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, 2015

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)

4200 East Beltline, Grand Rapids, Michigan  49525

(Address of principal executive offices)

(616) 527-5820

(Registrant's telephone number, including area code)

230 West Main, Ionia, Michigan 48846

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☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 ☒ NO ☐

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 ☐ Accelerated filer☒ Non-accelerated filer☐ Smaller reporting company☐

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

YES ☐ NO ☒

     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	22,970,455
Class	Outstanding at May 5, 2015

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

INDEX

		Number(s)
PART I -	Financial Information
Item 1.	Condensed Consolidated Statements of Financial Condition March 31, 2015 and December 31, 2014	3
	Condensed Consolidated Statements of Operations Three-month periods ended March 31, 2015 and 2014	4
	Condensed Consolidated Statements of Comprehensive Income Three-month periods ended March 31, 2015 and 2014	5
	Condensed Consolidated Statements of Cash Flows Three-month periods ended March 31, 2015 and 2014	6
	Condensed Consolidated Statements of Shareholders' Equity Three-month periods ended March 31, 2015 and 2014	7
	Notes to Interim Condensed Consolidated Financial Statements	8-53
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	54-76
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	77
Item 4.	Controls and Procedures	77
PART II -	Other Information
Item 1A	Risk Factors	78
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	78
Item 6.	Exhibits	79

1

FORWARD-LOOKING STATEMENTS

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, 2014, 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 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, 2015			December 31, 2014
	(unaudited)
	(In thousands, except share amounts)
Assets
Cash and due from banks	$	46,435		$	48,326
Interest bearing deposits		55,117			25,690
Cash and Cash Equivalents		101,552			74,016
Interest bearing deposits - time		11,575			13,561
Trading securities		213			203
Securities available for sale		571,762			533,178
Federal Home Loan Bank and Federal Reserve Bank stock, at cost		20,051			19,919
Loans held for sale, carried at fair value		30,932			23,662
Loans
Commercial		710,323			690,955
Mortgage		465,907			472,628
Installment		207,962			206,378
Payment plan receivables		38,767			40,001
Total Loans		1,422,959			1,409,962
Allowance for loan losses		(24,679	)		(25,990	)
Net Loans		1,398,280			1,383,972
Other real estate and repossessed assets		5,662			6,454
Property and equipment, net		45,220			45,948
Bank-owned life insurance		53,975			53,625
Deferred tax assets, net		46,190			48,632
Capitalized mortgage loan servicing rights		11,318			12,106
Vehicle service contract counterparty receivables, net		7,229			7,237
Other intangibles		2,540			2,627
Accrued income and other assets		22,797			23,590
Total Assets	$	2,329,296		$	2,248,730
Liabilities and Shareholders' Equity
Deposits
Non-interest bearing	$	620,598		$	576,882
Savings and interest-bearing checking		988,776			943,734
Reciprocal		58,705			53,668
Retail time		331,095			338,720
Brokered time		1,299			11,298
Total Deposits		2,000,473			1,924,302
Other borrowings		12,468			12,470
Subordinated debentures		35,569			35,569
Vehicle service contract counterparty payables		2,312			1,977
Accrued expenses and other liabilities		24,849			24,041
Total Liabilities		2,075,671			1,998,359
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: 22,958,316 shares at March 31, 2015 and 22,957,323 shares at December 31, 2014		351,881			352,462
Accumulated deficit		(94,054	)		(96,455	)
Accumulated other comprehensive loss		(4,202	)		(5,636	)
Total Shareholders’ Equity		253,625			250,371
Total Liabilities and Shareholders’ Equity	$	2,329,296		$	2,248,730

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,
	2015			2014
	(unaudited)
	(In thousands, except per share amounts)
Interest Income
Interest and fees on loans	$	17,239		$	18,215
Interest on securities
Taxable		1,758			1,383
Tax-exempt		217			262
Other investments		338			423
Total Interest Income		19,552			20,283
Interest Expense
Deposits		1,007			1,293
Other borrowings		454			512
Total Interest Expense		1,461			1,805
Net Interest Income		18,091			18,478
Provision for loan losses		(659	)		428
Net Interest Income After Provision for Loan Losses		18,750			18,050
Non-interest Income
Service charges on deposit accounts		2,850			3,055
Interchange income		2,142			1,941
Net gains on assets
Mortgage loans		2,139			1,144
Securities		85			112
Mortgage loan servicing		(420	)		264
Title insurance fees		256			274
Other		1,910			2,165
Total Non-interest Income		8,962			8,955
Non-Interest Expense
Compensation and employee benefits		11,785			11,238
Occupancy, net		2,419			2,483
Data processing		1,930			2,086
Loan and collection		1,155			1,465
Furniture, fixtures and equipment		952			1,069
Communications		736			789
Advertising		484			519
Legal and professional		380			401
FDIC deposit insurance		343			417
Interchange expense		291			402
Credit card and bank service fees		202			263
Vehicle service contract counterparty contingencies		29			68
Costs related to unfunded lending commitments		16			10
Provision for loss reimbursement on sold loans		(69	)		(481	)
Net gains on other real estate and repossessed assets		(39	)		(87	)
Other		1,537			1,758
Total Non-interest Expense		22,151			22,400
Income Before Income Tax		5,561			4,605
Income tax expense		1,780			1,467
Net Income	$	3,781		$	3,138
Net Income Per Common Share
Basic	$	0.16		$	0.14
Diluted	$	0.16		$	0.13
Dividends Per Common Share
Declared	$	0.06		$	-
Paid	$	0.06		$	-

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,
	2015			2014
	(unaudited)
	(In thousands)
Net income	$	3,781		$	3,138
Other comprehensive income, before tax
Available for sale securities
Unrealized gain arising during period		2,270			2,250
Change in unrealized losses for which a portion of other than temporary impairment has been recognized in earnings		11			119
Reclassification adjustments for gains included in earnings		(75	)		-
Unrealized gains recognized in other comprehensive income on available for sale securities		2,206			2,369
Income tax expense		772			830
Unrealized gains recognized in other comprehensive income on available for sale securities, net of tax		1,434			1,539
Derivative instruments
Reclassification adjustment for accretion on settled derivatives		-			95
Unrealized gains recognized in other comprehensive income on derivative instruments		-			95
Income tax expense		-			33
Unrealized gains recognized in other comprehensive income on derivative instruments, net of tax		-			62
Other comprehensive income		1,434			1,601
Comprehensive income	$	5,215		$	4,739

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,
	2015			2014
	(unaudited - In thousands)
Net Income	$	3,781		$	3,138
Adjustments to Reconcile Net Income to Net Cash From (Used in) Operating Activities
Proceeds from sales of loans held for sale		70,657			48,232
Disbursements for loans held for sale		(75,788	)		(41,398	)
Provision for loan losses		(659	)		428
Deferred federal income tax expense		2,442			2,302
Deferred loan fees		(193	)		(5	)
Depreciation, amortization of intangible assets and premiums and accretion of discounts on securities and loans		1,179			373
Net gains on mortgage loans		(2,139	)		(1,144	)
Net gains on securities		(85	)		(112	)
Net gains on other real estate and repossessed assets		(39	)		(87	)
Vehicle service contract counterparty contingencies		29			68
Share based compensation		373			255
(Increase) decrease in accrued income and other assets		517			(176	)
Decrease in accrued expenses and other liabilities		(2,385	)		(4,513	)
Total Adjustments		(6,091	)		4,223
Net Cash From (Used in) Operating Activities		(2,310	)		7,361
Cash Flow Used in Investing Activities
Proceeds from the sale of securities available for sale		11,786			-
Proceeds from the maturity of securities available for sale		6,785			15,030
Principal payments received on securities available for sale		25,103			17,852
Purchases of securities available for sale		(77,534	)		(91,556	)
Purchases of interest bearing deposits		(246	)		-
Proceeds from the maturity of interest bearing deposits		2,211			1,090
Purchase of Federal Reserve Bank stock		(132	)		-
Net (increase) decrease in portfolio loans (loans originated, net of principal payments)		(13,170	)		13,221
Proceeds from the collection of vehicle service contract counterparty receivables		-			256
Proceeds from the sale of other real estate and repossessed assets		1,848			1,195
Capital expenditures		(975	)		(964	)
Net Cash Used in Investing Activities		(44,324	)		(43,876	)
Cash Flow From Financing Activities
Net increase in total deposits		76,171			53,936
Net decrease in other borrowings		(2	)		(5	)
Payments of Federal Home Loan Bank advances		-			(4,240	)
Net increase (decrease) in vehicle service contract counterparty payables		335			(328	)
Dividends paid		(1,382	)		-
Proceeds from issuance of common stock		16			11
Repurchase of common stock		(902	)		-
Share based compensation withholding obligation		(66	)		-
Net Cash From Financing Activities		74,170			49,374
Net Increase in Cash and Cash Equivalents		27,536			12,859
Cash and Cash Equivalents at Beginning of Period		74,016			119,081
Cash and Cash Equivalents at End of Period	$	101,552		$	131,940
Cash paid during the period for
Interest	$	1,477		$	1,821
Income taxes		55			1
Transfers to other real estate and repossessed assets		1,017			827
Transfer of payment plan receivables to vehicle service contract counterparty receivables		21			131
Purchase of securities available for sale not yet settled		3,154			-

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,
	2015			2014
	(unaudited)
	(In thousands)
Balance at beginning of period	$	250,371		$	231,581
Net income		3,781			3,138
Cash dividends declared		(1,382	)		-
Issuance of common stock		16			11
Share based compensation		373			255
Share based compensation withholding obligation		(66	)		-
Repurchase of common stock		(902	)		-
Net change in accumulated other comprehensive loss, net of related tax effect		1,434			1,601
Balance at end of period	$	253,625		$	236,586

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, 2014 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, 2015 and December 31, 2014, and the results of operations for the three-month periods ended March 31, 2015 and 2014.  The results of operations for the three-month period ended March 31, 2015, 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 2014 Annual Report on Form 10-K for a disclosure of our accounting policies.

2. New Accounting Standards

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-04, “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure”. The amendments in this ASU clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. This amendment is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014, with early adoption and retrospective or prospective application permitted.  This amended guidance became effective for us on January 1, 2015 and did not have a material impact on our consolidated operating results or financial condition.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This ASU supersedes and replaces nearly all existing revenuerecognition guidance, including industry-specific guidance, establishes a new control-based revenue recognition model, changes the basis fordeciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improvesdisclosures about revenue. In addition, this ASU specifies the accounting for some costs to obtain or fulfill a contract with a customer.  This amended guidance is effective for us on January 1, 2017, and is not expected to have a material impact on our consolidated operating results or financial condition.

8

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

In June 2014, the FASB issued ASU 2014-12, “Compensation – Stock Compensation (Topic 718) – Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period”.  This ASU amends existing guidance related to the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. These amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition.  The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. This amended guidance is effective for us on January 1, 2016, and is not expected to have a material impact on our consolidated operating results or financial condition.

3. Securities

Securities available for sale consist of the following:

	Amortized		Unrealized				Fair Value
	Cost		Gains		Losses
	(In thousands)
March 31, 2015
U.S. agency	$	35,308	$	255	$	34	$	35,529
U.S. agency residential mortgage-backed		232,286		2,162		194		234,254
U.S. agency commercial mortgage-backed		32,846		270		35		33,081
Private label residential mortgage-backed		5,992		195		367		5,820
Other asset backed		95,197		110		116		95,191
Obligations of states and political subdivisions		142,133		1,469		814		142,788
Corporate		22,636		83		58		22,661
Trust preferred		2,910		-		472		2,438
Total	$	569,308	$	4,544	$	2,090	$	571,762
December 31, 2014
U.S. agency	$	34,936	$	133	$	63	$	35,006
U.S. agency residential mortgage-backed		256,387		1,838		667		257,558
U.S. agency commercial mortgage-backed		33,779		68		119		33,728
Private label residential mortgage-backed		6,216		187		390		6,013
Other asset backed		32,314		77		38		32,353
Obligations of states and political subdivisions		143,698		961		1,244		143,415
Corporate		22,690		53		79		22,664
Trust preferred		2,910		-		469		2,441
Total	$	532,930	$	3,317	$	3,069	$	533,178

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
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
March 31, 2015
U.S. agency	$	12,822	$	29	$	775	$	5	$	13,597	$	34
U.S. agency residential mortgage-backed		29,496		119		11,171		75		40,667		194
U.S. agency commercial mortgage-backed		7,999		28		2,600		7		10,599		35
Private label residential mortgage-backed		202		1		3,883		366		4,085		367
Other asset backed		28,970		46		7,232		70		36,202		116
Obligations of states and political subdivisions		24,722		70		28,979		744		53,701		814
Corporate		3,208		58		-		-		3,208		58
Trust preferred		-		-		2,438		472		2,438		472
Total	$	107,419	$	351	$	57,078	$	1,739	$	164,497	$	2,090

December 31, 2014
U.S. agency	$	12,851	$	58	$	606	$	5	$	13,457	$	63
U.S. agency residential mortgage-backed		89,547		531		15,793		136		105,340		667
U.S. agency commercial mortgage-backed		21,325		119		-		-		21,325		119
Private label residential mortgage-backed		208		1		4,013		389		4,221		390
Other asset backed		2,960		15		8,729		23		11,689		38
Obligations of states and political subdivisions		28,114		106		37,540		1,138		65,654		1,244
Corporate		8,660		79		-		-		8,660		79
Trust preferred		-		-		2,441		469		2,441		469
Total	$	163,665	$	909	$	69,122	$	2,160	$	232,787	$	3,069

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, 2015, we had 18 U.S. agency, 41 U.S. agency residential mortgage-backed and 10 U.S. agency commercial mortgage-backed securities whose fair market value is less than amortized cost. The unrealized losses are largely attributed to rises in term interest rates since acquisition 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, 2015, we had five of this type of security whose fair value is less than amortized cost. Two of the five issues are rated by a major rating agency as investment grade, two are rated below investment grade and one is split rated. Two of these bonds have an 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.

All of these securities are receiving principal and interest payments. Most of these transactions are pass-through structures, receiving pro rata principal and interest payments from a dedicated collateral pool. 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.  Our cash flow analysis forecasts complete recovery of our cost basis for four of the five securities whose fair value is less than amortized cost while the fifth security had credit related OTTI and is discussed in further detail below.

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, 2015, we had 29 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.

Obligations of states and political subdivisions — at March 31, 2015, we had 57 municipal securities whose fair value is less than amortized cost.  The unrealized losses are primarily due to increases in interest rates since 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, 2015, we had five 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.

11

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Trust preferred securities — at March 31, 2015, 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 has suffered from credit spread widening.

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, 2015, 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, 2015 and December 31, 2014:

	March 31, 2015					December 31, 2014
	Fair Value		Net Unrealized Loss			Fair Value		Net Unrealized Loss
	(In thousands)
Trust preferred securities
Rated issues	$	1,674	$	(236	)	$	1,643	$	(267	)
Unrated issues		764		(236	)		798		(202	)

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, 2015 and 2014, respectively.

At March 31, 2015, three private label residential mortgage-backed securities had credit related OTTI and are summarized as follows:

	Senior Security		Super Senior Security		Senior Support Security		Total
	(In thousands)
As of March 31, 2015
Fair value	$	2,053	$	1,524	$	96	$	3,673
Amortized cost		2,092		1,426		-		3,518
Non-credit unrealized loss		39		-		-		39
Unrealized gain		-		98		96		194
Cumulative credit related OTTI		757		457		380		1,594
Credit related OTTI recognized in our Condensed Consolidated Statements of Operations
For the three months ended March 31,
2015	$	-	$	-	$	-	$	-
2014		-		-		-		-

12

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.  Two of these securities have unrealized gains and one has an unrealized loss at March 31, 2015.  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.

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

	2015		2014
	(In thousands)
Balance at beginning of year	$	1,844	$	1,835
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	$	1,844	$	1,835

The amortized cost and fair value of securities available for sale at March 31, 2015, by contractual maturity, follow:

	Amortized Cost		Fair Value
	(In thousands)
Maturing within one year	$	28,410	$	28,419
Maturing after one year but within five years		61,845		62,190
Maturing after five years but within ten years		36,871		37,377
Maturing after ten years		75,861		75,430
		202,987		203,416
U.S. agency residential mortgage-backed		232,286		234,254
U.S. agency commercial mortgage-backed		32,846		33,081
Private label residential mortgage-backed		5,992		5,820
Other asset backed		95,197		95,191
Total	$	569,308	$	571,762

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:

	Proceeds		Realized Gains		Losses
	(In thousands)
2015	$	11,786	$	75	$	-
2014		-		-		-

13

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

During 2015 and 2014, our trading securities consisted of various preferred stocks.  During the first three months of 2015 and 2014, we recognized gains on trading securities of $0.010 million and $0.112 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.

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:

	Commercial			Mortgage			Installment			Payment Plan Receivables			Unallocated			Total
	(In thousands)
2015
Balance at beginning of period	$	5,445		$	13,444		$	1,814		$	64		$	5,223		$	25,990
Additions (deductions)
Provision for loan losses		328			(733	)		(85	)		(2	)		(167	)		(659	)
Recoveries credited to allowance		433			238			319			-			-			990
Loans charged against the allowance		(290	)		(868	)		(484	)		-			-			(1,642	)
Balance at end of period	$	5,916		$	12,081		$	1,564		$	62		$	5,056		$	24,679
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

14

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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

	Commercial		Mortgage		Installment		Payment Plan Receivables		Unallocated		Total
	(In thousands)
March 31, 2015
Allowance for loan losses
Individually evaluated for impairment	$	3,214	$	8,612	$	654	$	-	$	-	$	12,480
Collectively evaluated for impairment		2,702		3,469		910		62		5,056		12,199
Total ending allowance balance	$	5,916	$	12,081	$	1,564	$	62	$	5,056	$	24,679
Loans
Individually evaluated for impairment	$	32,633	$	70,478	$	6,461	$	-			$	109,572
Collectively evaluated for impairment		679,319		397,551		202,158		38,767				1,317,795
Total loans recorded investment		711,952		468,029		208,619		38,767				1,427,367
Accrued interest included in recorded investment		1,629		2,122		657		-				4,408
Total loans	$	710,323	$	465,907	$	207,962	$	38,767			$	1,422,959
December 31, 2014
Allowance for loan losses
Individually evaluated for impairment	$	3,194	$	9,311	$	728	$	-	$	-	$	13,233
Collectively evaluated for impairment		2,251		4,133		1,086		64		5,223		12,757
Total ending allowance balance	$	5,445	$	13,444	$	1,814	$	64	$	5,223	$	25,990
Loans
Individually evaluated for impairment	$	34,147	$	72,340	$	6,679	$	-			$	113,166
Collectively evaluated for impairment		658,423		402,458		200,368		40,001				1,301,250
Total loans recorded investment		692,570		474,798		207,047		40,001				1,414,416
Accrued interest included in recorded investment		1,615		2,170		669		-				4,454
Total loans	$	690,955	$	472,628	$	206,378	$	40,001			$	1,409,962

15

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 Still Accruing		Non- Accrual		Total Non- Performing Loans
	(In thousands)
March 31, 2015
Commercial
Income producing - real estate	$	-	$	1,187	$	1,187
Land, land development and construction - real estate		-		575		575
Commercial and industrial		197		2,749		2,946
Mortgage
1-4 family		-		6,235		6,235
Resort lending		-		1,815		1,815
Home equity - 1st lien		-		267		267
Home equity - 2nd lien		-		366		366
Installment
Home equity - 1st lien		-		290		290
Home equity - 2nd lien		-		528		528
Loans not secured by real estate		-		562		562
Other		-		8		8
Payment plan receivables
Full refund		-		7		7
Partial refund		-		1		1
Other		-		3		3
Total recorded investment	$	197	$	14,593	$	14,790
Accrued interest included in recorded investment	$	3	$	-	$	3
December 31, 2014
Commercial
Income producing - real estate	$	-	$	1,233	$	1,233
Land, land development and construction - real estate		-		594		594
Commercial and industrial		-		2,746		2,746
Mortgage
1-4 family		7		5,945		5,952
Resort lending		-		2,168		2,168
Home equity - 1st lien		-		331		331
Home equity - 2nd lien		-		605		605
Installment
Home equity - 1st lien		-		576		576
Home equity - 2nd lien		-		517		517
Loans not secured by real estate		-		454		454
Other		-		48		48
Payment plan receivables
Full refund		-		2		2
Partial refund		-		12		12
Other		-		-		-
Total recorded investment	$	7	$	15,231	$	15,238
Accrued interest included in recorded investment	$	-	$	-	$	-

16

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

An aging analysis of loans by class follows:

	Loans Past Due								Loans not Past Due		Total Loans
	30-59 days		60-89 days		90+ days		Total
	(In thousands)
March 31, 2015
Commercial
Income producing - real estate	$	268	$	-	$	214	$	482	$	271,395	$	271,877
Land, land development and construction - real estate		124		-		217		341		32,150		32,491
Commercial and industrial		288		278		1,101		1,667		405,917		407,584
Mortgage
1-4 family		2,390		468		6,235		9,093		267,027		276,120
Resort lending		865		283		1,815		2,963		121,834		124,797
Home equity - 1st lien		41		113		267		421		20,238		20,659
Home equity - 2nd lien		396		111		366		873		45,580		46,453
Installment
Home equity - 1st lien		186		12		290		488		20,562		21,050
Home equity - 2nd lien		193		115		528		836		26,078		26,914
Loans not secured by real estate		355		21		562		938		157,516		158,454
Other		1		18		8		27		2,174		2,201
Payment plan receivables
Full refund		596		113		7		716		23,941		24,657
Partial refund		376		63		1		440		8,577		9,017
Other		120		22		3		145		4,948		5,093
Total recorded investment	$	6,199	$	1,617	$	11,614	$	19,430	$	1,407,937	$	1,427,367
Accrued interest included in recorded investment	$	50	$	20	$	3	$	73	$	4,335	$	4,408
December 31, 2014
Commercial
Income producing - real estate	$	89	$	-	$	214	$	303	$	252,763	$	253,066
Land, land development and construction - real estate		131		-		223		354		33,984		34,338
Commercial and industrial		2,391		279		209		2,879		402,287		405,166
Mortgage
1-4 family		1,877		1,638		5,952		9,467		269,719		279,186
Resort lending		226		-		2,168		2,394		126,342		128,736
Home equity - 1st lien		39		50		331		420		19,782		20,202
Home equity - 2nd lien		711		89		605		1,405		45,269		46,674
Installment
Home equity - 1st lien		466		37		576		1,079		20,995		22,074
Home equity - 2nd lien		369		81		517		967		28,125		29,092
Loans not secured by real estate		589		231		454		1,274		152,115		153,389
Other		15		3		48		66		2,426		2,492
Payment plan receivables
Full refund		838		214		2		1,054		26,799		27,853
Partial refund		409		123		12		544		6,550		7,094
Other		96		24		-		120		4,934		5,054
Total recorded investment	$	8,246	$	2,769	$	11,311	$	22,326	$	1,392,090	$	1,414,416
Accrued interest included in recorded investment	$	55	$	29	$	-	$	84	$	4,370	$	4,454

17

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Impaired loans are as follows :

	March 31, 2015		December 31, 2014
Impaired loans with no allocated allowance	(In thousands)
TDR	$	9,402	$	9,325
Non - TDR		316		299
Impaired loans with an allocated allowance
TDR - allowance based on collateral		5,184		5,879
TDR - allowance based on present value cash flow		91,924		94,970
Non - TDR - allowance based on collateral		2,387		2,296
Non - TDR - allowance based on present value cash flow		-		-
Total impaired loans	$	109,213	$	112,769
Amount of allowance for loan losses allocated
TDR - allowance based on collateral	$	1,707	$	2,025
TDR - allowance based on present value cash flow		9,704		10,188
Non - TDR - allowance based on collateral		1,069		1,020
Non - TDR - allowance based on present value cash flow		-		-
Total amount of allowance for loan losses allocated	$	12,480	$	13,233

18

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Impaired loans by class  are as follows (1):

	March 31, 2015						December 31, 2014
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:	(In thousands)
Commercial
Income producing - real estate	$	5,827	$	6,046	$	-	$	5,868	$	6,077	$	-
Land, land development & construction-real estate		1,030		1,591		-		1,051		1,606		-
Commercial and industrial		2,851		2,843		-		2,685		2,667		-
Mortgage
1-4 family		25		66		-		-		49		-
Resort lending		13		96		-		48		397		-
Home equity - 1st lien		-		-		-		-		-		-
Home equity - 2nd lien		-		-		-		-		-		-
Installment
Home equity - 1st lien		-		39		-		-		40		-
Home equity - 2nd lien		-		-		-		-		-		-
Loans not secured by real estate		-		-		-		-		-		-
Other		-		-		-		-		-		-
		9,746		10,681		-		9,652		10,836		-
With an allowance recorded:
Commercial
Income producing - real estate		12,861		13,842		733		12,836		13,797		689
Land, land development & construction-real estate		1,961		2,043		394		3,456		3,528		499
Commercial and industrial		8,103		8,361		2,087		8,251		8,486		2,006
Mortgage