		1.45	%		6.21	%
Variable interest rate borrowings																	28,352			28,352		28,397
Average interest rate																	1.96	%
Repurchase agreements		46,784																		46,784		46,784
Average interest rate		0.19	%

As of December 31, 2010	2011			2012			2013			2014			2015			Thereafter			Total		Fair Value 12/31/10
Rate Sensitive Assets:
Fixed interest rate loans	$	166,669		$	131,532		$	156,007		$	99,335		$	79,738		$	136,298		$	756,579	$	753,918
Average interest rate		6.72	%		7.00	%		6.65	%		6.80	%		6.30	%		7.47	%
Variable interest rate loans		126,244			34,318			32,116			23,026			15,819			31,873			263,396		255,791
Average interest rate		5.04	%		4.54	%		4.33	%		3.80	%		5.21	%		4.55	%
Fixed interest rate securities		36,589			15,619			35,803			16,500			14,262			122,156			240,929		240,929
Average interest rate		1.42	%		1.62	%		1.77	%		2.26	%		2.47	%		3.31	%
Variable interest rate
Securities																	14,787			14,787		14,787
Average interest rate																	2.60	%
Other interest bearing assets		55,947			1,485			991			198						8,203			66,824		66,824
Average interest rate		0.35	%		1.29	%		1.69	%		1.97	%
Rate Sensitive Liabilities:
Savings and interest bearing checking		504,139																		504,139		504,157
Average interest rate		0.52	%
Time deposits		334,948			101,060			22,719			16,567			19,083			76			494,453		500,365
Average interest rate		2.20	%		2.12	%		3.40	%		3.12	%		3.08	%		3.50	%
Fixed interest rate borrowings		24,000			7,802			1,500						917			24,480			58,700		61,628
Average interest rate		2.53	%		2.29	%		2.74	%					4.79	%		6.36	%
Variable interest rate borrowings																	18,042			18,042		18,107
Average interest rate																	2.00	%
Repurchase agreements		41,328																		41,328		41,328
Average interest rate		0.24	%

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CAPITAL RESOURCES

We obtain funds for our operating expenses and dividends to shareholders through dividends from our subsidiary banks. In general, the subsidiary banks pay only those amounts required to meet holding company cash requirements, while maintaining appropriate capital at the banks. Capital is maintained at the subsidiary banks to support their current operations and projected future growth.

Bank regulators have established risk based capital guidelines for banks and bank holding companies. Minimum capital levels are established under these guidelines and each asset category is assigned a perceived risk weighting. Off balance sheet items, such as loan commitments and standby letters of credit, also require capital allocations.

As of December 31, 2011, our total capital to risk weighted assets exceeded the minimum requirement for capital adequacy purposes of 8% by $85 million. Tier 1 capital to risk weighted assets exceeded the minimum of 4% by $112 million, and Tier 1 capital to average assets exceeded the minimum of 4% by $93 million. In the current economic environment, regulatory agencies are encouraging banks to maintain capital well above this minimum requirement. At year end 2011, our total capital to risk weighted assets exceeded the well capitalized minimum requirement for capital adequacy purposes of 10% by $65 million. Tier 1 capital to risk weighted assets exceeded the well capitalized minimum of 6% by $92 million, and Tier 1 capital to average assets exceeded the well capitalized minimum of 5% by $78 million.

For a more complete discussion of capital requirements please refer to Note 22 of the Notes to Consolidated Financial Statements. The Federal Deposit Insurance Corporation insures specified customer deposits and assesses premium rates based on defined criteria. Insurance assessment rates may vary from bank to bank based on the factors that measure the perceived risk of a financial institution. One condition for maintaining the lowest risk assessment, and therefore, the lowest insurance rate, is the maintenance of capital at the “well capitalized” level. Each of our affiliate banks has exceeded the regulatory criteria for a “well capitalized” financial institution.

A certain level of capital growth is desirable to maintain an appropriate ratio of equity to total assets. The compound annual growth rate for total average assets for the past five years was 6.8%. The compound annual growth rate for average equity over the same period was 9.5%.

We have established an internal goal of maintaining our dividend payout ratio within a range that will create capital growth to support asset growth in the balance sheet. In 2008 we maintained our dividend payment rate at higher levels and distributed more capital to our shareholders than was generated, resulting in a negative earnings retention percentage. As a result of our earnings in 2008 and the need to preserve capital, the Board of Directors’ reduced the dividend in 2009 to better align with these objectives. Earnings continued under pressure in 2009 and dividends again exceeded earnings, causing a negative retention rate, and resulting in the Board of Directors’ decision to further reduce the dividend in the first quarter and further yet in the second quarter of 2010. In the first quarter of 2012, the Board of Directors determined to pay an additional $0.05 per share cash dividend on common stock in addition to the regular quarterly amount of $0.01 per share, for a total of $0.06 per share, based on the results of earnings for the full year of 2011. To achieve the goal of acceptable internal capital growth, we intend to continue our efforts to return to higher earnings levels, and will adjust our dividend payout rate as appropriate.

As an additional enhancement to capital growth we offer a dividend reinvestment program. The Firstbank Corporation Dividend Reinvestment Plan was first offered in 1988. At December 31, 1988, 123 owners holding 209,856 shares participated in the Plan. By the end of 2011, 1,243 owners holding 1,377,792 shares were participating in the Plan.

To further strengthen our capital position, we elected to participate in the United States Treasury’s Capital Purchase Plan, whereby we issued $33 million of preferred stock and warrants to purchase up to 578,947 shares of our common stock at a price of $8.55, to the United States Treasury on January 30, 2009. The preferred stock issued in this transaction requires a 5% dividend for five years and then converts to a 9% dividend rate.

We are not aware of any recommendations by regulatory authorities at December 31, 2011, which are likely to have a material effect on our liquidity, capital resources or operations.

FORWARD LOOKING STATEMENTS

This annual report including, without limitation, management’s discussion and analysis of financial condition and results of operations, and other sections of our Annual Report to Shareholders, contain 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 Company itself. Words such as “anticipate”, “believe”, “determine”, “estimate”, “expect”, “forecast”, “intend”, “is likely”, “plan”, “project”, “opinion”, “should”, variations of such terms, and similar expressions are intended to identify such forward-looking statements. 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; the ability of the Company to locate and correct all data sensitive computer codes; and the vicissitudes of the national economy. The Company undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.

19

COMMON STOCK DATA

Firstbank Corporation Common Stock was held by 1,838 shareholders of record as of December 31, 2011. Total shareholders number approximately 2,800, including those whose shares are held in nominee name through brokerage firms. Our shares are listed on the NASDAQ Global Select Market under the symbol FBMI and are traded by several brokers. The range of high and low sales prices for shares of common stock for each quarterly period during the past two years is as follows:

Quarter	High		Low
4th 2011		$ 5.36		$ 4.59
3rd 2011		$ 6.03		$ 4.78
2nd 2011		$ 6.27		$ 5.58
1st 2011		$ 7.15		$ 6.14
4th 2010		$ 5.96		$ 4.50
3rd 2010		$ 5.09		$ 4.00
2nd 2010		$ 6.99		$ 4.23
1st 2010		$ 8.25		$ 5.88

The prices quoted above were obtained from www.NASDAQ.com. Prices have been adjusted to reflect stock dividends.

The following table summarizes cash dividends paid per share (adjusted for stock dividends) of common stock during 2011 and 2010.

	2011		2010
First Quarter	$	0.01	$	0.05
Second Quarter		0.01		0.01
Third Quarter		0.01		0.01
Fourth Quarter		0.01		0.01
Total	$	0.04	$	0.08

Our principal sources of funds to pay cash dividends are the earnings of, and dividends paid by, our subsidiary banks. Under current regulations the subsidiary banks are restricted in their ability to transfer funds in the form of cash dividends, loans, and advances to the holding company (See Note 20 of the Notes to Consolidated Financial Statements). As of January 1, 2012, approximately $23.1 million of the subsidiaries’ retained earnings were available for transfer in the form of dividends to the holding company without prior regulatory approval. In addition, the subsidiaries’ 2012 earnings are expected to be available for distributions as dividends to the holding company. As a condition of our issuance of preferred stock in early 2009, we were prohibited from increasing our dividend above the $0.90 per year paid in 2008 for three years without approval from the United States Treasury Department.

STOCK PERFORMANCE

The following graph compares the cumulative total shareholder return on the common stock of the Corporation to the Standard & Poor’s 500 Stock Index and the NASDAQ Bank Index, assuming a $100 investment at the end of 2006. The Standard & Poor’s 500 Stock Index is a broad equity market index. The NASDAQ Bank Index is composed of 416 banks and savings institutions as well as companies performing functions closely related to banking, such as check cashing agencies, currency exchanges, safe deposit companies and corporations for banking abroad. Cumulative total return is measured by dividing (i) the sum of (A) the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and (B) the difference between the share price at the end and the beginning of the measurement period; by (ii) the share price at the beginning of the measurement period.

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The table below shows dollar values for cumulative total shareholder return plotted in the graph above.

	2006		2007		2008		2009		2010		2011
Firstbank Corporation	$	100.00	$	68.17	$	43.16	$	47.96	$	33.83	$	29.83
S & P 500	$	100.00	$	105.49	$	66.46	$	84.05	$	96.71	$	98.75
NASDAQ Bank	$	100.00	$	76.94	$	64.14	$	53.93	$	61.47	$	54.83

21

MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING

The management of Firstbank Corporation has the responsibility for preparing the accompanying consolidated financial statements and for their integrity and objectivity. The statements were prepared in accordance with accounting principles generally accepted in the United States of America. The consolidated financial statements include amounts that are based on management's best estimates and judgments. Management also prepared other information in the annual report and is responsible for its accuracy and consistency with the financial statements.

The Company's 2011 consolidated financial statements have been audited by Plante & Moran PLLC independent registered public accounting firm. Management has made available to Plante & Moran all financial records and related data, as well as the minutes of Boards of Directors' meetings. Management believes that all representations made to Plante & Moran during the audit were valid and appropriate.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Firstbank Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control system is designed to provide reasonable assurance to the Company's management and Board of Directors regarding the reliability of financial reporting and the presentation of published financial statements. The system of internal control provides for division of responsibility and is documented by written policies and procedures that are communicated to employees with significant roles in the financial reporting process and updated as necessary. Management monitors the system of internal control for compliance.

The Company maintains an internal auditing program that independently assesses the effectiveness of the internal controls and recommends possible improvements thereto. However, all internal control systems, no matter how well designed, have inherent limitations.

The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2011. In making this assessment, it used the criteria for effective internal control over financial reporting set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in "Internal Control-Integrated Framework". Based on our assessment management concludes that, as of December 31, 2011, the Company's internal control over financial reporting is effective based on those criteria.

FIRSTBANK CORPORATION

/s/ Thomas R. Sullivan

Thomas R. Sullivan

President & Chief Executive Officer

(Principal Executive Officer)

/s/ Samuel G. Stone

Samuel G. Stone

Executive Vice President & Chief Financial Officer

(Principal Financial and Accounting Officer)

Dated: March 12, 2012

22

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Firstbank Corporation

We have audited the accompanying consolidated balance sheet of Firstbank Corporation as of December 31, 2011 and 2010, and the related consolidated statements of income and comprehensive income, changes in shareholders' equity, and cash flows for each of the three years ended December 31, 2011. Our responsibility is to express an opinion on these financial statements.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  Our audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Firstbank Corporation as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.

Plante & Moran, PLLC

Grand Rapids, Michigan  

March 12, 2012

23

FIRSTBANK CORPORATION

CONSOLIDATED BALANCE SHEETS

(In Thousands of Dollars, Except for Share Data)

	December 31,
ASSETS	2011		2010
Cash and due from banks	$	40,151	$	25,322
Short term investments		35,665		48,216
Total cash and cash equivalents		75,816		73,538
FDIC insured bank time certificates of deposit		4,432		10,405
Trading Account Securities		2		13
Securities available for sale		342,184		255,703
Federal Home Loan Bank stock		7,266		8,203
Loans held for sale		349		1,355
Loans, net of allowance for loan losses of $21,019 in 2011 and $21,431 in 2010		962,890		1,010,189
Premises and equipment, net		25,087		25,431
Goodwill		35,513		35,513
Core deposits and other intangibles		1,448		2,145
Other real estate owned		5,251		8,316
Accrued interest receivable and other assets		25,061		27,532
TOTAL ASSETS	$	1,485,299	$	1,458,343
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits:
Non-interest bearing demand accounts	$	214,904	$	185,191
Interest bearing accounts:
Demand		340,942		293,900
Savings		241,603		210,239
Time		423,093		494,453
Total Deposits		1,220,542		1,183,783
Securities sold under agreements to repurchase and overnight borrowings		46,784		41,328
Federal Home Loan Bank advances		19,457		40,658
Subordinated Debentures		36,084		36,084
Accrued interest payable and other liabilities		7,055		8,062
Total Liabilities		1,329,922		1,309,915
SHAREHOLDERS’ EQUITY
Preferred stock; no par value, 300,000 shares authorized, 33,000 issued		32,792		32,763
Common stock, no par value, 20,000,000 shares authorized; 7,892,486 and 7,803,816 shares issued and outstanding in 2011 and 2010		115,734		115,224
Retained earnings		3,955		295
Accumulated other comprehensive income		2,896		146
Total Shareholders’ Equity		155,377		148,428
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,485,299	$	1,458,343

See notes to consolidated financial statements.

24

FIRSTBANK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(In Thousands of Dollars, Except for Per Share Data)

	Year Ended December 31,
	2011			2010			2009
Interest Income:
Loans, including fees	$	61,465		$	67,390		$	70,531
Securities:
Taxable		4,888			3,649			2,712
Exempt from federal income tax		1,118			1,138			1,306
Short term investments		173			205			137
Total Interest Income		67,644			72,382			74,686
Interest Expense:
Deposits		10,891			15,733			18,841
FHLB Advances and notes payable		801			3,564			5,350
Subordinated debentures		1,197			1,497			1,612
Other		83			96			136
Total Interest Expense		12,972			20,890			25,939
Net Interest Income		54,672			51,492			48,747
Provision for loan losses		13,337			13,344			14,671
Net Interest Income after Provision for Loan Losses		41,335			38,148			34,076
Non-Interest Income:
Service charges on deposit accounts		4,492			4,576			4,509
Gain on sale of mortgage loans		3,683			5,907			7,551
Mortgage servicing, net of amortization		89			(96	)		(471	)
Gain/(loss) on trading account securities		(11	)		3			(213	)
Gain/(loss) on securities transactions		(37	)		4			1,534
Courier and cash delivery services		0			174			751
Title insurance fees		0			0			626
Other		1,459			1,261			1,122
Total Non-Interest Income		9,675			11,829			15,409
Non-Interest Expense:
Salaries and employee benefits		21,263			20,889			22,291
Occupancy and equipment		5,311			5,555			6,248
FDIC Insurance Premium		1,560			2,098			2,430
Amortization of intangibles		698			796			934
Outside professional services		1,202			1,144			934
Advertising and promotions		1,425			1,684			1,588
OREO expense and valuation write downs		3,153			3,513			2,391
Other		8,941			9,023			8,934
Total Non-Interest Expense		43,553			44,702			45,750
Income or loss before Federal Income Taxes		7,457			5,275			3,735
Federal Income Taxes		1,834			1,512			1,044
NET INCOME	$	5,623		$	3,763		$	2,691
Preferred Stock Dividends and Accretion of Discount on Preferred Stock		1,679			1,679			1,540
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	3,944		$	2,084		$	1,151
COMPREHENSIVE INCOME
Net Income	$	5,623		$	3,763		$	2,691
Change in unrealized gain on securities, net of tax and reclassification effects		2,750			(452	)		(288	)
TOTAL COMPREHENSIVE INCOME	$	8,373		$	3,311		$	2,403
Basic earnings per common share	$	0.50		$	0.27		$	0.15
Diluted earnings per common share	$	0.50		$	0.27		$	0.15

See notes to consolidated financial statements.

25

FIRSTBANK CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2011, 2010, AND 2009

(In Thousands of Dollars, Except for Share and per Share Data)

	Common Stock			Preferred Stock		Retained Earnings/ (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total
Balances at January 1, 2009	$	113,411				$	686		$	886		$	114,983
Net income for 2009							2,691						2,691
Cash dividends on common stock - $0.40 per share							(3,062	)					(3,062	)
Accrued dividends on preferred stock and accretion of discount on preferred stock					27		(1,540	)					(1,513	)
Amortization of stock warrants		(27	)				27						0
Issuance of 33,000 shares of preferred stock and 578,948 warrants through the Treasury’s Capital Purchase Program		293		$	32,707								33,000
Issuance of 93,730 shares of common stock through the dividend reinvestment plan		591											591
Issuance of 7,375 shares of common stock from supplemental shareholder investments		49											49
Issuance of 49,337 shares of common stock		269											269
Stock option and restricted stock expense		160											160
Net change in unrealized gain/(loss) on securities available for sale, net of tax of $(148)	­­­­­			­­­­­		­­­­­				(288	)		(288	)
BALANCES AT DECEMBER 31, 2009	$	114,746		$	32,734	$	(1,198	)	$	598		$	146,880
Net income for 2010							3,763						3,763
Cash dividends on common stock - $0.08 per share							(620	)					(620	)
Accrued dividends on preferred stock and accretion of discount on preferred stock					29		(1,679	)					(1,650	)
Amortization of stock warrants		(29	)				29						0
Issuance of 21,933 shares of common stock through the dividend reinvestment plan		121											121
Issuance of 6,555 shares of common stock from supplemental shareholder investments		34											34
Issuance of 44,587 shares of common stock		237											237
Stock option and restricted stock expense		115											115
Net change in unrealized gain/(loss) on securities available for sale, net of tax of $(233)	­­­­­			­­­­­		­­­­­				(452	)		(452	)
BALANCES AT DECEMBER 31, 2010	$	115,224		$	32,763	$	295		$	146		$	148,428
Net income for 2011							5,623						5,623
Cash dividends on common stock - $0.04 per share							(313	)					(313	)
Accrued dividends on preferred stock and accretion of discount on preferred stock					29		(1,679	)					(1,650	)
Amortization of stock warrants		(29	)				29						0
Issuance of 11,610 shares of common stock through the dividend reinvestment plan		62											62
Issuance of 34,803 shares of common stock from supplemental shareholder investments		197											197
Issuance of 42,379 shares of common stock		162											162
Stock option and restricted stock expense		118											118
Net change in unrealized gain/(loss) on securities available for sale, net of tax of $1,417										2,750			2,750
BALANCES AT DECEMBER 31, 2011	$	115,734		$	32,792	$	3,955		$	2,896		$	155,377

See notes to consolidated financial statements.

26

FIRSTBANK CORPORATION

CONSOLIDATED STATEMENTS OF CASHFLOWS

(In Thousands of Dollars)

	Year Ended December 31,
	2011			2010			2009
OPERATING ACTIVITIES
Net income	$	5,623		$	3,763		$	2,691
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses		13,337			13,344			14,671
Depreciation of premises and equipment		2,062			2,278			2,675
Net amortization (accretion) of security premiums/discounts		3,783			2,161			897
(Gain)/Loss on trading account securities		11			(3	)		213
(Gain)/Loss on securities transactions		37			(4	)		(1,534	)
Amortization of intangibles		698			796			934
Stock option and restricted stock grant compensation expense		118			115			160
Gain on sale of mortgage loans		(3,683	)		(5,907	)		(7,551	)
Proceeds from sales of mortgage loans		115,100			186,040			332,576
Loans originated for sale		(110,411	)		(180,910	)		(324,195	)
Deferred federal income tax expense/(benefit)		(1,299	)		499			900
Decrease/(increase) in accrued interest receivable and other assets		4,513			6,042			(7,654	)
(Decrease) in accrued interest payable and other liabilities		(1,007	)		(2,595	)		(1,511	)
NET CASH FROM OPERATING ACTIVITIES		28,882			25,619			13,272
INVESTING ACTIVITIES
Purchase of trading account securities		0			0			(2,819	)
Proceeds from sales of securities available for sale		2,190			7,420			10,222
Proceeds from maturities and calls of securities available for sale		128,048			112,836			90,896
Purchase of securities available for sale		(210,398	)		(229,458	)		(144,975	)
Redemption/(purchase) of Federal Home Loan Bank stock, net		937			881			0
Net (increase)/decrease in portfolio loans		28,015			69,346			14,703
Proceeds from sale of Other Real Estate Owned		6,850			6,645			7,561
Net purchases of premises and equipment		(1,718	)		(2,272	)		(1,171	)
NET CASH USED IN INVESTING ACTIVITIES		(46,076	)		(34,602	)		(25,583	)
FINANCING ACTIVITIES
Net increase in deposits		36,759			34,720			102,149
Net increase/(decrease) in securities sold under agreements to repurchase and overnight borrowings		5,456			1,919			(13,508	)
Repayment of notes payable and other borrowings		0			0			(6,353	)
Repayment of Federal Home Loan Bank borrowings		(24,201	)		(68,605	)		(129,658	)
Proceeds from Federal Home Loan Bank borrowings		3,000			9,000			74,000
Cash proceeds from issuance of Preferred Stock and Warrants		0			0			33,000
Cash proceeds from issuance of Common Stock		421			392			909
Cash dividends on Preferred Stock		(1,650	)		(1,650	)		(1,513	)
Cash dividends on Common Stock		(313	)		(620	)		(3,062	)
NET CASH FROM/(USED IN) FINANCING ACTIVITIES		19,472			(24,844	)		55,964
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		2,278			(33,827	)		43,653
Cash and cash equivalents at beginning of year		73,538			107,365			63,712
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	75,816		$	73,538		$	107,365
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest	$	13,539		$	21,597		$	26,750
Income taxes	$	1,975		$	855		$	1,415
Non cash transfer of loans to other real estate owned	$	5,948		$	10,167		$	11,211

See notes to consolidated financial statements.

27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations:  Firstbank Corporation (the “Company”) is a bank holding company. Each of our subsidiary banks is a full service community bank. The subsidiary banks offer all customary banking services, including the acceptance of checking, savings and time deposits, and the making of commercial, agricultural, real estate, personal, home improvement, automobile and other installment and consumer loans. Our consolidated assets were, $1.485 billion as of December 31, 2011, and primarily represent commercial and retail banking activity. Mortgage loans serviced for others of $606 million, as of December 31, 2011, are not included in the consolidated balance sheet.

Principles of Consolidation:  The consolidated financial statements include the accounts of the Company and its subsidiaries, Firstbank – Alma; Firstbank (Mt. Pleasant); Firstbank – West Branch; Keystone Community Bank and Firstbank – West Michigan (the “Banks”); 1st Armored, Incorporated (sold March 31, 2010); 1st Title, Incorporated; 1st Investors Title, LLC; Austin Mortgage Company; and FBMI Risk Management Services, Inc., after elimination of inter-company accounts and transactions. These subsidiaries are wholly owned, except 1st Investors Title, LLC, which we held a 48% share at December 31, 2011. We do not consolidate their results into the results of the Company. Firstbank – St Johns was merged into Firstbank - Alma in 2011. Each of our five banks operates its own Mortgage Company. The operating results of these companies are consolidated into each Bank’s financial statements. During 2004 we formed a special purpose trust, Firstbank Capital Trust I, in 2006 we formed Firstbank Capital Trust II, and in 2007 we formed Firstbank Capital Trust III and Firstbank Capital Trust IV, for the sole purpose of issuing trust preferred securities. These trusts are not consolidated into our financial statements.

Use of Estimates:  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period.  Actual results could differ from those estimates.

Investments:  Investments are presented at fair value as required by accounting principles. Our investment portfolio is classified as available for sale, as such; adjustments to the fair value are reported as a change in equity. If a security is deemed to be other than temporarily impaired, the adjustment to fair value is recorded through the income statement.

Certain Significant Estimates:  The primary estimates incorporated into our financial statements, which are susceptible to change in the near term, include the allowance for loan losses, the determination of the fair value of certain financial instruments, fair value of investments, determination of state and federal tax assets and liabilities, goodwill, purchase accounting and core deposit intangible valuations, valuation of other real estate owned, and the valuation of mortgage servicing rights.

Current Vulnerability Due to Certain Concentrations:  Our business is concentrated in the mid-central and southwestern sections of the lower peninsula of Michigan. While the loan portfolio is diversified, the customers’ ability to honor their debts is partially dependent on the local economies. Our service area is primarily dependent on manufacturing (automotive and other), agricultural and recreational industries. Most commercial and agricultural loans are secured by business assets, including commercial and agricultural real estate and federal farm agency guarantees. Generally, consumer loans are secured by various items of personal property and mortgage loans are secured by residential real estate. Our funding sources include time deposits and other deposit products which bear interest. Periods of rising interest rates result in an increase in our cost of funds and an increase in the yields on certain assets. Conversely, periods of falling interest rates result in a decrease in yields on certain assets and costs of certain funds.

Cash and Cash Equivalents:  Cash and cash equivalents include cash on hand, amounts due from banks and short term investments with an original maturity of 90 days or less, which include interest bearing deposits with banks and the Federal Reserve, federal funds sold, and overnight money market fund investments. Generally, federal funds and overnight money market funds are purchased for a one day period. We report customer loan transactions, deposit transactions and repurchase agreements and overnight borrowings on a net basis within our cash flow statement.

Trading Account Securities: From time to time, we invest in the common stock of other companies. Trading account securities are adjusted to fair value through the income statement, with increases in value reflected as non-interest income and decreases in value reflected as a decrease to non-interest income.

Securities Available for Sale:  Securities available for sale consist of bonds and notes which might be sold prior to maturity due to changes in interest rate, prepayment risks, yield and availability of alternative investments, liquidity needs or other factors. Securities classified as available for sale are reported at their fair value and the related unrealized holding gain or loss (the difference between the fair value and amortized cost of the securities so classified) is reported in other comprehensive income. Other securities such as Federal Home Loan Bank stock are carried at cost. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method.  Gains and losses on sales are recorded on the trade date and are determined using the specific identification method.

28

Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers: (1) the length of time and extent that fair value has been less than carrying value; (2) the financial condition and near term prospects of the issuer; and (3) the Company’s ability and intent to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.

Mortgage Banking Activities:  Servicing rights are recognized as assets based on the allocated value of retained servicing rights on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates. Any impairment of a grouping is reported as a valuation allowance.

Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. Amortization of mortgage serving rights is netted against loan servicing fee income in the income statement.

Mortgage Derivatives: From time to time, we enter into mortgage banking derivatives such as forward contracts and rate lock commitments in the ordinary course of business. The derivatives are not designated as hedges and are carried at fair value. The net gain or loss on mortgage banking derivatives is included in gain on sale of loans.

Loans Held for Sale:  Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.

Mortgage loans held for sale are generally sold with servicing rights retained. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold, which is reduced by the cost allocated to the servicing right. We generally lock in the sale price to the purchaser of the loan at the same time we make a rate commitment to the borrower.

Loans:  Loans receivable, for which management has the intent and ability to hold for the foreseeable future or payoff are reported at their outstanding unpaid principal balances, net of any deferred fees or costs on originated loans, unamortized premiums or discounts. Loan origination fees and certain origination costs are capitalized and recognized as an adjustment to yield of the related loan. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term without anticipating prepayments. Interest income on mortgage and commercial loans is discontinued at the time the loan becomes 90 days delinquent unless the credit is well secured and in process of collection. Consumer and unsecured consumer line of credit loans are typically charged off no later than 120 days past due. Loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued, but not received, for loans placed on nonaccrual status, is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method until qualifying for return to accrual. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Loans classified as troubled debt restructurings (TDR’s) are accounted for in generally the same manner as all other loans. 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 basis under the new terms. If there is a forgiveness of debt or partial charge off, the loan will generally be placed on nonaccrual status with any accrued interest reversed against interest income. If a loan is in nonaccrual status at the time of a restructuring or subsequently becomes nonaccrual, it will 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, it will be returned to accrual status. The determination of the need for an allowance for loan loss adjustment is based on the sum of: 1) a factor relating to historical losses multiplied times the balance of the loan, and 2) a net present value adjustment relating to a change in interest rate, if applicable. The amount recorded in the allowance for loan losses for restructured loans during the years ended December 31, 2011 and 2010 was $591,000 and $704,000, respectively. Restructured loans charged off in 2011 were $2.4 million, while we had no charge offs of restructured loans in 2010.

Allowance for Loan Losses:  The allowance for loan losses is a valuation allowance for probable incurred credit losses. Management uses a quantitative and qualitative methodology for analyzing factors which impact the allowance for loan losses consistently across its five banking subsidiaries. The process applies risk factors for historical charge-offs and delinquency experience, portfolio segment weightings and industry and regional factors and trends as they affect the banks’ portfolios. Consideration of exposures to industries potentially most affected by risks in the current economic and political environment, and the review of potential risks in certain credits that are considered part of the non-performing loan category contributed to the establishment of the allowance levels at each bank. Loan losses are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed.

29

Loans are reviewed on an ongoing basis for impairment. A loan is impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected cash flows discounted at the loan’s effective interest rate or, as a practical expedient, the fair value of collateral, if the loan is collateral dependent. Loans considered to be impaired are reduced to the present value of expected future cash flows or to the fair value of collateral by allocating a portion of the allowance for loan losses to such loans. If these allocations cause an increase in the allowance for loan losses such increase is reported as provision for loan loss through the income statement. Increases or decreases in carrying value due to changes in estimates of future payments or the passage of time are reported as reductions or increases in the provision for loan losses.

Smaller balance homogeneous loans such as residential first mortgage loans secured by one to four family residences, residential construction, automobile, home equity and second mortgage loans, are collectively evaluated for impairment. Commercial loans and first mortgage loans secured by other properties are evaluated individually for impairment. When credit analysis of the borrower’s operating results and financial condition indicates the underlying ability of the borrower’s business activity is not sufficient to generate adequate cash flow to service the business’ cash needs, including our loans to the borrower, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 90 days or less. Commercial and commercial real estate loans are rated on a scale of 1 to 10, with grades 1 to 4 being pass grades, 5 watch, 6 special mention, 7 substandard, 8 impaired, 9 doubtful and 10 loss. Loans graded 6, 7, and 8 are reviewed for possible impairment at least quarterly. Loans are generally moved to nonaccrual status when 90 days or more past due and considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.  For a more complete explanation of our loan grading system, see Note 6.

Premises and Equipment:  Premises and equipment are stated on the basis of cost less accumulated depreciation. Depreciation is computed over the estimated useful lives of the assets, primarily by accelerated methods for income tax purposes and by the straight line method for financial reporting purposes.  Buildings and related components are assigned useful lives ranging from 5 to 33 years. Furniture, fixtures and equipment are assigned useful lives ranging from 3 to 10 years.

Other Real Estate Owned:  Other real estate owned includes properties acquired through either a foreclosure proceeding or acceptance of a deed in lieu of foreclosure and is initially recorded at the fair value less estimated carrying and selling costs when acquired, establishing a new cost basis. These properties are evaluated periodically and, if fair value is deemed to have declined subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Costs incurred for the property after foreclosure are expensed as incurred. Other real estate owned totaled $5.3 million and $8.3 million at December 31, 2011 and 2010. Gains and losses on the sale of other real estate owned are recorded on the income statement as other income.

The following table summarizes the activity associated with other real estate owned.

(In Thousands of Dollars)	2011			2010
Balance at beginning of year	$	8,316		$	7,425
Properties transferred into OREO		5,948			10,167
Valuation impairments recorded		(2,258	)		(2,307	)
Proceeds from sale of properties		(6,850	)		(6,645	)
Gain or (loss) on sale of properties		95			(324	)
Balance at end of year	$	5,251		$	8,316

Goodwill and Other Intangible Assets: Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment is recognized in the period identified. A more frequent assessment is performed if conditions in the market place or changes in the company’s organizational structure occur. We use a discounted income approach and a market valuation model, which compares the inherent value of our company to valuations of recent transactions in the market place to determine if our goodwill has been impaired. See footnote 8 for additional information.

Other intangible assets consist of core deposit intangibles arising from whole bank and branch acquisitions. They are initially measured at fair value and then are amortized on an accelerated method over their estimated useful lives.

Long Term Assets:  Premises and equipment, core deposit and other intangible assets, and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, a charge is taken to earnings, and the assets are written down to new estimate of fair value.

30

Loan Commitments and Related Financial Instruments:  Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Income Taxes:  We record income tax expense based on the amount of taxes due on our tax return plus the change in deferred taxes, computed based on the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities using enacted tax rates. A valuation allowance is recorded, if needed, and reduces deferred tax assets to the amount expected to be realized.

Earnings Per Share:  Basic earnings per share is calculated by dividing net income available for common shareholders (net income less preferred stock dividends and accretion of the preferred stock discount) by the weighted average number of common shares outstanding. Diluted earnings per share is calculated by dividing net income available for common shareholders by the weighted average common shares outstanding including the dilutive effect of additional common shares that may be issued under outstanding stock options and warrants.

Comprehensive Income:  Comprehensive income consists of net income and changes in unrealized gains and losses on securities available for sale, net of tax, which is recognized as a separate component of equity. Accumulated other comprehensive income consists of unrealized gains and losses on securities available for sale, net of tax.

Recent Accounting Pronouncements: Troubled Debt Restructurings - In April 2011, the FASB issued ASU 2011-02 “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring”, which provides additional guidance to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The amendments in this update were effective for the Corporation for the year ended December 31, 2011. The impact of the adoption of this standard was resulted in additional loans being identified as restructured as disclosed in Footnote 8 - Loans.

Effect of Newly Issued Accounting Standards: Fair Value - In May 2011, the FASB issued ASU 2011-04 “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. “The standard clarifies existing fair value measurement and disclosure requirements and changes existing principles and disclosure guidance. Clarifications were made to the relevancy of the highest and best use valuation concept, measurement of an instrument classified in an entity’s shareholder’s equity and disclosure of quantitative information about the unobservable inputs for level 3 fair value measurements. Changes to existing principles and disclosures included measurement of financial instruments managed within a portfolio, the application of premiums and discounts in fair value measurement, and additional disclosures related to fair value measurements. The updated guidance and requirements are effective for financial statements issued for the first interim or annual period beginning after December 15, 2011, and should be applied prospectively. The adoption of this standard is not expected to have a material effect on the Company’s financial statement.

Comprehensive Income - In June 2011, the FASB issued ASU 2011-05 “Presentation of Comprehensive Income”. This standard requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but continuous statements.  This standard eliminates the option to present the components of other comprehensive income as part of the statement of equity. This standard is effective for fiscal years and interim periods with those years beginning after December 15, 2011. The implementation of this standard will only change the presentation of comprehensive income; it will not have an impact on the Company’s financial position or results of operations. In December 2011, the FASB issued ASU 2011-12. This standard defers the requirement to present reclassification adjustments for each component of OCI in both net income and OCI on the face of the financial statements.

Goodwill - In September 2011, the FASB issued ASU 2011-08 “Testing Goodwill for Impairment.”  This standard gives an entity the option to assess qualitative factors to determine if goodwill is impaired.  If the qualitative assessment indicates no impairment, a quantitative goodwill impairment test is not required.  The standard is effective for fiscal years beginning after December 15, 2011, and early adoption is permitted. The adoption of this standard is not expected to have a material effect on the Company’s financial statements.

Loss Contingencies:  Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the financial statements as of December 31, 2011.

Fair Value of Financial Instruments:  Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Reclassification:  Certain 2009 and 2010 amounts may have been reclassified to conform to the 2011 presentation.

Operating Segments:  While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a company wide basis. Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

NOTE 2 – ACQUISITIONS AND DIVESTITURES

On March 31, 2010, we sold our 1st Armored, Inc. armored car company. No gain or loss was recorded on the transaction. Historical earnings from 1st Armored, Inc. are included in the financial statements presented through the date of its sale within this report. Financial results subsequent to March 31, 2010 are excluded for 1st Armored, Inc. as the sale transaction was completed on that date.

NOTE 3 – RESTRICTIONS ON CASH AND DUE FROM BANKS

Our subsidiary banks are required to maintain average reserve balances in the form of cash and non-interest bearing balances due from the Federal Reserve Bank. The average reserve balances required to be maintained during 2011 and 2010 were $14,561,000 and $9,471,000, respectively. These balances earned interest at a rate of 0.25% during both 2011 and 2010.

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NOTE 4 – SECURITIES

The fair value of securities available for sale was as follows:

(In Thousands of Dollars)	Amortized Cost		Gross Unrealized Gains		Gross  Unrealized  Losses			Carrying Value
Securities Available for Sale:
December 31, 2011:
U.S. governmental agency	$	132,534	$	1,325	$	(25	)	$	133,834
States and political subdivisions		76,574		1,238		(23	)		77,789
Mortgage Backed Securities		70,059		1,080		(87	)		71,052
Collateralized Mortgage Obligations		57,006		854		(15	)		57,845
Equity and Other Securities		1,606		58		0			1,664
Total	$	337,779	$	4,555	$	(150	)	$	342,184
December 31, 2010:
Treasury notes	$	12,513	$	17	$	0		$	12,530
U.S. governmental agency		82,395		632		(130	)		82,897
States and political subdivisions		48,278		255		(446	)		48,087
Mortgage Backed Securities		55,687		412		(200	)		55,899
Collateralized Mortgage Obligations		54,958		179		(494	)		54,643
Equity and Other Securities		1,650		0		(3	)		1,647
Total	$	255,481	$	1,495	$	(1,273	)	$	255,703

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

(In Thousands of Dollars)	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
December 31, 2011
US Government Agencies	$	0	$	0		$	17,974	$	(25	)	$	17,974	$	(25	)
Municipal Securities		3,738		(2	)		2,249		(21	)		5,987		(23	)
Mortgage Backed Securities		0		0			18,091		(87	)		18,091		(87	)
Collateralized Mortgage Obligations		0		0			6,590		(15	)		6,590		(15	)
Total Temporarily Impaired	$	3,738	$	(2	)	$	44,904	$	(148	)	$	48,642	$	(150	)
December 31, 2010
US Government Agencies	$	12,750	$	(130	)	$	0	$	0		$	12,750	$	(130	)
States and Political Subdivisions		19,284		(245	)		4,883		(201	)		24,167		(446	)
Mortgage Backed Securities		25,936		(200	)		0		0			25,936		(200	)
Collateralized Mortgage Obligations		39,442		(494	)		0		0			39,442		(494	)
Equity and Other Securities		0		0			31		(3	)		31		(3	)
Total Temporarily Impaired	$	97,412	$	(1,069	)	$	4,914	$	(204	)	$	102,326	$	(1,273	)

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

Trading account securities are marked to market with the change in value reported on the income statement. Gains and losses on available for sale securities are recognized if the security is either deemed to be other than temporarily impaired, or the security is sold. During 2009 we had two securities which were written down for other than temporary impairment by a total of $150,000. During 2010 we sold one of these two securities and recognized an additional $26,000 loss. Due to continuing problems within the other security, we recorded an additional charge for other than temporary impairment of $150,000 bringing the carrying value of that security to zero. Both of these securities were trust preferred securities of Michigan banks that had a combined original book value of $500,000. The following table shows gross gains and losses on investment securities for the three year period:

(In Thousands of Dollars)	2011			2010			2009
Trading Account Securities Gains/(Losses)	$	(11	)	$	3		$	(213	)
Available for Sale Securities
Other than temporary impairment losses	$	0		$	(150	)	$	(150	)
Gross realized gains		28			200			1,814
Gross realized losses		(65	)		(46	)		(130	)
Net realized gains (losses)	$	(37	)	$	4		$	1,534

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The fair value of securities at December 31, 2011, by stated maturity, is shown below. Actual maturities may differ from stated maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

(In Thousands of Dollars)	Fair Value
Due in one year or less	$	26,251
Due after one year through five years		168,377
Due after five years through ten years		71,278
Due after ten years		74,577
Total		340,483
Equity securities		1,701
Total securities	$	342,184

At December 31, 2011 and 2010, securities with carrying values approximating $46,784,000 and $41,328,000 were pledged to secure public trust deposits, securities sold under agreements to repurchase, and for such other purposes as required or permitted by law.

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

NOTE 5 – LOAN SERVICING

Loans held for sale at year end are as follows:

(In Thousands of Dollars)
	2011		2010
Loans held for sale	$	349	$	1,358
Less: Allowance to adjust to lower of cost or market		0		(3	)
Loans held for sale, net	$	349	$	1,355

Mortgage loans serviced for others are not reported as assets.  The principal balances of these loans at year end are as follows:

(In Thousands of Dollars)
	2011		2010
Mortgage loan portfolios serviced for:
Freddie Mac	$	601,710	$	617,558
Fannie Mae	$	1,446	$	1,942
Federal Home Loan Bank	$	2,757	$	3,188

Custodial escrow balances maintained in connection with serviced loans were $1,438,000 and $1,477,000 at year end 2011 and 2010.

Activity for capitalized mortgage servicing rights, included in other assets on the Consolidated Balance Sheet, was as follows:

(In Thousands of Dollars)
	2011			2010			2009
Servicing rights:
Beginning of year	$	4,603		$	3,705		$	2,370
Additions		1,505			2,428			3,056
Amortized to expense		(1,512	)		(1,530	)		(1,721	)
End of year	$	4,596		$	4,603		$	3,705

Management has determined that no valuation allowance was necessary at December 31, 2011, 2010, or 2009.

The fair value of mortgage servicing rights was $6,034,000 and $6,067,000 at year end 2011 and 2010. Fair value at the end of 2011 was determined using a discount rate of 7.375%, a weighted average constant prepayment rate of 14.79%, depending on the stratification of the specific right, and a weighted average delinquency rate of 1.09%.  At the end of 2010, fair value was determined using a discount rate of 7.97%, a weighted average constant prepayment rate of 14.12%, depending on the stratification of the specific right, and a weighted average delinquency rate of 1.38%

The weighted average amortization period is 2.6 years.  Estimated amortization expense for each of the next five years is:

(In Thousands of Dollars)
2012	$	995
2013	$	822
2014	$	692
2015	$	577
2016	$	466

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NOTE 6 – LOANS

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

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

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

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

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

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

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

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

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

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

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

Restructured Loans

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

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)	December 31, 2011		December 31, 2010
Commercial & Industrial
Pass loans	$	122,812	$	143,773
Watch loans		19,542		12,727
Special mention loans		7,878		4,267
Substandard loans		2,928		1,561
Impaired restructured and accruing loans		3,562		182
Impaired nonaccrual loans		1,771		1,681
Doubtful nonaccrual loans		0		141
Total Commercial & Industrial		158,493		164,332
Commercial Real Estate
Pass loans	$	373,320	$	394,674
Watch loans		56,571		50,590
Special mention loans		21,155		31,310
Substandard loans		5,686		8,320
Impaired restructured and accruing loans		10,652		5,780
Impaired nonaccrual loans		15,336		17,729
Doubtful nonaccrual loans		0		882
Total Commercial Real Estate		482,720		509,285
First lien residential mortgage loans
Performing loans	$	199,117	$	192,269
Loans > 60 days past due		2,203		2,102
Impaired restructured and accruing loans		4,425		4,205
Nonaccrual loans		5,374		5,189
Total First lien residential mortgage loans		211,119		203,765
Junior lien residential mortgage loans
Performing loans	$	66,169	$	75,589
Loans > 60 days past due		328		148
Impaired restructured and accruing loans		278		0
Nonaccrual loans		278		556
Total Junior lien residential mortgage loans		67,053		76,293
Consumer Loans
Performing loans	$	64,075	$	77,472
Loans > 60 days past due		239		289
Nonaccrual loans		210		184
Total Consumer Loans		64,524		77,945
Total Loans	$	983,909	$	1,031,620

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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.

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

For consumer and residential loan segments, loans that are current, or less than 60 days past due are assigned a unique historical loss rate as described above for commercial Pass and Watch loans. For loans that are more than 60 days past due including nonaccrual loans, a loss rate is determined based on charge offs within the last 12 months, divided by the sum of the average balance of loans 60 days or more past due and nonaccrual loans. These loss rates are multiplied by the outstanding balances in each unique loan segment at the end of the reporting period to determine the amount of allowance for loan loss.

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

After each of the steps outlined above is completed, the results are aggregated and compared with the existing balance of the allowance for loan losses. If the aggregation is greater than the balance, the allowance for loan losses is increased through a charge to earnings on the provision for loan losses line. If the resulting aggregation is below the current balance of the allowance for loan losses, management will determine, based upon the number, potential impact, and uncertainty of the estimates contained within the process whether the unallocated reserve is excessive. If in management’s judgment the unallocated reserve exceeds a level deemed prudent given the inherent uncertainty of these issues, a reversal of the provision for loan losses may be recorded.

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

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Allowance for credit losses and recorded investment in financing receivables:

(In Thousands of Dollars)
Twelve months ending December 31, 2011	Commercial and Industrial			Commercial Real Estate			First Lien Residential Mortgages			Junior Lien Residential Mortgages			Consumer Loans			Unallocated		Total
Allowance for Credit Losses:
Beginning balance	$	3,024		$	12,375		$	3,960		$	774		$	1,162		$	136	$	21,431
Provision for loan losses		1,836			6,611			4,468			6			381			35		13,337
Loans charged off		(2,546	)		(7,973	)		(3,215	)		(275	)		(913	)		0		(14,922	)
Recoveries		171			521			180			0			301			0		1,173
Ending balance	$	2,485		$	11,534		$	5,393		$	505		$	931		$	171	$	21,019
Ending balance: individually evaluated for impairment	$	253		$	3,622		$	0		$	0		$	0		$	0	$	3,875
Ending balance: collectively evaluated for impairment	$	2,232		$	7,912		$	5,393		$	505		$	931		$	171	$	17,144
Financing Receivables:
Ending balance	$	158,493		$	482,720		$	211,397		$	66,775		$	64,524		$	0	$	983,909
Ending balance: individually evaluated for impairment	$	5,331		$	25,988		$	0		$	0		$	0		$	0	$	31,319
Ending balance: collectively evaluated for impairment	$	153,162		$	456,732		$	211,397		$	66,775		$	64,524		$	0	$	952,590
Twelve months ending December 31, 2010
Allowance for Credit Losses:
Beginning balance	$	3,640		$	10,473		$	2,502		$	967		$	1,525		$	7	$	19,114
Provision for loan losses		812			8,222			3,844			(7	)		344			129		13,344
Loans charged off		(1,707	)		(6,366	)		(2,602	)		(186	)		(1,102	)		0		(11,963	)
Recoveries		279			46			216			0			395			0		936
Ending balance	$	3,024		$	12,375		$	3,960		$	774		$	1,162		$	136	$	21,431
Ending balance: individually evaluated for impairment	$	812		$	4,688		$	0		$	0		$	0		$	0	$	5,500
Ending balance: collectively evaluated for impairment	$	2,212		$	7,687		$	3,960		$	774		$	1,162		$	136	$	15,931
Financing Receivables:
Ending balance	$	164,332		$	509,285		$	203,765		$	76,293		$	77,945		$	0	$	1,031,620
Ending balance: individually evaluated for impairment	$	1,972		$	24,390		$	0		$	0		$	0		$	0	$	26,362
Ending balance: collectively evaluated for impairment	$	162,360		$	484,895		$	203,765		$	76,293		$	77,945		$	0	$	1,005,258

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Age Analysis of Past Due Loans excluding nonaccrual loans:

(In thousands of dollars)
At December 31, 2011	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Financing Receivables		Recorded Investment > 90 days and accruing
Commercial and Industrial	$	1,039	$	94	$	0	$	1,133	$	157,360	$	158,493	$	0
Commercial Real Estate		4,313		500		0		4,813		477,907		482,720		0
Residential Mortgages 1st Liens		973		1,875		328		3,176		208,221		211,397		328
Residential Mortgages Junior Liens		561		255		73		889		65,886		66,775		73
Consumer		848		221		18		1,087		63,437		64,524		18
Total	$	7,734	$	2,945	$	419	$	11,098	$	972,811	$	983,909	$	419
At December 31, 2010
Commercial and Industrial	$	916	$	400	$	0	$	1,316	$	159,532	$	164,413	$	0
Commercial Real Estate		3,514		981		18		4,513		352,615		373,996		18
Residential Mortgages 1st Liens		1,025		1,529		573		3,127		349,086		357,402		573
Residential Mortgages Junior Liens		628		148		0		776		74,934		76,266		0
Consumer		703		273		15		991		58,368		59,543		15
Total	$	6,786	$	3,331	$	606	$	10,723	$	994,535	$	1,031,620	$	606

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Impaired loans were as follows:

(In Thousands of Dollars)
December 31, 2011	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Period end loans with no allocated allowance for loan losses
Commercial and Industrial	$	4,358	$	5,846		0	$	2,073	$	116
Commercial Real Estate		11,940		16,987		0		12,444		452
Residential Mortgages 1st Liens		10,079		11,120		0		9,223		219
Residential Mortgages Junior Liens		278		331		0		459		2
Consumer		210		249		0		192		0
Total	$	26,865	$	34,533	$	0	$	24,391	$	789
Period end loans with allocated allowance for loan losses
Commercial and Industrial	$	720	$	998	$	253	$	722	$	0
Commercial Real Estate		10,423		15,225		3,622		9,003		28
Residential Mortgages 1st Liens		0		0		0		0		0
Residential Mortgages Junior Liens		0		0		0		0		0
Consumer		0		0		0		0		0
Total	$	11,143	$	16,223	$	3,875	$	9,725	$	28
Total
Commercial and Industrial	$	5,078	$	6,844	$	253	$	2,795	$	116
Commercial Real Estate		22,363		32,212		3,622		21,447		480
Residential Mortgages 1st Liens		10,079		11,120		0		9,223		219
Residential Mortgages Junior Liens		278		331		0		459		2
Consumer		210		249		0		192		0
Total	$	38,008	$	50,756	$	3,875	$	34,116	$	817
December 31, 2010
Period end loans with no allocated allowance for loan losses
Commercial and Industrial	$	476	$	564		0	$	1,121	$	0
Commercial Real Estate		10,142		11,718		0		12,432		158
Residential Mortgages 1st Liens		9,365		9,959		0		7,721		253
Residential Mortgages Junior Liens		555		555		0		295		1
Consumer		134		165		0		200		5
Total	$	20,672	$	22,961		0	$	21,769	$	417
Period end loans with allocated allowance for loan losses
Commercial and Industrial	$	693	$	1,978	$	812	$	438	$	0
Commercial Real Estate		9,725		16,614		4,688		8,724		125
Residential Mortgages 1st Liens		0		0		0		0		0
Residential Mortgages Junior Liens		0		0		0		0		0
Consumer		0		0		0		0		0
Total	$	10,418	$	18.592	$	5,550	$	9,162	$	125
Total
Commercial and Industrial	$	1,169	$	2,544	$	812	$	1,559	$	0
Commercial Real Estate		19,867		28,332		4,688		21,156		283
Residential Mortgages 1st Liens		9,365		9,959		0		7,721		253
Residential Mortgages Junior Liens		555		555		0		295		1
Consumer		134		165		0		200		5
Total	$	31,090	$	41,555	$	5,500	$	30,931	$	542

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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
December 31, 2011
Commercial and industrial		11	$	3,615	$	3,526		2	$	468
Commercial real estate		13		4,017		3,786		10		1,233
Residential 1st liens		13		1,427		1,291		11		828
Residential junior liens		1		83		83		0		0
Consumer		0		0		0		0		0
Total		85	$	9,142	$	8,686		23	$	2,529
December 31, 2010
Commercial and industrial		1	$	36	$	36		0	$	0
Commercial real estate		7		6,604		5,757		3		860
Residential 1st liens		27		3,025		2,633		8		614
Residential junior liens		1		43		0		1		43
Consumer		0		0		0		0		0
Total		36	$	9,708	$	8,426		12	$	1,517

Financing Receivables on Nonaccrual Status were as follows:

(In Thousands of Dollars)	December 31, 2011		December 31, 2010
Nonaccrual loans at period end
Commercial and Industrial	$	1,771	$	1,822
Commercial Real Estate		15,336		18,611
Residential Mortgages 1st Liens		5,374		5.189
Residential Mortgages Junior Liens		278		556
Consumer		210		184
Total nonaccrual loans	$	22,969	$	26,362

NOTE 7 – PREMISES AND EQUIPMENT

Year end premises and equipment were as follows:
(In Thousands of Dollars)	2011			2010
Land	$	6,186		$	6,213
Buildings		33,082			32,546
Furniture, fixtures and equipment		17,951			17,922
Total		57,219			56,681
Less:
Accumulated depreciation		(32,132	)		(31,250	)
Total	$	25,087		$	25,431

Depreciation expense was $2,062,000, $2,261,000, and $2,675,000 for 2011, 2010, and 2009. Facility rent expense was $377,000 in 2011 compared with $403,000 for 2010, and $356,000 for 2009. Equipment rent expense was $250,000 in 2011 compared with $252,000 for 2010, and $279,000 for 2009. Rental commitments for the next five years under non-cancelable operating leases were as follows (before considering renewal options that generally are present):

(In Thousands of Dollars)
	Facilities		Equipment		Total
2012	$	362	$	97	$	459
2013		371		7		378
2014		161		3		164
2015		110		2		112
2016		102		0		102
Total	$	1,106	$	109	$	1,215

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NOTE 8 – GOODWILL AND INTANGIBLE ASSETS

Goodwill

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

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

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

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

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

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

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

There was no change in the carrying amount of goodwill during the year.

(In Thousands of Dollars)
	2011		2010
Balance at January 1	$	35,513	$	35,513
Goodwill from acquisitions/(divestitures)		0		0
Balance at December 31	$	35,513	$	35,513

Acquired Intangible Assets

Acquired intangible assets at year end were as follows:

(In Thousands of Dollars)	2011			2010			2009
Core deposit intangibles resulting from bank and branch acquisitions:
Gross Amount	$	7,930		$	7,930		$	7,930
Accumulated Amortization		(6,482	)		(5,786	)		(4,990	)
Net Carrying Value	$	1,448		$	2,145		$	2,940

Aggregate amortization expense was $697,000, $796,000, and $934,000 for 2011, 2010, and 2009, respectively. Our estimated amortization expense for each of the next five years is:

 (In Thousands of Dollars)

Year	Amount
2012	$	482
2013	$	370
2014	$	278
2015	$	185
2016	$	99

NOTE 9 – FEDERAL INCOME TAXES

Federal income taxes consist of the following:

(In Thousands of Dollars)	2011			2010		2009
Current expense	$	3,133		$	1,013	$	144
Deferred expense (benefit)		(1,299	)		14		241
Change in deferred tax valuation allowance		0			485		659
Total	$	1,834		$	1,512	$	1,044

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A reconciliation of the difference between federal income tax expense and the amount computed by applying the federal statutory tax rate of 35% in 2011, 2010 and 2009 is as follows:

(In Thousands of Dollars)	2011			2010			2009
Tax at statutory rate	$	2,610		$	1,846		$	1,307
Effect of tax-exempt interest		(443	)		(489	)		(554	)
Deferred tax valuation allowance		0			485			659
Other		(333	)		(330	)		(368	)
Federal income taxes	$	1,834		$	1,512		$	1,044
Effective tax rate		25	%		29	%		28	%

The components of deferred tax assets and liabilities consist of the following at December 31st year end:

(In Thousands of Dollars)
	2011			2010
Deferred tax assets:
Allowance for loan losses	$	7,147		$	5,215
Deferred compensation		718			0
Losses on capital investments		1,727			1,920
Other		1,304			675
Total deferred tax assets		10,896			7,810
Deferred tax liabilities:
Fixed assets		(1,851	)		(982	)
Mortgage servicing rights		(1,563	)		(1,263	)
Purchase accounting adjustments		(373	)		(127	)
Unrealized gain on securities available for sale		(1,492	)		(75	)
Other		(992	)		(620	)
Total deferred tax liabilities		(6,271	)		(3,067	)
Net deferred tax assets		4,625			4,743
Deferred tax valuation allowance		(1,143	)		(1,143	)
Net deferred tax assets	$	3,482		$	3,600

A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefits related to such assets will not be realized. In reviewing the company’s position relative to deferred tax assets associated with certain incurred capital losses, management determined that a valuation adjustment of $1,143,000 was necessary at year end 2011, the same amount as year end 2010. These valuation adjustments are recorded through the income statement on the Federal income tax line item. Based on this determination, a non-cash charge was made to record the valuation adjustment, reducing our deferred tax asset, and increasing income tax expense by $485,000 in 2011. The establishment of a valuation allowance does not relinquish our rights to utilize the deferred asset, but rather recognizes that at the current time management does not believe the deferred asset will be able to be utilized prior to its expiration. The deferred assets for which the valuation allowance was established were related to capital losses for which we do not believe we will have capital gains to offset. These assets are: $70,000 to expire in 2012, and $589,000 to expire in 2015 and $485,000 for which an expiration date has yet to be established, as we have not sold the underlying stock.

Losses on capital investments have a three year carry back and five year carry forward time period for offset. The timeframe begins with the sale of the investment. Certain tax planning strategies have been established, including the possible sale and leaseback of certain of our facilities or other assets that management believes could be executed if necessary to retain the benefits listed above.

Net deferred tax assets at December 31, 2011 and 2010 are included in other assets in the accompanying consolidated balance sheets.

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NOTE 10 – DEPOSITS

Time deposits of $100,000 or more were $196 million and $213 million at year end 2011 and 2010. There were $16.1  million and $6.7 million of brokered CDs included in time deposits of $100,000 or more in 2011 and 2010 respectively.

Scheduled maturities of time deposits at December 31, 2011 were as follows:

(In Thousands of Dollars)
Year	Amount
2012	$	260,352
2013		92,305
2014		25,449
2015		25,414
2016		19,525
2017 and thereafter		48
Total	$	423,093

NOTE 11 – BORROWINGS

Information relating to securities sold under agreements to repurchase is as follows:

(In Thousands of Dollars)
	2011			2010
At December 31:
Outstanding Balance	$	46,784		$	41,328
Average Interest Rate		0.19	%		0.19	%
Daily Average for the Year:
Outstanding Balance	$	43,847		$	40,338
Average Interest Rate		0.19	%		0.24	%
Maximum Outstanding at any Month End	$	47,603		$	46,477

Securities sold under agreements to repurchase (repurchase agreements) generally have original maturities of less than one year. Repurchase agreements are treated as financings and the obligations to repurchase securities sold are reflected as liabilities. Securities involved with the agreements are recorded as assets of the Company and are primarily held in safekeeping by correspondent banks. Repurchase agreements are offered principally to certain large deposit customers as deposit equivalent investments.

We had no unsecured overnight borrowings, in the form of federal funds purchased at December 31, 2011. There were no overnight borrowings at December 31, 2010.

We currently do not have a line of credit agreement for the Company.

NOTE 12 – FEDERAL HOME LOAN BANK ADVANCES

Long term borrowings have been secured from the Federal Home Loan Bank. At year end, advances from the Federal Home Loan Bank were as follows:

(In Thousands of Dollars)
	2011		2010
Borrowings with a fixed rates at year end	$	19,457	$	40,658
Borrowings with a variable rate of interest at year end	$	0	$	0

Fixed rate advances shown above ranged in the interest rate owed from 1.28% to 7.30% and averaged 3.41% at year end 2011 and maturity dates ranged from January 2012 to March 2026. At the end of 2010, rates ranged from 0.73% to 7.30% and averaged 3.06%, with maturities ranging from January 2011 to March 2026. Each Federal Home Loan Bank advance is payable at its maturity date without penalty, however, substantial penalties do exist if an advance is paid before its contractual maturity. Such penalties vary from advance to advance and are based on the size, interest rate, and remaining term of each specific advance. Advances of $3.5 million may be converted from fixed to variable rate by the FHLB, but may be repaid, without penalty, if that option is exercised. The advances were collateralized by $183.7 million and $247.2 million of first mortgage loans under a blanket lien arrangement and pledges of specific mortgages at year end 2011 and 2010. As of December 31, 2011, we had $97.1 million of additional borrowing capacity with the Federal Home Loan Bank. Federal Home Loan Bank borrowings have decreased substantially as increased core deposits and low loan demand have combined to reduce the need for this funding in the near term.

44

Maturities of FHLB advances are as follows:

(In Thousands of Dollars)
2012	$	7,776
2013		1,500
2014		0
2015		849
2016		3,113
2017 and thereafter		6,219
Total	$	19,457

NOTE 13 – SUBORDINATED DEBENTURES

On October 18, 2004, a trust formed by us issued $10,310,000 of 90 day LIBOR plus 1.99% variable rate trust preferred securities as part of a pooled offering of such securities. We issued subordinated debentures to the trust in exchange for the proceeds of the offering; the debentures represent the sole assets of the trust. We may redeem the subordinated debentures, in whole or in part, any time on or after October 18, 2009 at 100% of the principal amount of the securities. The debentures are required to be paid in full on October 18, 2034.

On January 20, 2006, a trust formed by us issued $10,310,000 of trust preferred securities as part of a pooled offering of such securities. The securities carried an interest rate of 6.049% for five years, and then converted to a variable rate of 90 day LIBOR plus 1.27% in 2011, for the remainder of their term. We issued subordinated debentures to the trust in exchange for the proceeds of the offering; the debentures represent the sole assets of the trust. We may redeem the subordinated debentures, in whole or in part, any time on or after April 7, 2011 at 100% of the principal amount of the securities. The debentures are required to be paid in full on April 7, 2036.

On July 30, 2007, two trusts, formed by us, issued $15,464,000 of trust preferred securities as part of a pooled offering of such securities. One of the trusts issued $7,732,000 of variable rate securities at 90 day LIBOR plus 1.35% (6.71% on the date of issuance). The other trust issued $7,732,000 of fixed rate securities that carry an interest rate of 6.566% for five years, and then convert to a variable rate of 90 day LIBOR plus 1.35% for the remainder of their term. Firstbank then issued subordinated debentures to the trust in exchange for the proceeds of the offering; the debentures represent the sole assets of each of the trusts. We may redeem the subordinated debentures, in whole or in part, any time on or after July 30, 2012 at 100% of the principal amount of the securities. The debentures are required to be paid in full on July 30, 2037.

The trusts are not consolidated with the Company’s financial statements, but rather the subordinated debentures are shown as a liability. Our investment in the stock of the trust was $1,084,000 and is included in equity securities available for sale. These investments are restricted from sale and are carried at historical cost, which approximates fair value.

NOTE 14 – SHAREHOLDERS’ EQUITY

We are subject to various regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums.  At year end 2011 and 2010 we exceeded all requirements to be classified as well as capitalized.

On January 30, 2009 we issued 33,000 shares of Series A, no par value $1,000 liquidation preference, fixed rate cumulative perpetual preferred stock (Preferred Stock) and warrants to purchase 578,947 shares of our common stock at an exercise price of $8.55 per share (Warrants), to the U.S. Department of Treasury in return for $33 million under the Capital Purchase Program (CPP). Of the proceeds, $32.7 million was allocated to the Preferred Stock and $0.3 million was allocated to the Warrants based on the relative fair value of each. The $0.3 million discount on the Preferred Stock is being accreted using an effective yield method over five years. The Preferred Stock and Warrants qualify as Tier 1 capital.

The Preferred Stock pays cumulative quarterly cash dividends at a rate of 5% per year on the $1,000 liquidation preference through February 15, 2014 and at a rate of 9% per year thereafter. We accrue dividends based on the rates, liquidation preference and time since last quarterly dividend payment. Under the CPP, the consent of the U.S. Treasury is required for any quarterly common stock dividend of more than $0.225 per share (subject to adjustment for stock splits, stock dividends and certain other transactions) and for any common share repurchases (other than common share repurchases in connection with any benefit plan in the ordinary course of business) in each case until January 30, 2012, unless the Preferred Stock has been fully redeemed or the U.S. Treasury has transferred all the Preferred Stock to third parties prior to that date.  In addition, all accrued and unpaid dividends on the Preferred Stock must be declared and the payment set aside for the benefit of the holders of Preferred Stock before any dividend may be declared on our common stock and before any shares of our common stock may be repurchased, subject to certain limited exceptions.

45

Holders of shares of the Preferred Stock have no right to exchange or convert such shares into any other security of Firstbank Corporation and have no right to require the redemption or repurchase of the Preferred Stock.  The Preferred Stock does not have a sinking fund.  The Preferred Stock is non-voting, other than class voting rights on certain matters that could adversely affect the Preferred Stock.

After January 30, 2012, we may redeem the Preferred Stock for the liquidation preference plus accrued and unpaid dividends.  Any such redemption is subject to U.S. Treasury’s prior consultation with the Federal Reserve Board.

The Warrants are immediately exercisable for 578,947 shares of our common stock at an exercise price of $8.55 per common share. The Warrants are transferrable and may be exercised at any time on or before January 30, 2019.

NOTE 15 – BENEFIT PLANS

The Firstbank Corporation 401(k) plan, a defined contribution plan, is an IRS qualified 401(k) salary deferral plan, under which Firstbank Corporation stock is one of the investment options. The Board of Directors approved changing the plan to a Safe Harbor 401(k) plan for the 2008 plan year. A Safe Harbor plan relieves administrative testing in exchange for immediate vesting of the employee’s matching contributions. Both employee and employer contributions may be made to the plan. The Company’s 2011, 2010 and 2009 matching 401(k) contributions charged to expense were $522,000, $537,000 and $557,000 respectively.  The percent of the Company’s matching contribution to the 401(k), and the determination to offer a Safe Harbor plan, is determined annually by the Board of Directors.

Firstbank – West Michigan had a deferred compensation plan for its directors and executive officers. The plan was frozen before the ICNB acquisition and has a balance at the end of 2011 of $2.1 million compared with $2.2 million at the end of 2010. Expense associated with the plan was $110,000 in 2011, $94,000 in 2010, and $91,000 in 2009.

NOTE 16 – STOCK BASED COMPENSATION

The Company has stock based compensation plans as described below. Total compensation cost that has been charged against income for those plans was $118,000, $115,000, and $160,000 for 2011, 2010 and 2009. The total income tax benefit resulting from these charges was $40,000, $39,000 and $54,000, respectively.

The Firstbank Corporation Stock Compensation Plans of 1993, 1997 and 2006 (“Plans”), as amended, which were shareholder approved, provide for the grant of 395,986, 593,798 and 315,000 shares of stock, respectively, in either restricted form or under option. Options may be either incentive stock options or nonqualified stock options. As of December 31, 2011 only nonqualified stock options and restricted stock shares have been issued under the plans. The Plan of 1993 terminated April 26, 2003. The 1997 Plan terminated April 28, 2007. The 2006 Plan will terminate February 27, 2016. The Board, at its discretion, may terminate any or all of the Plans prior to the Plans’ scheduled termination dates. At year end 2011, there were 73,734 shares available for grant under the 2006 Plan.

Stock Option

Each option granted under the Plans may be exercised in whole or in part during such period as is specified in the option agreement governing that option. Options may only be issued with exercise prices equal to, or greater than, the stock’s market value on the date of issuance. The length of time available for a stock option to be exercised is governed by each option agreement, but has not been more than ten years from the issuance date.

All companies are required to record compensation cost for stock options provided to employees in return for employee service. The cost is measured at the fair value of the options when granted. This cost is expensed over the employee service period, which is normally the vesting period of the options.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of our common stock. We use historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The weighted average fair value of options granted was $2.33 and $2.18 in 2010, and 2009, respectively.  There were no options granted in 2011.

46

	2010			2009
Risk-free interest rate		2.11	%		2.90	%
Expected option life	7 years			7 years
Expected stock price volatility		44.7	%		38.6	%
Dividend yield		0.7	%		4.7	%

Activity under the plans:

	Twelve months ended December 31, 2011 Total options outstanding
	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)		Aggregate Intrinsic Value (000)
Options outstanding, beginning of period		454,745		$	16.55
Granted		0			-
Exercised		0			-
Forfeited		(25,273	)	$	19.44
Expired		(32,574	)	$	13.51
Options outstanding, end of period		396,898		$	16.58		5.1	$	0
Options exercisable, end of period		305,468		$	19.18		4.3	$	0

Proceeds, related tax benefits realized from options exercised and intrinsic value of options exercised were as follows:

	Twelve months ended December 31,
(In Thousands of Dollars)
	2011		2010		2009
Proceeds of options exercised	$	0	$	0	$	0
Related tax benefit recognized	$	0	$	0	$	0
Intrinsic value of options exercised	$	0	$	0	$	0

As of December 31, 2011, there was $72,000 of total unrecognized compensation cost related to non-vested stock options granted under the Plans. The cost is expected to be recognized over a weighted-average period of 1.8 years.

Options outstanding at December 31, 2011 were as follows:

	Options outstanding						Exercisable
Range of exercise prices	Shares		Weighted Average Exercise Price		Weighted Average Contractual Life (years)		Shares		Weighted Average Exercise Price
$5.19 - $12.00		137,650	$	7.17		7.8		56,760	$	7.60
$12.01 - $16.00		52,700	$	16.00		5.9		42,160	$	16.00
$16.01 - $ 20.00		35,495	$	19.20		0.9		35,495	$	19.20
$20.01 - $ 26.18		171,053	$	23.79		3.5		171,053	$	23.79
Total		396,898	$	16.58		5.1		305,468	$	19.18

Restricted Stock

Restricted shares may be issued under the Plans as described above. Compensation expense is recognized over the vesting period of the shares based on the market value of the shares on the issue date.

A summary of changes in the Company’s non-vested shares for 2011 follows:

	2011				2010
Non-vested Shares	Shares		Weighted-Average Grant-Date Fair Value		Shares		Weighted-Average Grant-Date Fair Value
Non-vested at January 1, 2011		13,373	$	9.13		16,228	$	11.87
Granted		14,120	$	5.00		4,000	$	4.84
Vested		4,866	$	11.77		4,069	$	14.48
Forfeited		0		-		2,786	$	11.08
Non-vested at December 31, 2011		22,627	$	5.99		13,373	$	9.13

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As of December 31, 2011, there was $115,000 of total unrecognized compensation cost related to non-vested shares granted under the Restricted Stock Plan. The cost is expected to be recognized over a weighted-average period of 2.2 years. The total fair value of shares vested during the years ended December 31, 2011, 2010 and 2009 was $57,000, $23,000, and $22,900. Expense of $37,000 was recorded for restricted stock in 2011 compared with $20,000 in 2010 and $48,000 in 2009.

NOTE 17 – RELATED PARTY TRANSACTIONS

Loans to principal officers, directors, and their affiliates were as follows:

(In Thousands of Dollars)	2011			2010
Beginning balance	$	48,510		$	39,709
New loans		46,283			50,180
Repayments		(47,972	)		(41,363	)
Addition/(Deletion) of Directors		(6,344	)		(16	)
Ending balance	$	40,477		$	48,510

Deposits from principal officers, directors, and their affiliates at year end 2011 and 2010 were $28.5 million and $24.9 million respectively.

NOTE 18 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

Some financial instruments, such as loan commitments, credit lines, letters of credit and overdraft protection are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.

Financial instruments with off-balance sheet risk were as follows at year end:

(In Thousands of Dollars)	2011				2010
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	44,091	$	11,254	$	25,047	$	7,430
(at market rates)
Unused lines of credit and letters of Credit	$	22,205	$	118,443	$	20,963	$	115,987
Standby Letters of Credit	$	4,776	$	15,110	$	4,987	$	16,324

Commitments to make loans are generally made for periods of 60 days or less. The fixed rate loan commitments have interest rates ranging from 2.99% to 8.0% and maturities ranging from 1 year to10 years.

NOTE 19 – CONTINGENCIES

From time to time certain claims are made against the Company and its banking subsidiaries in the normal course of business. There were no outstanding claims considered by management to be material at December 31, 2011.

NOTE 20 – DIVIDEND LIMITATION OF SUBSIDIARIES

Capital guidelines adopted by Federal and State regulatory agencies and restrictions imposed by law limit the amount of cash dividends the banks can pay to the Company. At December 31, 2011, using the most restrictive of these conditions for each bank, the aggregate cash dividends that the banks can pay the Company without prior approval was $23,118,000. It is not the intent of management to have dividends paid in amounts which would reduce the capital of the banks to levels below those which are considered prudent by management and in accordance with guidelines of regulatory authorities.

NOTE 21 – STOCK REPURCHASE PROGRAM

We currently have no authorized stock repurchase program in place. On June 30, 2009, the Board of Directors unanimously approved rescinding the then current authorization to repurchase $3.2 million worth of our stock under a prior approved plan.  No stock was repurchased in 2010 or 2011.

48

NOTE 22 – CAPITAL ADEQUACY

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators.  Failure to meet capital requirements can initiate regulatory action.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited; as are asset growth and expansion, and capital restoration plans are required.

At year end 2011 and 2010, the most recent regulatory notifications categorize us as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed that classification.

49

Actual and required capital amounts at year end and ratios are presented below:

(In thousands of dollars)	Actual					Minimum Required For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
2011
Total Capital to Risk Weighted Assets
Consolidated	$	163,919		16.55	%	$	79,233		8.00	%	$	99,041		10.00	%
Firstbank – Alma		32,595		15.02	%		17,358		8.00	%		21,698		10.00	%
Firstbank – Mt. Pleasant		37,793		13.05	%		23,165		8.00	%		28,957		10.00	%
Firstbank – West Branch		22,843		13.39	%		13,649		8.00	%		17,062		10.00	%
Keystone Community Bank		26,838		14.03	%		15,299		8.00	%		19,123		10.00	%
Firstbank – West Michigan		20,035		16.95	%		9,454		8.00	%		11,818		10.00	%
Tier 1 (Core) Capital to Risk Weighted Assets
Consolidated	$	151,473		15.29	%	$	39,616		4.00	%	$	59,425		6.00	%
Firstbank – Alma		29,855		13.76	%		8,679		4.00	%		13,019		6.00	%
Firstbank – Mt. Pleasant		34,168		11.80	%		11,583		4.00	%		17,374		6.00	%
Firstbank – West Branch		20,693		12.13	%		6,825		4.00	%		10,237		6.00	%
Keystone Community Bank		24,416		12.77	%		7,649		4.00	%		11,474		6.00	%
Firstbank – West Michigan		18,533		15.68	%		4,727		4.00	%		7,091		6.00	%
Tier 1 (Core) Capital to Average Assets
Consolidated	$	151,473		10.30	%	$	58,840		4.00	%	$	73,551		5.00	%
Firstbank – Alma		29,855		8.22	%		14,536		4.00	%		18,170		5.00	%
Firstbank – Mt. Pleasant		34,168		8.31	%		16,443		4.00	%		20,554		5.00	%
Firstbank – West Branch		20,693		8.39	%		9,871		4.00	%		12,338		5.00	%
Keystone Community Bank		24,416		10.09	%		9,680		4.00	%		12,100		5.00	%
Firstbank – West Michigan		18,533		9.72	%		7,625		4.00	%		9,531		5.00	%
	Amount		Ratio			Amount		Ratio			Amount		Ratio
2010
Total Capital to Risk Weighted Assets
Consolidated	$	159,222		15.94	%	$	79,896		8.00	%	$	99,870		10.00	%
Firstbank – Alma		22,337		15.18	%		11,771		8.00	%		14,714		10.00	%
Firstbank – Mt. Pleasant		37,663		13.10	%		22,998		8.00	%		28,748		10.00	%
Firstbank – West Branch		23,582		13.56	%		13,917		8.00	%		17,396		10.00	%
Firstbank – St. Johns		8,706		12.67	%		5,496		8.00	%		6,870		10.00	%
Keystone Community Bank		25,136		12.38	%		16,249		8.00	%		20,311		10.00	%
Firstbank – West Michigan		18,338		15.36	%		9,552		8.00	%		11,940		10.00	%
Tier 1 (Core) Capital to Risk Weighted Assets
Consolidated	$	146,619		14.68	%	$	39,948		4.00	%	$	59,922		6.00	%
Firstbank – Alma		20,492		13.93	%		5,886		4.00	%		8,828		6.00	%
Firstbank – Mt. Pleasant		34,059		11.85	%		11,499		4.00	%		17,249		6.00	%
Firstbank – West Branch		21,400		12.30	%		6,959		4.00	%		10,438		6.00	%
Firstbank – St. Johns		7,834		11.40	%		2,748		4.00	%		4,122		6.00	%
Keystone Community Bank		22,554		11.10	%		8,124		4.00	%		12,187		6.00	%
Firstbank – West Michigan		16,817		14.08	%		4,776		4.00	%		7,164		6.00	%
Tier 1 (Core) Capital to Average Assets
Consolidated	$	146,619		10.02	%	$	58,518		4.00	%	$	73,148		5.00	%
Firstbank – Alma		20,492		7.51	%		10,911		4.00	%		13,639		5.00	%
Firstbank – Mt. Pleasant		34,059		8.73	%		15,607		4.00	%		19,508		5.00	%
Firstbank – West Branch		21,400		8.64	%		9,910		4.00	%		12,388		5.00	%
Firstbank – St. Johns		7,834		8.25	%		3,800		4.00	%		4,750		5.00	%
Keystone Community Bank		22,554		9.18	%		9,828		4.00	%		12,285		5.00	%
Firstbank – West Michigan		16,817		8.76	%		7,683		4.00	%		9,604		5.00	%

50

NOTE 23 – FAIR VALUE

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

	(In Thousands of Dollars)
	December 31, 2011						December 31, 2010
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Financial Assets:
Cash and cash equivalents	$	75,816		$	75,816		$	73,538		$	73,538
FDIC insured bank certificates of deposit		4,432			4,432			10,405			10,405
Trading account securities		2			2			13			13
Securities available for sale		342,184			342,184			255,703			255,703
Federal Home Loan Bank stock		7,266			7,266			8,203			8,203
Loans held for sale		349			349			1,355			1,355
Loans, net		962,890			944,756			1,010,189			987,800
Accrued interest receivable		4,531			4,531			4,689			4,689
Financial Liabilities:
Deposits		(1,220,542	)		(1,215,484	)		(1,183,783	)		(1,173,030	)
Securities sold under agreements to repurchase and overnight borrowings		(46,784	)		(46,784	)		(41,328	)		(41,328	)
Federal Home Loan Bank advances		(19,457	)		(21,359	)		(40,658	)		(42,684	)
Accrued interest payable		(762	)		(762	)		(1,467	)		(1,467	)
Subordinated debentures		(36,084	)		(36,488	)		(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 December 31, 2011 and December 31, 2010.

The following tables present information about our assets measured at fair value on a recurring basis at December 31, 2011, and valuation techniques used by us to determine those fair values.

Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability. Level 3 Securities include local Municipal Securities where market pricing is not available, trust preferred securities issued by banks, and other miscellaneous investments.

51

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
December 31, 2011
Securities available for sale
U.S. Government Agency Bonds	$	0	$	133,834	$	0	$	133,834
Mortgage Backed Securities		0		71,052		0		71,052
U.S. Government Agency CMOs		0		57,845		0		57,845
Municipal Securities		0		62,447		15,342		77,789
Equity and Other Securities		92		0		1,572		1,664
Total Securities available for sale	$	92	$	325,179	$	16,914	$	342,184
Trading equity securities	$	2	$	0	$	0	$	2
December 31, 2010
Securities available for sale
Treasury Notes	$	12,530	$	0	$	0	$	12,530
U.S. Government Agency Bonds		0		82,897		0		82,897
Mortgage Backed Securities		0		55,899		0		55,899
U.S. Government Agency CMOs		0		54,643		0		54,643
Municipal Securities		0		38,371		9,716		48,087
Equity and Other Securities		530		0		1,117		1,647
Total Securities available for sale	$	13,060	$	231,810	$	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		0			56
Purchases of securities		11,325			5,127
Sales of securities		0			(897	)
Calls and maturities		(5,244	)		(862	)
Net transfers in/(out) of Level 3		0			0
Balance at December 31 of each year	$	16,914		$	10,833

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.

52

Assets Measured at Fair Value on a Nonrecurring Basis

(Dollars in Thousands)	Balance at December 31,		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 period ended December 31,
2011
Impaired loans	$	41,889		0		0	$	41,889	$	(9,827	)
Other Real Estate Owned	$	2,223		0		0	$	2,223	$	(1,290	)
2010
Impaired loans	$	36,418		0		0	$	36,418	$	(7,748	)
Other Real Estate Owned	$	3,751		0		0	$	3,751	$	(1,579	)

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 $9,827,000 loss on impaired loans indicated in the table above, for year ended December 31, 2011, and the $7,748,000 for the year ended December 31, 2010, were charged to the allowance for loan losses, while the $1,290,000 and the $1,579,000 losses, for the years ended December 31 of 2011 and 2010, in other real estate owned were charged to earnings through other non-interest expense on the income statement.

NOTE 24 – BASIC AND DILUTED EARNINGS PER SHARE

(In Thousands, Except per Share Data)	Year Ended December 31
	2011		2010		2009
Basic earnings per common share
Net income available to common shareholders	$	3,943	$	2,084	$	1,151
Weighted average common shares outstanding		7,843		7,766		7,657
Basic earnings per common share	$	0.50	$	0.27	$	0.15
Diluted Earnings per Share
Net income available to common shareholders	$	3,943	$	2,084	$	1,151
Weighted average common shares outstanding		7,843		7,766		7,657
Add dilutive effects of assumed exercises of options		2		2		2
Weighted average common and dilutive potential
Common shares outstanding		7,845		7,768		7,659
Diluted earnings per common share	$	0.50	$	0.27	$	0.15

Stock options and warrants for 975,845, 1,033,692, and 1,065,629 shares of common stock were not considered in computing diluted earnings per share for 2011, 2010, and 2009, respectively, because they were anti-dilutive.

53

NOTE 25 – FIRSTBANK CORPORATION (PARENT COMPANY ONLY)

CONDENSED FINANCIAL INFORMATION

CONDENSED BALANCE SHEETS
	Year Ended December 31,
(In Thousands of Dollars)	2011		2010
ASSETS
Cash and cash equivalents	$	16,870	$	15,563
Commercial loans		0		1,000
Investment in and advances to banking subsidiaries		170,981		164,611
Securities		1,086		1,097
Other assets		4,104		3,683
Total Assets	$	193,041	$	185,954
LIABILITIES AND EQUITY
Accrued expenses and other liabilities	$	1,580	$	1,442
Subordinated Debentures		36,084		36,084
Shareholders’ equity		155,377		148,428
Total Liabilities and Shareholders’ Equity	$	193,041	$	185,954

CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31	2011			2010			2009
Dividends from banking subsidiaries (net of capital infusions)	$	3,680		$	4,000		$	7,246
Other income		5,921			5,656			5,542
Other expense		(8,440	)		(8,418	)		(8,800	)
Income before income tax and undistributed subsidiary income		1,161			1,238			3,988
Income tax benefit		844			532			1,022
Equity in undistributed subsidiary income		3,618			1,993			(2,319	)
Net income		5,623			3,763			2,691
Change in unrealized gain (loss) on securities, net of tax and classification effects		2,750			(452	)		(288	)
Comprehensive income	$	8,373		$	3,311		$	2,403

CONDENSED STATEMENTS OF CASH FLOWS
	Year Ended December 31,
		2011			2010			2009
Cash flows from operating activities
Net income	$	5,623		$	3,763		$	2,691
Adjustments:
Unrealized loss on trading account securities		11			(3	)		213
Equity in undistributed subsidiary income		(3,618	)		(1,993	)		2,319
Stock Option and Restricted Stock Grant Compensation Expense		118			115			158
Change in other assets		3,797			6,734			1,207
Change in other liabilities		138			(1,410	)		(1,619	)
Net cash from operating activities		6,069			7,206			4,969
Cash flows from investing activities
Sale/(Purchase) of Securities AFS		0			2,818			(2,819	)
Net decrease in commercial loans		1,000			(786	)		28
Payments for Investments in Subsidiaries		(4,220	)		(1,950	)		(16,360	)
Net cash from investing activities		(3,220	)		82			(19,151	)
Cash flows from financing activities
Payments of long-term debt		0			0			(5,600	)
Proceeds from issuance of preferred stock and common stock warrants		0			0			33,000
Proceeds from issuance of common stock		421			393			909
Dividends on preferred stock		(1,650	)		(1,650	)		(1,513	)
Dividends on common stock		(313	)		(620	)		(3,062	)
Net cash from financing activities		(1,542	)		(1,877	)		23,734
Net change in cash and cash equivalents		1,307			5,411			9,552
Beginning cash and cash equivalents		15,563			10,152			600
Ending cash and cash equivalents	$	16,870		$	15,563		$	10,152

54

NOTE 26 – OTHER COMPREHENSIVE INCOME

Other comprehensive income components and related taxes were as follows:

(In Thousands of Dollars)	2011			2010			2009
Change in unrealized holding gains and losses on available for sale securities	$	4,204		$	(689	)	$	(1,098	)
Less reclassification adjustments for gains and losses later recognized in income		(37	)		4			1,534
Net unrealized gains and (losses)		4,167			(685	)		(436	)
Tax effect		(1,417	)		233			148
Other comprehensive income (loss)	$	2,750		$	(452	)	$	(288	)

NOTE 27 – QUARTERLY FINANCIAL DATA (UNAUDITED)

(In Thousands of Dollars, Except per Share Data)	2011
	1st  Quarter		2nd  Quarter		3rd  Quarter		4th  Quarter		Year
Interest income	$	16,989	$	17,215	$	16,924	$	16,516	$	67,644
Net interest income		13,292		13,741		13,781		13,858		54,672
Income before federal income taxes		1,564		686		2,170		3,037		7,457
Net income		1,215		628		1,630		2,150		5,623
Preferred stock dividends		420		420		420		419		1,679
Net income available to common shareholders		795		208		1,210		1,731		3,944
Basic earnings per common share	$	0.10	$	0.03	$	0.15	$	0.22	$	0.50
Diluted earnings per common share	$	0.10	$	0.03	$	0.15	$	0.22	$	0.50

	2010
	1st  Quarter		2nd  Quarter		3rd  Quarter		4th  Quarter		Year
Interest income	$	18,099	$	18,225	$	18,221	$	17,837	$	72,382
Net interest income		12,324		12,668		13,095		13,405		51,492
Income before federal income taxes		671		1,248		2,372		984		5,275
Net income		659		937		1,324		843		3,763
Preferred stock dividends		420		420		420		419		1,679
Net income available to common shareholders		239		517		904		424		2,084
Basic earnings per common share	$	0.03	$	0.07	$	0.12	$	0.05	$	0.27
Diluted earnings per common share	$	0.03	$	0.07	$	0.12	$	0.05	$	0.27

All per share amounts have been adjusted for stock dividends and stock splits.

55

FIRSTBANK CORPORATION

BOARD OF DIRECTORS	OFFICERS
William E. Goggin, Chairman	Thomas R. Sullivan
Chairman, Firstbank – Alma Attorney, Goggin Law Offices	President & Chief Executive Officer
Thomas D. Dickinson, CPA	Samuel G. Stone
Certified Public Accountant Biggs Dickinson & Roberts Wealth Management Services, LLC	Executive Vice President, Chief Financial Officer, Secretary & Treasurer
David W. Fultz	William L. Benear
Owner, Fultz Insurance Agency &, Kirtland Insurance Agency	Vice President
Jeff A. Gardner	Daniel  H. Grenier
Certified Property Manager & Owner, Gardner Group	Vice President
Edward B. Grant, Ph.D., CPA	David L. Miller
Chairman, Firstbank (Mt. Pleasant) General Manager, Public Broadcasting, Central Michigan University	Vice President
Samuel A. Smith	Douglas J. Ouellette
Owner, Smith Family Funeral Homes	Vice President
Thomas R. Sullivan	Richard D. Rice
President & Chief Executive Officer, Firstbank Corporation	Vice President and Controller
	Thomas O. Schlueter
	Vice President
	James E. Wheeler, II
	Vice President
	NON-BANK SUBSIDIARY Austin Mortgage Company, LLC FBMI Risk Management Services

FIRSTBANK CORPORATION    311 Woodworth Avenue P. O. Box 1029 Alma, Michigan  48801 (989) 463-3131 www.firstbankmi.com FIRSTBANK CORPORATION OPERATIONS CENTER 308 Woodworth Avenue Alma, Michigan  48801

56

FIRSTBANK – ALMA

BOARD OF DIRECTORS	OFFICERS
William E. Goggin, Chairman	James E. Wheeler, II
Chairman, Firstbank Corporation Attorney, Goggin Law Office	President & Chief Executive Officer
Mark J. Abernathy	Richard A. Barratt
President, Alma College	Executive Vice President
Martha A. Bamfield	Craig A. Bishop
Dentist, Nester & Bamfield, DDS, PC	Community Bank  President
Cindy M. Bosley	Laura A. Crocker
Chief Administrative Officer, Masonic Pathways	Vice President
Sara Clark-Pierson	Gregory A. Daniels
Attorney, Certified Public Accountant, Clark Family Enterprises.	Vice President
Todd G. Deitrich	Tammy L. Halfmann
President, Olympian Tool, Inc.	Vice President
Ann M. Flermoen Dentist, Ann M. Flermoen, DDS	Marita A. Harkness Vice President
Frank G. Pauli	Janette Havlik
President, Pauli Ford-Mercury, Inc.	Vice President
Samuel A. Smith	Jeffery A. Hicks
Owner, Smith Family Funeral Homes	Vice President
Thomas R. Sullivan	Timothy M. Lowe
President & Chief Executive Officer	Vice President
James E. Wheeler, II	Daniel P. Redman
President & Chief Executive Officer, Firstbank - Alma Vice President, Firstbank Corporation	Vice President
	Joan S. Welke
	Vice President
	Pamela K. Winters
	Vice President
	SUBSIDIARY Firstbank – Alma Mortgage Company

Alma	Ashley	DeWitt	Ithaca
7455 N. Alger Road	114 S. Sterling St.	13215 S. US – 27 B.R.	219 E. Center St.
(989)463-3134	(989) 847-2394	(517) 668-8000	(989) 875-4107
230 Woodworth Ave.	Merrill	St. Charles	St. Johns
(989)463-3137	125 W. Saginaw St.	102 Pine St.	201 N. Clinton Ave.
	(989) 643-7253	(989) 865-9918	(989) 227-8383
311 Woodworth Ave.
(989) 463-3131	St. Louis	Vestbaburg	1065 Superior Dr.
	135 W. Washington Ave.	9002 W. Howard City-Edmore Rd	(989) 227-6995
	(989) 681-5758	(989) 268-5445

57

FIRSTBANK (MT. PLEASANT)

BOARD OF DIRECTORS	OFFICERS
Edward B. Grant, Ph.D, CPA, Chairman	Douglas J. Ouellette
General Manager, Public Broadcasting, Central Michigan University	President & Chief Executive Officer
Steven K. Anderson	Peter D. Stalker
President & CEO Cadillac Tire Center, Cadillac	Community Bank President-Cadillac
Ralph M. Berry	Daniel J. Timmins
Owner, Berry Funeral Homes	Community Bank President-Clare
Glen D. Blystone, CPA	Robert L. Wheeler
Blystone & Bailey, CPA’s PC	Senior Vice President
Kenneth C. Bovee	Cheryl L. Gaudard
President & Chief Executive Officer, Keystone Management Group	Vice President
Robert E. List, CPA	Cheryl A. Hall
Shareholder, Weinlander Fitzhugh,CPA’s	Vice President
Robert J. Long	Barbara J. Kain
Owner, Summit Petroleum Corporation	Vice President
Keith D. Merchant	Robert S. Klimczak
President, B&P Manufacturing	Vice President
J. Regan O’Neill	Karen L. McKenzie
President and Co-Founder, Network Reporting Corporation President	Vice President
and Co-Founder, NetMed Transcription Services, LLC
	Teresa L. Rupert
Douglas J. Ouellette	Vice President
President & Chief Executive Officer, Firstbank (Mt. Pleasant) Vice President, Firstbank Corporation
	Tracey L. Sallee
E. Lynn Pohl	Vice President
Partner, Boge, Wybenga & Bradely, PC
	Dianne M. Stilson
Kenneth A. Rader	Vice President
Owner, Ken Rader Farms
Phillip R. Seybert
President, P.S. Equities, Inc.	SUBSIDIARY
	Firstbank (Mt. Pleasant) Mortgage Company
Thomas R. Sullivan
President & Chief Executive Officer, Firstbank Corporation

OFFICE LOCATIONS

Mt. Pleasant	Cadillac	Howard City	Remus
102 S. Main St.	114 W. Pine St.	830 W. Shaw St.	201 W Whetland Ave.
(989) 773-2600	(231) 775-9000	(231) 937-4383	(989) 967-3602
4699 Pickard St.	8851 E. 34 Road	Lakeview	Shepherd
(989) 773-2335	(231) 779-8954	506 Lincoln Ave.	258 W. Wright Ave.
		(989) 352-7271	(989) 828-6625
2015 S. Mission St.	Clare
(989) 773-3959	806 N. McEwan Ave.	9531 N. Greenville Rd.	Winn
	(989) 386-7313	(989) 352-8180	2783 Blanchard Rd.
1925 E. Remus Rd.			(989) 866-2210
(989) 775-8528	Canadian Lakes	Morley
	10049 Buchanan Rd.   Stanwood, MI	101 E. 4th St.   (231) 856-7652

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FIRSTBANK – WEST BRANCH

BOARD OF DIRECTORS	OFFICERS
Joseph M. Clark, Chairman	Daniel H. Grenier
Owner, Morse Clark Furniture	President & Chief Executive Officer
Bryon A. Bernard	Kim D. vonKronenberger
CEO, Bernard Building Center	Executive Vice President
Robert J. Carpenter, CPA	Lorri A. Burzlaff
Vice President, Robertson & Carpenter CPAs, P.C.	Vice President
David W. Fultz	Pamela J. Crainer
Owner, Fultz Insurance Agency &	Vice President
Kirtland Insurance Agency
	Eileen S. Fournier
Daniel H. Grenier	Vice President
President & Chief Executive Officer, Firstbank – West Branch
Vice President, Firstbank Corporation	Danny J. Gallagher
	Vice President
Robert T. Griffin, Jr.
Owner and President, Griffin Beverage Company,	James L. Kloostra
Northern Beverage Co. and West Branch Tank & Trailer	Vice President
Christine R. Juarez	Stevens P. Loomis
Attorney, Juarez and Juarez, PLLC	Vice President
Norman J. Miller	Mark D. Wait
Owner, Miller Farms and Miller Dairy Equipment and Feed	Vice President
Thomas R. Sullivan	Marie A. Wilkins
President & Chief Executive Officer, Firstbank Corporation	Vice President
Mark D. Weber, MD	Subsidiaries
Orthopedic Surgeon	Firstbank – West Branch Mortgage Company
Kimberly Zygiel
Accountant, Stephenson, Gracik & Company, PC

OFFICE LOCATIONS

West Branch	Fairview	Hale	Higgins Lake
502 W. Houghton Ave.	1979 Miller Rd.	3281 M-65	4522 W. Higgins Lake Dr.
(989) 345-7900	(989) 848-2243	(989) 728-7566	(989) 821-9231
601 W. Houghton Ave.	Prescott	Rose City	St. Helen
(989) 345-7900	311 Harrison St.	505 S. Bennett St.	1990 N. St. Helen Rd.
	(989) 873-6201	(989) 685-3909	(989) 389-1311
2087 S. M-76
(989) 345-5050
2375 M-30
(989) 345-6210

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KEYSTONE COMMUNITY BANK

BOARD OF DIRECTORS	OFFICERS
Kenneth V. Miller, Chairman	Thomas O. Schlueter
Partner, Havirco	President & Chief Executive Officer
Owner, Millennium Restaurant Group
John M. Brink (Effective January, 2012)	Thomas D. Lundquist
Brink, Key & Chludzinski, P.C.	Senior Vice President
Michelle L. Eldridge	Cynthia J. Carter
Principal, LVM Capital Management, LTD.	Vice President
Samuel T. Field	Sara S. Dana
Attorney, Field & Field, P.C	Vice President
Jeff A. Gardner	Kimberly A. Labadie
Certified Property Manager &	Vice President
Owner, Gardner Group
John E. Hopkins	Cynthia L. Mount
Retired, former President & Chief Executive Officer,	Vice President
Kalamazoo Community Foundation
Ronald A. Molitor	Derek T. Naylor
President, Mol-Son, Inc.	Vice President
John M. Novak	Ryan M. Turtle
Principal, Miller Canfield Attorneys & Counselors	Vice President
Thomas O. Schlueter
President & Chief Executive Officer, Keystone Community Bank
Vice President, Firstbank Corporation
Thomas R. Sullivan
President & Chief Executive Officer, Firstbank Corporation
John R. Trittschuh, M.D.
President, EyeCare Physicians and Surgeons, P.C.
	SUBSIDIARY
	Keystone Mortgage Services, LLC

OFFICE LOCATIONS

Kalamazoo	Portage	Paw Paw
107 West Michigan Ave.	6405 South Westnedge Ave.	900 East Michigan Avenue
(269) 553-9100	(269) 321-9100	(269) 655-1000
235 North Drake Road	3910 West Centre Street
(269) 544-9100	(269) 323-9100
2925 Oakland Drive
(269) 488-9200
5073 Gull Road
(269)488-4800

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FIRSTBANK – WEST MICHIGAN

BOARD OF DIRECTORS	OFFICERS
Janice K. DeYoung, Chairman	William L. Benear
Former Business Owner	President & Chief Executive Officer
William L. Benear	Clare R. Colwell
President & Chief Executive Officer, Firstbank – West Michigan	Executive Vice President
Vice President, Firstbank Corporation
	Kevin M. Meade
Thomas D. Dickinson, CPA	Senior Vice President
Biggs, Dickinson & Roberts Wealth Management, LLC
Certified Public Accountant	Debrann Hausserman
	Vice President
Jerome I. Gregory
Chief Executive Officer, Carr Real Estate, Inc.	William Kavanagh
	Vice President
David M. Laux
President, Industrial Engineering Services, Inc.	Blaine A. Kemme
	Vice President
Douglas J. Ouellette
President & Chief Executive Officer, Firstbank (Mt. Pleasant)	Michele M. Krick
Vice President, Firstbank Corporation	Vice President
James E. Reagan, D.D.S.	Daniel P. Mitchell
Dentist, James E. Reagan, DDS	Vice President
Thomas R. Sullivan	Jackeline Salerno Thebo
President & Chief Executive Officer, Firstbank Corporation	Vice President
	Subsidiary ICNB Mortgage Company

OFFICE LOCATIONS

Ionia	Belding	Lowell	Woodland
302 W. Main St.	105 S. Pearl St.	2601 W. Main St.	115 S. Main St.
(616) 527-0220	(616) 794-1195	(616) 897-6171	(269) 367-4911
202 N. Dexter St.	9344 W. Belding Rd.	Sunfield
(616) 527-1550	(616) 794-0890	145 Main St.
		(517) 566-8025
2600 S. State Rd.	Hastings
(616) 527-9250	1500 W. M-43 Hwy.
	(269) 948-2905

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BUSINESS OF THE COMPANY

Firstbank Corporation is a bank holding company.  As of December 31, 2011 our subsidiaries are Firstbank – Alma; Firstbank (Mt. Pleasant); Firstbank – West Branch; Keystone Community Bank; Firstbank – West Michigan; FBMI Risk Management Services, Inc.; and Austin Mortgage Company, LLC. As of December 31, 2010, Firstbank Corporation and its subsidiaries employed 435 people on a full-time equivalent basis.

We are in the business of banking. Each of our subsidiary banks is a full service community bank. The subsidiary banks offer all customary banking services, including the acceptance of checking, savings and time deposits and the making of commercial, agricultural, real estate, personal, home improvement, automobile and other installment and consumer loans. Trust services are offered to customers through Citizens Bank Wealth Management in the Firstbank – Alma main office.

The banks obtain most of their deposits and loans from residents and businesses in Barry, Bay, Clare, Gratiot, Kalamazoo, Ionia, Iosco, Isabella, Mecosta, Midland, Montcalm, Ogemaw, Oscoda, Roscommon, Saginaw, and parts of Clinton, Eaton, Kent, Wexford and Van Buren counties. Firstbank – Alma has its main office and one branch in Alma, Michigan, and branches located in each of the following areas: Ashley, Dewitt, Ithaca, Merrill, Pine River Township (near Alma), St. Charles, St. Johns (2 branches), St. Louis, and Vestaburg, Michigan. Firstbank (Mt. Pleasant) has its main office and one branch located in Mt. Pleasant, Michigan, two branches located in Union Township (near Mt. Pleasant), two branches in Lakeview, and one branch located in each of the following areas: Cadillac, Canadian Lakes, Clare, Howard City, Morley, Remus, Shepherd, and Winn, Michigan. Firstbank – West Branch has its main office in West Branch, Michigan, and one branch located in each of the following areas: Fairview, Hale, Higgins Lake, Rose City, St. Helen, Prescott, and West Branch Township (near West Branch), Michigan. Keystone Community bank has its main office and three branches located in Kalamazoo, Michigan, two additional branches in Portage, Michigan, and one branch in Paw Paw, Michigan. Firstbank – West Michigan has its main office and two additional branches in Ionia, Michigan, two branches in Belding, Michigan, and one branch each in Hastings, Lowell, Sunfield and Woodland, Michigan. The banks have no material foreign assets or income.

Our principal sources of revenues are interest and fees on loans and non-interest revenue resulting from banking and non-bank subsidiary activity. On a consolidated basis, interest and fees on loans accounted for approximately 79% of total revenues in 2011, 80% in 2010, and 78% in 2009. Non-interest revenue accounted for approximately 13% of total revenue in 2011, 14% in 2010, and 17% in 2009. Interest on securities accounted for approximately 8% of total revenue in 2011, 6% in 2010, and 5% in 2009.

Annual Meeting

The annual meeting of shareholders will be held on Monday, April 23, 2012 at 4:30 p.m., Heritage Center, Alma College, Alma, Michigan.

Independent Auditors	General Counsel
Plante & Moran, PLLC	Varnum LLP
Grand Rapids, Michigan	Grand Rapids, Michigan

Stock Information

Firstbank Corporation common stock is traded on the NASDAQ National Market System under the symbol FBMI.  For research information and/or investment recommendations, contact:

Raymond James		FIG Partners, LLC
800-248-8863	- or -	800-677-9654

Transfer Agent Information

Registrar and Transfer Company is Firstbank Corporation’s Transfer Agent.  You may contact the Investor Relations Department at 800-368-5948.

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