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, 2016

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)

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 ☒    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	21,245,536
Class	Outstanding at November 2, 2016

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

INDEX

		Number(s)
PART I -	Financial Information
Item 1.	Condensed Consolidated Statements of Financial Condition September 30, 2016 and December 31, 2015	3
	Condensed Consolidated Statements of Operations Three- and Nine-month periods ended September 30, 2016 and 2015	4
	Condensed Consolidated Statements of Comprehensive Income Three- and Nine-month periods ended September 30, 2016 and 2015	5
	Condensed Consolidated Statements of Cash Flows Nine-month periods ended September 30, 2016 and 2015	6
	Condensed Consolidated Statements of Shareholders' Equity Nine-month periods ended September 30, 2016 and 2015	7
	Notes to Interim Condensed Consolidated Financial Statements	8-59
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	60-86
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	87
Item 4.	Controls and Procedures	87
PART II -	Other Information
Item 1A	Risk Factors	88
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	88
Item 6.	Exhibits	89

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, 2015, 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

	September 30, 2016			December 31, 2015
	(unaudited)
	(In thousands, except share amounts)
Assets
Cash and due from banks	$	38,610		$	54,260
Interest bearing deposits		75,706			31,523
Cash and Cash Equivalents		114,316			85,783
Interest bearing deposits - time		7,233			11,866
Trading securities		152			148
Securities available for sale		603,112			585,484
Federal Home Loan Bank and Federal Reserve Bank stock, at cost		15,507			15,471
Loans held for sale, carried at fair value		38,008			27,866
Loans
Commercial		784,976			748,398
Mortgage		522,833			498,036
Installment		268,357			234,017
Payment plan receivables		31,188			34,599
Total Loans		1,607,354			1,515,050
Allowance for loan losses		(22,043	)		(22,570	)
Net Loans		1,585,311			1,492,480
Other real estate and repossessed assets		4,989			7,150
Property and equipment, net		40,375			43,103
Bank-owned life insurance		53,779			54,402
Deferred tax assets, net		32,156			39,635
Capitalized mortgage loan servicing rights		11,048			12,436
Vehicle service contract counterparty receivables, net		2,608			7,229
Other intangibles		2,019			2,280
Accrued income and other assets		27,706			23,733
Total Assets	$	2,538,319		$	2,409,066
Liabilities and Shareholders' Equity
Deposits
Non-interest bearing	$	725,166		$	659,793
Savings and interest-bearing checking		1,009,354			988,174
Reciprocal		46,636			50,207
Time		425,804			387,789
Total Deposits		2,206,960			2,085,963
Other borrowings		11,527			11,954
Subordinated debentures		35,569			35,569
Vehicle service contract counterparty payables		538			797
Accrued expenses and other liabilities		32,823			23,691
Total Liabilities		2,287,417			2,157,974
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: 21,227,974 shares at September 30, 2016 and 22,251,373 shares at December 31, 2015		323,303			339,462
Accumulated deficit		(69,386	)		(82,334	)
Accumulated other comprehensive loss		(3,015	)		(6,036	)
Total Shareholders’ Equity		250,902			251,092
Total Liabilities and Shareholders’ Equity	$	2,538,319		$	2,409,066

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,
	2016			2015			2016			2015
	(unaudited)						(unaudited)
	(In thousands, except per share amounts)
Interest Income
Interest and fees on loans	$	18,597		$	17,869		$	55,361		$	52,859
Interest on securities
Taxable		2,537			1,901			7,261			5,528
Tax-exempt		330			228			860			667
Other investments		281			295			884			922
Total Interest Income		21,745			20,293			64,366			59,976
Interest Expense
Deposits		1,254			987			3,520			2,961
Other borrowings		493			465			1,455			1,382
Total Interest Expense		1,747			1,452			4,975			4,343
Net Interest Income		19,998			18,841			59,391			55,633
Provision for loan losses		(175	)		(244	)		(1,439	)		(1,037	)
Net Interest Income After Provision for Loan Losses		20,173			19,085			60,830			56,670
Non-Interest Income
Service charges on deposit accounts		3,281			3,294			9,164			9,261
Interchange income		1,943			2,169			5,797			6,551
Net gains (losses) on assets
Mortgage loans		3,556			1,812			7,727			5,735
Securities		(45	)		45			302			97
Mortgage loan servicing, net		858			(556	)		(454	)		476
Title insurance fees		319			281			860			874
Net gain on branch sale		-			1,193			-			1,193
Other		1,796			1,881			5,701			5,881
Total Non-Interest Income		11,708			10,119			29,097			30,068
Non-Interest Expense
Compensation and employee benefits		13,031			12,029			36,912			35,605
Data processing		1,971			2,001			6,008			5,958
Occupancy, net		1,919			1,940			5,982			6,399
Furniture, fixtures and equipment		990			998			2,939			2,915
Communications		670			754			2,280			2,184
Loan and collection		568			816			1,964			2,938
Advertising		455			406			1,410			1,338
Legal and professional		420			519			1,178			1,352
FDIC deposit insurance		187			350			852			1,044
Interchange expense		276			279			809			859
Credit card and bank service fees		203			197			588			602
Net (gains) losses on other real estate and repossessed assets		263			5			98			(173	)
Provision for loss reimbursement on sold loans		45			(35	)		30			(59	)
Costs related to unfunded lending commitments		73			26			6			46
Vehicle service contract counterparty contingencies		(39	)		30			(10	)		89
Other		1,497			1,564			4,423			4,512
Total Non-Interest Expense		22,529			21,879			65,469			65,609
Income Before Income Tax		9,352			7,325			24,458			21,129
Income tax expense		2,979			2,278			7,547			6,682
Net Income	$	6,373		$	5,047		$	16,911		$	14,447
Net Income Per Common Share
Basic	$	0.30		$	0.22		$	0.79		$	0.63
Diluted	$	0.30		$	0.22		$	0.78		$	0.62
Dividends Per Common Share
Declared	$	0.08		$	0.06		$	0.24		$	0.18
Paid	$	0.08		$	0.06		$	0.24		$	0.18

See notes to interim condensed consolidated financial statements (unaudited)

4

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

	Three months ended September 30,					Nine months ended September 30,
	2016			2015		2016			2015
	(unaudited)					(unaudited)
	(In thousands)					(In thousands)
Net income	$	6,373		$	5,047	$	16,911		$	14,447
Other comprehensive income, before tax
Securities available for sale
Unrealized gains arising during period		451			1,366		4,899			1,830
Change in unrealized gains for which a portion of other than temporary impairment has been recognized in earnings		(24	)		10		47			-
Reclassification adjustments for gains included in earnings		(15	)		-		(298	)		(75	)
Unrealized gains recognized in other comprehensive income on securities available for sale		412			1,376		4,648			1,755
Income tax expense		144			482		1,627			615
Unrealized gains recognized in other comprehensive income on available for sale securities, net of tax		268			894		3,021			1,140
Other comprehensive income		268			894		3,021			1,140
Comprehensive income	$	6,641		$	5,941	$	19,932		$	15,587

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,
	2016			2015
	(unaudited - In thousands)
Net Income	$	16,911		$	14,447
Adjustments to Reconcile Net Income to Net Cash From Operating Activities
Proceeds from sales of loans held for sale		222,610			227,381
Disbursements for loans held for sale		(225,025	)		(223,446	)
Provision for loan losses		(1,439	)		(1,037	)
Deferred federal income tax expense		8,726			7,210
Deferred loan fees		(1,634	)		(1,189	)
Depreciation, amortization of intangible assets and premiums and accretion of discounts on securities, loans and interest bearning deposits - time		3,831			3,345
Net gains on mortgage loans		(7,727	)		(5,735	)
Net gains on securities		(302	)		(97	)
Net (gains) losses on other real estate and repossessed assets		98			(173	)
Vehicle service contract counterparty contingencies		(10	)		89
Share based compensation		1,200			1,153
Gain on branch sale		-			(1,193	)
Net gain on sale of fixed assets		(2	)		(152	)
Increase in accrued income and other assets		(5,540	)		(359	)
Increase (decrease) in accrued expenses and other liabilities		1,409			(684	)
Total Adjustments		(3,805	)		5,113
Net Cash From Operating Activities		13,106			19,560
Cash Flow Used in Investing Activities
Proceeds from the sale of securities available for sale		56,451			11,786
Proceeds from the maturity of securities available for sale		32,590			25,458
Principal payments received on securities available for sale		117,513			94,333
Purchases of securities available for sale		(213,839	)		(195,623	)
Purchases of interest bearing deposits - time		-			(4,100	)
Proceeds from the maturity of interest bearing deposits - time		4,613			4,576
Purchase of Federal Reserve Bank stock		(407	)		(272	)
Redemption of Federal Reserve Bank stock		371			391
Redemption of Federal Home Loan Bank stock		-			4,514
Net increase in portfolio loans (loans originated, net of principal payments)		(73,673	)		(56,407	)
Purchase of portfolio loans		(15,000	)		-
Net cash paid in branch sale		-			(7,229	)
Proceeds from the collection of vehicle service contract counterparty receivables		4,671			255
Proceeds from the sale of other real estate and repossessed assets		3,854			5,619
Proceeds from life insurance		2,235			-
Proceeds from the sale of property and equipment		23			490
Capital expenditures		(1,717	)		(2,925	)
Net Cash Used in Investing Activities		(82,315	)		(119,134	)
Cash Flow From Financing Activities
Net increase in total deposits		120,997			145,313
Net increase (decrease) in other borrowings		5			(1	)
Payments of Federal Home Loan Bank Advances		(432	)		(399	)
Net decrease in vehicle service contract counterparty payables		(259	)		(27	)
Dividends paid		(5,149	)		(4,118	)
Proceeds from issuance of common stock		61			103
Repurchase of common stock		(16,854	)		(9,025	)
Share based compensation withholding obligation		(627	)		(1,091	)
Net Cash From Financing Activities		97,742			130,755
Net Increase in Cash and Cash Equivalents		28,533			31,181
Cash and Cash Equivalents at Beginning of Period		85,783			74,016
Cash and Cash Equivalents at End of Period	$	114,316		$	105,197
Cash paid during the period for
Interest	$	4,811		$	4,302
Income taxes		437			229
Transfers to other real estate and repossessed assets		1,791			2,843
Transfer of payment plan receivables to vehicle service contract counterparty receivables		40			431
Purchase of securities available for sale not yet settled		7,440			7,717

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,
	2016			2015
	(unaudited)
	(In thousands)
Balance at beginning of period	$	251,092		$	250,371
Cumulative effect of change in accounting principle		1,247			-
Balance at beginning of period, as adjusted		252,339			250,371
Net income		16,911			14,447
Cash dividends declared		(5,149	)		(4,118	)
Issuance of common stock		61			103
Share based compensation		1,200			1,153
Share based compensation withholding obligation		(627	)		(1,091	)
Repurchase of common stock		(16,854	)		(9,025	)
Net change in accumulated other comprehensive loss, net of related tax effect		3,021			1,140
Balance at end of period	$	250,902		$	252,980

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, 2015 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, 2016 and December 31, 2015, and the results of operations for the three and nine-month periods ended September 30, 2016 and 2015.  The results of operations for the three and nine-month periods ended September 30, 2016, 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 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 2015 Annual Report on Form 10-K for a disclosure of our accounting policies.

2. New Accounting Standards

In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 became effective for us on January 1, 2016, 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, 2018, 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 January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities”.  This ASU amends existing guidance related to the accounting for certain financial assets and liabilities. These amendments, among other things, requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. This amended guidance is effective for us on January 1, 2018, and is not expected to have a material impact on our consolidated operating results or financial condition.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”.  This ASU amends existing guidance related to the accounting for leases. These amendments, among other things, requires lessees to account for most leases on the balance sheet while recognizing expense on the income statement in a manner similar to existing guidance.  For lessors the guidance modifies the classification criteria and the accounting for sales-type and direct finance leases. This amended guidance is effective for us on January 1, 2019, and is not expected to have a material impact on our consolidated operating results or financial condition.

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (718) Improvements to Employee Share-Based Payment Accounting”.  This ASU amends existing guidance in an effort to simplify certain aspects of accounting for share-based payments. The areas for simplification in this ASU include income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows.  This amended guidance is effective for us on January 1, 2017, with early adoption permitted.  We adopted this amended guidance during the second quarter of 2016 using a modified retrospective approach.  The impact of this adoption was to adjust our January 1, 2016 Condensed Consolidated Statement of Financial Position to reflect cumulative effect adjustments as follows:

	January 1, 2016 Originally Presented			Cumulative Retrospective Adjustments		January 1, 2016 Adjusted
	(Dollars in thousands)
Deferred tax assets	$	39,635		$	1,247	$	40,882
Total assets	$	2,409,066		$	1,247	$	2,410,313
Common stock	$	339,462		$	62	$	339,524
Accumulated deficit	$	(82,334	)	$	1,185	$	(81,149	)
Total Shareholders’ Equity	$	251,092		$	1,247	$	252,339
Total Liabilities and Shareholders’ Equity	$	2,409,066		$	1,247	$	2,410,313

9

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The adjustments above reflect the recording of $1.23 million of unrealized excess benefits on share based compensation and $0.06 million (impact to equity of $0.02 million after consideration of deferred taxes)  for the impact of making an accounting policy election to account for forfeitures as they occur.  After January 1, 2016, excess tax benefits or deficiencies resulting from share-based payments will be recognized as tax benefit or expense when they occur.  Tax benefits of zero and $0.3 million were recorded during the three and nine month periods ended September 30, 2016, respectively as a result of share awards vesting during the periods.  In addition, we have elected to apply the  amendments related to the presentation of excess tax benefits in the statement of cash flows on a prospective basis.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments”.  This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income.  This ASU will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities, allowances will be recorded rather than reducing the carrying amount as is done under the current other-than-temporary impairment model. This ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. This amended guidance is effective for us on January 1, 2020.  We have not yet determined what the impact will be on our consolidated operating results or financial condition.

3. Securities

Securities available for sale consist of the following:

	Amortized		Unrealized
	Cost		Gains		Losses		Fair Value
	(In thousands)
September 30, 2016
U.S. agency	$	29,482	$	508	$	41	$	29,949
U.S. agency residential mortgage-backed		168,233		1,857		132		169,958
U.S. agency commercial mortgage-backed		13,694		214		16		13,892
Private label mortgage-backed		33,482		374		278		33,578
Other asset backed		142,058		435		305		142,188
Obligations of states and political subdivisions		156,539		2,115		665		157,989
Corporate		50,787		792		124		51,455
Trust preferred		2,921		-		471		2,450
Foreign government		1,635		18		0		1,653
Total	$	598,831	$	6,313	$	2,032	$	603,112
December 31, 2015
U.S. agency	$	47,283	$	309	$	80	$	47,512
U.S. agency residential mortgage-backed		195,055		1,584		583		196,056
U.S. agency commercial mortgage-backed		34,017		94		83		34,028
Private label mortgage-backed		5,061		161		319		4,903
Other asset backed		117,431		54		581		116,904
Obligations of states and political subdivisions		145,193		941		1,150		144,984
Corporate		38,895		9		290		38,614
Trust preferred		2,916		-		433		2,483
Total	$	585,851	$	3,152	$	3,519	$	585,484

10

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)
September 30, 2016
U.S. agency	$	1,604	$	3	$	8,147	$	38	$	9,751	$	41
U.S. agency residential mortgage-backed		22,982		48		19,099		84		42,081		132
U.S. agency commercial mortgage-backed		3,455		14		257		2		3,712		16
Private label mortgage- backed		12,202		18		1,429		260		13,631		278
Other asset backed		22,147		96		16,998		209		39,145		305
Obligations of states and political subdivisions		17,853		91		15,203		574		33,056		665
Corporate		3,776		14		2,892		110		6,668		124
Trust preferred		-		-		2,450		471		2,450		471
Total	$	84,019	$	284	$	66,475	$	1,748	$	150,494	$	2,032
December 31, 2015
U.S. agency	$	12,164	$	47	$	6,746	$	33	$	18,910	$	80
U.S. agency residential mortgage-backed		57,538		316		23,340		267		80,878		583
U.S. agency commercial mortgage-backed		16,747		60		2,247		23		18,994		83
Private label mortgage- backed		-		-		3,393		319		3,393		319
Other asset backed		102,660		434		5,189		147		107,849		581
Obligations of states and political subdivisions		52,493		597		12,240		553		64,733		1,150
Corporate		30,550		290		-		-		30,550		290
Trust preferred		-		-		2,483		433		2,483		433
Total	$	272,152	$	1,744	$	55,638	$	1,775	$	327,790	$	3,519

Our portfolio of securities available for sale 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.

11

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 September 30, 2016, we had 21 U.S. agency, 59 U.S. agency residential mortgage-backed and seven U.S. agency commercial mortgage-backed securities whose fair market value is less than amortized cost. The unrealized losses are largely attributed to increases in 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 mortgage backed securities — at September 30, 2016, we had 24 of this type of security whose fair value is less than amortized cost.  The unrealized losses are primarily attributed to four securities purchased prior to 2016.  Two of these four securities have an impairment in excess of 10% and three of these holdings have been impaired for more than 12 months.  The unrealized losses are largely attributable to credit spread widening on these four securities since their acquisition.

These four 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.

These four private label mortgage-backed securities are reviewed for other than temporary impairment (“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 all four of these securities whose fair value is less than amortized cost.

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, 2016, we had 70 other asset backed securities whose fair value is less than amortized cost. The unrealized losses are primarily due to credit spread widening and 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.

Obligations of states and political subdivisions — at September 30, 2016, we had 100 municipal securities whose fair value is less than amortized cost.  The unrealized losses are primarily due to increases in interest rates since acquisition.  One of these securities has an impairment in excess of 10%.  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, 2016, we had seven corporate securities whose fair value is less than amortized cost. The unrealized losses are primarily due to credit spread widening and 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.

12

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Trust preferred securities — at September 30, 2016, 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 $0.7 million as of September 30, 2016, continues to have satisfactory credit metrics and make interest payments.

The following table breaks out our trust preferred securities in further detail as of September 30, 2016 and December 31, 2015:

	September 30, 2016					December 31, 2015
	Fair Value		Net Unrealized Loss			Fair Value		Net Unrealized Loss
	(In thousands)
Trust preferred securities
Rated issues	$	1,735	$	(186	)	$	1,690	$	(226	)
Unrated issues		715		(285	)		793		(207	)

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 our Condensed Consolidated Statements of Operations related to securities available for sale during the three or nine month periods ended September 30, 2016 and 2015, respectively.

At September 30, 2016, three private label 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 September 30, 2016
Fair value	$	1,346	$	1,135	$	75	$	2,556
Amortized cost		1,303		1,064		-		2,367
Non-credit unrealized loss		-		-		-		-
Unrealized gain		43		71		75		189
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 September 30,
2016	$	-	$	-	$	-	$	-
2015		-		-		-		-
For the nine months ended September 30,
2016		-		-		-		-
2015		-		-		-		-

13

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.  All three of these securities have unrealized gains at September 30, 2016.  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 these securities is now less than previously recorded credit related OTTI amounts.

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 September 30,				Nine months ended September 30,
	2016		2015		2016		2015
	(In thousands)				(In thousands)
Balance at beginning of period	$	1,844	$	1,844	$	1,844	$	1,844
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		-		-		-		-
Balance at end of period	$	1,844	$	1,844	$	1,844	$	1,844

The amortized cost and fair value of securities available for sale at September 30, 2016, by contractual maturity, follow:

	Amortized Cost		Fair Value
	(In thousands)
Maturing within one year	$	23,706	$	23,753
Maturing after one year but within five years		86,673		87,599
Maturing after five years but within ten years		63,799		64,784
Maturing after ten years		67,186		67,360
		241,364		243,496
U.S. agency residential mortgage-backed		168,233		169,958
U.S. agency commercial mortgage-backed		13,694		13,892
Private label residential mortgage-backed		33,482		33,578
Other asset backed		142,058		142,188
Total	$	598,831	$	603,112

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 nine month periods ending September 30, follows:

	Proceeds		Realized Gains		Losses
	(In thousands)
2016	$	56,451	$	350	$	52
2015		11,786		75		-

During 2016 and 2015, our trading securities consisted of various preferred stocks.  During the first nine months of 2016 and 2015, we recognized gains on trading securities of $0.004 million and $0.022 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 September 30, follows:

	Commercial			Mortgage			Installment			Payment Plan Receivables			Subjective Allocation			Total
	(In thousands)
2016
Balance at beginning of period	$	6,039		$	9,956		$	1,139		$	52		$	5,526		$	22,712
Additions (deductions)
Provision for loan losses		(153	)		(247	)		208			-			17			(175	)
Recoveries credited to allowance		474			195			236			-			-			905
Loans charged against the allowance		(365	)		(561	)		(473	)		-			-			(1,399	)
Balance at end of period	$	5,995		$	9,343		$	1,110		$	52		$	5,543		$	22,043
2015
Balance at beginning of period	$	6,707		$	11,465		$	1,461		$	65		$	4,888		$	24,586
Additions (deductions)
Provision for loan losses		(26	)		(47	)		(49	)		(5	)		(117	)		(244	)
Recoveries credited to allowance		637			286			250			-			-			1,173
Loans charged against the allowance		(190	)		(379	)		(342	)		-			-			(911	)
Balance at end of period	$	7,128		$	11,325		$	1,320		$	60		$	4,771		$	24,604

15

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:

	Commercial			Mortgage			Installment			Payment Plan Receivables			Subjective Allocation			Total
	(In thousands)
2016
Balance at beginning of period	$	5,670		$	10,391		$	1,181		$	56		$	5,272		$	22,570
Additions (deductions)
Provision for loan losses		(1,220	)		(885	)		399			(4	)		271			(1,439	)
Recoveries credited to allowance		1,944			871			808			-			-			3,623
Loans charged against the allowance		(399	)		(1,034	)		(1,278	)		-			-			(2,711	)
Balance at end of period	$	5,995		$	9,343		$	1,110		$	52		$	5,543		$	22,043
2015
Balance at beginning of period	$	5,445		$	13,444		$	1,814		$	64		$	5,223		$	25,990
Additions (deductions)
Provision for loan losses		479			(881	)		(179	)		(4	)		(452	)		(1,037	)
Recoveries credited to allowance		1,722			843			853			-			-			3,418
Loans charged against the allowance		(518	)		(2,081	)		(1,168	)		-			-			(3,767	)
Balance at end of period	$	7,128		$	11,325		$	1,320		$	60		$	4,771		$	24,604

16

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		Subjective Allocation		Total
	(In thousands)
September 30, 2016
Allowance for loan losses
Individually evaluated for impairment	$	3,325	$	6,717	$	333	$	-	$	-	$	10,375
Collectively evaluated for impairment		2,670		2,626		777		52		5,543		11,668
Total ending allowance balance	$	5,995	$	9,343	$	1,110	$	52	$	5,543	$	22,043
Loans
Individually evaluated for impairment	$	16,087	$	60,891	$	5,101	$	-			$	82,079
Collectively evaluated for impairment		770,642		464,234		263,973		31,188				1,530,037
Total loans recorded investment		786,729		525,125		269,074		31,188				1,612,116
Accrued interest included in recorded investment		1,753		2,292		717		-				4,762
Total loans	$	784,976	$	522,833	$	268,357	$	31,188			$	1,607,354
December 31, 2015
Allowance for loan losses
Individually evaluated for impairment	$	2,708	$	7,818	$	457	$	-	$	-	$	10,983
Collectively evaluated for impairment		2,962		2,573		724		56		5,272		11,587
Total ending allowance balance	$	5,670	$	10,391	$	1,181	$	56	$	5,272	$	22,570
Loans
Individually evaluated for impairment	$	16,868	$	66,375	$	5,888	$	-			$	89,131
Collectively evaluated for impairment		733,399		433,931		228,827		34,599				1,430,756
Total loans recorded investment		750,267		500,306		234,715		34,599				1,519,887
Accrued interest included in recorded investment		1,869		2,270		698		-				4,837
Total loans	$	748,398	$	498,036	$	234,017	$	34,599			$	1,515,050

17

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)
September 30, 2016
Commercial
Income producing - real estate	$	-	$	658	$	658
Land, land development and construction - real estate		-		211		211
Commercial and industrial		-		2,517		2,517
Mortgage
1-4 family		-		4,429		4,429
Resort lending		-		1,624		1,624
Home equity - 1st lien		-		273		273
Home equity - 2nd lien		-		353		353
Purchased loans		-		-		-
Installment
Home equity - 1st lien		-		96		96
Home equity - 2nd lien		-		249		249
Loans not secured by real estate		-		384		384
Other		-		3		3
Payment plan receivables
Full refund		-		-		-
Partial refund		-		4		4
Other		-		-		-
Total recorded investment	$	-	$	10,801	$	10,801
Accrued interest included in recorded investment	$	-	$	-	$	-
December 31, 2015
Commercial
Income producing - real estate	$	-	$	1,027	$	1,027
Land, land development and construction - real estate		49		401		450
Commercial and industrial		69		2,028		2,097
Mortgage
1-4 family		-		4,744		4,744
Resort lending		-		1,094		1,094
Home equity - 1st lien		-		187		187
Home equity - 2nd lien		-		147		147
Purchased loans		-		2		2
Installment
Home equity - 1st lien		-		106		106
Home equity - 2nd lien		-		443		443
Loans not secured by real estate		-		421		421
Other		-		2		2
Payment plan receivables
Full refund		-		2		2
Partial refund		-		2		2
Other		-		1		1
Total recorded investment	$	118	$	10,607	$	10,725
Accrued interest included in recorded investment	$	2	$	-	$	2

18

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, 2016
Commercial
Income producing - real estate	$	-	$	-	$	541	$	541	$	273,461	$	274,002
Land, land development and construction - real estate		-		-		133		133		53,836		53,969
Commercial and industrial		105		116		457		678		458,080		458,758
Mortgage
1-4 family		2,180		1,461		4,429		8,070		285,892		293,962
Resort lending		1,975		-		1,624		3,599		103,597		107,196
Home equity - 1st lien		107		-		273		380		27,542		27,922
Home equity - 2nd lien		226		73		353		652		52,882		53,534
Purchased loans		7		1		-		8		42,503		42,511
Installment
Home equity - 1st lien		474		179		96		749		13,079		13,828
Home equity - 2nd lien		133		72		249		454		15,064		15,518
Loans not secured by real estate		291		114		384		789		236,376		237,165
Other		10		4		3		17		2,546		2,563
Payment plan receivables
Full refund		258		70		-		328		10,035		10,363
Partial refund		506		313		4		823		14,041		14,864
Other		159		40		-		199		5,762		5,961
Total recorded investment	$	6,431	$	2,443	$	8,546	$	17,420	$	1,594,696	$	1,612,116
Accrued interest included in recorded investment	$	67	$	28	$	-	$	95	$	4,667	$	4,762