SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2013

Commission file number   0-7818

INDEPENDENT BANK CORPORATION

(Exact name of registrant as specified in its charter)

Michigan	38-2032782
(State or jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)

230 West Main Street, P.O. Box 491, Ionia, Michigan  48846

(Address of principal executive offices)

(616) 527-5820

(Registrant's telephone number, including area code)

NONE

Former name, address and fiscal year, if changed since last report.

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

YES x NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YESx NO o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or smaller reporting company.

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting companyx

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o NO x

     Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Common stock, no par value	22,813,593
Class	Outstanding at November 6, 2013

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

INDEX

		Number(s)
PART I -	Financial Information
Item 1.	Condensed Consolidated Statements of Financial Condition September 30, 2013 and December 31, 2012	3
	Condensed Consolidated Statements of Operations Three- and Nine-month periods ended September 30, 2013 and 2012	4
	Condensed Consolidated Statements of Comprehensive Income Three- and Nine-month periods ended September 30, 2013 and 2012	5
	Condensed Consolidated Statements of Cash Flows Nine-month periods ended September 30, 2013 and 2012	6
	Condensed Consolidated Statements of Shareholders' Equity Nine-month periods ended September 30, 2013 and 2012	7
	Notes to Interim Condensed Consolidated Financial Statements	8-68
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	69-99
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	100
Item 4.	Controls and Procedures	100
PART II -	Other Information
Item 1A	Risk Factors	101
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	101
Item 6.	Exhibits	102

Discussions and statements in this report that are not statements of historical fact, including, without limitation, statements that include terms such as “will,” “may,” “should,” “believe,” “expect,” “forecast,” “anticipate,” “estimate,” “project,” “intend,” “likely,” “optimistic” and “plan,” and statements about future or projected financial and operating results, plans, projections, objectives, expectations, and intentions and other statements that are not historical facts, are forward-looking statements. Forward-looking statements include, but are not limited to, descriptions of plans and objectives for future operations, products or services; projections of our future revenue, earnings or other measures of economic performance; forecasts of credit losses and other asset quality trends; and predictions as to our Bank’s ability to maintain certain regulatory capital standards. These forward-looking statements express our current expectations, forecasts of future events, or long-term goals and, by their nature, are subject to assumptions, risks, and uncertainties.  Although we believe that the expectations, forecasts, and goals reflected in these forward-looking statements are reasonable, actual results could differ materially for a variety of reasons, including, among others:

· the failure of assumptions underlying the establishment of and provisions made to our allowance for loan losses;

· the timing and pace of an economic recovery in Michigan and the United States in general, including regional and local real estate markets;

· the ability of our Bank to remain well-capitalized;

· the failure of assumptions underlying our estimate of probable incurred losses from vehicle service contract payment plan counterparty contingencies, including our assumptions regarding future cancellations of vehicle service contracts, the value to us of collateral that may be available to recover funds due from our counterparties, and our ability to enforce the contractual obligations of our counterparties to pay amounts owing to us;

· the risk that sales of our common stock could trigger a reduction in the amount of net operating loss carryforwards that we may be able to utilize for income tax purposes;

· the continued services of our management team; and

1

· implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act or other new legislation, which may have significant effects on us and the financial services industry, the exact nature and extent of which cannot be determined at this time.

This list provides examples of factors that could affect the results described by forward-looking statements contained in this report, but the list is not intended to be all inclusive.  The risk factors disclosed in Part I – Item A of our Annual Report on Form 10-K for the year ended December 31, 2012, as updated by any new or modified risk factors disclosed in Part II – Item 1A of any subsequently filed Quarterly Report on Form 10-Q, include all known risks that our management believes could materially affect the results described by forward-looking statements in this report.  However, those risks may not be the only risks we face.  Our results of operations, cash flows, financial position, and prospects could also be materially and adversely affected by additional factors that are not presently known to us, that we currently consider to be immaterial, or that develop after the date of this report.  We cannot assure you that our future results will meet expectations. While we believe the forward-looking statements in this report are reasonable, you should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. We do not undertake, and expressly disclaim, any obligation to update or alter any statements, whether as a result of new information, future events, or otherwise, except as required by applicable law.

2

Part I - Item 1. INDEPENDENT BANK CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Financial Condition

	September 30, 2013			December 31, 2012
	(unaudited)
Assets	(In thousands, except share amounts)
Cash and due from banks	$	56,179		$	55,487
Interest bearing deposits		74,766			124,295
Cash and Cash Equivalents		130,945			179,782
Interest bearing deposits - time		16,946			-
Trading securities		308			110
Securities available for sale		415,885			208,413
Federal Home Loan Bank and Federal Reserve Bank stock, at cost		21,496			20,838
Loans held for sale, carried at fair value		27,622			47,487
Loans held for sale, carried at lower of cost or fair value		-			3,292
Loans
Commercial		625,422			617,258
Mortgage		491,525			527,340
Installment		194,542			189,849
Payment plan receivables		68,494			84,692
Total Loans		1,379,983			1,419,139
Allowance for loan losses		(34,437	)		(44,275	)
Net Loans		1,345,546			1,374,864
Other real estate and repossessed assets		16,637			26,133
Property and equipment, net		47,884			47,016
Bank-owned life insurance		51,916			50,890
Deferred tax assets, net		58,807			-
Capitalized mortgage loan servicing rights		13,051			11,013
Vehicle service contract counterparty receivables, net		9,753			18,449
Other intangibles		3,366			3,975
Prepaid FDIC deposit insurance assessment		-			9,448
Accrued income and other assets		23,342			22,157
Total Assets	$	2,183,504		$	2,023,867
Liabilities and Shareholders' Equity
Deposits
Non-interest bearing	$	508,983		$	488,126
Savings and interest-bearing checking		908,599			871,238
Reciprocal		55,924			33,242
Retail time		362,585			372,340
Brokered time		13,227			14,591
Total Deposits		1,849,318			1,779,537
Other borrowings		17,282			17,625
Subordinated debentures		50,175			50,175
Vehicle service contract counterparty payables		5,499			7,725
Accrued expenses and other liabilities		34,629			33,830
Total Liabilities		1,956,903			1,888,892
Shareholders' Equity
Convertible preferred stock, no par value, 200,000 shares authorized; None issued and outstanding at September 30, 2013 and 74,426 shares issued and outstanding at December 31, 2012; liquidation preference: $85,150 at December 31, 2012		-			84,204
Common stock, no par value, 500,000,000 shares authorized; issued and outstanding:  22,808,839 shares at September 30, 2013 and 9,093,732 shares at December 31, 2012		350,926			251,237
Accumulated deficit		(115,155	)		(192,408	)
Accumulated other comprehensive loss		(9,170	)		(8,058	)
Total Shareholders' Equity		226,601			134,975
Total Liabilities and Shareholders' Equity	$	2,183,504		$	2,023,867

See notes to interim condensed consolidated financial statements (unaudited)

3

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Interest Income	(unaudited – in thousands, except per share amounts)
Interest and fees on loans	$	20,083		$	23,385		$	61,096		$	71,427
Interest on securities
Taxable		1,109			655			2,772			2,246
Tax-exempt		282			261			762			801
Other investments		310			432			966			1,210
Total Interest Income		21,784			24,733			65,596			75,684
Interest Expense
Deposits		1,371			2,223			4,363			6,952
Other borrowings		884			1,059			2,625			3,351
Total Interest Expense		2,255			3,282			6,988			10,303
Net Interest Income		19,529			21,451			58,608			65,381
Provision for loan losses		(355	)		251			(3,153	)		6,438
Net Interest Income After Provision for Loan Losses		19,884			21,200			61,761			58,943
Non-interest Income
Service charges on deposit accounts		3,614			4,739			10,603			13,492
Interchange income		1,852			2,324			5,542			7,053
Net gains (losses) on assets
Mortgage loans		1,570			4,602			8,415			12,041
Securities		14			301			205			1,154
Other than temporary impairment loss on securities
Total impairment loss		-			(70	)		(26	)		(332	)
Loss recognized in other comprehensive loss		-			-			-			-
Net impairment loss recognized in earnings		-			(70	)		(26	)		(332	)
Mortgage loan servicing		338			(364	)		2,614			(716	)
Title insurance fees		409			482			1,261			1,479
(Increase) decrease in fair value of U.S. Treasury warrant		-			(32	)		(1,025	)		(211	)
Other		2,040			2,560			6,327			8,208
Total Non-interest Income		9,837			14,542			33,916			42,168
Non-interest Expense
Compensation and employee benefits		12,591			13,610			35,613			39,598
Occupancy, net		2,017			2,482			6,588			7,688
Data processing		2,090			2,024			6,048			5,960
Loan and collection		1,584			2,832			5,512			8,129
Vehicle service contract counterparty contingencies		149			281			3,403			1,078
Furniture, fixtures and equipment		1,051			1,083			3,171			3,490
Provision for loss reimbursement on sold loans		1,417			193			2,436			751
Communications		695			896			2,205			2,791
FDIC deposit insurance		685			816			2,026			2,489
Advertising		652			647			1,881			1,842
Legal and professional		487			952			1,843			3,117
Interchange expense		410			468			1,238			1,321
Net losses on other real estate and repossessed assets		119			291			1,091			1,911
Credit card and bank service fees		310			433			975			1,708
Write-down of property and equipment held for sale		-			860			-			860
Cost (recoveries) related to unfunded lending commitments		(86	)		(538	)		(57	)		(597	)
Other		1,763			1,966			5,176			4,692
Total Non-interest Expense		25,934			29,296			79,149			86,828
Income Before Income Tax		3,787			6,446			16,528			14,283
Income tax expense (benefit)		282			-			(56,172	)		-
Net Income	$	3,505		$	6,446		$	72,700		$	14,283
Preferred stock dividends and discount accretion		(749	)		(1,093	)		(3,001	)		(3,241	)
Preferred stock discount		7,554			-			7,554			-
Net Income Applicable to Common Stock	$	10,310		$	5,353		$	77,253		$	11,042
Net Income Per Common Share
Basic	$	0.73		$	0.61		$	7.03		$	1.28
Diluted		0.17			0.16			3.40			0.36
Dividends Per Common Share
Declared	$	0.00		$	0.00		$	$0.00		$	0.00
Paid		0.00			0.00			0.00			0.00

See notes to interim condensed consolidated financial statements (unaudited)

4

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

	Three months ended						Nine months ended
	September 30,						September 30,
	2013			2012			2013			2012
	(unaudited - in thousands)
Net income	$	3,505		$	6,446		$	72,700		$	14,283
Other comprehensive income (loss), before tax
Available for sale securities
Unrealized gain (loss) arising during period		(2,910	)		909			(4,399	)		2,543
Change in unrealized losses for which a portion of other than temporary impairment has been recognized in earnings		(108	)		770			183			1,103
Reclassification adjustment for other than temporary impairment included in earnings		-			70			26			332
Reclassification adjustments for (gains) losses included in earnings		-			(350	)		(8	)		(1,193	)
Unrealized gains (losses) recognized in other comprehensive income on available for sale securities		(3,018	)		1,399			(4,198	)		2,785
Income tax benefit		(1,056	)		-			(1,469	)		-
Unrealized gains (losses) recognized in other comprehensive income on available for sale securities, net of tax		(1,962	)		1,399			(2,729	)		2,785
Derivative instruments
Unrealized loss arising during period		-			(54	)		(38	)		(129	)
Reclassification adjustment for expense recognized in earnings		-			92			208			397
Reclassification adjustment for accretion on settled derivatives		95			145			95			436
Unrealized gains recognized in other comprehensive income on derivative instruments		95			183			265			704
Income tax expense (benefit)		33			-			(1,352	)		-
Unrealized gains recognized in other comprehensive income on derivative instruments, net of tax		62			183			1,617			704
Other comprehensive income (loss)		(1,900	)		1,582			(1,112	)		3,489
Comprehensive income	$	1,605		$	8,028		$	71,588		$	17,772

 See notes to interim condensed consolidated financial statements (unaudited)

5

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

	Nine months ended September 30,
	2013			2012
	(unaudited - in thousands)
Net Income	$	72,700		$	14,283
Adjustments to Reconcile Net Income to Net Cash from Operating Activities
Proceeds from sales of loans held for sale		346,206			378,804
Disbursements for loans held for sale		(317,926	)		(363,931	)
Net decrease in loans held for sale relating to branch sale		-			900
Net decrease in deposits held for sale relating to branch sale		-			(11,671	)
Provision for loan losses		(3,153	)		6,438
Deferred federal income tax benefit		(58,807	)		-
Deferred loan fees		(28	)		(501	)
Depreciation, amortization of intangible assets and premiums and accretion of discounts on securities and loans		(2,168	)		(3,532	)
Write-down of property and equipment held for sale		-			860
Net gains on mortgage loans		(8,415	)		(12,041	)
Net gains on securities		(205	)		(1,154	)
Securities impairment recognized in earnings		26			332
Net losses on other real estate and repossessed assets		1,091			1,911
Vehicle service contract counterparty contingencies		3,403			1,078
Share based compensation		1,002			572
(Increase) decrease in accrued income and other assets		8,572			(5,439	)
Increase (decrease) in accrued expenses and other liabilities		(947	)		3,957
Total Adjustments		(31,349	)		(3,417	)
Net Cash from Operating Activities		41,351			10,866
Cash Flow used in Investing Activities
Proceeds from the sale of securities available for sale		2,940			37,176
Proceeds from the maturity of securities available for sale		25,975			66,868
Principal payments received on securities available for sale		28,766			18,214
Purchases of securities available for sale		(266,974	)		(192,382	)
Purchases of interest bearing deposits		(16,419	)		-
Purchase of Federal Reserve Bank stock		(658	)		-
Redemption of Federal Reserve Bank stock		-			334
Net cash from branch sale		3,292			-
Net decrease in portfolio loans (loans originated, net of principal payments)		30,255			75,148
Net proceeds from the sale of watch, substandard and non-performing loans		6,721			-
Proceeds from the collection of vehicle service contract counterparty receivables		6,351			7,413
Proceeds from the sale of other real estate and repossessed assets		11,659			14,062
Proceeds from the sale of property and equipment, net		52			415
Capital expenditures		(5,992	)		(4,185	)
Net Cash from (used in) Investing Activities		(174,032	)		23,063
Cash Flow from Financing Activities
Net increase in total deposits		69,781			98,836
Net increase (decrease) in other borrowings		(2	)		3
Proceeds from Federal Home Loan Bank advances		100			12,000
Payments of Federal Home Loan Bank advances		(441	)		(27,670	)
Redemption of convertible preferred stock and common stock warrant		(81,000	)		-
Share based compensation withholding obligation		(513	)		-
Net increase (decrease) in vehicle service contract counterparty payables		(2,226	)		1,781
Proceeds from issuance of common stock		98,145			557
Net Cash from Financing Activities		83,844			85,507
Net Increase (Decrease) in Cash and Cash Equivalents		(48,837	)		119,436
Cash and Cash Equivalents at Beginning of Period		179,782			341,108
Cash and Cash Equivalents at End of Period	$	130,945		$	460,544
Cash paid during the period for
Interest	$	13,853		$	8,647
Income taxes		42			198
Transfers to other real estate and repossessed assets		3,254			9,110
Transfer of payment plan receivables to vehicle service contract counterparty receivables		995			1,225
Purchase of securities available for sale and interest bearing deposits - time not yet settled		3,816			-
Transfers to loans held for sale		-			54,127
Transfers to fixed assets held for sale		-			10,884
Transfers to deposits held for sale		-			420,261

See notes to interim condensed consolidated financial statements (unaudited)

6

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders' Equity

	Nine months ended September 30,
	2013			2012
	(unaudited)
	(In thousands)
Balance at beginning of period	$	134,975		$	102,627
Net income		72,700			14,283
Issuance of common stock		99,065			557
Redemption of convertible preferred stock and common stock warrant		(81,000	)		-
Common stock warrant		1,484			-
Share based compensation		1,002			572
Share based compensation withholding obligation		(513	)		-
Net change in accumulated other comprehensive loss, net of related tax effect		(1,112	)		3,489
Balance at end of period	$	226,601		$	121,528

See notes to interim condensed consolidated financial statements (unaudited)

7

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Preparation of Financial Statements

The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading.  The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 2012 included in our Annual Report on Form 10-K.

In our opinion, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary to present fairly our consolidated financial condition as of September 30, 2013 and December 31, 2012, and the results of operations for the three and nine-month periods ended September 30, 2013 and 2012.  The results of operations for the three and nine-month periods ended September 30, 2013, are not necessarily indicative of the results to be expected for the full year.  Certain reclassifications have been made in the prior period financial statements to conform to the current period presentation.  Our critical accounting policies include the assessment for other than temporary impairment (“OTTI”) on investment securities,  the determination of the allowance for loan losses, the determination of vehicle service contract counterparty contingencies, the valuation of originated mortgage loan servicing rights and the valuation of deferred tax assets.  Refer to our 2012 Annual Report on Form 10-K for a disclosure of our accounting policies.

2. New Accounting Standards

In February, 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”. This ASU amended guidance on the reporting of reclassifications out of accumulated other comprehensive income.  The amendments in this guidance require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts.  This amended guidance became effective for us at January 1, 2013 and was applied prospectively.  The effect of adopting this standard did not have a material impact on our consolidated operating results or financial condition, but the additional disclosures are included in note #16.

8

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

3. Securities

Securities available for sale consist of the following:

	Amortized		Unrealized
	Cost		Gains		Losses		Fair Value
	(In thousands)
September 30, 2013
U.S. agency	$	23,794	$	3	$	405	$	23,392
U.S. agency residential mortgage-backed		198,424		1,062		1,147		198,339
Private label residential mortgage-backed		7,615		57		779		6,893
Other asset backed		26,877		8		55		26,830
Obligations of states and political subdivisions		143,957		422		3,440		140,939
Corporate		17,031		22		37		17,016
Trust preferred		2,901		-		425		2,476
Total	$	420,599	$	1,574	$	6,288	$	415,885
December 31, 2012
U.S. agency	$	30,620	$	70	$	23	$	30,667
U.S. agency residential mortgage-backed		126,151		1,264		3		127,412
Private label residential mortgage-backed		9,070		-		876		8,194
Obligations of states and political subdivisions		38,384		736		69		39,051
Trust preferred		4,704		-		1,615		3,089
Total	$	208,929	$	2,070	$	2,586	$	208,413

Our investments’ gross unrealized losses and fair values aggregated by investment type and length of time that individual securities have been at a continuous unrealized loss position follows:

	Less Than Twelve Months				Twelve Months or More				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(In thousands)
September 30, 2013
U.S. agency	$	18,090	$	405	$	-	$	-	$	18,090	$	405
U.S. agency residential mortgage-backed		84,132		1,147		-		-		84,132		1,147
Private label residential mortgage-backed		2,150		14		4,684		765		6,834		779
Other asset backed		17,364		55		-		-		17,364		55
Obligations of states and political subdivisions		100,584		3,210		4,940		230		105,524		3,440
Corporate		10,980		37		-		-		10,980		37
Trust preferred		-		-		2,476		425		2,476		425
Total	$	233,300	$	4,868	$	12,100	$	1,420	$	245,400	$	6,288
December 31, 2012
U.S. agency	$	8,097	$	23	$	-	$	-	$	8,097	$	23
U.S. agency residential mortgage-backed		-		-		457		3		457		3
Private label residential mortgage-backed		-		-		8,192		876		8,192		876
Obligations of states and political subdivisions		7,384		69		-		-		7,384		69
Trust preferred		-		-		3,089		1,615		3,089		1,615
Total	$	15,481	$	92	$	11,738	$	2,494	$	27,219	$	2,586

9

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Our portfolio of available-for-sale securities is reviewed quarterly for impairment in value. In performing this review management considers (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) the impact of changes in market interest rates on the market value of the security and (4) an assessment of whether we intend to sell, or it is more likely than not that we will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. For securities that do not meet the aforementioned recovery criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income or loss.

U.S. agency and U.S. agency residential mortgage-backed securities — at September 30, 2013 we had six U.S. Agency and 13 U.S. Agency residential mortgage-backed securities whose fair market value is less than amortized cost. The unrealized losses are largely attributed to rises in term interest rates and widening spreads to Treasury bonds. As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Private label residential mortgage backed securities — at September 30, 2013 we had seven of this type of securities whose fair value is less than amortized cost. Two of the issues are rated by a major rating agency as investment grade while three are below investment grade and two are split rated. Three of these bonds have impairment in excess of 10% and four of these holdings have been impaired for more than 12 months.

The unrealized losses are largely attributable to credit spread widening on these securities since their acquisition.  The underlying loans within these securities include Jumbo (70%) and Alt A (30%) at September 30, 2013.

	September 30, 2013					December 31, 2012
			Net					Net
	Fair		Unrealized			Fair		Unrealized
	Value		Gain (Loss)			Value		Gain (Loss)
	(In thousands)
Private label residential mortgage-backed
Jumbo	$	4,820	$	(566	)	$	6,041	$	(594	)
Alt-A		2,073		(156	)		2,153		(282	)

All of these securities are receiving some principal and interest payments. Most of these transactions are passthrough structures, receiving pro rata principal and interest payments from a dedicated collateral pool for loans that are performing. The nonreceipt of interest cash flows is not expected and thus not presently considered in our discounted cash flow methodology discussed below.

10

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

All private label residential mortgage-backed securities are reviewed for OTTI utilizing a cash flow projection. The cash flow analysis forecasts cash flow from the underlying loans in each transaction and then applies these cash flows to the bonds in the securitization. The cash flows from the underlying loans consider contractual payment terms (scheduled amortization), prepayments, defaults and severity of loss given default. The analysis uses dynamic assumptions for prepayments, defaults and loss severity. Near term prepayment assumptions are based on recently observed prepayment rates. More weight is given to longer term historic performance (12 months). In some cases, recently observed prepayment rates are lower than historic norms due to a minimal amount of new jumbo loan issuances. This loan market is heavily dependent upon securitization for funding, and new securitization transactions have been minimal. Our model projections anticipate that prepayment rates gradually revert to historical levels. For seasoned ARM transactions, normalized prepayment rates range from 12% to 16% CPR. For fixed rate collateral (one transaction), the prepayment speeds are projected to remain stable.

Default assumptions are largely based on the volume of existing real estate owned, pending foreclosures and severe delinquencies. Other considerations include the quality of loan underwriting, recent default experience, realized loss performance and the volume of less severe delinquencies. Default levels generally are projected to remain elevated or increase for a period of time sufficient to address the level of distressed loans in the transaction. Our projections expect defaults to then decline, generally beginning in year three. Current loss severity assumptions are based on recent observations when meaningful data is available. Loss severity is expected to remain elevated for the next 18 months. Severity is expected to decline after this period due to improving overall economic conditions, improving real estate prices and a reduced inventory of foreclosed properties on the market. Except for three securities discussed in further detail below (all three are currently below investment grade), our cash flow analysis forecasts complete recovery of our cost basis for each reviewed security.

At September 30, 2013 three below investment grade private label residential mortgage-backed securities had credit related OTTI and are summarized as follows:

			Super		Senior
	Senior		Senior		Support
	Security		Security		Security		Total
	(In thousands)
As of September 30, 2013
Fair value	$	2,584	$	1,717	$	57	$	4,358
Amortized cost		2,978		1,722		-		4,700
Non-credit unrealized loss		394		5		-		399
Unrealized gain		-		-		57		57
Cumulative credit related OTTI		748		457		380		1,585
Credit related OTTI recognized in our Condensed Consolidated Statements of Operations
For the three months ended September 30,
2013	$	-	$	-	$	-	$	-
2012		70		-		-		70
For the nine months ended September 30,
2013		26		-		-		26
2012		240		32		60		332

11

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Each of these securities is receiving principal and interest payments similar to principal reductions in the underlying collateral.  One of these securities has an unrealized gain and two have unrealized losses at September 30, 2013.  Prior to the second quarter of 2013 all three of these securities had an unrealized loss.  The original amortized cost for each of these securities has been permanently adjusted downward for previously recorded credit related OTTI.  The unrealized loss (based on original amortized cost) for one of these securities is now less than previously recorded credit related OTTI amounts.  The remaining non-credit related unrealized loss in the senior and super senior securities is attributed to other factors and is reflected in other comprehensive income during those same periods.

As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no other declines discussed above are deemed to be other than temporary.

Other asset backed — at September 30, 2013 we had five other asset backed securities whose fair value is less than amortized cost. The unrealized losses are primarily due to increases in interest rates.  As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Obligations of states and political subdivisions — at September 30, 2013 we had 137 municipal securities whose fair value is less than amortized cost. The increase in unrealized losses during 2013 is primarily due to increases in interest rates.  As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Corporate — at September 30, 2013 we had nine corporate securities whose fair value is less than amortized cost. The unrealized losses are primarily due to credit spread widening.  As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Trust preferred securities — at September 30, 2013 we had three trust preferred securities whose fair value is less than amortized cost. All of our trust preferred securities are single issue securities issued by a trust subsidiary of a bank holding company. The pricing of trust preferred securities over the past several years has suffered from credit spread widening fueled by uncertainty regarding potential losses of financial companies and repricing of risk related to these hybrid capital securities.

One of the three securities is rated by two major rating agencies as investment grade, while one (a Bank of America issuance) is rated below investment grade by two major rating agencies and the other one is non-rated. The non-rated issue is a relatively small bank and was never rated. The issuer of this non-rated trust preferred security, which had a total amortized cost of $1.0 million and total fair value of $0.9 million as of September 30, 2013, continues to have satisfactory credit metrics and make interest payments.

12

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The following table breaks out our trust preferred securities in further detail as of September 30, 2013 and December 31, 2012:

	September 30, 2013					December 31, 2012
			Net					Net
	Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss
	(In thousands)
Trust preferred securities
Rated issues	$	1,620	$	(281	)	$	1,581	$	(316	)
Unrated issues		856		(144	)		1,508		(1,299	)

As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

We recorded credit related OTTI charges in earnings on securities available for sale of zero and $0.070 million during the three month periods ended September 30, 2013 and 2012, respectively and $0.026 million and $0.332 million during the nine month periods ended September 30, 2013 and 2012, respectively (see discussion above).

A roll forward of credit losses recognized in earnings on securities available for sale for the three and nine month periods ending September 30, follows:

	Three months ended				Nine months ended
	September 30,				September 30,
	2013		2012		2013		2012
	(In thousands)
Balance at beginning of period	$	1,835	$	1,732	$	1,809	$	1,470
Additions to credit losses on securities for which no previous OTTI was recognized		-		-		-		-
Increases to credit losses on securities for which OTTI was previously recognized		-		70		26		332
Balance at end of period	$	1,835	$	1,802	$	1,835	$	1,802

The amortized cost and fair value of securities available for sale at September 30, 2013, by contractual maturity, follow. The actual maturity may differ from the contractual maturity because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Fair
	Cost		Value
	(In thousands)
Maturing within one year	$	12,322	$	12,325
Maturing after one year but within five years		70,216		70,165
Maturing after five years but within ten years		29,982		29,545
Maturing after ten years		75,163		71,788
		187,683		183,823
U.S. agency residential mortgage-backed		198,424		198,339
Private label residential mortgage-backed		7,615		6,893
Other asset backed		26,877		26,830
Total	$	420,599	$	415,885

13

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Gains and losses realized on the sale of securities available for sale are determined using the specific identification method and are recognized on a trade-date basis.  A summary of proceeds from the sale of securities available for sale and gains and losses for the nine month periods ending September 30, follows:

			Realized
	Proceeds		Gains		Losses(1)
	(In thousands)
2013	$	2,940	$	15	$	7
2012		37,176		1,193		-

(1) Losses in 2013 and 2012 exclude $0.026 million and $0.332 million, respectively of credit related OTTI recognized in earnings.

During 2013 and 2012 our trading securities consisted of various preferred stocks.  During the first nine months of 2013 and 2012 we recognized gains (losses) on trading securities of $0.20 million and ($0.04) million, respectively, that are included in net gains (losses) on securities in the Condensed Consolidated Statements of Operations.  Both of these amounts, relate to gains (losses) recognized on trading securities still held at each respective period end.

4. Loans

Our assessment of the allowance for loan losses is based on an evaluation of the loan portfolio, recent loss experience, current economic conditions and other pertinent factors.

An analysis of the allowance for loan losses by portfolio segment for the three months ended September 30, follows:

										Payment
										Plan
	Commercial			Mortgage			Installment			Receivables			Unallocated			Total
	(In thousands)
2013
Balance at beginning of period	$	8,236		$	18,659		$	2,996		$	125		$	6,770		$	36,786
Additions (deductions)
Provision for loan losses		(709	)		712			105			(37	)		(426	)		(355	)
Recoveries credited to allowance		878			343			244			19			-			1,484
Loans charged against the allowance		(1,450	)		(1,497	)		(534	)		3			-			(3,478	)
Balance at end of period	$	6,955		$	18,217		$	2,811		$	110		$	6,344		$	34,437
2012
Balance at beginning of period	$	15,476		$	21,271		$	4,981		$	195		$	9,423		$	51,346
Additions (deductions)
Provision for loan losses		18			1,839			(849	)		(17	)		(740	)		251
Recoveries credited to allowance		782			303			287			-			-			1,372
Loans charged against the allowance		(2,619	)		(1,720	)		(793	)		13			-			(5,119	)
Reclassification to loans held for sale		16			136			133			-			(114	)		171
Balance at end of period	$	13,673		$	21,829		$	3,759		$	191		$	8,569		$	48,021

14

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

An analysis of the allowance for loan losses by portfolio segment for the nine months ended September 30, follows:

										Payment
										Plan
	Commercial			Mortgage			Installment			Receivables			Unallocated			Total
	(In thousands)
2013
Balance at beginning of period	$	11,402		$	21,447		$	3,378		$	144		$	7,904		$	44,275
Additions (deductions)
Provision for loan losses		(2,385	)		224			621			(53	)		(1,560	)		(3,153	)
Recoveries credited to allowance		4,595			1,415			836			47			-			6,893
Loans charged against the allowance		(6,657	)		(4,869	)		(2,024	)		(28	)		-			(13,578	)
Balance at end of period	$	6,955		$	18,217		$	2,811		$	110		$	6,344		$	34,437
2012
Balance at beginning of period	$	18,183		$	22,885		$	6,146		$	197		$	11,473		$	58,884
Additions (deductions)
Provision for loan losses		2,708			6,644			(331	)		6			(2,589	)		6,438
Recoveries credited to allowance		2,178			1,423			1,002			-			-			4,603
Loans charged against the allowance		(9,242	)		(9,067	)		(2,973	)		(12	)		-			(21,294	)
Reclassification to loans held for sale		(154	)		(56	)		(85	)		-			(315	)		(610	)
Balance at end of period	$	13,673		$	21,829		$	3,759		$	191		$	8,569		$	48,021

15

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Allowance for loan losses and recorded investment in loans by portfolio segment follows:

							Payment
							Plan
	Commercial		Mortgage		Installment		Receivables		Unallocated		Total
	(In thousands)
September 30, 2013
Allowance for loan losses:
Individually evaluated for impairment	$	3,500	$	11,318	$	1,365	$	-	$	-	$	16,183
Collectively evaluated for impairment		3,455		6,899		1,446		110		6,344		18,254
Total ending allowance balance	$	6,955	$	18,217	$	2,811	$	110	$	6,344	$	34,437
Loans
Individually evaluated for impairment	$	44,789	$	79,511	$	7,097	$	-			$	131,397
Collectively evaluated for impairment		582,213		414,311		188,104		68,494				1,253,122
Total loans recorded investment		627,002		493,822		195,201		68,494				1,384,519
Accrued interest included in recorded investment		1,580		2,297		659		-				4,536
Total loans	$	625,422	$	491,525	$	194,542	$	68,494			$	1,379,983
December 31, 2012
Allowance for loan losses:
Individually evaluated for impairment	$	6,558	$	12,869	$	1,582	$	-	$	-	$	21,009
Collectively evaluated for impairment		4,844		8,578		1,796		144		7,904		23,266
Total ending allowance balance	$	11,402	$	21,447	$	3,378	$	144	$	7,904	$	44,275
Loans
Individually evaluated for impairment	$	55,634	$	88,028	$	7,505	$	-			$	151,167
Collectively evaluated for impairment		563,316		441,703		183,090		84,692				1,272,801
Total loans recorded investment		618,950		529,731		190,595		84,692				1,423,968
Accrued interest included in recorded investment		1,692		2,391		746		-				4,829
Total loans	$	617,258	$	527,340	$	189,849	$	84,692			$	1,419,139

16

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Loans on non-accrual status and past due more than 90 days (“Non-performing Loans”) follow:

	90+ and				Total Non-
	Still		Non-		Performing
	Accruing		Accrual		Loans
	(In thousands)
September 30, 2013
Commercial
Income producing - real estate	$	153	$	4,666	$	4,819
Land, land development and construction - real estate		-		1,291		1,291
Commercial and industrial		212		372		584
Mortgage
1-4 family		-		7,520		7,520
Resort lending		-		3,039		3,039
Home equity line of credit - 1st lien		-		378		378
Home equity line of credit - 2nd lien		-		609		609
Installment
Home equity installment - 1st lien		-		1,181		1,181
Home equity installment - 2nd lien		-		479		479
Loans not secured by real estate		-		448		448
Other		-		-		-
Payment plan receivables
Full refund		-		25		25
Partial refund		-		6		6
Other		-		-		-
Total recorded investment	$	365	$	20,014	$	20,379
Accrued interest included in recorded investment	$	9	$	-	$	9
December 31, 2012
Commercial
Income producing - real estate	$	-	$	5,611	$	5,611
Land, land development and construction - real estate		-		4,062		4,062
Commercial and industrial		-		5,080		5,080
Mortgage
1-4 family		7		9,654		9,661
Resort lending		-		4,861		4,861
Home equity line of credit - 1st lien		-		529		529
Home equity line of credit - 2nd lien		-		685		685
Installment
Home equity installment - 1st lien		-		1,278		1,278
Home equity installment - 2nd lien		-		675		675
Loans not secured by real estate		-		390		390
Other		-		-		-
Payment plan receivables
Full refund		-		57		57
Partial refund		-		38		38
Other		-		9		9
Total recorded investment	$	7	$	32,929	$	32,936
Accrued interest included in recorded investment	$	-	$	-	$	-

17

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

An aging analysis of loans by class follows:

	Loans Past Due								Loans not		Total
	30-59 days		60-89 days		90+ days		Total		Past Due		Loans
	(In thousands)
September 30, 2013
Commercial
Income producing - real estate	$	136	$	297	$	4,495	$	4,928	$	235,617	$	240,545
Land, land development and construction - real estate		44		-		296		340		45,597		45,937
Commercial and industrial		1,700		369		261		2,330		338,190		340,520
Mortgage
1-4 family		2,519		910		7,520		10,949		268,098		279,047
Resort lending		646		-		3,039		3,685		148,609		152,294
Home equity line of credit - 1st lien		50		28		378		456		18,440		18,896
Home equity line of credit - 2nd lien		253		257		609		1,119		42,466		43,585
Installment
Home equity installment - 1st lien		625		417		1,181		2,223		26,341		28,564
Home equity installment - 2nd lien		393		180		479		1,052		37,188		38,240
Loans not secured by real estate		919		188		448		1,555		124,225