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 March 31, 2014

Commission file number   0-7818

INDEPENDENT BANK CORPORATION

(Exact name of registrant as specified in its charter)

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

YES x       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 company x

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	22,924,740
Class	Outstanding at May 5, 2014

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

INDEX

		Number(s)
PART I -	Financial Information
Item 1.	Condensed Consolidated Statements of Financial Condition March 31, 2014 and December 31, 2013	3
	Condensed Consolidated Statements of Operations Three-month periods ended March 31, 2014 and 2013	4
	Condensed Consolidated Statements of Comprehensive Income Three-month periods ended March 31, 2014 and 2013	5
	Condensed Consolidated Statements of Cash Flows Three-month periods ended March 31, 2014 and 2013	6
	Condensed Consolidated Statements of Shareholders' Equity Three-month periods ended March 31, 2014 and 2013	7
	Notes to Interim Condensed Consolidated Financial Statements	8-56
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	57-81
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	82
Item 4.	Controls and Procedures	82
PART II -	Other Information
Item 1A	Risk Factors	83
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	83
Item 6.	Exhibits	84

1

FORWARD-LOOKING STATEMENTS

Discussions and statements in this report that are not statements of historical fact, including 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, 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; statements about our business and growth strategies; and expectations about economic and market conditions and trends.  These forward-looking statements express our current expectations, forecasts of future events, or long-term goals.  They are based on assumptions, estimates, and forecasts that, although believed to be reasonable, may turn out to be incorrect.   Actual results could differ materially from those discussed in the forward-looking statements for a variety of reasons, including:

· economic, market, operational, liquidity, credit, and interest rate risks associated with our business;

· economic conditions generally and in the financial services industry, particularly economic conditions within Michigan and the regional and local real estate markets in which our bank operates;

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

· 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;

· increased competition in the financial services industry, either nationally or regionally;

· our ability to achieve loan and deposit growth;

· volatility and direction of market interest rates;

· the continued services of our management team; and

· implementation of new legislation, which may have significant effects on us and the financial services industry.

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 1A of our Annual Report on Form 10-K for the year ended December 31, 2013, 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

	March 31,			December 31,
	2014			2013
	(unaudited)
	(In thousands, except share amounts)
Assets
Cash and due from banks	$	53,815		$	48,156
Interest bearing deposits		78,125			70,925
Cash and Cash Equivalents		131,940			119,081
Interest bearing deposits - time		16,875			17,999
Trading securities		610			498
Securities available for sale		522,935			462,481
Federal Home Loan Bank and Federal Reserve Bank stock, at cost		23,419			23,419
Loans held for sale, carried at fair value		14,700			20,390
Loans
Commercial		642,051			635,234
Mortgage		475,580			486,633
Installment		188,337			192,065
Payment plan receivables		54,544			60,638
Total Loans		1,360,512			1,374,570
Allowance for loan losses		(30,437	)		(32,325	)
Net Loans		1,330,075			1,342,245
Other real estate and repossessed assets		18,001			18,282
Property and equipment, net		47,872			48,594
Bank-owned life insurance		52,571			52,253
Deferred tax assets, net		55,248			57,550
Capitalized mortgage loan servicing rights		13,273			13,710
Vehicle service contract counterparty receivables, net		7,096			7,716
Other intangibles		3,029			3,163
Accrued income and other assets		21,995			22,562
Total Assets	$	2,259,639		$	2,209,943
Liabilities and Shareholders' Equity
Deposits
Non-interest bearing	$	531,355		$	518,658
Savings and interest-bearing checking		958,486			910,352
Reciprocal		77,082			83,527
Retail time		358,588			358,800
Brokered time		13,231			13,469
Total Deposits		1,938,742			1,884,806
Other borrowings		12,943			17,188
Subordinated debentures		40,723			40,723
Vehicle service contract counterparty payables		3,761			4,089
Accrued expenses and other liabilities		26,884			31,556
Total Liabilities		2,023,053			1,978,362
Shareholders’ Equity
Preferred stock, no par value, 200,000 shares authorized;  none issued or outstanding		-			-
Common stock, no par value, 500,000,000 shares authorized; issued and outstanding: 22,921,774 shares at March 31, 2014 and 22,819,136 shares at December 31, 2013		351,439			351,173
Accumulated deficit		(107,209	)		(110,347	)
Accumulated other comprehensive loss		(7,644	)		(9,245	)
Total Shareholders’ Equity		236,586			231,581
Total Liabilities and Shareholders’ Equity	$	2,259,639		$	2,209,943

See notes to interim condensed consolidated financial statements (unaudited)

3

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

	Three months ended
	March 31,
	2014			2013
	(unaudited)
	(In thousands)
Interest Income
Interest and fees on loans	$	18,215		$	20,710
Interest on securities
Taxable		1,383			670
Tax-exempt		262			238
Other investments		423			332
Total Interest Income		20,283			21,950
Interest Expense
Deposits		1,293			1,529
Other borrowings		512			865
Total Interest Expense		1,805			2,394
Net Interest Income		18,478			19,556
Provision for loan losses		428			(691	)
Net Interest Income After Provision for Loan Losses		18,050			20,247
Non-interest Income
Service charges on deposit accounts		3,055			3,406
Interchange income		1,941			1,757
Net gains on assets
Mortgage loans		1,144			3,637
Securities		112			84
Mortgage loan servicing		264			622
Title insurance fees		274			484
Increase in fair value of U.S. Treasury warrant		-			(1,045	)
Other		2,165			2,123
Total Non-interest Income		8,955			11,068
Non-Interest Expense
Compensation and employee benefits		11,238			11,307
Occupancy, net		2,483			2,424
Data processing		2,086			1,916
Loan and collection		1,465			2,226
Furniture, fixtures and equipment		1,069			1,032
Communications		789			780
Advertising		519			570
FDIC deposit insurance		417			630
Interchange expense		402			410
Legal and professional		401			692
Credit card and bank service fees		263			334
Vehicle service contract counterparty contingencies		68			127
Costs (recoveries) related to unfunded lending commitments		10			(19	)
Provision for loss reimbursement on sold loans		(481	)		663
Net (gains) losses on other real estate and repossessed assets		(87	)		652
Other		1,758			1,729
Total Non-interest Expense		22,400			25,473
Income Before Income Tax		4,605			5,842
Income tax expense		1,467			35
Net Income	$	3,138		$	5,807
Preferred stock dividends and discount accretion		-			(1,095	)
Net Income Applicable to Common Stock	$	3,138		$	4,712
Net Income Per Common Share
Basic	$	0.14		$	0.51
Diluted	$	0.13		$	0.27
Dividends Per Common Share
Declared	$	-		$	-
Paid	$	-		$	-

See notes to interim condensed consolidated financial statements (unaudited)

4

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

	Three months ended
	March 31,
	2014		2013
	(unaudited)
	(In thousands)
Net income	$	3,138	$	5,807
Other comprehensive income, before tax
Available for sale securities
Unrealized gain arising during period		2,250		974
Change in unrealized losses for which a portion of other than temporary impairment has been recognized in earnings		119		33
Reclassification adjustment for other than temporary impairment included in earnings		-		-
Reclassification adjustments for losses included in earnings		-		7
Unrealized gains recognized in other comprehensive income on available for sale securities		2,369		1,014
Income tax expense		830		-
Unrealized gains recognized in other comprehensive income on available for sale securities, net of tax		1,539		1,014
Derivative instruments
Unrealized loss arising during period		-		(3	)
Reclassification adjustment for expense recognized in earnings		-		94
Reclassification adjustment for accretion on settled derivatives		95		-
Unrealized gains recognized in other comprehensive income on derivative instruments		95		91
Income tax expense		33		-
Unrealized gains recognized in other comprehensive income on derivative instruments, net of tax		62		91
Other comprehensive income		1,601		1,105
Comprehensive income	$	4,739	$	6,912

See notes to interim condensed consolidated financial statements (unaudited)

5

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

	Three months ended March 31,
	2014			2013
	(unaudited - In thousands)
Net Income	$	3,138		$	5,807
Adjustments to Reconcile Net Income to Net Cash from Operating Activities
Proceeds from sales of loans held for sale		48,232			131,495
Disbursements for loans held for sale		(41,398	)		(117,925	)
Provision for loan losses		428			(691	)
Deferred federal income tax expense		2,302			-
Deferred loan fees		(5	)		133
Depreciation, amortization of intangible assets and premiums and accretion of discounts on securities and loans		373			(1,040	)
Net gain on sale of property and equipment		-			(1	)
Net gains on mortgage loans		(1,144	)		(3,637	)
Net gains on securities		(112	)		(84	)
Net (gains) losses on other real estate and repossessed assets		(87	)		652
Vehicle service contract counterparty contingencies		68			127
Share based compensation		255			236
(Increase) decrease in accrued income and other assets		(176	)		2,573
Increase (decrease) in accrued expenses and other liabilities		(4,513	)		823
Total Adjustments		4,223			12,661
Net Cash From Operating Activities		7,361			18,468
Cash Flow used in Investing Activities
Proceeds from the sale of securities available for sale		-			1,800
Proceeds from the maturity of securities available for sale		15,030			22,820
Principal payments received on securities available for sale		17,852			6,487
Purchases of securities available for sale		(91,556	)		(103,259	)
Purchases of interest bearing deposits		-			(6,986	)
Proceeds from the maturity of interest bearing deposits		1,090			-
Net decrease in portfolio loans (loans originated, net of principal payments)		13,221			26,729
Net cash from branch sale		-			3,292
Proceeds from the collection of vehicle service contract counterparty receivables		256			169
Proceeds from the sale of other real estate and repossessed assets		1,195			3,511
Proceeds from the sale of property and equipment		-			3
Capital expenditures		(964	)		(2,119	)
Net Cash used in Investing Activities		(43,876	)		(47,553	)
Cash Flow from Financing Activities
Net increase in total deposits		53,936			71,256
Net increase (decrease) in other borrowings		(5	)		5
Payments of Federal Home Loan Bank advances		(4,240	)		-
Net decrease in vehicle service contract counterparty payables		(328	)		(1,282	)
Proceeds from issuance of common stock		11			954
Net Cash from Financing Activities		49,374			70,933
Net Increase in Cash and Cash Equivalents		12,859			41,848
Cash and Cash Equivalents at Beginning of Period		119,081			179,782
Cash and Cash Equivalents at End of Period	$	131,940		$	221,630
Cash paid during the period for
Interest	$	1,821		$	1,810
Income taxes		1			6
Transfers to other real estate and repossessed assets		827			1,669
Transfer of payment plan receivables to vehicle service contract counterparty receivables		131			79
Purchase of securities available for sale not yet settled		-			2,565

See notes to interim condensed consolidated financial statements (unaudited)

6

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders' Equity

	Three months ended
	March 31,
	2014		2013
	(unaudited)
	(In thousands)
Balance at beginning of period	$	231,581	$	134,975
Net income		3,138		5,807
Issuance of common stock		11		1,962
Share based compensation		255		236
Net change in accumulated other comprehensive loss, net of related tax effect		1,601		1,105
Balance at end of period	$	236,586	$	144,085

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, 2013 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 March 31, 2014 and December 31, 2013, and the results of operations for the three-month periods ended March 31, 2014 and 2013.  The results of operations for the three-month period ended March 31, 2014, 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 2013 Annual Report on Form 10-K for a disclosure of our accounting policies.

2. New Accounting Standards

In July, 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-11, “Income Taxes (Topic 740), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”.  This ASU amends existing guidance so that an unrecognized tax benefit, or a portion thereof, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability.  This amended guidance became effective for us on January 1, 2014 and did not have a material impact on our consolidated operating results or financial condition.

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)
March 31, 2014
U.S. agency	$	48,024	$	18	$	388	$	47,654
U.S. agency residential mortgage-backed		235,601		1,573		429		236,745
U.S. agency commercial mortgage-backed		12,640		27		27		12,640
Private label residential mortgage-backed		7,052		137		546		6,643
Other asset backed		43,425		45		156		43,314
Obligations of states and political subdivisions		156,342		738		3,150		153,930
Corporate		19,503		83		21		19,565
Trust preferred		2,904		-		460		2,444
Total	$	525,491	$	2,621	$	5,177	$	522,935
December 31, 2013
U.S. agency	$	32,106	$	44	$	342	$	31,808
U.S. agency residential mortgage-backed		202,649		1,343		532		203,460
Private label residential mortgage-backed		7,294		112		618		6,788
Other asset backed		45,369		10		194		45,185
Obligations of states and political subdivisions		157,966		496		4,784		153,678
Corporate		19,120		43		26		19,137
Trust preferred		2,902		-		477		2,425
Total	$	467,406	$	2,048	$	6,973	$	462,481

9

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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)
March 31, 2014
U.S. agency	$	36,853	$	388	$	-	$	-	$	36,853	$	388
U.S. agency residential mortgage-backed		52,705		315		23,242		114		75,947		429
U.S. agency commercial mortgage-backed		4,318		27		-		-		4,318		27
Private label residential mortgage-backed		167		1		4,485		545		4,652		546
Other asset backed		28,442		156		-		-		28,442		156
Obligations of states and political subdivisions		70,657		2,607		11,521		543		82,178		3,150
Corporate		5,844		21		-		-		5,844		21
Trust preferred		-		-		2,444		460		2,444		460
Total	$	198,986	$	3,515	$	41,692	$	1,662	$	240,678	$	5,177
December 31, 2013
U.S. agency	$	16,715	$	342	$	-	$	-	$	16,715	$	342
U.S. agency residential mortgage-backed		78,256		532		-		-		78,256		532
Private label residential mortgage-backed		407		6		4,602		612		5,009		618
Other asset backed		33,862		194		-		-		33,862		194
Obligations of states and political subdivisions		103,942		4,645		4,805		139		108,747		4,784
Corporate		7,105		26		-		-		7,105		26
Trust preferred		-		-		2,425		477		2,425		477
Total	$	240,287	$	5,745	$	11,832	$	1,228	$	252,119	$	6,973

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.

10

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

U.S. agency, U.S. agency residential mortgage-backed securities and U.S. agency commercial mortgage backed securities — at March 31, 2014 we had 21 U.S. agency, 33 U.S. agency residential mortgage-backed securities and seven U.S. agency commercial mortgage-backed 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 March 31, 2014 we had five 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 two are below investment grade and one is 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 (69%) and Alt A (31%) at March 31, 2014.

	March 31, 2014					December 31, 2013
			Net					Net
	Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss
	(In thousands)
Private label residential mortgage-backed
Jumbo	$	4,563	$	(371	)	$	4,687	$	(441	)
Alt-A		2,080		(38	)		2,101		(65	)

All of these securities are receiving 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.

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 10% to 15% CPR. For fixed rate collateral (one transaction), the prepayment speeds are projected to remain stable.

11

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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 12 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 March 31, 2014 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 March 31, 2014
Fair value	$	2,426	$	1,712	$	45	$	4,183
Amortized cost		2,697		1,622		-		4,319
Non-credit unrealized loss		271		-		-		271
Unrealized gain		-		90		45		135
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 March 31,
2014	$	-	$	-	$	-	$	-
2013		-		-		-		-

Each of these securities is receiving principal and interest payments similar to principal reductions in the underlying collateral.  Two of these securities have unrealized gains and one has an unrealized loss at March 31, 2014.  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 two of these securities is now less than previously recorded credit related OTTI amounts.  The remaining non-credit related unrealized loss in the senior security 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 March 31, 2014 we had 20 other asset backed securities whose fair value is less than amortized cost. The unrealized losses are primarily due to widening discount margins.  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.

12

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Obligations of states and political subdivisions — at March 31, 2014 we had 96 municipal securities whose fair value is less than amortized cost.  The unrealized losses are primarily due to increases in interest rates since the securities acquisition.  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 March 31, 2014 we had eight 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 March 31, 2014 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 $0.8 million as of March 31, 2014, continues to have satisfactory credit metrics and make interest payments.

The following table breaks out our trust preferred securities in further detail as of March 31, 2014 and December 31, 2013:

	March 31, 2014					December 31, 2013
			Net					Net
	Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss
	(In thousands)
Trust preferred securities
Rated issues	$	1,619	$	(285	)	$	1,600	$	(302	)
Unrated issues		825		(175	)		825		(175	)

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 no credit related OTTI charges in earnings on securities available for sale during the three month periods ended March 31, 2014 and 2013, respectively.

13

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

A roll forward of credit losses recognized in earnings on securities available for sale for the three month periods ending March 31, follows:

	2014		2013
	(In thousands)
Balance at beginning of year	$	1,835	$	1,809
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		-		-
Total	$	1,835	$	1,809

The amortized cost and fair value of securities available for sale at March 31, 2014, by contractual maturity, follow:

	Amortized		Fair
	Cost		Value
	(In thousands)
Maturing within one year	$	15,809	$	15,837
Maturing after one year but within five years		86,513		86,741
Maturing after five years but within ten years		50,721		50,491
Maturing after ten years		73,730		70,524
		226,773		223,593
U.S. agency residential mortgage-backed		235,601		236,745
U.S. agency commercial mortgage-backed		12,640		12,640
Private label residential mortgage-backed		7,052		6,643
Other asset backed		43,425		43,314
Total	$	525,491	$	522,935

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.

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 three month periods ending March 31, follows:

			Realized
	Proceeds		Gains		Losses
	(In thousands)
2014	$	-	$	-	$	-
2013		1,800		-		7

During 2014 and 2013, our trading securities consisted of various preferred stocks.  During the first three months of 2014 and 2013, we recognized gains on trading securities of $0.112 million and $0.091 million, respectively, that are included in net gains on securities in the Condensed Consolidated Statements of Operations.  Both of these amounts relate to gains recognized on trading securities still held at each respective period end.

14

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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 March 31, follows:

										Payment
										Plan
	Commercial			Mortgage			Installment			Receivables			Unallocated			Total
	(In thousands)
2014
Balance at beginning of period	$	6,827		$	17,195		$	2,246		$	97		$	5,960		$	32,325
Additions (deductions)
Provision for loan losses		507			193			176			(14	)		(434	)		428
Recoveries credited to allowance		355			458			251			4			-			1,068
Loans charged against the allowance		(1,926	)		(846	)		(612	)		-			-			(3,384	)
Balance at end of period	$	5,763		$	17,000		$	2,061		$	87		$	5,526		$	30,437
2013
Balance at beginning of period	$	11,402		$	21,447		$	3,378		$	144		$	7,904		$	44,275
Additions (deductions)
Provision for loan losses		(272	)		(139	)		375			(4	)		(651	)		(691	)
Recoveries credited to allowance		536			622			286			7			-			1,451
Loans charged against the allowance		(1,608	)		(1,767	)		(877	)		(18	)		-			(4,270	)
Balance at end of period	$	10,058		$	20,163		$	3,162		$	129		$	7,253		$	40,765

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)
March 31, 2014
Allowance for loan losses:
Individually evaluated for impairment	$	3,289	$	10,912	$	785	$	-	$	-	$	14,986
Collectively evaluated for impairment		2,474		6,088		1,276		87		5,526		15,451
Total ending allowance balance	$	5,763	$	17,000	$	2,061	$	87	$	5,526	$	30,437
Loans
Individually evaluated for impairment	$	40,014	$	77,159	$	7,126	$	-			$	124,299
Collectively evaluated for impairment		603,533		400,598		181,856		54,544				1,240,531
Total loans recorded investment		643,547		477,757		188,982		54,544				1,364,830
Accrued interest included in recorded investment		1,496		2,177		645		-				4,318
Total loans	$	642,051	$	475,580	$	188,337	$	54,544			$	1,360,512
December 31, 2013
Allowance for loan losses:
Individually evaluated for impairment	$	3,878	$	10,488	$	792	$	-	$	-	$	15,158
Collectively evaluated for impairment		2,949		6,707		1,454		97		5,960		17,167
Total ending allowance balance	$	6,827	$	17,195	$	2,246	$	97	$	5,960	$	32,325
Loans
Individually evaluated for impairment	$	40,623	$	78,022	$	7,068	$	-			$	125,713
Collectively evaluated for impairment		596,235		410,887		185,676		60,638				1,253,436
Total loans recorded investment		636,858		488,909		192,744		60,638				1,379,149
Accrued interest included in recorded investment		1,624		2,276		679		-				4,579
Total loans	$	635,234	$	486,633	$	192,065	$	60,638			$	1,374,570

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)
March 31, 2014
Commercial
Income producing - real estate	$	115	$	3,443	$	3,558
Land, land development and construction - real estate		-		904		904
Commercial and industrial		-		3,351		3,351
Mortgage		.
1-4 family		-		6,655		6,655
Resort lending		-		3,371		3,371
Home equity - 1st lien		-		430		430
Home equity - 2nd lien		-		747		747
Installment
Home equity - 1st lien		-		859		859
Home equity - 2nd lien		-		511		511
Loans not secured by real estate		-		432		432
Other		-		2		2
Payment plan receivables
Full refund		-		5		5
Partial refund		-		-		-
Other		-		1		1
Total recorded investment	$	115	$	20,711	$	20,826
Accrued interest included in recorded investment	$	-	$	-	$	-
December 31, 2013
Commercial
Income producing - real estate	$	-	$	1,899	$	1,899
Land, land development and construction - real estate		-		1,036		1,036
Commercial and industrial		-		2,434		2,434
Mortgage
1-4 family		-		6,594		6,594
Resort lending		-		2,668		2,668
Home equity - 1st lien		-		415		415
Home equity - 2nd lien		-		689		689
Installment
Home equity - 1st lien		-		938		938
Home equity - 2nd lien		-		571		571
Loans not secured by real estate		-		638		638
Other		-		-		-
Payment plan receivables
Full refund		-		20		20
Partial refund		-		3		3
Other		-		-		-
Total recorded investment	$	-	$	17,905	$	17,905
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)
March 31, 2014
Commercial
Income producing - real estate	$	506	$	391	$	2,505	$	3,402	$	248,983	$	252,385
Land, land development and construction - real estate		43		-		328		371		33,855		34,226
Commercial and industrial		2,235		809		1,441		4,485		352,451		356,936
Mortgage
1-4 family		2,440		1,284		6,655		10,379		264,136		274,515
Resort lending		1,182		235		3,371		4,788		137,395		142,183
Home equity - 1st lien		262		-		430		692		18,609		19,301
Home equity - 2nd lien		227		318		747		1,292		40,466		41,758
Installment
Home equity - 1st lien		382		50		859		1,291		25,042		26,333
Home equity - 2nd lien		188		105		511		804		35,698		36,502
Loans not secured by real estate		443		259		432		1,134		122,571		123,705
Other		15		20		2		37		2,405		2,442
Payment plan receivables
Full refund		1,076		192		5		1,273		40,611		41,884
Partial refund		192		34		-		226		5,348		5,574
Other		164		10		1		175		6,911		7,086
Total recorded investment	$	9,355	$	3,707	$	17,287	$	30,349	$	1,334,481	$	1,364,830
Accrued interest included in recorded investment	$	61	$	54	$	-	$	115	$	4,203	$	4,318
December 31, 2013
Commercial
Income producing - real estate	$	1,014	$	428	$	878	$	2,320	$	249,313	$	251,633
Land, land development and construction - real estate		781		129		256		1,166		30,670		31,836
Commercial and industrial		1,155		1,665		318		3,138		350,251		353,389
Mortgage
1-4 family		3,750		224		6,594		10,568		270,855		281,423
Resort lending		698		234		2,668		3,600		142,356		145,956
Home equity - 1st lien		172		-		415		587		18,214		18,801
Home equity - 2nd lien		663		73		689		1,425		41,304		42,729
Installment
Home equity - 1st lien		557		134		938		1,629		25,513		27,142
Home equity - 2nd lien		536		136		571		1,243		36,701		37,944
Loans not secured by real estate		833		281		638		1,752		123,295		125,047
Other		22		12		-		34		2,577		2,611
Payment plan receivables
Full refund		1,364		349		20		1,733		46,344		48,077
Partial refund		190		20		3		213		4,840		5,053
Other		122		4		-		126		7,382		7,508
Total recorded investment	$	11,857	$	3,689	$	13,988	$	29,534	$	1,349,615	$	1,379,149
Accrued interest included in recorded investment	$	100	$	26	$	-	$	126	$	4,453	$	4,579

18

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Impaired loans are as follows :

	March 31,		December 31,
	2014		2013
Impaired loans with no allocated allowance	(In thousands)
TDR	$	11,911	$	13,006
Non - TDR		911		334
Impaired loans with an allocated allowance
TDR - allowance based on collateral		11,435		10,085
TDR - allowance based on present value cash flow		98,187		101,131
Non - TDR - allowance based on collateral		1,433		688
Non - TDR - allowance based on present value cash flow		-		-
Total impaired loans	$	123,877	$	125,244
Amount of allowance for loan losses allocated
TDR - allowance based on collateral	$	3,224	$	3,127
TDR - allowance based on present value cash flow		11,262		11,777
Non - TDR - allowance based on collateral		500		254
Non - TDR - allowance based on present value cash flow		-		-
Total amount of allowance for loan losses allocated	$	14,986	$	15,158

19

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Impaired loans by class  are as follows (1):

	March 31, 2014						December 31, 2013
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:	(In thousands)
Commercial
Income producing - real estate	$	8,883	$	9,151	$	-	$	7,042	$	7,178	$	-
Land, land development & construction-real estate		770		1,817		-		2,185		3,217		-
Commercial and industrial		3,166		3,136		-		4,110		4,087		-
Mortgage
1-4 family		8		8		-		8		8		-
Resort lending		35		163		-		35		163		-
Home equity - 1st lien		-		-		-		-		-		-
Home equity - 2nd lien		-		-		-		-		-		-
Installment
Home equity - 1st lien		-		-		-		-		-		-
Home equity - 2nd lien		-		-		-		-		-		-
Loans not secured by real estate		-		-		-		-		-		-
Other