EXHIBIT 13

Performance Graph	6
Selected Consolidated Financial Data	7
Management’s Discussion and Analysis	8
Management’s Annual Report on Internal Control Over Financial Reporting	35
Report of Independent Registered Public Accounting Firm	36
Consolidated Financial Statements	37
Notes to Consolidated Financial Statements	42
Quarterly Data	103

5

PERFORMANCE GRAPH

The graph below compares the total returns (assuming reinvestment of dividends) of Independent Bank Corporation common stock, the NASDAQ Composite Index and the NASDAQ Bank Stock Index. The graph assumes $100 invested in Independent Bank Corporation common stock (returns based on stock prices per the NASDAQ) and each of the indices on December 31, 2009 and the reinvestment of all dividends during the periods presented. The performance shown on the graph is not necessarily indicative of future performance.

 

	Period Ending
Index	12/31/09		12/31/10		12/31/11		12/31/12		12/31/13		12/31/14
Independent Bank Corporation	$	100.00	$	18.06	$	18.47	$	48.61	$	166.67	$	183.95
NASDAQ Composite		100.00		118.02		117.04		137.47		192.62		221.02
NASDAQ Bank		100.00		111.35		83.04		111.88		152.85		170.93

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SELECTED CONSOLIDATED FINANCIAL DATA (1)

	Year Ended December 31,
	2014			2013			2012			2011			2010
	(Dollars in thousands, except per share amounts)
SUMMARY OF OPERATIONS
Interest income	$	80,555		$	87,121		$	99,398		$	114,762		$	148,851
Interest expense		7,299			9,162			13,143			20,193			37,198
Net interest income		73,256			77,959			86,255			94,569			111,653
Provision for loan losses		(3,136	)		(3,988	)		6,887			27,946			46,765
Net gains (losses) on securities		320			369			887			(511	)		1,177
Gain on extinguishment of debt		500			—			—			—			18,066
Net gain on branch sale		—			—			5,402			—			—
Other non-interest income		37,955			44,460			57,276			47,424			52,570
Non-interest expenses		89,951			104,118			116,735			133,948			155,000
Income (loss) before income tax		25,216			22,658			26,198			(20,412	)		(18,299	)
Income tax expense (benefit)		7,195			(54,851	)		—			(212	)		(1,590	)
Net income (loss)	$	18,021		$	77,509		$	26,198		$	(20,200	)	$	(16,709	)
Preferred Stock Dividends		—			(3,001	)		(4,347	)		(4,157	)		(4,095	)
Preferred Stock Discount		—			7,554			—			—			—
Net income (loss) applicable to common stock	$	18,021		$	82,062		$	21,851		$	(24,357	)	$	(20,804	)
PER COMMON SHARE DATA (2)
Net income (loss) per common share
Basic	$	0.79		$	5.87		$	2.51		$	(2.94	)	$	(4.09	)
Diluted		0.77			3.55			0.80			(2.94	)		(4.09	)
Cash dividends declared		0.18			0.00			0.00			0.00			0.00
Book value		10.91			10.15			5.58			2.68			5.52
SELECTED BALANCES
Assets	$	2,248,730		$	2,209,943		$	2,023,867		$	2,307,406		$	2,535,248
Loans		1,409,962			1,374,570			1,419,139			1,576,608			1,813,116
Allowance for loan losses		25,990			32,325			44,275			58,884			67,915
Deposits		1,924,302			1,884,806			1,779,537			2,086,125			2,251,838
Shareholders’ equity		250,371			231,581			134,975			102,627			119,085
Long-term debt - FHLB advances		12,470			17,188			17,622			33,384			71,022
Subordinated debentures		35,569			40,723			50,175			50,175			50,175
SELECTED RATIOS
Net interest income to average interest earning assets		3.67	%		4.11	%		4.04	%		4.46	%		4.41	%
Net income (loss) to (3)
Average common equity		7.43			64.22			68.29			(68.44	)		(54.38	)
Average assets		0.80			3.87			0.92			(1.02	)		(0.75	)
Average shareholders’ equity to average assets		10.83			8.69			4.82			4.76			3.92
Tier 1 capital to average assets		11.18			10.61			8.08			6.25			6.35
Non-performing loans to Portfolio Loans		1.08			1.30			2.32			3.80			3.73

(1) The significant variations in the results of operations for the five years presented above is a result of a number of factors, including asset quality challenges, our consolidation, closing or sale of 36 branches in 2012, our exit from the Troubled Asset Relief Program in 2013, and a significant income tax benefit realized in 2013. Please read “Management's Discussion and Analysis of Financial Condition and Results of Operations” below for more information regarding these factors and others.

(2) Per share data has been adjusted for a 1 for 10 reverse stock split in 2010.

(3) These amounts are calculated using net income (loss) applicable to common stock.

7

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Disclaimer Regarding 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.

Introduction. The following section presents additional information to assess the financial condition and results of operations of Independent Bank Corporation, its wholly-owned bank, Independent Bank (the “Bank”), and their subsidiaries. This section should be read in conjunction with the consolidated financial statements and the supplemental financial data contained elsewhere in this annual report. We also encourage you to read our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”). That report includes a list of risk factors that you should consider in connection with any decision to buy or sell our securities.

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Overview. We provide banking services to customers located primarily in Michigan’s Lower Peninsula. As a result, our success depends to a great extent upon the economic conditions in Michigan’s Lower Peninsula. We have in general experienced a difficult economy in Michigan since 2001, which has had significant adverse effects on our performance. As a result of the recession, we incurred net losses from 2008 through 2011 and found it necessary to take certain steps to preserve capital and maintain our regulatory capital ratios.

Economic conditions in Michigan began to show signs of improvement during 2010. Generally, these improvements have continued into 2014, albeit at an uneven pace. There has been an overall decline in the unemployment rate, although Michigan’s unemployment rate has been consistently above the national average. In addition, housing prices and other related statistics (such as home sales and new building permits) have generally been improving. In addition, since early- to mid-2009, we have seen an improvement in asset quality metrics. In particular, since early 2012, we have generally experienced a decline in non-performing assets, reduced levels of new loan defaults, and reduced levels of loan net charge-offs. As a result of the foregoing factors and others, we returned to profitability in 2012 and have now been profitable for 12 consecutive quarters. In addition, we have completed various transactions to improve our capital structure, as described below.

Recent Developments. In January 2015, we adopted a plan to consolidate certain branch offices. This consolidation reflects our ongoing cost reduction initiatives and undertakings to further improve the overall efficiency of our operations. The consolidation will result in the closing of six of our branch offices. It is expected that the aggregate, annual reduction in non-interest expenses resulting from this consolidation will amount to approximately $1.6 million. We also estimate a potential annual loss of revenue of approximately $0.3 million to $0.4 million due to possible customer attrition. We expect that the consolidation will be completed no later than April 30, 2015. We also undertook certain additional staffing reductions related to our retail banking operations. In connection with the consolidation, we expect to incur one-time expenses and charges of approximately $0.3 million in the first four months of 2015, which consist primarily of severance and certain other costs. We do not expect any material loss related to the sale or disposition of real property or other fixed assets.

In 2013, we successfully completed the implementation of a capital plan we had adopted to restore and improve our capital position. In particular, during the last half of 2013, we completed the following:

• On July 26, 2013, we executed a Securities Purchase Agreement with the United States Department of the Treasury (“UST”), pursuant to which we agreed to purchase from the UST for $81.0 million in cash consideration: (i) 74,426 shares of our Series B Fixed Rate Cumulative Mandatorily Convertible Preferred Stock, with an original liquidation preference of $1,000 per share (“Series B Preferred Stock”), including all accrued and unpaid dividends; and (ii) the Amended and Restated Warrant to purchase up to 346,154 shares of our common stock at an exercise price of $7.234 per share and expiring on December 12, 2018 (the “Amended Warrant”);

• In the third quarter of 2013, we sold a total of 13.225 million shares of our common stock in a public offering for total net proceeds of $97.1 million (including 11.5 million shares sold on August 28, 2013, and 1.725 million shares sold on September 10, 2013 pursuant to the underwriters’ overallotment option), after payment of $5.4 million in underwriting discounts and other offering expenses;

• On August 29, 2013, we brought current the interest payments and quarterly dividends we had been deferring since the fourth quarter of 2009 on all of our subordinated debentures and trust preferred securities;

• On August 30, 2013, we completed the redemption of the Series B Preferred Stock and Amended Warrant from the UST pursuant to the terms of the Securities Purchase Agreement described above, which resulted in our exit from the Troubled Asset Relief Program (TARP); and

• On October 11, 2013, we redeemed all of the 8.25% trust preferred securities (with an aggregate liquidation amount of $9.2 million) issued by IBC Capital Finance II.

Regulation. On July 2, 2013, the Federal Reserve Board (the “FRB”) approved a final rule that establishes an integrated regulatory capital framework (the “New Capital Rules”). The rule implements in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). In general,

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under the New Capital Rules, minimum requirements have increased for both the quantity and quality of capital held by banking organizations. Consistent with the international Basel framework, the New Capital Rules include a new minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5% and a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets that applies to all supervised financial institutions. The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking organizations. As to the quality of capital, the New Capital Rules emphasize common equity tier 1 capital, the most loss-absorbing form of capital, and implements strict eligibility criteria for regulatory capital instruments. The New Capital Rules also change the methodology for calculating risk-weighted assets to enhance risk sensitivity. We are subject to the New Capital Rules beginning on January 1, 2015. The 2.5% capital conservation buffer is being phased in over a four-year period beginning in 2016. Under the New Capital Rules our existing trust preferred securities are grandfathered as qualifying regulatory capital. We believe that we currently exceed all of the capital ratio requirements of the New Capital Rules.

It is against this backdrop that we discuss our results of operations and financial condition in 2014 as compared to earlier periods.

RESULTS OF OPERATIONS

Summary. We recorded net income applicable to common stock of $18.0 million, or $0.77 per diluted share, in 2014, as compared to net income applicable to common stock of $82.1 million, or $3.55 per diluted share, in 2013, and net income applicable to common stock of $21.9 million, or $0.80 per share, in 2012. The significantly higher earnings in 2013, as compared to 2014 or 2012, primarily reflects the income tax benefit associated with the reversal of substantially all of the valuation allowance on our deferred tax assets (see “Income tax benefit”) and the discount on our redemption of our outstanding preferred stock.

2012 also included a net gain on the sale of branches. On December 7, 2012, we sold 21 branches to another financial institution (the “Branch Sale”), including 6 branches in the Battle Creek market area and 15 branches in northeast Michigan. The Branch Sale resulted in the transfer of approximately $403.1 million of deposits in exchange for our receipt of a deposit premium of approximately $11.5 million. It also resulted in the sale of approximately $48.0 million of loans at a discount of 1.75%, the sale of premises and equipment totaling approximately $8.1 million, and our transfer of $336.1 million of cash to the purchaser. We recorded a net gain on the Branch Sale of approximately $5.4 million in the fourth quarter of 2012. In addition to the Branch Sale, we also closed or consolidated a total of 15 other branch locations during 2012.

KEY PERFORMANCE RATIOS   

	Year Ended December 31,
	2014			2013			2012
Net income to
Average common equity		7.43	%		64.22	%		68.29	%
Average assets		0.80			3.87			0.92
Net income per common share
Basic	$	0.79		$	5.87		$	2.51
Diluted		0.77			3.55			0.80

Net interest income. Net interest income is the most important source of our earnings and thus is critical in evaluating our results of operations. Changes in our net interest income are primarily influenced by our level of interest-earning assets and the income or yield that we earn on those assets and the manner and cost of funding our interest-earning assets. Certain macro-economic factors can also influence our net interest income such as the level and direction of interest rates, the difference between short-term and long-term interest rates (the steepness of the yield curve) and the general strength of the economies in which we are doing business. Finally, risk management plays an important role in our level of net interest income. The ineffective management of credit risk and interest-rate risk in particular can adversely impact our net interest income.

Net interest income totaled $73.3 million during 2014, compared to $78.0 million and $86.3 million during 2013 and 2012, respectively. The decrease in net interest income in 2014 compared to 2013 primarily reflects a 44 basis point decrease in our tax equivalent net interest income as a percent of average interest-earning assets (the “net interest margin”) that was partially offset by a $100.3 million increase in average interest-earning assets.

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The decline in our net interest margin is primarily due to the prolonged low interest rate environment that has pushed our average yield on loans lower. In addition, the growth in average interest-earning assets has been in lower yielding investment securities.

Interest rates have generally been at extremely low levels over the past five to six years due primarily to the FRB’s monetary policies and its efforts to stimulate the U.S. economy. This very low interest rate environment has had an adverse impact on our interest income and net interest income. Based on recent announcements by the FRB, short-term interest rates are expected to remain extremely low until at least mid- to late-2015. Given the repricing characteristics of our interest-earning assets and interest-bearing liabilities (and our level of non-interest bearing demand deposits), we would expect that our net interest margin will generally benefit on a long-term basis from rising interest rates.

The decrease in net interest income in 2013 compared to 2012 primarily reflects a $238.8 million decrease in average interest-earning assets that was partially offset by a seven basis point increase in our net interest margin. The decline in average interest-earning assets was primarily a result of the Branch Sale. The increase in the net interest margin was due primarily to a reduction in our cost of funds.

Our net interest income is also impacted by our level of non-accrual loans. Average non-accrual loans totaled $17.9 million, $24.1 million and $45.5 million in 2014, 2013 and 2012, respectively.

AVERAGE BALANCES AND RATES

	2014							2013							2012
	Average Balance		Interest		Rate			Average Balance		Interest		Rate			Average Balance		Interest		Rate
	(Dollars in thousands)
ASSETS (1)
Taxable loans	$	1,383,883	$	71,621		5.18	%	$	1,408,305	$	80,434		5.71	%	$	1,543,592	$	93,494		6.06	%
Tax-exempt loans (2)		4,889		310		6.34			5,491		354		6.45			6,864		440		6.41
Taxable securities		475,917		6,341		1.33			305,468		4,059		1.33			216,355		2,934		1.36
Tax-exempt securities (2)		40,200		1,510		3.76			32,051		1,680		5.24			26,111		1,593		6.10
Interest bearing cash and repurchase agreement		84,244		282		0.33			139,082		396		0.28			337,311		858		0.25
Other investments		23,252		1,118		4.81			21,673		901		4.16			20,645		782		3.79
Interest earning assets		2,012,385		81,182		4.03			1,912,070		87,824		4.59			2,150,878		100,101		4.65
Cash and due from banks		45,213							44,745							53,926
Other assets, net		182,099							164,281							159,925
Total assets	$	2,239,697						$	2,121,096						$	2,364,729
LIABILITIES
Savings and interest-bearing checking	$	951,745		1,064		0.11		$	908,740		1,131		0.12		$	1,060,882		1,830		0.17
Time deposits		413,729		3,903		0.94			423,291		4,575		1.08			552,903		7,083		1.28
Other borrowings		60,225		2,332		3.87			65,517		3,456		5.27			72,240		4,230		5.86
Interest bearing liabilities		1,425,699		7,299		0.51			1,397,548		9,162		0.66			1,686,025		13,143		0.78
Non-interest bearing deposits		540,107							500,673							523,926
Other liabilities		31,247							38,462							40,719
Shareholders’ equity		242,644							184,413							114,059
Total liabilities and shareholders’ equity	$	2,239,697						$	2,121,096						$	2,364,729
Net interest income			$	73,883						$	78,662						$	86,958
Net interest income as a percent of average interest earning assets						3.67	%						4.11	%						4.04	%

(1) All domestic.

(2) Interest on tax-exempt loans and securities is presented on a fully tax equivalent basis assuming a marginal tax rate of 35%.

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CHANGE IN NET INTEREST INCOME

	2014 compared to 2013									2013 compared to 2012
	Volume			Rate			Net			Volume			Rate			Net
	(In thousands)
Increase (decrease) in interest income (1, 2)
Taxable loans	$	(1,374	)	$	(7,439	)	$	(8,813	)	$	(7,911	)	$	(5,149	)	$	(13,060	)
Tax-exempt loans (3)		(38	)		(6	)		(44	)		(89	)		3			(86	)
Taxable securities		2,271			11			2,282			1,185			(60	)		1,125
Tax-exempt securities (3)		370			(540	)		(170	)		331			(244	)		87
Interest bearing cash and repurchase agreement		(175	)		61			(114	)		(554	)		92			(462	)
Other investments		69			148			217			40			79			119
Total interest income		1,123			(7,765	)		(6,642	)		(6,998	)		(5,279	)		(12,277	)
Increase (decrease) in interest expense (1)
Savings and interest bearing checking		52			(119	)		(67	)		(238	)		(461	)		(699	)
Time deposits		(101	)		(571	)		(672	)		(1,505	)		(1,003	)		(2,508	)
Other borrowings		(262	)		(862	)		(1,124	)		(375	)		(399	)		(774	)
Total interest expense		(311	)		(1,552	)		(1,863	)		(2,118	)		(1,863	)		(3,981	)
Net interest income	$	1,434		$	(6,213	)	$	(4,779	)	$	(4,880	)	$	(3,416	)	$	(8,296	)

(1) The change in interest due to changes in both balance and rate has been allocated to change due to balance and change due to rate in proportion to the relationship of the absolute dollar amounts of change in each.

(2) All domestic.

(3) Interest on tax-exempt loans and securities is presented on a fully tax equivalent basis assuming a marginal tax rate of 35%.

COMPOSITION OF AVERAGE INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES   

	Year Ended December 31,
	2014			2013			2012
As a percent of average interest earning assets
Loans (1)		69.0	%		73.9	%		72.1	%
Other interest earning assets		31.0			26.1			27.9
Average interest earning assets		100.0	%		100.0	%		100.0	%
Savings and NOW		47.3	%		47.5	%		49.3	%
Time deposits		19.9			21.4			25.0
Brokered CDs		0.6			0.8			0.7
Other borrowings and long-term debt		3.0			3.4			3.4
Average interest bearing liabilities		70.8	%		73.1	%		78.4	%
Earning asset ratio		89.9	%		90.1	%		91.0	%
Free-funds ratio (2)		29.2			26.9			21.6

(1) All domestic.

(2) Average interest earning assets less average interest bearing liabilities.

Provision for loan losses. The provision for loan losses was a credit of $3.1 million and a credit of $4.0 million during 2014 and 2013, respectively, compared to an expense of $6.9 million during 2012. The provision reflects our assessment of the allowance for loan losses taking into consideration factors such as loan mix, levels of non- performing and classified loans and loan net charge-offs. While we use relevant information to recognize losses on loans, additional provisions for related losses may be necessary based on changes in economic conditions, customer

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circumstances and other credit risk factors. The decrease in the provision for loan losses over the past two years primarily reflects reduced levels of loan defaults, non-performing loans and loan net charge-offs. See “Portfolio Loans and asset quality” for a discussion of the various components of the allowance for loan losses and their impact on the provision for loan losses.

Non-interest income. Non-interest income is a significant element in assessing our results of operations. We regard net gains on mortgage loans as a core recurring source of revenue but they are quite cyclical and thus can be volatile. We regard net gains (losses) on securities as a “non-operating” component of non-interest income.

Non-interest income totaled $38.8 million during 2014 compared to $44.8 million and $63.6 million during 2013 and 2012, respectively. Non-interest income for 2012 included a $5.4 million net gain on the Branch Sale.

NON-INTEREST INCOME   

	Year Ended December 31,
	2014			2013			2012
	(In thousands)
Service charges on deposit accounts	$	13,446		$	14,076		$	17,887
Interchange income		8,164			7,362			9,188
Net gains (losses) on assets
Mortgage loans		5,628			10,022			17,323
Securities		329			395			1,226
Other than temporary impairment loss on securities:
Total impairment loss		(9	)		(26	)		(339	)
Loss recognized in other comprehensive loss		—			—			—
Net impairment loss recognized in earnings		(9	)		(26	)		(339	)
Mortgage loan servicing		791			3,806			166
Investment and insurance commissions		1,814			1,709			2,146
Bank owned life insurance		1,371			1,363			1,622
Title insurance fees		995			1,682			1,963
Gain on extinguishment of debt		500			—			—
(Increase) decrease in fair value of U.S. Treasury warrant		—			(1,025	)		(285	)
Net gain on branch sale		—			—			5,402
Other		5,746			5,465			7,266
Total non-interest income	$	38,775		$	44,829		$	63,565

Service charges on deposit accounts totaled $13.4 million during 2014, compared to $14.1 million and $17.9 million during 2013 and 2012, respectively. The decrease in such service charges in 2014 as compared to 2013 principally reflects a decline in non-sufficient funds (“NSF”) occurrences and related NSF fees. We believe the decline in NSF occurrences is primarily due to our customers managing their finances more closely in order to reduce NSF activity and avoid the associated fees. The decrease in 2013 as compared to 2012 principally results from the Branch Sale.

Interchange income totaled $8.2 million in 2014, compared to $7.4 million in 2013 and $9.2 million in 2012. The increase in interchange income in 2014 as compared to 2013 primarily results from a new Debit Brand Agreement with MasterCard (which replaces our former agreement with VISA) that we executed in January 2014. We began converting our debit card base to MasterCard in June 2014 and completed the conversion in September 2014. The decrease in interchange income in 2013 as compared to 2012 primarily results from the Branch Sale.

The Dodd-Frank Act includes a provision under which interchange fees for debit cards are set by the FRB under a restrictive “reasonable and proportional cost” per transaction standard. On June 29, 2011, the FRB issued final rules (that were effective October 1, 2011) on interchange fees for debit cards. Overall, these final rules established price caps for debit card interchange fees that were significantly lower than previous averages. However, debit card issuers

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with less than $10 billion in total assets (like us) are exempt from this rule. On a long-term basis, it is not clear how competitive market factors may impact debit card issuers who are exempt from the rule. However, we have been experiencing some reduction in per transaction interchange revenue due to certain transaction routing changes, particularly at large merchants.

We realized net gains of $5.6 million on mortgage loans during 2014, compared to $10.0 million and $17.3 million during 2013 and 2012 respectively. The volume of loans sold is dependent upon our ability to originate mortgage loans as well as the demand for fixed-rate obligations and other loans that we choose to not put into our portfolio because of our established interest-rate risk parameters. (See “Portfolio Loans and asset quality.”) Net gains on mortgage loans are also dependent upon economic and competitive factors as well as our ability to effectively manage exposure to changes in interest rates and thus can often be a volatile part of our overall revenues.

MORTGAGE LOAN ACTIVITY

	Year Ended December 31,
	2014			2013			2012
	(Dollars in thousands)
Mortgage loans originated	$	265,494		$	419,494		$	538,717
Mortgage loans sold		223,580			407,235			510,488
Mortgage loans sold with servicing rights released		37,476			57,099			83,296
Net gains on the sale of mortgage loans		5,628			10,022			17,323
Net gains as a percent of mortgage loans sold (“Loan Sales Margin”)		2.52	%		2.46	%		3.39	%
Fair value adjustments included in the Loan Sales Margin		0.01			(0.55	)		0.28

Net gains on mortgage loans declined in 2014 as compared to 2013 due primarily to decreases in mortgage loan originations and sales. The declines in mortgage loan originations and sales are due primarily to significantly lower mortgage loan refinance volumes. Net gains on mortgage loans in 2012 were elevated due primarily to low interest rates during that year that spurred heavy refinance volume. In addition, changes in the Loan Sales Margin (as described below) impacted the level of net gains.

Net gains as a percentage of mortgage loans sold (our “Loan Sales Margin”) are impacted by several factors including competition and the manner in which the loan is sold (with servicing rights retained or released). Our decision to sell or retain mortgage loan servicing rights is primarily influenced by an evaluation of the price being paid for mortgage loan servicing by outside third parties compared to our calculation of the economic value of retaining such servicing. Gains on mortgage loans are also impacted by recording fair value accounting adjustments. Excluding these fair value accounting adjustments, the Loan Sales Margin would have been 2.51% in 2014, 3.01% in 2013 and 3.11% in 2012. The lower Loan Sales Margin in 2014, as compared to 2013 and 2012, was principally due to less favorable competitive conditions including narrower primary-to-secondary market pricing spreads. In general, as overall industry-wide mortgage loan origination levels drop, pricing becomes more competitive. The changes in the fair value accounting adjustments are primarily due to changes in the amount of commitments to originate mortgage loans for sale during each period.

We generated securities net gains of $0.3 million in 2014, and $0.4 million and $1.2 million in 2013 and 2012, respectively. The 2014 securities net gains were primarily due to the sales of U.S. Government agency securities and municipal securities as well as fair value adjustments on a U.S. treasury short sale position that were partially offset by a $0.3 million decline in the fair value of trading securities. The 2013 securities net gains were due to a $0.4 million increase in the fair value of trading securities. The 2012 securities net gains were principally due to the sale of residential mortgage-backed securities.

We also recorded net impairment losses of $0.01 million, $0.03 million and $0.3 million in 2014, 2013 and 2012, respectively, related to other than temporary impairment of securities available for sale. These impairment charges related to private label residential mortgage-backed securities.

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GAINS AND LOSSES ON SECURITIES

	Year Ended December 31,
	Proceeds		Gains (1)		Losses (2)		Net
	(In thousands)
2014	$	14,633	$	624	$	304	$	320
2013		2,940		402		33		369
2012		37,176		1,226		339		887

(1) Gains in 2014 include $0.295 million relating to a U.S. Treasury short position and gains in 2013 and 2012 include $0.388 million and $0.033 million, respectively, related to an increase in the fair value of trading securities.

(2) Losses in 2014, 2013 and 2012 include $0.009 million, $0.026 million and $0.339 million, respectively of other than temporary impairment charges and 2014 includes $0.295 million related to a decrease in the fair value of trading securities.

Mortgage loan servicing generated net earnings of $0.8 million, $3.8 million and $0.2 million in 2014, 2013 and 2012, respectively. These yearly comparative variances are primarily due to changes in the valuation allowance on capitalized mortgage loan servicing rights and the level of amortization of this asset. The period end valuation allowance is based on the valuation of the mortgage loan servicing portfolio and the amortization is primarily impacted by prepayment activity. The changes in the valuation allowance are principally due to changes in the estimated future prepayment rates being used in the period end valuations.

CAPITALIZED MORTGAGE LOAN SERVICING RIGHTS

	2014			2013			2012
	(In thousands)
Balance at January 1,	$	13,710		$	11,013		$	11,229
Originated servicing rights capitalized		1,823			3,210			4,006
Amortization		(2,509	)		(3,745	)		(4,679	)
Change in valuation allowance		(918	)		3,232			457
Balance at December 31,	$	12,106		$	13,710		$	11,013
Valuation allowance at December 31,	$	3,773		$	2,855		$	6,087

At December 31, 2014, we were servicing approximately $1.66 billion in mortgage loans for others on which servicing rights have been capitalized. This servicing portfolio had a weighted average coupon rate of 4.44% and a weighted average service fee of approximately 25.3 basis points. Remaining capitalized mortgage loan servicing rights at December 31, 2014 totaled $12.1 million, representing approximately 73 basis points on the related amount of mortgage loans serviced for others. The capitalized mortgage loan servicing rights had an estimated fair market value of $12.6 million at December 31, 2014.

Investment and insurance commissions totaled $1.8 million, $1.7 million and $2.1 million in 2014, 2013 and 2012, respectively. These changes primarily reflect the sales volumes of such products. The decline in sales volumes compared to 2012 is primarily due to the impact of the Branch Sale.

We earned $1.4 million, $1.4 million and $1.6 million in 2014, 2013 and 2012, respectively, on our separate account bank owned life insurance principally as a result of increases in the cash surrender value. Our separate account is primarily invested in agency mortgage-backed securities and managed by PIMCO. The crediting rate (on which the earnings are based) reflects the performance of the separate account. The total cash surrender value of our bank owned life insurance was $53.6 million and $52.3 million at December 31, 2014 and 2013, respectively.

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Title insurance fees totaled $1.0 million in 2014, $1.7 million in 2013 and $2.0 million in 2012. The fluctuation in title insurance fees is primarily a function of the level of mortgage loans that we originated.

On December 1, 2014, we entered into a Securities Purchase Agreement with EJF Capital LLC. Under the terms of this agreement, we purchased 5,000 shares of trust preferred securities (liquidation amount of $1,000 per security) that were issued by IBC Capital Finance IV, a special purpose entity whose common stock we own. The trust preferred securities have been retired along with certain related common stock issued by IBC Capital Finance IV and subordinated debentures issued by us. We paid $4.5 million for the trust preferred securities that had a par value of $5.0 million, as well as $0.033 million in accrued and unpaid interest. We recorded a gain on the extinguishment of debt of $0.5 million in the fourth quarter of 2014. Additionally, we expect this transaction to improve our net interest income by approximately $0.143 million annually.

Changes in the fair value of the Amended Warrant issued to the UST in April 2010 had been recorded as a component of non-interest income. Up until April 16, 2013, the fair value of this Amended Warrant was included in accrued expenses and other liabilities in our Condensed Consolidated Statements of Financial Condition. The provision in the Amended Warrant which caused it to be accounted for as a derivative and included in accrued expenses and other liabilities expired on April 16, 2013. As a result, the Amended Warrant was reclassified into shareholders’ equity on that date at its then fair value (which was approximately $1.5 million). (See “Liquidity and capital resources.”) We purchased (and subsequently cancelled) the Amended Warrant from the UST on August 30, 2013.

Two significant inputs in the valuation model for the Amended Warrant were our common stock price and the probability of triggering anti-dilution provisions in this instrument related to certain equity transactions. The fair value of the Amended Warrant increased by $1.0 million in 2013 (through April 16) and by $0.3 million in 2012, respectively, due primarily to a rise in our common stock price during the relevant periods.

In the fourth quarter of 2012, we recorded a $5.4 million gain on the Branch Sale as described above.

Other non-interest income totaled $5.7 million, $5.5 million and $7.3 million in 2014, 2013 and 2012, respectively. The increase in 2014 compared to 2013 is primarily due to the change in results of our private mortgage insurance (“PMI”) reinsurance captive ($0.1 million of income in 2014 as compared to a $0.2 million loss in 2013). Our PMI reinsurance captive (which we originally formed in 2002) was placed into run-off during 2013. The decrease in other non-interest income in 2013 compared to 2012 is in part due to declines in certain revenue categories (ATM fees, check charges, money order fees, and safe deposit box rental) totaling $0.8 million primarily as a result of the Branch Sale. In addition, in 2013, Other Real Estate (“ORE”) rental income declined $0.3 million (due primarily to a reduction in the number of properties owned), gain on sale of fixed assets declined $0.2 million (2012 included a gain on the sale of some branch facilities) and we incurred a net loss in our PMI reinsurance captive of $0.2 million (compared to net income of $0.2 million in 2012).

Non-interest expense. Non-interest expense is an important component of our results of operations. We strive to efficiently manage our cost structure and management is focused on a number of initiatives to reduce and contain non-interest expenses.

Non-interest expense totaled $90.0 million in 2014, $104.1 million in 2013, and $116.7 million in 2012. Most categories of non-interest expense have declined since 2012 due to the Branch Sale and the closing or consolidation of 15 other branch locations, as well as our cost reduction initiatives. In addition, credit related expenses (loan and collection expenses, net (gains) losses on ORE and repossessed assets, the provision for loss reimbursement on sold loans, and vehicle service contract counterparty contingencies expense) declined significantly in 2014 as compared to the prior two years.

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NON-INTEREST EXPENSE

	Year ended December 31,
	2014			2013			2012
	(In thousands)
Compensation	$	33,833		$	33,515		$	39,002
Performance-based compensation		5,154			6,507			5,672
Payroll taxes and employee benefits		8,234			7,902			9,309
Compensation and employee benefits		47,221			47,924			53,983
Occupancy, net		8,912			8,845			10,104
Data processing		7,532			8,019			8,009
Loan and collection		5,392			6,886			9,965
Furniture, fixtures and equipment		4,137			4,293			4,635
Communications		2,926			2,919			3,677
Advertising		2,193			2,433			2,494
Legal and professional		1,969			2,459			4,175
FDIC deposit insurance		1,567			2,435			3,306
Interchange expense		1,291			1,645			1,799
Supplies		993			1,028			1,281
Credit card and bank service fees		946			1,263			2,091
Amortization of intangible assets		536			812			1,065
Vehicle service contract counterparty contingencies		199			4,837			1,629
(Costs) recoveries related to unfunded lending commitments		31			(90	)		(688	)
Write down of property and equipment held for sale		—			—			860
Provision for loss reimbursement on sold loans		(466	)		2,152			1,112
Net (gains) losses on other real estate and repossessed assets		(500	)		1,237			2,854
Other		5,072			5,021			4,384
Total non-interest expense	$	89,951		$	104,118		$	116,735

Compensation expense, which is primarily salaries, totaled $33.8 million, $33.5 million and $39.0 million in 2014, 2013 and 2012, respectively. The increase in 2014 as compared to 2013 is due to a $0.6 million decline in the amount of compensation that was deferred as direct loan origination costs principally resulting from the reduced levels of new mortgage loan volume in 2014. The decline in 2013 as compared to 2012 was due principally to staffing decreases primarily related to the Branch Sale and the closing or consolidation of certain locations during 2012, as well as our cost reduction initiatives. 2014 average total full time equivalent employee levels have fallen by 3.8% compared to 2013 and by 20.9% compared to 2012.

Performance-based compensation expense totaled $5.2 million, $6.5 million and $5.7 million in 2014, 2013 and 2012, respectively. The decrease in 2014 as compared to 2013 is primarily related to a decline in compensation of $0.7 million under our Management Incentive Compensation Plan based on our actual 2014 financial performance relative to plan targets, a decline in loan production related compensation of $0.3 million due to reduced levels of new mortgage loan volume, and a decline of $0.3 million in the estimated employee stock ownership plan (“ESOP”) contribution. During 2014, we decreased our ESOP contribution from 3% to 2% of eligible compensation and increased our 401(k) plan match from 1% to 2% of eligible compensation. The increase in 2013 as compared to 2012 is primarily due to higher incentive compensation based on our actual 2013 financial performance relative to plan targets.

We maintain performance-based compensation plans. In addition to commissions and cash incentive awards, such plans include an ESOP and a long-term equity based incentive plan. The amount of expense recognized in 2014, 2013 and 2012 for share-based awards under our long-term equity based incentive plan was $1.0 million, $0.9 million and $0.3 million, respectively. In 2014, there were new grants of restricted stock and performance share awards. In 2013 and 2012, there were new grants of restricted stock units, stock options and salary stock.

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Payroll taxes and employee benefits expense totaled $8.2 million, $7.9 million and $9.3 million in 2014, 2013 and 2012, respectively. The increase in 2014 as compared to 2013 is primarily due to a $0.2 million increase in health insurance costs and a $0.1 million increase in the 401(k) plan match. The decrease in 2013 as compared to 2012 was primarily due to lower payroll taxes and health insurance costs due to the staffing decreases described above.

Occupancy expenses, net, totaled $8.9 million, $8.8 million and $10.1 million in 2014, 2013 and 2012, respectively. The slight increase in 2014 as compared to 2013 is primarily due to higher snow removal costs associated with a harsh Michigan winter in 2014. The decline in 2013 as compared to 2012 was primarily due to a reduction in the number of branch offices resulting from the Branch Sale and the closing or consolidation of certain locations during 2012.

Data processing expenses totaled $7.5 million, $8.0 million, and $8.0 million in 2014, 2013 and 2012, respectively. The decline in 2014 as compared to 2013 and 2012 is due primarily to the impact of a new seven-year core data processing contract that we executed in March 2014. Under the terms of the new contract, we have reduced core data processing and interchange costs by approximately $1 million annually.

Loan and collection expenses primarily reflect costs related to the management and collection of non-performing loans and other problem credits. These expenses have declined significantly during the past two years primarily due to decreases in non-performing loans, new loan defaults and commercial watch credits. 2014, 2013 and 2012 also included $0.5 million, $0.7 million and $0.5 million, respectively, of collection related costs at Mepco Finance Corporation (“Mepco”) primarily associated with the acquisition and management of collateral that related to receivables from vehicle service contract counterparties.

Furniture, fixtures and equipment expense declined by $0.2 million in 2014 from 2013 and declined by $0.3 million in 2013 from 2012. These declines are due primarily to our cost reduction initiatives, the Branch Sale, and the closing or consolidation of certain branch offices. A portion of these expense reductions were offset by additional depreciation expense related to the replacement of substantially all of our ATMs during 2013 to meet applicable Americans with Disabilities Act requirements.

Communications expense was relatively unchanged in 2014 and declined by $0.8 million in 2013, respectively, compared to each prior year. The 2013 decline primarily reflects the impact of the Branch Sale and branch closings or consolidations that occurred in 2012, decreases in mailing costs at Mepco associated with a reduction in the volume of payment plan receivables, and a decrease in telephone and data line expenses due to the renegotiation of some supplier contracts.

Advertising expense declined by $0.2 million in 2014 and was relatively unchanged in 2013, respectively, compared to each prior year. The 2014 decline was due to a reduction in direct mail costs.

Legal and professional fees totaled $2.0 million, $2.5 million, and $4.2 million in 2014, 2013 and 2012, respectively. The substantial reduction in these expenses during 2013 as compared to 2012 was primarily due to lower costs at Mepco because of reduced litigation activities, and 2012 also included approximately $1.0 million of professional fees at the Bank associated with a consulting firm that was engaged to assist us in identifying and implementing revenue enhancement, expense reduction and process improvement initiatives.

FDIC deposit insurance expense totaled $1.6 million, $2.4 million, and $3.3 million in 2014, 2013 and 2012, respectively. The decline in 2014 as compared to 2013 reflects a full-year reduction in the Bank’s risk based premium rate due to our improved financial metrics. The decline in 2013 as compared to 2012 principally reflects the decrease in total assets due primarily to the Branch Sale as well as a reduction in the Bank’s risk based premium rate in the fourth quarter of 2013 due to our improved financial metrics.

Interchange expense primarily represents fees paid to our core information systems processor and debit card licensor related to debit card and ATM transactions. The decrease in this expense in 2014 as compared to 2013 is primarily due to the impact of our new seven-year core data processing contract that we executed in March 2014. The decrease in this expense in 2013 as compared to 2012 was due primarily to the Branch Sale that resulted in reduced debit card and ATM transaction volumes.

Supplies expense has declined over the past two years consistent with our cost reduction initiatives and the smaller size of the organization resulting from the Branch Sale and the closing or consolidation of branches.

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The decline in credit card and bank service fees is primarily due to a decrease in the number of payment plans being administered by Mepco. In addition, in the third quarter of 2012, Mepco entered into a new contract with a different vendor for credit card processing services that has a lower fee structure.

The amortization of intangible assets primarily relates to branch acquisitions and the amortization of the deposit customer relationship value, including core deposit value, which was acquired in connection with those acquisitions. We had remaining unamortized intangible assets of $2.6 million and $3.2 million at December 31, 2014 and 2013, respectively. See note #7 to the Consolidated Financial Statements for a schedule of future amortization of intangible assets.

We record estimated incurred losses associated with Mepco’s vehicle service contract payment plan receivables in our provision for loan losses and establish a related allowance for loan losses. (See “Portfolio Loans and asset quality.”) We record estimated incurred losses associated with defaults by Mepco’s counterparties as “vehicle service contract counterparty contingencies expense,” which is included in non-interest expenses in our Consolidated Statements of Operations. Such expenses totaled $0.2 million, $4.8 million and $1.6 million in 2014, 2013 and 2012, respectively. The higher levels of expense in 2013 and 2012 were due to write-downs of or additional reserves on vehicle service contract counterparty receivables. We reached settlements in certain litigation to collect these receivables. Given the costs and uncertainty of continued litigation, we determined it was in our best interest to resolve these matters.

Our estimate of probable incurred losses from vehicle service contract counterparty contingencies requires a significant amount of judgment because a number of factors can influence the amount of loss that we may ultimately incur. These factors include our estimate of future cancellations of vehicle service contracts, our evaluation of collateral that may be available to recover funds due from our counterparties, and our assessment of the amount that may ultimately be collected from counterparties in connection with their contractual obligations. We apply a rigorous process, based upon historical payment plan activity and past experience, to estimate probable incurred losses and quantify the necessary reserves for our vehicle service contract counterparty contingencies, but there can be no assurance that our modeling process will successfully identify all such losses. We believe our assumptions regarding the collection of vehicle service contract counterparty receivables are reasonable, and we based them on our good faith judgments using data currently available. We also believe the current amount of reserves we have established and the vehicle service contract counterparty contingencies expense that we have recorded are appropriate given our estimate of probable incurred losses at the applicable Statement of Financial Condition date. However, because of the uncertainty surrounding the numerous and complex assumptions made, actual losses could exceed the charges we have taken to date.

Upon the cancellation of a service contract and the completion of the billing process to the counterparties for amounts due to Mepco, there is a decrease in the amount of “payment plan receivables” and an increase in the amount of “vehicle service contract counterparty receivables” until such time as the amount due from the counterparty is collected. These amounts represent funds due to Mepco from its counterparties for cancelled service contracts. At December 31, 2014, the aggregate amount of such obligations owing to Mepco by counterparties, net of write-downs and reserves made through the recognition of vehicle service contract counterparty contingency expense, totaled $7.2 million. This compares to a balance of $7.7 million at December 31, 2013.

We face continued risk with respect to certain counterparties defaulting in their contractual obligations to Mepco which could result in additional charges for losses if these counterparties go out of business. Further, Mepco has incurred elevated legal and collection expenses, in general, in dealing with defaults by its counterparties in recent years. In particular, Mepco has had to initiate litigation against certain counterparties to collect amounts owed to Mepco as a result of those parties’ dispute of their contractual obligations. Net payment plan receivables declined to $40.0 million (or approximately 1.8% of total assets) at December 31, 2014 from $60.6 million (or approximately 2.7% of total assets) at December 31, 2013, due primarily to a planned reduction in such balances. This decline in payment plan receivables has adversely impacted our net interest income. In addition, see note #11 to the Consolidated Financial Statements included within this report for more information about Mepco’s business, certain risks and difficulties we currently face with respect to that business, and reserves we have established (through vehicle service contract counterparty contingencies expense) for losses related to the business.

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The changes in costs (recoveries) related to unfunded lending commitments are primarily impacted by changes in the amounts of such commitments to originate portfolio loans as well as (for commercial loan commitments) the grade (pursuant to our loan rating system) of such commitments.

The provision for loss reimbursement on sold loans was a credit of $0.5 million in 2014 and an expense of $2.2 million and $1.1 million in 2013 and 2012, respectively, and represents our estimate of incurred losses related to mortgage loans that we have sold to investors (primarily Fannie Mae and Freddie Mac). The credit provision in 2014 is due primarily to the rescission of certain loss reimbursement requests by Freddie Mac that had been pending and accrued for at the end of 2013. Since we sell mortgage loans without recourse, loss reimbursements only occur in those instances where we have breached a representation or warranty or other contractual requirement related to the loan sale. Historically, loss reimbursements on mortgage loans sold without recourse were rare. In 2009, we had only one actual loss reimbursement (for $0.06 million). Prior to 2009, we had years in which we incurred no such loss reimbursements. However, our loss reimbursements increased from 2010 to 2013 as Fannie Mae and Freddie Mac, in particular, were doing more reviews of mortgage loans where they had incurred or expected to incur a loss and were more aggressive in pursuing loss reimbursements from the sellers of such mortgage loans. In November 2013, we executed a Resolution Agreement with Fannie Mae to resolve our existing and future repurchase and make whole obligations (collectively “Repurchase Obligations”) related to mortgage loans originated between January 1, 2000 and December 31, 2008 and delivered to them by January 31, 2009. Under the terms of the Resolution Agreement, we paid Fannie Mae approximately $1.5 million in November 2013 with respect to the Repurchase Obligations. We believe that it was in our best interest to execute the Resolution Agreement in order to bring finality to the loss reimbursement exposure with Fannie Mae for these years and reduce the resources spent on individual file reviews and defending loss reimbursement requests. In addition, we were notified by Freddie Mac in January 2014 that they had completed their review of mortgage loans that we originated between January 1, 2000 and December 31, 2008 and delivered to them. The reserve for loss reimbursements on sold mortgage loans totaled $0.7 million and $1.4 million at December 31, 2014 and 2013, respectively. This reserve is included in accrued expenses and other liabilities in our Consolidated Statements of Financial Condition. This reserve is based on an analysis of mortgage loans that we have sold which are further categorized by delinquency status, loan to value, and year of origination. The calculation includes factors such as probability of default, probability of loss reimbursement (breach of representation or warranty) and estimated loss severity. The reserve levels at December 31, 2014 and 2013 also reflect the resolution of the mortgage loan origination years of 2000 to 2008 with Fannie Mae and Freddie Mac. We believe that the amounts that we have accrued for incurred losses on sold mortgage loans are appropriate given our analyses. However, future losses could exceed our current estimate.

Net (gains) losses on ORE and repossessed assets represent the gain or loss on the sale or additional write downs on these assets subsequent to the transfer of the asset from our loan portfolio. This transfer occurs at the time we acquire the collateral that secured the loan. At the time of acquisition, the other real estate or repossessed asset is valued at fair value, less estimated costs to sell, which becomes the new basis for the asset. Any write-downs at the time of acquisition are charged to the allowance for loan losses. The net gain of $0.5 million in 2014 (as compared to net losses of $1.2 million and $2.9 million recorded in 2013 and 2012, respectively) primarily reflects greater stability in real estate prices during the last twelve months, with many markets even experiencing price increases.

During the third quarter of 2012, we adopted a plan to close or consolidate nine branch offices. Seven of the nine branch offices were closed in November 2012. The remaining two branch offices were closed during 2013. We recorded a $0.9 million write-down of property and equipment in the third quarter of 2012 based on the expected disposal price of these branch offices. As of yearend 2014, eight of the nine branch offices had been sold (or otherwise disposed).

Other non-interest expenses totaled $5.1 million in 2014, compared to $5.0 million in 2013, and $4.4 million in 2012. The lower level of these expenses in 2012, as compared to 2014 and 2013, principally reflects the first quarter 2012 reversal of a previously established accrual at Mepco for $1.4 million that was determined to no longer be necessary. This was partially offset by $0.4 million of expense during 2012 related to the settlement of various legal matters. Also in 2014 and 2013, certain expense categories (express mail and freight and insurance) declined primarily due to the Branch Sale and branch closings and consolidations that occurred in 2012.

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We are subject to an industry-specific tax based on net capital (the Michigan Business Tax [“MBT”]). The MBT is recorded in other non-interest expenses. Our MBT expense was $0.3 million, $0.2 million and $0.2 million in 2014, 2013 and 2012, respectively.

Income tax expense (benefit). We recorded an income tax expense of $7.2 million in 2014 as compared to an income tax benefit of $54.9 in 2013. We recorded no income tax expense or benefit in 2012. Prior to the second quarter of 2013, we had established a deferred tax asset valuation allowance against all of our net deferred tax assets.

We assess whether a valuation allowance on our deferred tax assets is necessary each quarter. Reversing or reducing the valuation allowance requires us to conclude that the realization of the deferred tax assets is “more likely than not.” The ultimate realization of this asset is primarily based on generating future income. As of June 30, 2013, we concluded that the realization of substantially all of our deferred tax assets was more likely than not. That conclusion was primarily based upon the following factors:

• Achieving a sixth consecutive quarter of profitability;

• A forecast of future profitability that supported the conclusion that the realization of the deferred tax assets was more likely than not; and

• A forecast that future asset quality continued to be stable to improving and that other factors did not exist that could cause a significant adverse impact on future profitability.

The reversal of substantially all of the valuation allowance on our deferred tax assets resulted in our recording an income tax benefit of $57.6 million in the second quarter of 2013. In addition, during the second quarter of 2013, we recorded $1.4 million of income tax expense to clear from accumulated other comprehensive loss (“AOCL”) the disproportionate tax effects from cash flow hedges. These disproportionate tax effects had been charged to other comprehensive income and credited to income tax expense due to our valuation allowance on deferred tax assets as more fully discussed in Note #13 to the Consolidated Financial Statements.

We have also concluded subsequent to June 30, 2013, that the realization of substantially all of our deferred tax assets continues to be more likely than not for substantially the same reasons as enumerated above, including six additional profitable quarters since the second quarter of 2013.

The valuation allowance against our deferred tax assets totaled approximately $1.0 million and $1.1 million at December 31, 2014 and 2013, respectively. The portion of the valuation allowance on our deferred tax assets that we did not reverse in 2013 primarily relates to state income taxes at our Mepco segment. In this instance, we determined that the future realization of these particular deferred tax assets was not more likely than not. This conclusion was primarily based on the uncertainty of Mepco’s future earnings attributable to particular states (given the various apportionment criteria) and the significant reduction in the size of Mepco’s business over the past several years.

Because of our net operating loss and tax credit carryforwards, we are still subject to the rules of Section 382 of the Internal Revenue Code of 1986, as amended. An ownership change, as defined by these rules, would negatively affect our ability to utilize our net operating loss carryforwards and other deferred tax assets in the future. If such an ownership change were to occur, we may suffer higher-than-anticipated tax expense, and consequently lower net income and cash flow, in those future years. Although we cannot control market purchases or sales of our common stock, we have in place a Tax Benefits Preservation Plan to dissuade any movement in our stock that would trigger an ownership change, and we limited the size of our common stock offering in 2013 to avoid triggering any Section 382 limitations.

Our actual federal income tax expense (benefit) is different than the amount computed by applying our statutory federal income tax rate to our pre-tax income (loss) primarily due to tax-exempt interest income and tax-exempt income from the increase in the cash surrender value on life insurance and also, for 2013 and 2012, the impact of changes in the deferred tax asset valuation allowance. In addition, 2014 income tax expense was reduced by a credit of approximately $0.7 million due to a true-up of the amount of unrecognized tax benefits relative to certain net operating loss carryforwards and the reversal of the valuation allowance on our capital loss carryforward that we now believe is more likely than not to be realized due to the generation of certain capital gains during 2014.

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The income tax benefit in the Consolidated Statements of Operations also includes income taxes in a variety of other states due primarily to Mepco’s operations. The amounts of such state income taxes were an expense (benefit) of $0.005 million, $(0.2) million and zero in 2014, 2013 and 2012, respectively.

Business segments. Our reportable segments are based upon legal entities. We currently have two reportable segments: Independent Bank and Mepco. These business segments are also differentiated based on the products and services provided. We evaluate performance based principally on net income (loss) of the respective reportable segments.

The following table presents net income (loss) by business segment.

BUSINESS SEGMENTS

	Year ended December 31,
	2014			2013			2012
	(In thousands)
Independent Bank	$	18,550		$	74,313		$	28,260
Mepco		366			(1,801	)		1,710
Other (1)		(712	)		5,092			(3,677	)
Elimination		(183	)		(95	)		(95	)
Net income	$	18,021		$	77,509		$	26,198

(1) Includes amounts relating to our parent company and certain insignificant operations.

The substantial change in the Bank’s results in 2014 compared to 2013 is primarily due to the change in income tax expense (benefit) as 2013 included the reversal of the valuation allowance on deferred tax assets resulting in the recording of a significant income tax benefit that year. In addition, declines in net interest income and non-interest income in 2014 were only partially offset by a decline in non-interest expense. The significant improvement in the Bank’s results in 2013 compared to 2012 is primarily due to the aforementioned reversal of the valuation allowance on deferred tax assets, a lower provision for loan losses and a decrease in non-interest expenses partially offset by a decline in net interest income and non-interest income. The Bank’s 2012 results also included a $5.4 million net gain on the Branch Sale. (See “Net interest income,” “Provision for loan losses,” “Non-interest income,” “Non-interest expense,” “Income tax expense (benefit),” and “Portfolio Loans and asset quality.”)

The changes in Mepco’s results are due primarily to changes in the level of vehicle service contract counterparty contingencies expense (see “Non-interest expense”) as well as changes in its level of net interest income. All of Mepco’s funding is provided by its parent company (Independent Bank) through an intercompany loan (that is eliminated in consolidation). The rate on this intercompany loan is based on the Prime Rate (currently 3.25%). Mepco might not be able to obtain such favorable funding costs on its own in the open market. Mepco’s 2014 results also included a $0.3 million gain on the sale of ORE and repossessed assets compared to a loss of $0.5 million in 2013.

“Other” is essentially our parent company only results. The change between the various periods is primarily due to the change in the amount of income tax benefit recorded in each year, as 2013 included the reversal of the valuation allowance on deferred tax assets resulting in recording a significant income tax benefit at the parent company. (See “Income tax expense (benefit).”) Interest expense at the parent company has declined in 2014 and 2013 as compared to 2012 due to the reduction in the balance of subordinated debentures. “Other” in 2014 also includes a $0.5 million gain on the extinguishment of debt. In addition, 2013 and 2012 included $1.0 million and $0.3 million, respectively, of increases (which reduce income before income taxes) in the fair value of the Amended Warrant issued to the UST. (See “Non-interest income.”)

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FINANCIAL CONDITION

Summary. Our total assets increased to $2.25 billion at December 31, 2014, compared to $2.21 billion at December 31, 2013, primarily due to increases in securities available for sale and loans, which were partially offset by a decline in cash and cash equivalents. Loans, excluding loans held for sale (“Portfolio Loans”), totaled $1.41 billion at December 31, 2014, an increase of 2.6% from $1.37 billion at December 31, 2013. (See “Portfolio Loans and asset quality”).

Deposits totaled $1.92 billion at December 31, 2014, compared to $1.88 billion at December 31, 2013. The increase in deposits during 2014 is primarily due to growth in checking and savings account balances.

Securities. We maintain diversified securities portfolios, which include obligations of U.S. government-sponsored agencies, securities issued by states and political subdivisions, residential and commercial mortgage-backed securities, asset-backed securities, corporate securities and trust preferred securities. We regularly evaluate asset/liability management needs and attempt to maintain a portfolio structure that provides sufficient liquidity and cash flow. Except as discussed below, we believe that the unrealized losses on securities available for sale are temporary in nature and are expected to be recovered within a reasonable time period. We believe that we have the ability to hold securities with unrealized losses to maturity or until such time as the unrealized losses reverse. (See “Asset/liability management.”)

Securities available for sale increased during 2014 due primarily to the purchase of U.S. government-sponsored agency securities, mortgage-backed securities, and corporate securities. The securities were purchased to utilize cash and cash equivalents as well as to utilize funds generated from the increase in total deposits. (See “Deposits” and “Liquidity and capital resources.”)

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 these 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.

We recorded net impairment losses related to other than temporary impairment on securities available for sale of $0.009 million, $0.026 million, and $0.3 million in 2014, 2013, and 2012, respectively. These net other than temporary impairment charges are all related to private label residential mortgage-backed securities. In these instances, we believe that the decline in value is directly due to matters other than changes in interest rates, are not expected to be recovered within a reasonable timeframe based upon available information and are therefore other than temporary in nature. (See “Non-interest income” and “Asset/liability management.”)

SECURITIES

			Unrealized
	Amortized Cost		Gains		Losses		Fair Value
	(In thousands)
Securities available for sale
December 31, 2014	$	532,930	$	3,317	$	3,069	$	533,178
December 31, 2013		467,406		2,048		6,973		462,481

Portfolio Loans and asset quality. In addition to the communities served by our Bank branch network, our principal lending markets also include nearby communities and metropolitan areas. Subject to established underwriting criteria, we also may participate in commercial lending transactions with certain non-affiliated banks.

The senior management and board of directors of our Bank retain authority and responsibility for credit decisions and we have adopted uniform underwriting standards. Our loan committee structure and the loan review process attempt to provide requisite controls and promote compliance with such established underwriting standards.

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However, there can be no assurance that our lending procedures and the use of uniform underwriting standards will prevent us from incurring significant credit losses in our lending activities.

We generally retain loans that may be profitably funded within established risk parameters. (See “Asset/liability management.”) As a result, we may hold adjustable-rate mortgage loans as Portfolio Loans, while 15- and 30-year, fixed-rate obligations are generally sold to mitigate exposure to changes in interest rates. (See “Non-interest income.”)

LOAN PORTFOLIO COMPOSITION

	2014		2013
	(In thousands)
Real estate (1)
Residential first mortgages	$	411,423	$	431,812
Residential home equity and other junior mortgages		108,162		113,703
Construction and land development		54,644		50,290
Other (2)		447,837		440,348
Commercial		186,875		146,954
Consumer		154,591		126,443
Payment plan receivables		40,001		60,638
Agricultural		6,429		4,382
Total loans	$	1,409,962	$	1,374,570

(1) Includes both residential and non-residential commercial loans secured by real estate.

(2) Includes loans secured by multi-family residential and non-farm, non-residential property.

Future growth of overall Portfolio Loans is dependent upon a number of competitive and economic factors. Further, it is our desire to reduce or restrict certain loan categories for risk management reasons.

NON-PERFORMING ASSETS (1)

	December 31,
	2014			2013			2012
	(Dollars in thousands)
Non-accrual loans	$	15,231		$	17,905		$	32,929
Loans 90 days or more past due and still accruing interest		7			—			7
Total non-performing loans		15,238			17,905			32,936
Other real estate and repossessed assets		6,454			18,282			26,133
Total non-performing assets	$	21,692		$	36,187		$	59,069
As a percent of Portfolio Loans
Non-performing loans		1.08	%		1.30	%		2.32	%
Allowance for loan losses		1.84			2.35			3.12
Non-performing assets to total assets		0.96			1.64			2.92
Allowance for loan losses as a percent of non-performing loans		170.56			180.54			134.43

(1) Excludes loans classified as “troubled debt restructured” that are performing and vehicle service contract counterparty receivables, net.

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TROUBLED DEBT RESTRUCTURINGS

	December 31, 2014
	Commercial		Retail			Total
	(In thousands)
Performing TDR’s	$	29,475	$	73,496		$	102,971
Non-performing TDR's (1)		1,978		5,225	(2)		7,203
Total	$	31,453	$	78,721		$	110,174

	December 31, 2013
	Commercial		Retail			Total
	(In thousands)
Performing TDR's	$	35,134	$	79,753		$	114,887
Non-performing TDR's (1)		4,347		4,988	(2)		9,335
Total	$	39,481	$	84,741		$	124,222

(1) Included in non-performing assets table above.

(2) Also includes loans on non-accrual at the time of modification until six payments are received on a timely basis.

Non-performing loans declined by $2.7 million, or 14.9%, in 2014 and by $15.0 million, or 45.6%, in 2013 due principally to declines in non-performing commercial loans and residential mortgage loans. These declines primarily reflect reduced levels of new loan defaults as well as loan charge-offs, pay-offs, negotiated transactions, and the migration of loans into ORE. In general, improving economic conditions in our market areas, as well as our collection and resolution efforts, have resulted in a downward trend in non-performing loans. However, we are still experiencing some loan defaults, particularly related to commercial loans secured by income-producing property and mortgage loans secured by resort/vacation property.

Non-performing loans exclude performing loans that are classified as troubled debt restructurings (“TDRs”). Performing TDRs totaled $103.0 million, or 7.3% of total Portfolio Loans, and $114.9 million, or 8.4% of total Portfolio Loans, at December 31, 2014 and 2013, respectively. The decrease in the amount of performing TDRs during 2014 reflects declines in both commercial loan and retail loan TDRs.

ORE and repossessed assets totaled $6.5 million at December 31, 2014, compared to $18.3 million at December 31, 2013. This decrease is primarily the result of sales of ORE being in excess of the migration of non-performing loans secured by real estate into ORE as the foreclosure process is completed. In particular, the significant decline in ORE during 2014 primarily reflects the sale of four large properties during the last six months of the year.

We will place a loan that is 90 days or more past due on non-accrual, unless we believe the loan is both well secured and in the process of collection. Accordingly, we have determined that the collection of the accrued and unpaid interest on any loans that are 90 days or more past due and still accruing interest is probable.

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

	December 31,
	2014		2013		2012
	(In thousands)
Specific allocations	$	13,233	$	15,158	$	21,009
Other adversely rated commercial loans		761		1,358		2,419
Historical loss allocations		6,773		9,849		12,943
Additional allocations based on subjective factors		5,223		5,960		7,904
Total	$	25,990	$	32,325	$	44,275

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Some loans will not be repaid in full. Therefore, an allowance for loan losses (“AFLL”) is maintained at a level which represents our best estimate of losses incurred. In determining the AFLL and the related provision for loan losses, we consider four principal elements: (i) specific allocations based upon probable losses identified during the review of the loan portfolio, (ii) allocations established for other adversely rated commercial loans, (iii) allocations based principally on historical loan loss experience, and (iv) additional allowances based on subjective factors, including local and general economic business factors and trends, portfolio concentrations and changes in the size and/or the general terms of the loan portfolios.

The first AFLL element (specific allocations) reflects our estimate of probable incurred losses based upon our systematic review of specific loans. These estimates are based upon a number of factors, such as payment history, financial condition of the borrower, discounted collateral exposure and discounted cash flow analysis. Impaired commercial, mortgage and installment loans are allocated allowance amounts using this first element. The second AFLL element (other adversely rated commercial loans) reflects the application of our commercial loan rating system. This rating system is similar to those employed by state and federal banking regulators. Commercial loans that are rated below a certain predetermined classification are assigned a loss allocation factor for each loan classification category that is based upon a historical analysis of both the probability of default and the expected loss rate (“loss given default”). The lower the rating assigned to a loan or category, the greater the allocation percentage that is applied. The third AFLL element (historical loss allocations) is determined by assigning allocations to higher rated (“non-watch credit”) commercial loans using a probability of default and loss given default similar to the second AFLL element and to homogenous mortgage and installment loan groups based upon borrower credit score and portfolio segment. For homogenous mortgage and installment loans, a probability of default for each homogenous pool is calculated by way of credit score migration. Historical loss data for each homogenous pool coupled with the associated probability of default is utilized to calculate an expected loss allocation rate. The fourth AFLL element (additional allocations based on subjective factors) is based on factors that cannot be associated with a specific credit or loan category and reflects our attempt to ensure that the overall allowance for loan losses appropriately reflects a margin for the imprecision necessarily inherent in the estimates of expected credit losses. We consider a number of subjective factors when determining this fourth element, including local and general economic business factors and trends, portfolio concentrations and changes in the size, mix and the general terms of the overall loan portfolio.

Increases in the AFLL are recorded by a provision for loan losses charged to expense. Although we periodically allocate portions of the AFLL to specific loans and loan portfolios, the entire AFLL is available for incurred losses. We generally charge-off commercial, homogenous residential mortgage and installment loans and payment plan receivables when they are deemed uncollectible or reach a predetermined number of days past due based on product, industry practice and other factors. Collection efforts may continue and recoveries may occur after a loan is charged against the allowance.

While we use relevant information to recognize losses on loans, additional provisions for related losses may be necessary based on changes in economic conditions, customer circumstances and other credit risk factors.

Mepco’s allowance for losses is determined in a similar manner as discussed above, and primarily takes into account historical loss experience and other subjective factors deemed relevant to Mepco’s payment plan business. Estimated incurred losses associated with Mepco’s outstanding vehicle service contract payment plans are included in the provision for loan losses. Mepco recorded credits of $0.038 million, $0.1 million and $0.008 million for its provision for loan losses in 2014, 2013 and 2012, respectively, due primarily to significant declines in the balance of payment plan receivables ($20.6 million, or 34.0%, $24.1 million, or 28.4%, and $30.3 million, or 26.4%, in 2014, 2013 and 2012, respectively). Mepco’s allowance for loan losses totaled $0.072 million and $0.1 million at December 31, 2014 and 2013, respectively. Mepco has established procedures for vehicle service contract payment plan servicing, administration and collections, including the timely cancellation of the vehicle service contract, in order to protect our position in the event of payment default or voluntary cancellation by the customer. Mepco has also established procedures to attempt to prevent and detect fraud since the payment plan origination activities and initial customer contacts are done entirely through unrelated third parties (vehicle service contract administrators and sellers or automobile dealerships). However, there can be no assurance these risk management policies and

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procedures will prevent us from incurring significant credit or fraud related losses in this business segment. The estimated incurred losses described in this paragraph should be distinguished from the possible losses we may incur from counterparties failing to pay their obligations to Mepco. (See note #11 to the Consolidated Financial Statements included within this report.)

The AFLL decreased $6.3 million to $26.0 million at December 31, 2014 from $32.3 million at December 31, 2013 and was equal to 1.84% of total Portfolio Loans at December 31, 2014 compared to 2.35% at December 31, 2013. All four components of the allowance for loan losses outlined above declined during 2014. The allowance for loan losses related to specific loans decreased $1.9 million in 2014 due primarily to a $12.5 million, or 10.0%, decline in the balance of individually impaired loans as well as charge-offs. The allowance for loan losses related to other adversely rated commercial loans decreased $0.6 million in 2014 primarily due to lower expected loss given default rates. The total balance of such loans included in this component also decreased to $30.6 million at December 31, 2014, from $39.4 million at December 31, 2013. In addition, the mix improved, with the balance of loans with more adverse ratings declining to $12.7 million at December 31, 2014, from $18.1 million at December 31, 2013. The allowance for loan losses related to historical losses decreased $3.1 million during 2014 due principally to the use of a lower estimated probability of default for homogenous mortgage and installment loans (resulting from lower loan net charge-offs and reduced levels of new defaults on loans). The allowance for loan losses related to subjective factors decreased $0.7 million during 2014 primarily due to the improvement of various economic indicators used in computing this portion of the allowance.

All four of the components of the AFLL outlined above also declined in 2013 as compared to 2012. The AFLL related to specific loans decreased $5.9 million in 2013 primarily because of a decline in loss allocations on individual commercial and mortgage loans due to a decline in the balance of such loans as well as lower loss given default rates. The AFLL related to other adversely rated commercial loans decreased $1.1 million in 2013 due to a decrease in the balance of such loans included in this component ($39.4 million at December 31, 2013, as compared to $52.8 million at December 31, 2012) and due to lower loss given default rates. The AFLL related to historical losses decreased $3.1 million in 2013 due primarily to lower loss given default rates. The lower loss given default rates in 2013 reflect both a reduced level of loan defaults and a reduced loss severity. The AFLL related to subjective factors decreased $1.9 million in 2013 primarily due to the improvement of various economic indicators used in computing this portion of the allowance as well as an overall reduction in total Portfolio Loans.

ALLOWANCE FOR LOSSES ON LOANS AND UNFUNDED COMMITMENTS

	2014					2013						2012
	Loan Losses			Unfunded Commitments		Loan Losses			Unfunded Commitments			Loan Losses			Unfunded Commitments
	(Dollars in thousands)
Balance at beginning of year	$	32,325		$	508	$	44,275		$	598		$	58,884		$	1,286
Additions (deductions)
Provision for loan losses		(3,136	)		—		(3,988	)		—			6,887			—
Recoveries credited to allowance		7,420			—		8,270			—			6,522			—
Loans charged against the allowance		(10,619	)		—		(16,232	)		—			(27,408	)		—
Reclassification to loans held for sale		—			—		—			—			(610	)		—
Additions (deductions) included in non-interest expense		—			31		—			(90	)		—			(688	)
Balance at end of year	$	25,990		$	539	$	32,325		$	508		$	44,275		$	598
Net loans charged against the allowance to average Portfolio Loans		0.23	%				0.58	%					1.39	%

The ratio of loan net charge-offs to average loans was 0.23% in 2014 (or $3.2 million) compared to 0.58% in 2013 (or $8.0 million) and 1.39% in 2012 (or $20.9 million). The decreases in loan net charge-offs occurred across all loan categories. These decreases primarily reflect reduced levels of non-performing loans and improvement in collateral liquidation values.

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Deposits and borrowings. Historically, the loyalty of our customer base has allowed us to price deposits competitively, contributing to a net interest margin that compares favorably to our peers. However, we still face a significant amount of competition for deposits within many of the markets served by our branch network, which limits our ability to materially increase deposits without adversely impacting the weighted-average cost of core deposits.

To attract new core deposits, we have implemented various account acquisition strategies as well as branch staff sales training. Account acquisition initiatives have historically generated increases in customer relationships. Over the past several years, we have also expanded our treasury management products and services for commercial businesses and municipalities or other governmental units and have also increased our sales calling efforts in order to attract additional deposit relationships from these sectors. We view long-term core deposit growth as an important objective. Core deposits generally provide a more stable and lower cost source of funds than alternative sources such as short-term borrowings. (See “Liquidity and capital resources.”)

Deposits totaled $1.92 billion and $1.88 billion at December 31, 2014 and 2013, respectively. The $39.5 million increase in deposits in 2014 is due to growth in checking and savings deposit account balances. Reciprocal deposits totaled $53.7 million and $83.5 million at December 31, 2014 and 2013, respectively. These deposits represent demand, money market and time deposits from our customers that have been placed through Promontory Interfinancial Network’s Insured Cash Sweep^® service and Certificate of Deposit Account Registry Service^®. These services allow our customers to access multi-million dollar FDIC deposit insurance on deposit balances greater than the standard FDIC insurance maximum.

We cannot be sure that we will be able to maintain our current level of core deposits. In particular, those deposits that are uninsured may be susceptible to outflow. At December 31, 2014, we had approximately $372.6 million of uninsured deposits. A reduction in core deposits would likely increase our need to rely on wholesale funding sources.

We have also implemented strategies that incorporate using federal funds purchased, other borrowings and Brokered CDs to fund a portion of our interest-earning assets. The use of such alternate sources of funds supplements our core deposits and is also an integral part of our asset/liability management efforts.

Other borrowings, comprised almost entirely of advances from the Federal Home Loan Bank (the “FHLB”), totaled $12.5 million and $17.2 million at December 31, 2014 and 2013, respectively.

As described above, we utilize wholesale funding, including FHLB borrowings and Brokered CDs to augment our core deposits and fund a portion of our assets. At December 31, 2014, our use of such wholesale funding sources (including reciprocal deposits) amounted to approximately $77.4 million, or 4.0% of total funding (deposits and total borrowings, excluding subordinated debentures). Because wholesale funding sources are affected by general market conditions, the availability of such funding may be dependent on the confidence these sources have in our financial condition and operations. The continued availability to us of these funding sources is not certain, and Brokered CDs may be difficult for us to retain or replace at attractive rates as they mature. Our liquidity may be constrained if we are unable to renew our wholesale funding sources or if adequate financing is not available in the future at acceptable rates of interest or at all. Our financial performance could also be affected if we are unable to maintain our access to funding sources or if we are required to rely more heavily on more expensive funding sources. In such case, our net interest income and results of operations could be adversely affected.

We historically employed derivative financial instruments to manage our exposure to changes in interest rates. We discontinued the active use of derivative financial instruments during 2008. In June 2013, we terminated our last remaining interest-rate swap, which had an aggregate notional amount of $10.0 million. We have begun to again utilize interest-rate swaps in 2014, relating to our commercial lending activities. During 2014, we entered into $3.3 million (aggregate notional amount) of interest rate swaps with commercial loan customers, which were offset with interest rate swaps that the Bank entered into with a broker-dealer. We recorded $0.070 million of fee income related to these transactions during 2014.

Liquidity and capital resources. Liquidity risk is the risk of being unable to timely meet obligations as they come due at a reasonable funding cost or without incurring unacceptable losses. Our liquidity management involves the measurement and monitoring of a variety of sources and uses of funds. Our Consolidated Statements of Cash Flows categorize these sources and uses into operating, investing and financing activities. We primarily focus our liquidity

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management on maintaining adequate levels of liquid assets (primarily funds on deposit with the FRB and certain investment securities) as well as developing access to a variety of borrowing sources to supplement our deposit gathering activities and provide funds for purchasing investment securities or originating Portfolio Loans as well as to be able to respond to unforeseen liquidity needs.

Our primary sources of funds include our deposit base, secured advances from the FHLB, a federal funds purchased borrowing facility with another commercial bank, and access to the capital markets (for Brokered CDs).

At December 31, 2014, we had $239.9 million of time deposits that mature in the next 12 months. Historically, a majority of these maturing time deposits are renewed by our customers. Additionally, $1.53 billion of our deposits at December 31, 2014, were in account types from which the customer could withdraw the funds on demand. Changes in the balances of deposits that can be withdrawn upon demand are usually predictable and the total balances of these accounts have generally grown (excluding the Branch Sale) or have been stable over time as a result of our marketing and promotional activities. However, there can be no assurance that historical patterns of renewing time deposits or overall growth or stability in deposits will continue in the future.

We have developed contingency funding plans that stress test our liquidity needs that may arise from certain events such as an adverse change in our financial metrics (for example, credit quality or regulatory capital ratios). Our liquidity management also includes periodic monitoring that measures quick assets (defined generally as short-term assets with maturities less than 30 days and loans held for sale) to total assets, short-term liability dependence and basic surplus (defined as quick assets compared to short-term liabilities). Policy limits have been established for our various liquidity measurements and are monitored on a monthly basis. In addition, we also prepare cash flow forecasts that include a variety of different scenarios.

We believe that we currently have adequate liquidity at our Bank because of our cash and cash equivalents, our portfolio of securities available for sale, our access to secured advances from the FHLB, our ability to issue Brokered CDs and our improved financial metrics.

We also believe that the available cash on hand at the parent company (including time deposits) of approximately $17.7 million as of December 31, 2014 provides sufficient liquidity resources at the parent company to meet operating expenses, to make interest payments on the subordinated debentures and to pay a cash dividend on our common stock for the foreseeable future.

In the normal course of business, we enter into certain contractual obligations. Such obligations include requirements to make future payments on debt and lease arrangements, contractual commitments for capital expenditures, and service contracts. The table below summarizes our significant contractual obligations at December 31, 2014.

CONTRACTUAL COMMITMENTS (1)

	1 Year or Less		1-3 Years		3-5 Years		After 5 Years		Total
	(In thousands)
Time deposit maturities	$	239,914	$	110,692	$	38,449	$	1,072	$	390,127
Other borrowings		521		4,108		5,185		2,656		12,470
Subordinated debentures		—		—		—		35,569		35,569
Operating lease obligations		1,254