SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 20162017

Commission file number   0-7818
 
INDEPENDENT BANK CORPORATION
(Exact name of registrant as specified in its charter)

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

4200 East Beltline, Grand Rapids, Michigan  49525
(Address of principal executive offices)

(616) 527-5820
(Registrant's telephone number, including area code)
(616) 527-5820
(Registrant's telephone number, including area code)

NONE
Former name, address and fiscal year, if changed since last report.

Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.         
YES ☒       NO ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES ☒          NO ☐    

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or smaller reporting company or an emerging growth company.
Large accelerated filer ☐ Accelerated filer  ☒ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act.  Yes ☐  No ☐
Accelerated filer  ☒
Non-accelerated filer  ☐
Smaller reporting company  ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ☐      NO ☒         

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

Common stock, no par value 21,245,53621,331,967
Class Outstanding at November 2, 20162017
 
Index
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
 
INDEX

 
Number(s)
PART I -
Financial Information
 
Item 1.
Condensed Consolidated Statements of Financial Condition September 30, 20162017 and December 31, 20152016
3
 
Condensed Consolidated Statements of Operations Three- and Nine-month periods ended September 30, 20162017 and 20152016
4
Condensed Consolidated Statements of Comprehensive Income Three- and Nine-month periods ended September 30, 20162017 and 20152016
5
Condensed Consolidated Statements of Cash Flows Nine-month periods ended September 30, 20162017 and 20152016
6
Condensed Consolidated Statements of Shareholders' Equity Nine-month periods ended September 30, 20162017 and 20152016
7
Notes to Interim Condensed Consolidated Financial Statements
8-59
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
60-8660-83
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
8784
Item 4.
Controls and Procedures
8784
   
PART II -
Other Information
 
Item 1A
Risk Factors
8885
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
8885
Item 6.
Exhibits
8986
 
1
Index
FORWARD-LOOKING STATEMENTS

Statements in this report that are not statements of historical fact, including statements that include terms such as “will,” “may,” “should,” “believe,” “expect,” “forecast,” “anticipate,” “estimate,” “project,” “intend,” “likely,” “optimistic” and “plan” and statements about future or projected financial and operating results, plans, projections, objectives, expectations, and intentions, are forward-looking statements. Forward-looking statements include, but are not limited to, descriptions of plans and objectives for future operations, products or services; projections of our future revenue, earnings or other measures of economic performance; forecasts of credit losses and other asset quality trends; statements about our business and growth strategies; and expectations about economic and market conditions and trends. These forward-looking statements express our current expectations, forecasts of future events, or long-term goals. They are based on assumptions, estimates, and forecasts that, although believed to be reasonable, may turn out to be incorrect. Actual results could differ materially from those discussed in the forward-looking statements for a variety of reasons, including:

economic, market, operational, liquidity, credit, and interest rate risks associated with our business;
economic conditions generally and in the financial services industry, particularly economic conditions within Michigan and the regional and local real estate markets in which our bank operates;
the failure of assumptions underlying the establishment of, and provisions made to, our allowance for loan losses;
the failure of assumptions underlying our estimate of probable incurred losses from vehicle service contract payment plan counterparty contingencies, including our assumptions regarding future cancellations of vehicle service contracts, the value to us of collateral that may be available to recover funds due from our counterparties, and our ability to enforce the contractual obligations of our counterparties to pay amounts owing to us;
increased competition in the financial services industry, either nationally or regionally;
our ability to achieve loan and deposit growth;
volatility and direction of market interest rates;
the continued services of our management team; and
implementation of new legislation, which may have significant effects on us and the financial services industry.

This list provides examples of factors that could affect the results described by forward-looking statements contained in this report, but the list is not intended to be all-inclusive. The risk factors disclosed in Part I – Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015,2016, as updated by any new or modified risk factors disclosed in Part II – Item 1A of any subsequently filed Quarterly Report on Form 10-Q, include all known risks our management believes could materially affect the results described by forward-looking statements in this report. However, those risks may not be the only risks we face. Our results of operations, cash flows, financial position, and prospects could also be materially and adversely affected by additional factors that are not presently known to us that we currently consider to be immaterial, or that develop after the date of this report. We cannot assure you that our future results will meet expectations. While we believe the forward-looking statements in this report are reasonable, you should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. We do not undertake, and expressly disclaim, any obligation to update or alter any statements, whether as a result of new information, future events, or otherwise, except as required by applicable law.
 
2
Index
Part I - Item 1.
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition

  
September 30,
2017
  
December 31,
2016
 
  (unaudited) 
  (In thousands, except share amounts) 
Assets 
Cash and due from banks $31,998  $35,238 
Interest bearing deposits  15,605   47,956 
Cash and Cash Equivalents  47,603   83,194 
Interest bearing deposits - time  3,489   5,591 
Trading securities  347   410 
Securities available for sale  548,865   610,616 
Federal Home Loan Bank and Federal Reserve Bank stock, at cost  15,543   15,543 
Loans held for sale, carried at fair value  47,611   35,946 
Payment plan receivables and other assets held for sale  -   33,360 
Loans        
Commercial  837,250   804,017 
Mortgage  781,346   538,615 
Installment  318,498   265,616 
Total Loans  1,937,094   1,608,248 
Allowance for loan losses  (21,478)  (20,234)
Net Loans  1,915,616   1,588,014 
Other real estate and repossessed assets  2,150   5,004 
Property and equipment, net  38,774   40,175 
Bank-owned life insurance  54,286   54,033 
Deferred tax assets, net  22,433   32,818 
Capitalized mortgage loan servicing rights  14,675   13,671 
Other intangibles  1,673   1,932 
Accrued income and other assets  40,381   28,643 
Total Assets $2,753,446  $2,548,950 
         
Liabilities and Shareholders' Equity 
Deposits        
Non-interest bearing $753,555  $717,472 
Savings and interest-bearing checking  1,040,974   1,015,724 
Reciprocal  49,078   38,657 
Time  412,601   453,866 
Brokered time  87,553   - 
Total Deposits  2,343,761   2,225,719 
Federal funds purchased  3,000   - 
Other borrowings  72,849   9,433 
Subordinated debentures  35,569   35,569 
Other liabilities held for sale  -   718 
Accrued expenses and other liabilities  30,557   28,531 
Total Liabilities  2,485,736   2,299,970 
         
Shareholders’ Equity        
Preferred stock, no par value, 200,000 shares authorized;  none issued or outstanding  -   - 
Common stock, no par value, 500,000,000 shares authorized; issued and outstanding: 21,332,317 shares at September 30, 2017 and 21,258,092 shares at December 31, 2016  324,607   323,745 
Accumulated deficit  (53,240)  (65,657)
Accumulated other comprehensive loss  (3,657)  (9,108)
Total Shareholders’ Equity  267,710   248,980 
Total Liabilities and Shareholders’ Equity $2,753,446  $2,548,950 
  
September 30,
2016
  
December 31,
2015
 
  (unaudited) 
  
(In thousands, except share
amounts)
 
Assets 
Cash and due from banks $38,610  $54,260 
Interest bearing deposits  75,706   31,523 
Cash and Cash Equivalents  114,316   85,783 
Interest bearing deposits - time  7,233   11,866 
Trading securities  152   148 
Securities available for sale  603,112   585,484 
Federal Home Loan Bank and Federal Reserve Bank stock, at cost  15,507   15,471 
Loans held for sale, carried at fair value  38,008   27,866 
Loans        
Commercial  784,976   748,398 
Mortgage  522,833   498,036 
Installment  268,357   234,017 
Payment plan receivables  31,188   34,599 
Total Loans  1,607,354   1,515,050 
Allowance for loan losses  (22,043)  (22,570)
Net Loans  1,585,311   1,492,480 
Other real estate and repossessed assets  4,989   7,150 
Property and equipment, net  40,375   43,103 
Bank-owned life insurance  53,779   54,402 
Deferred tax assets, net  32,156   39,635 
Capitalized mortgage loan servicing rights  11,048   12,436 
Vehicle service contract counterparty receivables, net  2,608   7,229 
Other intangibles  2,019   2,280 
Accrued income and other assets  27,706   23,733 
Total Assets $2,538,319  $2,409,066 
         
Liabilities and Shareholders' Equity 
Deposits        
Non-interest bearing $725,166  $659,793 
Savings and interest-bearing checking  1,009,354   988,174 
Reciprocal  46,636   50,207 
Time  425,804   387,789 
Total Deposits  2,206,960   2,085,963 
Other borrowings  11,527   11,954 
Subordinated debentures  35,569   35,569 
Vehicle service contract counterparty payables  538   797 
Accrued expenses and other liabilities  32,823   23,691 
Total Liabilities  2,287,417   2,157,974 
         
Shareholders’ Equity        
Preferred stock, no par value, 200,000 shares authorized;  none issued or outstanding  -   - 
Common stock, no par value, 500,000,000 shares authorized; issued and outstanding: 21,227,974 shares at September 30, 2016 and 22,251,373 shares at December 31, 2015  323,303   339,462 
Accumulated deficit  (69,386)  (82,334)
Accumulated other comprehensive loss  (3,015)  (6,036)
Total Shareholders’ Equity  250,902   251,092 
Total Liabilities and Shareholders’ Equity $2,538,319  $2,409,066 

See notes to interim condensed consolidated financial statements (unaudited)
 
3
Index
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations

 
Three months ended
September 30,
  
Nine months ended
September 30,
 
 
Three months ended
September 30,
  
Nine months ended
September 30,
  2017  2016  2017  2016 
 2016  2015  2016  2015  (unaudited)  (unaudited) 
 (unaudited)  (unaudited)  (In thousands, except per share amounts) 
 (In thousands, except per share amounts)          
Interest Income                        
Interest and fees on loans $18,597  $17,869  $55,361  $52,859  $21,831  $18,597  $61,638  $55,361 
Interest on securities                                
Taxable  2,537   1,901   7,261   5,528   2,765   2,537   8,300   7,261 
Tax-exempt  330   228   860   667   512   330   1,478   860 
Other investments  281   295   884   922   263   281   867   884 
Total Interest Income  21,745   20,293   64,366   59,976   25,371   21,745   72,283   64,366 
Interest Expense                                
Deposits  1,254   987   3,520   2,961   1,833   1,254   4,754   3,520 
Other borrowings  493   465   1,455   1,382 
Other borrowings and subordinated debentures  626   493   1,659   1,455 
Total Interest Expense  1,747   1,452   4,975   4,343   2,459   1,747   6,413   4,975 
Net Interest Income  19,998   18,841   59,391   55,633   22,912   19,998   65,870   59,391 
Provision for loan losses  (175)  (244)  (1,439)  (1,037)  582   (175)  806   (1,439)
Net Interest Income After Provision for Loan Losses  20,173   19,085   60,830   56,670   22,330   20,173   65,064   60,830 
Non-Interest Income                
Non-interest Income                
Service charges on deposit accounts  3,281   3,294   9,164   9,261   3,281   3,281   9,465   9,164 
Interchange income  1,943   2,169   5,797   6,551   1,942   1,943   5,869   5,797 
Net gains (losses) on assets                                
Mortgage loans  3,556   1,812   7,727   5,735   2,971   3,556   8,886   7,727 
Securities  (45)  45   302   97   69   (45)  62   302 
Mortgage loan servicing, net  858   (556)  (454)  476   1   858   668   (454)
Title insurance fees  319   281   860   874 
Net gain on branch sale  -   1,193   -   1,193 
Other  1,796   1,881   5,701   5,881   2,040   2,115   6,139   6,561 
Total Non-Interest Income  11,708   10,119   29,097   30,068 
Non-Interest Expense                
Total Non-interest Income  10,304   11,708   31,089   29,097 
Non-interest Expense                
Compensation and employee benefits  13,031   12,029   36,912   35,605   13,577   13,031   41,104   36,912 
Occupancy, net  1,970   1,919   6,032   5,982 
Data processing  1,971   2,001   6,008   5,958   1,796   1,971   5,670   6,008 
Occupancy, net  1,919   1,940   5,982   6,399 
Furniture, fixtures and equipment  990   998   2,939   2,915   961   990   2,943   2,939 
Communications  670   754   2,280   2,184   685   670   2,046   2,280 
Loan and collection  568   816   1,964   2,938   481   568   1,564   1,964 
Advertising  455   406   1,410   1,338   526   455   1,551   1,410 
Legal and professional  420   519   1,178   1,352   550   420   1,376   1,178 
Interchange expense  294   276   869   809 
FDIC deposit insurance  187   350   852   1,044   208   187   608   852 
Interchange expense  276   279   809   859 
Credit card and bank service fees  203   197   588   602   105   203   432   588 
Net (gains) losses on other real estate and repossessed assets  263   5   98   (173)
Provision for loss reimbursement on sold loans  45   (35)  30   (59)
Costs related to unfunded lending commitments  73   26   6   46 
Vehicle service contract counterparty contingencies  (39)  30   (10)  89 
Other  1,497   1,564   4,423   4,512   1,463   1,839   4,751   4,547 
Total Non-Interest Expense  22,529   21,879   65,469   65,609 
Total Non-interest Expense  22,616   22,529   68,946   65,469 
Income Before Income Tax  9,352   7,325   24,458   21,129   10,018   9,352   27,207   24,458 
Income tax expense  2,979   2,278   7,547   6,682   3,159   2,979   8,443   7,547 
Net Income $6,373  $5,047  $16,911  $14,447  $6,859  $6,373  $18,764  $16,911 
Net Income Per Common Share                                
Basic $0.30  $0.22  $0.79  $0.63  $0.32  $0.30  $0.88  $0.79 
Diluted $0.30  $0.22  $0.78  $0.62  $0.32  $0.30  $0.87  $0.78 
Dividends Per Common Share                                
Declared $0.08  $0.06  $0.24  $0.18  $0.10  $0.08  $0.30  $0.24 
Paid $0.08  $0.06  $0.24  $0.18  $0.10  $0.08  $0.30  $0.24 

See notes to interim condensed consolidated financial statements (unaudited)
 
4
Index
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income

  
Three months ended
September 30,
  
Nine months ended
September 30,
 
  2017  2016  2017  2016 
  (unaudited) 
  (In thousands) 
             
Net income $6,859  $6,373  $18,764  $16,911 
Other comprehensive income, before tax                
Securities available for sale                
Unrealized gains arising during period  20   451   7,738   4,899 
Change in unrealized gains for which a portion of other than temporary impairment has been recognized in earnings  126   (24)  211   47 
Reclassification adjustments for gains included in earnings  (8)  (15)  (125)  (298)
Unrealized gains recognized in other comprehensive income on securities available for sale  138   412   7,824   4,648 
Income tax expense  48   144   2,738   1,627 
Unrealized gains recognized in other comprehensive income on securities available for sale, net of tax  90   268   5,086   3,021 
Derivative instruments                
Unrealized gain arising during period  95   -   95   - 
Reclassification adjustment for expense recognized in earnings  5   -   5   - 
Unrealized gains recognized in other comprehensive income on derivative instruments  100   -   100   - 
Income tax expense  35   -   35   - 
Unrealized gains recognized in other comprehensive income on derivative instruments, net of tax  65   -   65   - 
Other comprehensive income  155   268   5,151   3,021 
Comprehensive income $7,014  $6,641  $23,915  $19,932 
  
Three months ended
September 30,
  
Nine months ended
September 30,
 
  2016  2015  2016  2015 
  (unaudited)  (unaudited) 
  (In thousands)  (In thousands) 
             
Net income $6,373  $5,047  $16,911  $14,447 
Other comprehensive income, before tax                
Securities available for sale                
Unrealized gains arising during period  451   1,366   4,899   1,830 
Change in unrealized gains for which a portion of other than temporary impairment has been recognized in earnings  (24)  10   47   - 
Reclassification adjustments for gains included in earnings  (15)  -   (298)  (75)
Unrealized gains recognized in other comprehensive
income on securities available for sale
  412   1,376   4,648   1,755 
Income tax expense  144   482   1,627   615 
Unrealized gains recognized in other comprehensive
income on available for sale securities, net of tax
  268   894   3,021   1,140 
Other comprehensive income  268   894   3,021   1,140 
Comprehensive income $6,641  $5,941  $19,932  $15,587 

See notes to interim condensed consolidated financial statements (unaudited)
 
5
Index
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows

  Nine months ended September 30, 
  2017  2016 
  (unaudited - In thousands) 
Net Income $18,764  $16,911 
Adjustments to Reconcile Net Income to Net Cash From Operating Activities Proceeds from sales of loans held for sale  313,559   222,610 
Disbursements for loans held for sale  (316,338)  (225,025)
Provision for loan losses  806   (1,439)
Deferred income tax expense  7,422   7,099 
Deferred loan fees  (4,588)  (1,634)
Net depreciation, amortization of intangible assets and premiums and accretion of discounts on securities, loans and interest bearing deposits - time  5,079   3,831 
Net gains on mortgage loans  (8,886)  (7,727)
Net gains on securities  (62)  (302)
Share based compensation  1,342   1,200 
Increase in accrued income and other assets  (13,159)  (3,804)
Increase in accrued expenses and other liabilities  2,274   1,150 
Total Adjustments  (12,551)  (4,041)
Net Cash From Operating Activities  6,213   12,870 
Cash Flow Used in Investing Activities        
Proceeds from the sale of securities available for sale  8,834   56,451 
Proceeds from maturities, prepayments and calls of securities available for sale  143,953   150,103 
Purchases of securities available for sale  (84,080)  (213,839)
Proceeds from the maturity of interest bearing deposits - time  2,100   4,613 
Purchase of Federal Reserve Bank stock  -   (407)
Redemption of Federal Reserve Bank stock  -   371 
Net increase in portfolio loans (loans originated, net of principal payments)  (326,089)  (73,673)
Purchase of portfolio loans  -   (15,000)
Cash received from the sale of Mepco Finance Corporation assets, net  33,446   - 
Proceeds from bank-owned life insurance  523   2,235 
Proceeds from the collection of vehicle service contract counterparty receivables  411   4,671 
Proceeds from the sale of other real estate and repossessed assets  4,111   3,854 
Capital expenditures  (2,592)  (1,717)
Net Cash Used in Investing Activities  (219,383)  (82,338)
Cash Flow From Financing Activities        
Net increase in total deposits  118,042   120,997 
Net increase in other borrowings  3,003   5 
Proceeds from Federal Home Loan Bank Advances  461,000   - 
Payments of Federal Home Loan Bank Advances  (397,587)  (432)
Dividends paid  (6,400)  (5,149)
Proceeds from issuance of common stock  57   61 
Repurchase of common stock  -   (16,854)
Share based compensation withholding obligation  (536)  (627)
Net Cash From Financing Activities  177,579   98,001 
Net Increase (Decrease) in Cash and Cash Equivalents  (35,591)  28,533 
Cash and Cash Equivalents at Beginning of Period  83,194   85,783 
Cash and Cash Equivalents at End of Period $47,603  $114,316 
Cash paid during the period for        
Interest $6,240  $4,811 
Income taxes  988   437 
Transfers to other real estate and repossessed assets  1,389   1,791 
Purchase of securities available for sale not yet settled  1,765   7,440 
Sale of securities available for sale not yet settled  760   - 
  Nine months ended September 30, 
  2016  2015 
  (unaudited - In thousands) 
Net Income $16,911  $14,447 
Adjustments to Reconcile Net Income to Net Cash From Operating Activities        
Proceeds from sales of loans held for sale  222,610   227,381 
Disbursements for loans held for sale  (225,025)  (223,446)
Provision for loan losses  (1,439)  (1,037)
Deferred federal income tax expense  8,726   7,210 
Deferred loan fees  (1,634)  (1,189)
Depreciation, amortization of intangible assets and premiums and accretion of discounts on securities, loans and interest bearning deposits - time  3,831   3,345 
Net gains on mortgage loans  (7,727)  (5,735)
Net gains on securities  (302)  (97)
Net (gains) losses on other real estate and repossessed assets  98   (173)
Vehicle service contract counterparty contingencies  (10)  89 
Share based compensation  1,200   1,153 
Gain on branch sale  -   (1,193)
Net gain on sale of fixed assets  (2)  (152)
Increase in accrued income and other assets  (5,540)  (359)
Increase (decrease) in accrued expenses and other liabilities  1,409   (684)
Total Adjustments  (3,805)  5,113 
Net Cash From Operating Activities  13,106   19,560 
Cash Flow Used in Investing Activities        
Proceeds from the sale of securities available for sale  56,451   11,786 
Proceeds from the maturity of securities available for sale  32,590   25,458 
Principal payments received on securities available for sale  117,513   94,333 
Purchases of securities available for sale  (213,839)  (195,623)
Purchases of interest bearing deposits - time  -   (4,100)
Proceeds from the maturity of interest bearing deposits - time  4,613   4,576 
Purchase of Federal Reserve Bank stock  (407)  (272)
Redemption of Federal Reserve Bank stock  371   391 
Redemption of Federal Home Loan Bank stock  -   4,514 
Net increase in portfolio loans (loans originated, net of principal payments)  (73,673)  (56,407)
Purchase of portfolio loans  (15,000)  - 
Net cash paid in branch sale  -   (7,229)
Proceeds from the collection of vehicle service contract counterparty receivables  4,671   255 
Proceeds from the sale of other real estate and repossessed assets  3,854   5,619 
Proceeds from life insurance  2,235   - 
Proceeds from the sale of property and equipment  23   490 
Capital expenditures  (1,717)  (2,925)
Net Cash Used in Investing Activities  (82,315)  (119,134)
Cash Flow From Financing Activities        
Net increase in total deposits  120,997   145,313 
Net increase (decrease) in other borrowings  5   (1)
Payments of Federal Home Loan Bank Advances  (432)  (399)
Net decrease in vehicle service contract counterparty payables  (259)  (27)
Dividends paid  (5,149)  (4,118)
Proceeds from issuance of common stock  61   103 
Repurchase of common stock  (16,854)  (9,025)
Share based compensation withholding obligation  (627)  (1,091)
Net Cash From Financing Activities  97,742   130,755 
Net Increase in Cash and Cash Equivalents  28,533   31,181 
Cash and Cash Equivalents at Beginning of Period  85,783   74,016 
Cash and Cash Equivalents at End of Period $114,316  $105,197 
Cash paid during the period for        
Interest $4,811  $4,302 
Income taxes  437   229 
Transfers to other real estate and repossessed assets  1,791   2,843 
Transfer of payment plan receivables to vehicle service contract counterparty receivables  40   431 
Purchase of securities available for sale not yet settled  7,440   7,717 

See notes to interim condensed consolidated financial statements (unaudited)
 
6
Index
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders' Equity

  
Nine months ended
September 30,
 
  2017  2016 
  (unaudited) 
  (In thousands) 
       
Balance at beginning of period $248,980  $251,092 
Cumulative effect of change in accounting  352   1,247 
Balance at beginning of period, as adjusted  249,332   252,339 
Net income  18,764   16,911 
Cash dividends declared  (6,400)  (5,149)
Issuance of common stock  57   61 
Share based compensation  1,342   1,200 
Share based compensation withholding obligation  (536)  (627)
Repurchase of common stock  -   (16,854)
Net change in accumulated other comprehensive loss, net of related tax effect  5,151   3,021 
Balance at end of period $267,710  $250,902 
  
Nine months ended
September 30,
 
  2016  2015 
  (unaudited) 
  (In thousands) 
       
Balance at beginning of period $251,092  $250,371 
Cumulative effect of change in accounting principle  1,247   - 
Balance at beginning of period, as adjusted  252,339   250,371 
Net income  16,911   14,447 
Cash dividends declared  (5,149)  (4,118)
Issuance of common stock  61   103 
Share based compensation  1,200   1,153 
Share based compensation withholding obligation  (627)  (1,091)
Repurchase of common stock  (16,854)  (9,025)
Net change in accumulated other comprehensive loss, net of related tax effect  3,021   1,140 
Balance at end of period $250,902  $252,980 

See notes to interim condensed consolidated financial statements (unaudited)
 
7
Index
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.
Preparation of Financial Statements

The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading.  The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 20152016 included in our Annual Report on Form 10-K.

In our opinion, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary to present fairly our consolidated financial condition as of September 30, 20162017 and December 31, 2015,2016, and the results of operations for the three and nine-month periods ended September 30, 20162017 and 2015.2016.  The results of operations for the three and nine-month periods ended September 30, 2016,2017, are not necessarily indicative of the results to be expected for the full year.  Certain reclassifications have been made in the prior period financial statements to conform to the current period presentation.  Our critical accounting policies include the determination of the allowance for loan losses, the determination of vehicle service contract counterparty contingencies, the valuation of originated mortgage loan servicing rights and the valuation of deferred tax assets.  Refer to our 20152016 Annual Report on Form 10-K for a disclosure of our accounting policies.

2.
New Accounting Standards

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

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This ASU supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific guidance, establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, this ASU specifies the accounting for some costs to obtain or fulfill a contract with a customer.  This amended guidance is effective for us on January 1, 2018, and is not expected to have a material impact on our consolidated operating results or financial condition.  We expect to adopt this ASU using the modified retrospective approach.  Financial instruments for the most part and related contractual rights and obligations which are the sources of the majority of our operating revenue are excluded from the scope of this amended guidance.  In addition, for those operating revenue streams that are included in the scope of this amended guidance, based upon our review of these sources of income we do not believe they will be materially impacted by this amended guidance.
 
8
Index
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities”.  This ASU amends existing guidance related to the accounting for certain financial assets and liabilities. These amendments, among other things, requiresrequire equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requiresrequire public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requiresrequire separate presentation of financial assets and financial liabilities by measurement category and form of financial asset and eliminateseliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. This amended guidance is effective for us on January 1, 2018,2018.  We have reviewed the types of financial instruments impacted by this amended guidance, including certain equity investments and liabilities measured under the fair value election, and have determined that we do not currently own any such instruments.  The balance of this amended guidance is expected to impact certain disclosure items but is not expected to have a materialany impact on our consolidated operating results or financial condition.

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

In March 2016,  Based on a review of our operating leases that we currently have in place we do not expect a material change in the FASB issued ASU 2016-09, “Compensation – Stock Compensation (718) Improvements to Employee Share-Based Payment Accounting”.  This ASU amends existing guidance in an effort to simplifyrecognition, measurement and presentation of lease expense or impact on cash flow.  While the primary impact will be the recognition of certain aspects of accounting for share-based payments. The areas for simplification in this ASU include income tax consequences, classification of awards as either equity or liabilities and classificationoperating leases on the statement of cash flows.  This amended guidance is effective for us on January 1, 2017, with early adoption permitted.  We adopted this amended guidance during the second quarter of 2016 using a modified retrospective approach.  The impact of this adoption was to adjust our January 1, 2016 Condensed Consolidated StatementStatements of Financial PositionCondition this impact is not expected to reflect cumulative effect adjustments as follows:

  
January 1,
2016
Originally
Presented
  
Cumulative
Retrospective
Adjustments
  
January 1,
2016
Adjusted
 
  (Dollars in thousands) 
          
Deferred tax assets $39,635  $1,247  $40,882 
Total assets $2,409,066  $1,247  $2,410,313 
Common stock $339,462  $62  $339,524 
Accumulated deficit $(82,334) $1,185  $(81,149)
Total Shareholders’ Equity $251,092  $1,247  $252,339 
Total Liabilities and Shareholders’ Equity $2,409,066  $1,247  $2,410,313 
9
Index
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

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

In June 2016, the FASB issued ASU 2016-13, “Financial“Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments”Instruments”.  This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income.  This ASU will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities available for sale, allowances will be recorded rather than reducing the carrying amount as is done under the current other-than-temporary impairment model. This ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. This amended guidance is effective for us on January 1, 2020.  We began evaluating this ASU in 2016 and have formed a committee that includes personnel from various areas of the Bank that meets regularly to discuss the implementation of the ASU.  We are currently in the process of gathering data and reviewing loss methodologies and have engaged third party resources that will assist us in the implementation of this ASU.  While we have not yet determined what the impact will be on our consolidated operating results or financial condition by the nature of the implementation of an expected loss model compared to an incurred loss approach, we would expect our allowance for loan losses (“AFLL”) to increase under this ASU.
9
Index
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities”.  This new ASU amends the hedge accounting model in Topic 815 to enable entities to better portray the economics of their risk management activities in the financial statements and enhance the transparency and understandability of hedge results. The amendments expand an entity’s ability to hedge nonfinancial and financial risk components and reduce complexity in fair value hedges of interest rate risk. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness.  This amended guidance is effective for us on January 1, 2019, and given our current level of derivatives designated as hedges is not expected to have a material impact on our consolidated operating results or financial condition.

In March 2017, the FASB issued ASU 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities” (“ASU 2017-08”).  This ASU shortens the amortization period for certain callable debt securities held at a premium.  Specifically, the amendments require the premium to be amortized to the earliest call date.  The amendments do not require an accounting change for securities held at a discount; the discount continues to be accreted to maturity.   This amended guidance is effective for us on January 1, 2019, with early adoption permitted.  We adopted this amended guidance during the first quarter of 2017 using a modified retrospective approach.  The impact of this adoption was to adjust our January 1, 2017 Condensed Consolidated Statement of Financial Position to reflect cumulative effect adjustments as summarized in the table below. The adjustments below reflect the recording of $0.46 million ($0.30 million, net of tax) of additional premium amortization on securities available for sale and a $0.30 million decrease in accumulated other comprehensive loss to reflect the decrease in after tax unrealized losses on securities available for sale as of January 1, 2017 as a result of adopting this amended guidance. After January 1, 2017, premium amortization on certain callable debt securities is now amortized to the first call date.  During the first quarter of 2017 the impact on the Condensed Consolidated Statements of Operations was an increase to premium amortization of $0.03 million.

During the first quarter of 2017, we adopted the fair value method of accounting for our capitalized mortgage loan servicing rights pursuant to FASB Accounting Standards Codification topic 860 – “Transfers and Servicing”.  Prior to January 1, 2017, we were accounting for our capitalized mortgage loan servicing rights under the amortization method.  We adopted the fair value method using a modified retrospective adjustment to beginning accumulated deficit.  The impact of the adoption of the fair value method is summarized in the table below.  The adjustments below reflect the recording of a $0.54 million increase in the fair value of our capitalized mortgage loan servicing rights with a $0.19 million reduction in deferred tax assets, net for a net impact on accumulated deficit and total equity of $0.35 million.
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Index
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

  
January 1,
2017
Originally
Presented
  
Cumulative
Retrospective
Adjustments
    
January 1,
2017
Adjusted
 
  (In thousands) 
            
Deferred tax assets, net $32,818  $(190)(1) $32,628 
Capitalized mortgage loan servicing rights $13,671  $542 (1) $14,213 
Total assets $2,548,950  $352    $2,549,302 
Accumulated deficit $(65,657) $352 (1)    
      $(300)(2) $(65,605)
Accumulated other comprehensive loss $(9,108) $300 (2) $(8,808)
Total Shareholders’ Equity $248,980  $352    $249,332 
Total Liabilities and Shareholders’ Equity $2,548,950  $352    $2,549,302 

(1)Represents adjustment to capitalized mortgage loan servicing rights, deferred tax assets, net, and accumulated deficit to reflect the adoption of the fair value method of accounting for our capitalized mortgage loan servicing rights.
(2)Represents  adjustment to accumulated deficit and accumulated other comprehensive loss to reflect the adoption of ASU 2017-08.

3.
Securities

Securities available for sale consist of the following:

 Amortized  Unrealized     Amortized  Unrealized    
 Cost  Gains  Losses  Fair Value  Cost  Gains  Losses  Fair Value 
 (In thousands)  (In thousands) 
September 30, 2016            
September 30, 2017            
U.S. agency $29,482  $508  $41  $29,949  $26,455  $210  $39  $26,626 
U.S. agency residential mortgage-backed  168,233   1,857   132   169,958   135,293   1,331   515   136,109 
U.S. agency commercial mortgage-backed  13,694   214   16   13,892   10,767   84   115   10,736 
Private label mortgage-backed  33,482   374   278   33,578   26,703   518   231   26,990 
Other asset backed  142,058   435   305   142,188   108,128   319   108   108,339 
Obligations of states and political subdivisions  156,539   2,115   665   157,989   176,087   1,708   619   177,176 
Corporate  50,787   792   124   51,455   57,213   853   66   58,000 
Trust preferred  2,921   -   471   2,450   2,928   -   128   2,800 
Foreign government  1,635   18   0   1,653   2,098   -   9   2,089 
Total $598,831  $6,313  $2,032  $603,112  $545,672  $5,023  $1,830  $548,865 
                                
December 31, 2015                
December 31, 2016                
U.S. agency $47,283  $309  $80  $47,512  $28,909  $159  $80  $28,988 
U.S. agency residential mortgage-backed  195,055   1,584   583   196,056   156,053   1,173   937   156,289 
U.S. agency commercial mortgage-backed  34,017   94   83   34,028   12,799   28   195   12,632 
Private label mortgage-backed  5,061   161   319   4,903   35,035   216   524   34,727 
Other asset backed  117,431   54   581   116,904   146,829   271   391   146,709 
Obligations of states and political subdivisions  145,193   941   1,150   144,984   175,180   478   4,759   170,899 
Corporate  38,895   9   290   38,614   56,356   223   399   56,180 
Trust preferred  2,916   -   433   2,483   2,922   -   343   2,579 
Foreign government  1,626   -   13   1,613 
Total $585,851  $3,152  $3,519  $585,484  $615,709  $2,548  $7,641  $610,616 
 
1011
Index
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

We adopted ASU 2017-08 during the first quarter of 2017 using a modified retrospective approach.  As a result, the amortized cost of securities as of January 1, 2017 was adjusted lower by $0.46 million (see note #2).

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

  Less Than Twelve Months  Twelve Months or More  Total 
  Fair Value  
Unrealized
Losses
  Fair Value  
Unrealized
Losses
  Fair Value  
Unrealized
Losses
 
  (In thousands) 
                   
September 30, 2017                  
U.S. agency $4,819  $21  $4,947  $18  $9,766  $39 
U.S. agency residential mortgage-backed  24,116   215   27,817   300   51,933   515 
U.S. agency commercial mortgage-backed  1,815   22   3,933   93   5,748   115 
Private label mortgage- backed  3,423   26   3,163   205   6,586   231 
Other asset backed  12,756   18   16,298   90   29,054   108 
Obligations of states and political subdivisions  42,186   447   13,787   172   55,973   619 
Corporate  8,654   22   2,458   44   11,112   66 
Trust preferred  -   -   2,800   128   2,800   128 
Foreign government  2,089   9   -   -   2,089   9 
Total $99,858  $780  $75,203  $1,050  $175,061  $1,830 
 Less Than Twelve Months  Twelve Months or More  Total 
 Fair Value  
Unrealized
Losses
  Fair Value  
Unrealized
Losses
  Fair Value  
Unrealized
Losses
 
 (In thousands) 
                  
September 30, 2016                  
December 31, 2016                  
U.S. agency $1,604  $3  $8,147  $38  $9,751  $41  $4,179  $41  $8,217  $39  $12,396  $80 
U.S. agency residential mortgage-backed  22,982   48   19,099   84   42,081   132   62,524   732   20,857   205   83,381   937 
U.S. agency commercial mortgage-backed  3,455   14   257   2   3,712   16   6,079   194   143   1   6,222   195 
Private label mortgage- backed  12,202   18   1,429   260   13,631   278 
Private label mortgage-backed  20,545   281   1,413   243   21,958   524 
Other asset backed  22,147   96   16,998   209   39,145   305   52,958   172   17,763   219   70,721   391 
Obligations of states and political subdivisions  17,853   91   15,203   574   33,056   665   113,078   4,014   14,623   745   127,701   4,759 
Corporate  3,776   14   2,892   110   6,668   124   25,546   292   2,810   107   28,356   399 
Trust preferred  -   -   2,450   471   2,450   471   -   -   2,579   343   2,579   343 
Foreign government  1,613   13   -   -   1,613   13 
Total $84,019  $284  $66,475  $1,748  $150,494  $2,032  $286,522  $5,739  $68,405  $1,902  $354,927  $7,641 
                        
December 31, 2015                        
U.S. agency $12,164  $47  $6,746  $33  $18,910  $80 
U.S. agency residential mortgage-backed  57,538   316   23,340   267   80,878   583 
U.S. agency commercial mortgage-backed  16,747   60   2,247   23   18,994   83 
Private label mortgage- backed  -   -   3,393   319   3,393   319 
Other asset backed  102,660   434   5,189   147   107,849   581 
Obligations of states and political subdivisions  52,493   597   12,240   553   64,733   1,150 
Corporate  30,550   290   -   -   30,550   290 
Trust preferred  -   -   2,483   433   2,483   433 
Total $272,152  $1,744  $55,638  $1,775  $327,790  $3,519 

Our portfolio of securities available for sale is reviewed quarterly for impairment in value. In performing this review management considers (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) the impact of changes in market interest rates on the market value of the security and (4) an assessment of whether we intend to sell, or it is more likely than not that we will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. For securities that do not meet the aforementioned recovery criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income.
 
1112
Index
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

U.S. agency, U.S. agency residential mortgage-backed securities and U.S. agency commercial mortgage backed securities — at September 30, 2016,2017, we had 2133 U.S. agency, 59109 U.S. agency residential mortgage-backed and seven10 U.S. agency commercial mortgage-backed securities whose fair market value is less than amortized cost. The unrealized losses are largely attributed to increases in interest rates since acquisition and widening spreads to Treasury bonds. As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Private label mortgage backed securities — at September 30, 2016,2017, we had 2411 of this type of security whose fair value is less than amortized cost.  The majority of unrealized losses are primarily attributed to fourthree securities purchased prior to 2016.  Two of these fourthree securities havehas an impairment in excess of 10% and all three of these holdings have been impaired for more than 12 months.  The unrealized losses are largely attributable to credit spread widening on these fourthree securities since their acquisition.

These fourthree securities are receiving principal and interest payments. Most of theseThese transactions are pass-through structures, receiving pro rata principal and interest payments from a dedicated collateral pool. The nonreceipt of interest cash flows is not expected and thus not presently considered in our discounted cash flow methodology discussed below.

These fourthree private label mortgage-backed securities are periodically reviewed for other than temporary impairment (“OTTI”) utilizing a cash flow projection. The cash flow analysis forecasts cash flow from the underlying loans in each transaction and then applies these cash flows to the bonds in the securitization.  Our cash flow analysis forecasts complete recovery of our cost basis for all fourthree of these securities whose fair value is less than amortized cost.

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

Other asset backed — at September 30, 2016,2017, we had 7051 other asset backed securities whose fair value is less than amortized cost. The unrealized losses are primarily due to credit spread widening and increases in interest rates since acquisition.  As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Obligations of states and political subdivisions — at September 30, 2016,2017, we had 100182 municipal securities whose fair value is less than amortized cost. The unrealized losses are primarily due to wider benchmark pricing spreads and increases in interest rates since acquisition. One of these securities has an impairment in excess of 10%.  As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Corporate — at September 30, 2016,2017, we had seven11 corporate securities whose fair value is less than amortized cost. The unrealized losses are primarily due to credit spread widening and increases in interest rates since acquisition.  As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.
 
1213
Index
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Trust preferred securities — at September 30, 2016,2017, we had three trust preferred securities whose fair value is less than amortized cost. All of our trust preferred securities are single issue securities issued by a trust subsidiary of a bank holding company. The pricing of trust preferred securities has suffered from credit spread widening.

One of the three securities is rated by two major rating agencies as investment grade, while one (a Bank of America issuance) is rated below investment grade by two major rating agencies and the other one is non-rated. The non-rated issue is a relatively small bank and was never rated. The issuer of this non-rated trust preferred security, which had a total amortized cost of $1.0 million and total fair value of $0.7$0.9 million as of September 30, 2016,2017, continues to have satisfactory credit metrics and make interest payments.

The following table breaks out our trust preferred securities in further detail as of September 30, 20162017 and December 31, 2015:2016:

  September 30, 2017  December 31, 2016 
  
Fair
Value
  
Net
Unrealized
Loss
  
Fair
Value
  
Net
Unrealized
Loss
 
  (In thousands) 
             
Trust preferred securities            
Rated issues $1,880  $(48) $1,800  $(123)
Unrated issues  920   (80)  779   (220)
As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

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

Foreign government — at September 30, 2017, we had two foreign government securities whose fair value is less than amortized cost. The unrealized loss is primarily due to increases in interest rates since acquisition. As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

We recorded no credit related OTTI charges in our Condensed Consolidated Statements of Operations related to securities available for sale during the three orand nine month periods ended September 30, 20162017 and 2015,2016, respectively.

At September 30, 2016,2017, three private label mortgage-backed securities had credit related OTTI and are summarized as follows:

  
Senior
Security
  
Super
Senior
Security
  
Senior
Support
Security
  Total 
  (In thousands) 
             
As of September 30, 2016            
Fair value $1,346  $1,135  $75  $2,556 
Amortized cost  1,303   1,064   -   2,367 
Non-credit unrealized loss  -   -   -   - 
Unrealized gain  43   71   75   189 
Cumulative credit related OTTI  757   457   380   1,594 
                 
Credit related OTTI recognized in our Condensed                
Consolidated Statements of Operations                
For the three months ended September 30,                
2016 $-  $-  $-  $- 
2015  -   -   -   - 
For the nine months ended September 30,                
2016  -   -   -   - 
2015  -   -   -   - 
  
Senior
Security
  
Super
Senior
Security
  
Senior
Support
Security
  Total 
  (In thousands) 
             
As of September 30, 2017            
Fair value $1,076  $1,032  $65  $2,173 
Amortized cost  937   842   -   1,779 
Non-credit unrealized loss  -   -   -   - 
Unrealized gain  139   190   65   394 
Cumulative credit related OTTI  757   457   380   1,594 
 
1314
Index
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Each of these securities is receiving principal and interest payments similar to principal reductions in the underlying collateral.  All three of these securities have unrealized gains at September 30, 2016.2017.  The original amortized cost for each of these securities has been permanently adjusted downward for previously recorded credit related OTTI.  The unrealized loss (based on original amortized cost) for these securities is now less than previously recorded credit related OTTI amounts.

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

  
Three months ended
September 30,
  
Nine months ended
September 30,
 
  2017  2016  2017  2016 
  (In thousands) 
Balance at beginning of period $1,844  $1,844  $1,844  $1,844 
Additions to credit losses on securities for which no previous OTTI was recognized  -   -   -   - 
Increases to credit losses on securities for which OTTI was previously recognized  -   -   -   - 
Balance at end of period $1,844  $1,844  $1,844  $1,844 
  
Three months ended
September 30,
  
Nine months ended
September 30,
 
  2016  2015  2016  2015 
  (In thousands)  (In thousands) 
Balance at beginning of period $1,844  $1,844  $1,844  $1,844 
Additions to credit losses on securities for which no previous OTTI was recognized  -   -   -   - 
Increases to credit losses on securities for which OTTI was previously recognized  -   -   -   - 
Balance at end of period $1,844  $1,844  $1,844  $1,844 

The amortized cost and fair value of securities available for sale at September 30, 2016,2017, by contractual maturity, follow:

  
Amortized
Cost
  
Fair
Value
 
  (In thousands) 
Maturing within one year $27,811  $27,865 
Maturing after one year but within five years  98,784   99,533 
Maturing after five years but within ten years  82,590   83,671 
Maturing after ten years  55,596   55,622 
   264,781   266,691 
U.S. agency residential mortgage-backed  135,293   136,109 
U.S. agency commercial mortgage-backed  10,767   10,736 
Private label mortgage-backed  26,703   26,990 
Other asset backed  108,128   108,339 
Total $545,672  $548,865 
  
Amortized
Cost
  
Fair
Value
 
  (In thousands) 
Maturing within one year $23,706  $23,753 
Maturing after one year but within five years  86,673   87,599 
Maturing after five years but within ten years  63,799   64,784 
Maturing after ten years  67,186   67,360 
   241,364   243,496 
U.S. agency residential mortgage-backed  168,233   169,958 
U.S. agency commercial mortgage-backed  13,694   13,892 
Private label residential mortgage-backed  33,482   33,578 
Other asset backed  142,058   142,188 
Total $598,831  $603,112 

The actual maturity may differ from the contractual maturity because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

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

 Proceeds  
Realized
Gains
  Losses     Realized 
 (In thousands)  Proceeds (1)  Gains  Losses 
 (In thousands) 
2017 $9,594  $125  $- 
2016 $56,451  $350  $52   56,451   350   52 
2015  11,786   75   - 

During 2016 and 2015, our trading securities consisted of various preferred stocks.  During the first nine months of 2016 and 2015, we recognized gains on trading securities of $0.004 million and $0.022 million, respectively, that are included in net gains on securities in the Condensed Consolidated Statements of Operations.  Both of these amounts relate to gains recognized on trading securities still held at each respective period end.
(1)2017 includes $0.760 million for trades that did not settle until after September 30, 2017.
 
1415
Index
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

During 2017 and 2016, our trading securities consisted of various preferred stocks.  During the nine months ended September 30, 2017 and 2016, we recognized gains (losses) on trading securities of $(0.063) million and $0.004 million, respectively, that are included in net gains (losses) on securities in the Condensed Consolidated Statements of Operations.  These amounts relate to trading securities still held at each respective period end.

4.
Loans

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

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

 Commercial  Mortgage  Installment  
Payment
Plan
Receivables
  
Subjective
Allocation
  Total  Commercial  Mortgage  Installment  
Payment
Plan
Receivables(1)
  
Subjective
Allocation
  Total 
 (In thousands) 
2017                  
Balance at beginning of period $5,100  $8,145  $900  $-  $6,441  $20,586 
Additions (deductions) Provision for loan losses  (97)  68   (33)  -   644   582 
Recoveries credited to the allowance  340   587   285   -   -   1,212 
Loans charged against the allowance  (92)  (471)  (339)  -   -   (902)
Balance at end of period $5,251  $8,329  $813  $-  $7,085  $21,478 
 (In thousands)                         
2016                                          
Balance at beginning of period $6,039  $9,956  $1,139  $52  $5,526  $22,712  $6,039  $9,956  $1,139  $52  $5,526  $22,712 
Additions (deductions)                        
Provision for loan losses  (153)  (247)  208   -   17   (175)
Recoveries credited to allowance  474   195   236   -   -   905 
Additions (deductions) Provision for loan losses  (153)  (247)  208   -   17   (175)
Recoveries credited to the allowance  474   195   236   -   -   905 
Loans charged against the allowance  (365)  (561)  (473)  -   -   (1,399)  (365)  (561)  (473)  -   -   (1,399)
Balance at end of period $5,995  $9,343  $1,110  $52  $5,543  $22,043  $5,995  $9,343  $1,110  $52  $5,543  $22,043 
                        
2015                        
Balance at beginning of period $6,707  $11,465  $1,461  $65  $4,888  $24,586 
Additions (deductions)                        
Provision for loan losses  (26)  (47)  (49)  (5)  (117)  (244)
Recoveries credited to allowance  637   286   250   -   -   1,173 
Loans charged against the allowance  (190)  (379)  (342)  -   -   (911)
Balance at end of period $7,128  $11,325  $1,320  $60  $4,771  $24,604 
 
15
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

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

  Commercial  Mortgage  Installment  
Payment
Plan
Receivables
  
Subjective
Allocation
  Total 
  (In thousands)    
2016                  
Balance at beginning of period $5,670  $10,391  $1,181  $56  $5,272  $22,570 
Additions (deductions)                        
Provision for loan losses  (1,220)  (885)  399   (4)  271   (1,439)
Recoveries credited to allowance  1,944   871   808   -   -   3,623 
Loans charged against the allowance  (399)  (1,034)  (1,278)  -   -   (2,711)
Balance at end of period $5,995  $9,343  $1,110  $52  $5,543  $22,043 
                         
2015                        
Balance at beginning of period $5,445  $13,444  $1,814  $64  $5,223  $25,990 
Additions (deductions)                        
Provision for loan losses  479   (881)  (179)  (4)  (452)  (1,037)
Recoveries credited to allowance  1,722   843   853   -   -   3,418 
Loans charged against the allowance  (518)  (2,081)  (1,168)  -   -   (3,767)
Balance at end of period $7,128  $11,325  $1,320  $60  $4,771  $24,604 
(1)Payment plan receivables were reclassified to held for sale at December 31, 2016.  See note #15.
 
16
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

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

  Commercial  Mortgage  Installment  
Payment
Plan
Receivables(1)
  
Subjective
Allocation
  Total 
  (In thousands) 
2017                  
Balance at beginning of period $4,880  $8,681  $1,011  $-  $5,662  $20,234 
Additions (deductions) Provision for loan losses  (197)  (593)  173   -   1,423   806 
Recoveries credited to the allowance  946   1,264   788   -   -   2,998 
Loans charged against the allowance  (378)  (1,023)  (1,159)  -   -   (2,560)
Balance at end of period $5,251  $8,329  $813  $-  $7,085  $21,478 
                         
2016                        
Balance at beginning of period $5,670  $10,391  $1,181  $56  $5,272  $22,570 
Additions (deductions) Provision for loan losses  (1,220)  (885)  399   (4)  271   (1,439)
Recoveries credited to the allowance  1,944   871   808   -   -   3,623 
Loans charged against the allowance  (399)  (1,034)  (1,278)  -   -   (2,711)
Balance at end of period $5,995  $9,343  $1,110  $52  $5,543  $22,043 
(1)Payment plan receivables were reclassified to held for sale at December 31, 2016.  See note #15.
17
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

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

 Commercial  Mortgage  Installment  
Payment
Plan
Receivables
  
Subjective
Allocation
  Total  Commercial  Mortgage  Installment  
Subjective
Allocation
  Total 
 (In thousands)  (In thousands) 
September 30, 2016                  
September 30, 2017               
Allowance for loan losses                                      
Individually evaluated for impairment $3,325  $6,717  $333  $-  $-  $10,375  $967  $5,823  $271  $-  $7,061 
Collectively evaluated for impairment  2,670   2,626   777   52   5,543   11,668   4,284   2,506   542   7,085   14,417 
Total ending allowance balance $5,995  $9,343  $1,110  $52  $5,543  $22,043  $5,251  $8,329  $813  $7,085  $21,478 
                                            
Loans                                            
Individually evaluated for impairment $16,087  $60,891  $5,101  $-      $82,079  $10,257  $54,322  $4,215      $68,794 
Collectively evaluated for impairment  770,642   464,234   263,973   31,188       1,530,037   829,073   730,050   315,146       1,874,269 
Total loans recorded investment  786,729   525,125   269,074   31,188       1,612,116   839,330   784,372   319,361       1,943,063 
Accrued interest included in recorded investment  1,753   2,292   717   -       4,762   2,080   3,026   863       5,969 
Total loans $784,976  $522,833  $268,357  $31,188      $1,607,354  $837,250  $781,346  $318,498      $1,937,094 
                                            
December 31, 2015                        
December 31, 2016                    
Allowance for loan losses                                            
Individually evaluated for impairment $2,708  $7,818  $457  $-  $-  $10,983  $2,244  $6,579  $329  $-  $9,152 
Collectively evaluated for impairment  2,962   2,573   724   56   5,272   11,587   2,636   2,102   682   5,662   11,082 
Total ending allowance balance $5,670  $10,391  $1,181  $56  $5,272  $22,570  $4,880  $8,681  $1,011  $5,662  $20,234 
                                            
Loans                                            
Individually evaluated for impairment $16,868  $66,375  $5,888  $-      $89,131  $15,767  $59,151  $4,913      $79,831 
Collectively evaluated for impairment  733,399   433,931   228,827   34,599       1,430,756   790,228   481,828   261,474       1,533,530 
Total loans recorded investment  750,267   500,306   234,715   34,599       1,519,887   805,995   540,979   266,387       1,613,361 
Accrued interest included in recorded investment  1,869   2,270   698   -       4,837   1,978   2,364   771       5,113 
Total loans $748,398  $498,036  $234,017  $34,599      $1,515,050  $804,017  $538,615  $265,616      $1,608,248 
 
1718
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

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

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

An aging analysis of loans by class follows:

 Loans Past Due  Loans not  Total  
90+ and
Still
Accruing
  
Non-
Accrual
  
Total Non-
Performing
Loans
 
 30-59 days  60-89 days  90+ days  Total  Past Due  Loans  (In thousands) 
 (In thousands) 
September 30, 2016                  
September 30, 2017         
Commercial                           
Income producing - real estate $-  $-  $541  $541  $273,461  $274,002  $-  $72  $72 
Land, land development and construction - real estate  -   -   133   133   53,836   53,969   -   10   10 
Commercial and industrial  105   116   457   678   458,080   458,758   -   706   706 
Mortgage                                    
1-4 family  2,180   1,461   4,429   8,070   285,892   293,962   -   5,207   5,207 
Resort lending  1,975   -   1,624   3,599   103,597   107,196   -   1,411   1,411 
Home equity - 1st lien  107   -   273   380   27,542   27,922   -   258   258 
Home equity - 2nd lien  226   73   353   652   52,882   53,534   -   221   221 
Purchased loans  7   1   -   8   42,503   42,511   -   -   - 
Installment                                    
Home equity - 1st lien  474   179   96   749   13,079   13,828   -   97   97 
Home equity - 2nd lien  133   72   249   454   15,064   15,518   -   224   224 
Loans not secured by real estate  291   114   384   789   236,376   237,165 
Other  10   4   3   17   2,546   2,563 
Payment plan receivables                        
Full refund  258   70   -   328   10,035   10,363 
Partial refund  506   313   4   823   14,041   14,864 
Boat lending  -   69   69 
Recreational vehicle lending  -   25   25 
Other  159   40   -   199   5,762   5,961   -   110   110 
Total recorded investment $6,431  $2,443  $8,546  $17,420  $1,594,696  $1,612,116  $-  $8,410  $8,410 
Accrued interest included in recorded investment $67  $28  $-  $95  $4,667  $4,762  $-  $-  $- 
                        
December 31, 2015                        
December 31, 2016            
Commercial                                    
Income producing - real estate $203  $209  $647  $1,059  $305,155  $306,214  $-  $628  $628 
Land, land development and construction - real estate  -   -   252   252   44,231   44,483   -   105   105 
Commercial and industrial  785   16   151   952   398,618   399,570   -   4,430   4,430 
Mortgage                                    
1-4 family  1,943   640   4,744   7,327   269,880   277,207   -   5,248   5,248 
Resort lending  307   -   1,094   1,401   114,619   116,020   -   1,507   1,507 
Home equity - 1st lien  50   -   187   237   22,327   22,564   -   222   222 
Home equity - 2nd lien  439   54   147   640   50,618   51,258   -   317   317 
Purchased loans  9   1   2   12   33,245   33,257   -   -   - 
Installment                                    
Home equity - 1st lien  315   107   106   528   16,707   17,235   -   266   266 
Home equity - 2nd lien  231   149   443   823   19,727   20,550   -   289   289 
Loans not secured by real estate  567   83   421   1,071   193,680   194,751 
Other  15   3   2   20   2,159   2,179 
Payment plan receivables                        
Full refund  492   62   2   556   21,294   21,850 
Partial refund  415   228   2   645   5,834   6,479 
Boat lending  -   219   219 
Recreational vehicle lending  -   21   21 
Other  110   3   1   114   6,156   6,270   -   112   112 
Total recorded investment $5,881  $1,555  $8,201  $15,637  $1,504,250  $1,519,887  $-  $13,364  $13,364 
Accrued interest included in recorded investment $53  $17  $2  $72  $4,765  $4,837  $-  $-  $- 
 
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Impaired
An aging analysis of loans are asby class follows:

  Loans Past Due  Loans not  Total 
  30-59 days  60-89 days  90+ days  Total  Past Due  Loans 
  (In thousands) 
September 30, 2017                  
Commercial                  
Income producing - real estate $425  $-  $30  $455  $271,747  $272,202 
Land, land development and construction - real estate  10   -   -   10   67,793   67,803 
Commercial and industrial  120   149   65   334   498,991   499,325 
 Mortgage                        
1-4 family  1,929   919   5,207   8,055   553,928   561,983 
Resort lending  363   135   1,411   1,909   91,370   93,279 
Home equity - 1st lien  460   -   258   718   35,826   36,544 
Home equity - 2nd lien  597   195   221   1,013   56,677   57,690 
Purchased loans  3   1   -   4   34,872   34,876 
Installment                        
Home equity - 1st lien  115   86   97   298   9,925   10,223 
Home equity - 2nd lien  161   23   224   408   10,103   10,511 
Boat lending  112   69   69   250   131,153   131,403 
Recreational vehicle lending  52   4   25   81   93,687   93,768 
Other  108   50   110   268   73,188   73,456 
Total recorded investment $4,455  $1,631  $7,717  $13,803  $1,929,260  $1,943,063 
Accrued interest included in recorded investment $53  $24  $-  $77  $5,892  $5,969 
  
September 30,
2016
  
December 31,
2015
 
Impaired loans with no allocated allowance (In thousands) 
TDR $541  $2,518 
Non - TDR  133   203 
Impaired loans with an allocated allowance        
TDR - allowance based on collateral  3,472   4,810 
TDR - allowance based on present value cash flow  76,701   81,002 
Non - TDR - allowance based on collateral  902   260 
Non - TDR - allowance based on present value cash flow  -   - 
Total impaired loans $81,749  $88,793 
         
Amount of allowance for loan losses allocated        
TDR - allowance based on collateral $1,710  $2,436 
TDR - allowance based on present value cash flow  8,361   8,471 
Non - TDR - allowance based on collateral  304   76 
Non - TDR - allowance based on present value cash flow  -   - 
Total amount of allowance for loan losses allocated $10,375  $10,983 
                   
December 31, 2016                  
Commercial                  
Income producing - real estate $-  $-  $383  $383  $287,255  $287,638 
Land, land development and construction - real estate  74   -   31   105   51,670   51,775 
Commercial and industrial  100   1,385   66   1,551   465,031   466,582 
Mortgage                        
1-4 family  2,361   869   5,248   8,478   306,063   314,541 
Resort lending  -   -   1,507   1,507   101,541   103,048 
Home equity - 1st lien  149   -   222   371   28,645   29,016 
Home equity - 2nd lien  470   218   317   1,005   54,232   55,237 
Purchased loans  13   2   -   15   39,122   39,137 
Installment                        
Home equity - 1st lien  311   48   266   625   12,025   12,650 
Home equity - 2nd lien  238   41   289   568   13,390   13,958 
Boat lending  184   33   219   436   102,489   102,925 
Recreational vehicle lending  68   33   21   122   74,413   74,535 
Other  289   30   112   431   61,888   62,319 
Total recorded investment $4,257  $2,659  $8,681  $15,597  $1,597,764  $1,613,361 
Accrued interest included in recorded investment $45  $19  $-  $64  $5,049  $5,113 
 
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Impaired loans by class  are as follows (1):follows:

  September 30, 2016  December 31, 2015 
  
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
 
With no related allowance recorded: (In thousands)    
Commercial                  
Income producing - real estate $541  $787  $-  $641  $851  $- 
Land, land development & construction-real estate  133   709   -   818   1,393   - 
Commercial and industrial  -   -   -   1,245   1,241   - 
Mortgage                        
1-4 family  1   305   -   23   183   - 
Resort lending  -   -   -   -   -   - 
Home equity - 1st lien  -   -   -   -   -   - 
Home equity - 2nd lien  -   -   -   -   -   - 
Installment                        
Home equity - 1st lien  -   67   -   -   76   - 
Home equity - 2nd lien  -   -   -   -   -   - 
Loans not secured by real estate  -   -   -   -   -   - 
Other  -   -   -   -   -   - 
   675   1,868   -   2,727   3,744   - 
With an allowance recorded:                        
Commercial                        
Income producing - real estate  7,813   7,951   561   8,377   9,232   516 
Land, land development & construction-real estate  389   391   67   1,690   1,778   296 
Commercial and industrial  7,211   7,566   2,697   4,097   4,439   1,896 
Mortgage                        
1-4 family  43,038   44,922   4,173   47,792   49,808   5,132 
Resort lending  17,295   17,327   2,488   18,148   18,319   2,662 
Home equity - 1st lien  239   244   32   168   172   9 
Home equity - 2nd lien  318   400   24   244   325   15 
Installment                        
Home equity - 1st lien  2,108   2,223   105   2,364   2,492   143 
Home equity - 2nd lien  2,461   2,480   191   2,929   2,951   271 
Loans not secured by real estate  530   566   37   587   658   42 
Other  2   2   -   8   8   1 
   81,404   84,072   10,375   86,404   90,182   10,983 
Total                        
Commercial                        
Income producing - real estate  8,354   8,738   561   9,018   10,083   516 
Land, land development & construction-real estate  522   1,100   67   2,508   3,171   296 
Commercial and industrial  7,211   7,566   2,697   5,342   5,680   1,896 
Mortgage                        
1-4 family  43,039   45,227   4,173   47,815   49,991   5,132 
Resort lending  17,295   17,327   2,488   18,148   18,319   2,662 
Home equity - 1st lien  239   244   32   168   172   9 
Home equity - 2nd lien  318   400   24   244   325   15 
Installment                        
Home equity - 1st lien  2,108   2,290   105   2,364   2,568   143 
Home equity - 2nd lien  2,461   2,480   191   2,929   2,951   271 
Loans not secured by real estate  530   566   37   587   658   42 
Other  2   2   -   8   8   1 
Total $82,079  $85,940  $10,375  $89,131  $93,926  $10,983 
                         
Accrued interest included in recorded investment $330          $338         
(1)There were no impaired payment plan receivables or purchased mortgage loans at September 30, 2016 or December 31, 2015
  
September 30,
2017
  
December 31,
2016
 
Impaired loans with no allocated allowance (In thousands) 
TDR $349  $1,782 
Non - TDR  186   1,107 
Impaired loans with an allocated allowance        
TDR - allowance based on collateral  2,320   3,527 
TDR - allowance based on present value cash flow  65,449   72,613 
Non - TDR - allowance based on collateral  202   491 
Total impaired loans $68,506  $79,520 
         
Amount of allowance for loan losses allocated        
TDR - allowance based on collateral $641  $1,868 
TDR - allowance based on present value cash flow  6,329   7,146 
Non - TDR - allowance based on collateral  91   138 
Total amount of allowance for loan losses allocated $7,061  $9,152 
 
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Impaired loans by class  are as follows (1):
  September 30, 2017  December 31, 2016 
  
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
  
Recorded
Investment
  
Unpaid
Principal
Balance
  
Related
Allowance
 
With no related allowance recorded: (In thousands)    
Commercial                  
Income producing - real estate $-  $-  $-  $517  $768  $- 
Land, land development & construction-real estate  -   -   -   31   709   - 
Commercial and industrial  535   557   -   2,341   3,261   - 
Mortgage                        
1-4 family  2   472   -   2   387   - 
Resort lending  -   -   -   -   -   - 
Home equity - 1st lien  -   -   -   -   -   - 
Home equity - 2nd lien  -   -   -   -   -   - 
Installment                        
Home equity - 1st lien  1   71   -   -   66   - 
Home equity - 2nd lien  -   -   -   -   -   - 
Boat lending  -   -   -   -   -   - 
Recreational vehicle lending  -   -   -   -   -   - 
Other  -   -   -   -   -   - 
   538   1,100   -   2,891   5,191   - 
With an allowance recorded:                        
Commercial                        
Income producing - real estate  6,975   7,121   482   7,737   7,880   554 
Land, land development & construction-real estate  169   197   10   239   244   36 
Commercial and industrial  2,578   2,612   475   4,902   5,246   1,654 
Mortgage                        
1-4 family  37,872   39,393   3,517   41,701   43,479   4,100 
Resort lending  16,098   16,169   2,264   16,898   16,931   2,453 
Home equity - 1st lien  171   238   30   235   242   10 
Home equity - 2nd lien  179   213   12   315   398   16 
Installment                        
Home equity - 1st lien  1,791   1,921   85   1,994   2,117   118 
Home equity - 2nd lien  1,969   1,994   161   2,415   2,443   182 
Boat lending  1   6   1   1   6   - 
Recreational vehicle lending  93   93   5   109   108   6 
Other  360   377   19   394   426   23 
   68,256   70,334   7,061   76,940   79,520   9,152 
Total                        
Commercial                        
Income producing - real estate  6,975   7,121   482   8,254   8,648   554 
Land, land development & construction-real estate  169   197   10   270   953   36 
Commercial and industrial  3,113   3,169   475   7,243   8,507   1,654 
Mortgage                        
1-4 family  37,874   39,865   3,517   41,703   43,866   4,100 
Resort lending  16,098   16,169   2,264   16,898   16,931   2,453 
Home equity - 1st lien  171   238   30   235   242   10 
Home equity - 2nd lien  179   213   12   315   398   16 
Installment                        
Home equity - 1st lien  1,792   1,992   85   1,994   2,183   118 
Home equity - 2nd lien  1,969   1,994   161   2,415   2,443   182 
Boat lending  1   6   1   1   6   - 
Recreational vehicle lending  93   93   5   109   108   6 
Other  360   377   19   394   426   23 
Total $68,794  $71,434  $7,061  $79,831  $84,711  $9,152 
                         
Accrued interest included in recorded investment $288          $311         
(1)There were no impaired purchased mortgage loans at September 30, 2017 or December 31, 2016.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Average recorded investment in and interest income earned on impaired loans by class for the three month periods ending September 30, follows (1):

 2016  2015  2017  2016 
 
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
 
With no related allowance recorded: (In thousands) 
With no related allowance recorded (In thousands) 
Commercial                        
Income producing - real estate $551  $-  $5,133  $45  $-  $-  $551  $- 
Land, land development & construction-real estate  133   -   932   14   -   -   133   - 
Commercial and industrial  -   -   1,922   68   445   8   -   - 
Mortgage                                
1-4 family  12   3   24   3   127   7   12   3 
Resort lending  -   -   -   -   -   -   -   - 
Home equity - 1st lien  -   -   -   -   -   -   -   - 
Home equity - 2nd lien  -   -   -   -   -   -   -   - 
Installment                                
Home equity - 1st lien  -   3   -   -   1   1   -   3 
Home equity - 2nd lien  -   -   -   -   -   -   -   - 
Loans not secured by real estate  -   -   -   - 
Boat lending  -   -   -   - 
Recreational vehicle lending  -   -   -   - 
Other  -   -   -   -   -   1   -   - 
  696   6   8,011   130   573   17   696   6 
With an allowance recorded:                
With an allowance recorded                
Commercial                                
Income producing - real estate  8,000   111   14,655   154   7,311   91   8,000   111 
Land, land development & construction-real estate  1,117   3   1,993   2   171   2   1,117   3 
Commercial and industrial  7,145   69   6,431   37   2,878   26   7,145   69 
Mortgage                                
1-4 family  44,256   470   49,706   554   38,533   462   44,256   470 
Resort lending  17,372   161   18,414   163   16,175   153   17,372   161 
Home equity - 1st lien  241   2   157   2   201   1   241   2 
Home equity - 2nd lien  280   6   185   -   180   2   280   6 
Installment                                
Home equity - 1st lien  2,140   34   2,474   47   1,808   40   2,140   34 
Home equity - 2nd lien  2,585   37   2,999   47   2,058   26   2,585   37 
Loans not secured by real estate  536   9   645   10 
Boat lending  1   -   2   - 
Recreational vehicle lending  98   1   114   2 
Other  4   -   10   -   361   6   424   7 
  83,676   902   97,669   1,016   69,775   810   83,676   902 
Total                                
Commercial                                
Income producing - real estate  8,551   111   19,788   199   7,311   91   8,551   111 
Land, land development & construction-real estate  1,250   3   2,925   16   171   2   1,250   3 
Commercial and industrial  7,145   69   8,353   105   3,323   34   7,145   69 
Mortgage                                
1-4 family  44,268   473   49,730   557   38,660   469   44,268   473 
Resort lending  17,372   161   18,414   163   16,175   153   17,372   161 
Home equity - 1st lien  241   2   157   2   201   1   241   2 
Home equity - 2nd lien  280   6   185   -   180   2   280   6 
Installment                                
Home equity - 1st lien  2,140   37   2,474   47   1,809   41   2,140   37 
Home equity - 2nd lien  2,585   37   2,999   47   2,058   26   2,585   37 
Loans not secured by real estate  536   9   645   10 
Boat lending  1   -   2   - 
Recreational vehicle lending  98   1   114   2 
Other  4   -   10   -   361   7   424   7 
Total $84,372  $908  $105,680  $1,146  $70,348  $827  $84,372  $908 

(1)There were no impaired payment plan receivables or purchased mortgage loans during the three month periods ended September 30, 20162017 and 2015, respectively.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Average recorded investment in and interest income earned on impaired loans by class for the nine month periods ending September 30, follows (1):

  2016  2015 
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
 
With no related allowance recorded: (In thousands) 
Commercial            
Income producing - real estate $632  $2  $5,490  $170 
Land, land development & construction-real estate  405   7   986   57 
Commercial and industrial  616   21   2,345   195 
Mortgage                
1-4 family  12   9   18   5 
Resort lending  -   -   15   - 
Home equity - 1st lien  -   -   -   - 
Home equity - 2nd lien  -   -   -   - 
Installment                
Home equity - 1st lien  -   4   -   1 
Home equity - 2nd lien  4   -   -   - 
Loans not secured by real estate  -   -   -   - 
Other  -   -   -   - 
   1,669   43   8,854   428 
With an allowance recorded:                
Commercial                
Income producing - real estate  8,153   318   13,752   452 
Land, land development & construction-real estate  1,352   29   2,351   35 
Commercial and industrial  5,929   151   7,304   117 
Mortgage                
1-4 family  45,728   1,447   51,078   1,644 
Resort lending  17,705   480   18,523   507 
Home equity - 1st lien  223   6   159   6 
Home equity - 2nd lien  231   11   154   6 
Installment                
Home equity - 1st lien  2,233   118   2,582   141 
Home equity - 2nd lien  2,723   122   3,086   147 
Loans not secured by real estate  557   28   669   29 
Other  5   -   11   1 
   84,839   2,710   99,669   3,085 
Total                
Commercial                
Income producing - real estate  8,785   320   19,242   622 
Land, land development & construction-real estate  1,757   36   3,337   92 
Commercial and industrial  6,545   172   9,649   312 
Mortgage                
1-4 family  45,740   1,456   51,096   1,649 
Resort lending  17,705   480   18,538   507 
Home equity - 1st lien  223   6   159   6 
Home equity - 2nd lien  231   11   154   6 
Installment                
Home equity - 1st lien  2,233   122   2,582   142 
Home equity - 2nd lien  2,727   122   3,086   147 
Loans not secured by real estate  557   28   669   29 
Other  5   -   11   1 
Total $86,508  $2,753  $108,523  $3,513 

(1)There were no impaired payment plan receivables or purchased mortgage loans during the nine month periods ended September 30, 2016, and 2015, respectively.
 
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Our average
 Average recorded investment in and interest income earned on impaired loans was approximately $84.4 million and $105.7 millionby class for the three-monthnine month periods endedending September 30, 2016 and 2015, respectively and $86.5 million and $108.5 million for the nine-month periods ended September 30, 2016 and 2015, respectively.  follows (1):
  2017  2016 
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
 
With no related allowance recorded: (In thousands) 
Commercial            
Income producing - real estate $222  $-  $632  $2 
Land, land development & construction-real estate  8   -   405   7 
Commercial and industrial  808   16   616   21 
Mortgage                
1-4 family  64   16   12   9 
Resort lending  -   -   -   - 
Home equity - 1st lien  -   -   -   - 
Home equity - 2nd lien  -   -   -   - 
Installment                
Home equity - 1st lien  1   4   -   4 
Home equity - 2nd lien  -   -   4   - 
Boat lending  -   -   -   - 
Recreational vehicle lending  -   -   -   - 
Other  -   1   -   - 
   1,103   37   1,669   43 
With an allowance recorded:                
Commercial                
Income producing - real estate  7,525   300   8,153   318 
Land, land development & construction-real estate  187   6   1,352   29 
 Commercial and industrial  3,488   98   5,929   151 
Mortgage                
1-4 family  39,716   1,420   45,728   1,447 
Resort lending  16,485   464   17,705   480 
Home equity - 1st lien  218   5   223   6 
Home equity - 2nd lien  217   5   231   11 
Installment                
Home equity - 1st lien  1,874   107   2,233   118 
Home equity - 2nd lien  2,210   96   2,723   122 
Boat lending  1   -   2   - 
Recreational vehicle lending  103   4   117   5 
Other  373   19   443   23 
   72,397   2,524   84,839   2,710 
Total                
Commercial                
Income producing - real estate  7,747   300   8,785   320 
Land, land development & construction-real estate  195   6   1,757   36 
Commercial and industrial  4,296   114   6,545   172 
Mortgage                
1-4 family  39,780   1,436   45,740   1,456 
Resort lending  16,485   464   17,705   480 
Home equity - 1st lien  218   5   223   6 
Home equity - 2nd lien  217   5   231   11 
Installment                
Home equity - 1st lien  1,875   111   2,233   122 
Home equity - 2nd lien  2,210   96   2,727   122 
Boat lending  1   -   2   - 
Recreational vehicle lending  103   4   117   5 
Other  373   20   443   23 
Total $73,500  $2,561  $86,508  $2,753 

(1)There were no impaired purchased mortgage loans during the nine month periods ended September 30, 2017 and 2016, respectively.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Cash receipts on impaired loans on non-accrual status are generally applied to the principal balance.  Interest income recognized on impaired loans during the three months ending September 30, 2016 and 2015, was approximately $0.9 million and $1.1 million, respectively and was approximately $2.8 million and $3.5 million during the nine months ending September 30, 2016 and 2015, respectively.

Troubled debt restructurings follow:

  September 30, 2017 
  Commercial  Retail (1)   Total 
  (In thousands) 
Performing TDRs $9,431  $53,755   $63,186 
Non-performing TDRs(2)  401   4,531
(3) 
   4,932 
Total $9,832  $58,286   $68,118 
              
  December 31, 2016 
  Commercial  Retail (1)   Total 
  (In thousands) 
Performing TDRs $10,560  $59,726   $70,286 
Non-performing TDRs(2)  3,565   4,071
(3) 
   7,636 
Total $14,125  $63,797   $77,922 
  September 30, 2016 
  Commercial  Retail   Total 
  (In thousands) 
Performing TDRs $12,642  $62,299   $74,941 
Non-performing TDRs(1)  2,352   3,421 
(2) 
  5,773 
Total $14,994  $65,720   $80,714 

 December 31, 2015 
 Commercial  Retail   Total 
 (In thousands) 
Performing TDRs $13,318  $68,194   $81,512 
Non-performing TDRs(1)  3,041   3,777 
(2) 
  6,818 
Total $16,359  $71,971   $88,330 
(1)Retail loans include mortgage and installment portfolio segments.
(1)(2)Included in non-performing loans table above.
(2)(3)Also includes loans on non-accrual at the time of modification until six payments are received on a timely basis.

We allocated $10.1$7.0 million and $10.9$9.0 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 20162017 and December 31, 2015,2016, respectively.

During the nine months ended September 30, 20162017 and 2015,2016, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans generally included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

Modifications involving a reduction of the stated interest rate of the loan have generally been for periods ranging from 9 months to 36 months but have extended to as much as 480 months in certain circumstances. Modifications involving an extension of the maturity date have generally been for periods ranging from 1 month to 60 months but have extended to as much as 230 months in certain circumstances.
 
2425
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Loans that have been classified as troubled debt restructurings during the three-month periods ended September 30 follow(1):

 
Number of
Contracts
  
Pre-modification
Recorded
Balance
  
Post-modification
Recorded
Balance
  
Number of
Contracts
  
Pre-modification
Recorded
Balance
  
Post-modification
Recorded
Balance
 
 (Dollars in thousands) 
2017         
Commercial         
Income producing - real estate  -  $-  $- 
Land, land development & construction-real estate  -   -   - 
Commercial and industrial  -   -   - 
Mortgage            
1-4 family  1   93   95 
Resort lending  -   -   - 
Home equity - 1st lien  -   -   - 
Home equity - 2nd lien  -   -   - 
Installment            
Home equity - 1st lien  -   -   - 
Home equity - 2nd lien  2   51   50 
Boat lending  -   -   - 
Recreational vehicle lending  -   -   - 
Other  1   10   10 
Total  4  $154  $155 
 (Dollars in thousands)             
2016                     
Commercial                     
Income producing - real estate  2  $180  $180   2  $180  $180 
Land, land development & construction-real estate  -   -   -   -   -   - 
Commercial and industrial  2   175   158   2   175   158 
Mortgage                        
1-4 family  2   204   207   2   204   207 
Resort lending  -   -   -   -   -   - 
Home equity - 1st lien  -   -   -   -   -   - 
Home equity - 2nd lien  2   77   78   2   77   78 
Installment                        
Home equity - 1st lien  2   82   85   2   82   85 
Home equity - 2nd lien  1   7   7   1   7   7 
Loans not secured by real estate  1   34   34 
Boat lending  -   -   - 
Recreational vehicle lending  -   -   - 
Other  -   -   -   1   34   34 
Total  12  $759  $749   12  $759  $749 
            
2015            
Commercial            
Income producing - real estate  -  $-  $- 
Land, land development & construction-real estate  -   -   - 
Commercial and industrial  1   48   26 
Mortgage            
1-4 family  3   343   344 
Resort lending  -   -   - 
Home equity - 1st lien  -   -   - 
Home equity - 2nd lien  -   -   - 
Installment            
Home equity - 1st lien  -   -   - 
Home equity - 2nd lien  -   -   - 
Loans not secured by real estate  1   19   19 
Other  -   -   - 
Total  5  $410  $389 

(1)There were no payment plan receivables or purchased mortgage loans classified as troubled debt restructurings during the three month periods ended September 30, 20162017 and 2015,2016, respectively.
 
2526
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Loans that have been classified as troubled debt restructurings during the nine-month periods ended September 30 follow(1):

 
Number of
Contracts
  
Pre-modification
Recorded
Balance
  
Post-modification
Recorded
Balance
  
Number of
Contracts
  
Pre-modification
Recorded
Balance
  
Post-modification
Recorded
Balance
 
 (Dollars in thousands) 
2017         
Commercial         
Income producing - real estate  -  $-  $- 
Land, land development & construction-real estate  -   -   - 
Commercial and industrial  12   786   786 
Mortgage            
1-4 family  3   142   144 
Resort lending  1   189   189 
Home equity - 1st lien  -   -   - 
Home equity - 2nd lien  -   -   - 
Installment            
Home equity - 1st lien  2   34   37 
Home equity - 2nd lien  7   300   301 
Boat lending  -   -   - 
Recreational vehicle lending  -   -   - 
Other  1   10   10 
Total  26  $1,461  $1,467 
 (Dollars in thousands)             
2016                     
Commercial                     
Income producing - real estate  4  $290  $290   4  $290  $290 
Land, land development & construction-real estate  -   -   -   -   -   - 
Commercial and industrial  6   1,933   1,916   6   1,933   1,916 
Mortgage                        
1-4 family  5   396   470   5   396   470 
Resort lending  1   116   117   1   116   117 
Home equity - 1st lien  1   107   78   1   107   78 
Home equity - 2nd lien  2   77   78   2   77   78 
Installment                        
Home equity - 1st lien  6   141   145   6   141   145 
Home equity - 2nd lien  5   133   136   5   133   136 
Loans not secured by real estate  2   46   46 
Boat lending  -   -   - 
Recreational vehicle lending  -   -   - 
Other  -   -   -   2   46   46 
Total  32  $3,239  $3,276   32  $3,239  $3,276 
            
2015            
Commercial            
Income producing - real estate  2  $229  $234 
Land, land development & construction-real estate  -   -   - 
Commercial and industrial  4   301   273 
Mortgage            
1-4 family  9   1,373   1,189 
Resort lending  1   313   309 
Home equity - 1st lien  -   -   - 
Home equity - 2nd lien  -   -   - 
Installment            
Home equity - 1st lien  5   190   164 
Home equity - 2nd lien  3   58   58 
Loans not secured by real estate  2   19   25 
Other  -   -   - 
Total  26  $2,483  $2,252 

(1)There were no payment plan receivables or purchased mortgage loans classified as troubled debt restructurings during the nine month periods ended September 30, 20162017 and 2015,2016, respectively.
The troubled debt restructurings described above for 2017 increased the allowance for loan losses by $0.02 million and resulted in zero charge offs during the three months ended September 30, 2017, and increased the allowance by $0.08 million and resulted in zero charge offs during the nine months ended September 30, 2017.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The troubled debt restructurings described above for 2016 increased the allowance for loan losses by $0.34 million and resulted in charge offs of $0.02 million during the three months ended September 30, 2016, and increased the allowance by $0.69 million and resulted in charge offs of $0.02 million during the nine months ended September 30, 2016.

The troubled debt restructurings described above for 2015 decreased the allowance for loan losses by $0.05Six commercial and industrial loans with a recorded balance of $0.16 million and resulted in zero charge offs during the three months ended September 30, 2015, and increased the allowance by $0.05 million and resulted in zero charge offs during the nine months ended September 30, 2015.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Loans that have been classified as troubled debt restructurings during the past twelve months and that have subsequently defaulted during the three-monththree and nine month periods ended September 30, follow:

  
Number of
Contracts
  
Recorded
Balance
 
  (Dollars in thousands) 
2016      
Commercial      
Income producing - real estate  -  $- 
Land, land development & construction-real estate  -   - 
Commercial and industrial  -   - 
Mortgage        
1-4 family  -   - 
Resort lending  -   - 
Home equity - 1st lien  -   - 
Home equity - 2nd lien  -   - 
Installment        
Home equity - 1st lien  -   - 
Home equity - 2nd lien  -   - 
Loans not secured by real estate  -   - 
Other  -   - 
   -  $- 
         
2015        
Commercial        
Income producing - real estate  -  $- 
Land, land development & construction-real estate  -   - 
Commercial and industrial  -   - 
Mortgage        
1-4 family  1   54 
Resort lending  -   - 
Home equity - 1st lien  -   - 
Home equity - 2nd lien  -   - 
Installment        
Home equity - 1st lien  -   - 
Home equity - 2nd lien  -   - 
Loans not secured by real estate  -   - 
Other  -   - 
   1  $54 
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Loans that have been classified as troubled debt restructurings2017.  These subsequent defaults resulted in an increase in the allowance of $0.02 million and $0.04 million during the past twelve monthsthree and that have subsequently defaulted during the nine-monthnine month periods ended September 30, follow:2017, respectively and resulted in charge-offs of $0.05 million during both the three and nine month periods ended September 30, 2017.  There were no troubled debt restructurings that subsequently defaulted within twelve months following the modification during the three and nine months ended September 30, 2017 for any other loan class.

  
Number of
Contracts
  
Recorded
Balance
 
  (Dollars in thousands) 
2016      
Commercial      
Income producing - real estate  -  $- 
Land, land development & construction-real estate  -   - 
Commercial and industrial  -   - 
Mortgage        
1-4 family  -   - 
Resort lending  -   - 
Home equity - 1st lien  -   - 
Home equity - 2nd lien  -   - 
Installment        
Home equity - 1st lien  -   - 
Home equity - 2nd lien  -   - 
Loans not secured by real estate  -   - 
Other  -   - 
   -  $- 
         
2015        
Commercial        
Income producing - real estate  -  $- 
Land, land development & construction-real estate  -   - 
Commercial and industrial  2   157 
Mortgage        
1-4 family  1   54 
Resort lending  -   - 
Home equity - 1st lien  -   - 
Home equity - 2nd lien  -   - 
Installment        
Home equity - 1st lien  -   - 
Home equity - 2nd lien  -   - 
Loans not secured by real estate  1   4 
Other  -   - 
   4  $215 
There were no troubled debt restructurings that subsequently defaulted within twelve months following the modification during the three and nine months ended September 30, 2016.

A loan is considered to be in payment default generally once it is 90 days contractually past due under the modified terms.

There were no troubled debt restructurings that subsequently defaulted during the three and nine months ended September 30, 2016.

The troubled debt restructurings that subsequently defaulted described above for 2015 decreased the allowance for loan losses by $0.01 million and resulted in zero charge offs during the three months ended September 30, 2015 and had no impact on the allowance for loan losses and resulted in zero charge offs during the nine months ended September 30, 2015.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

In order to determine whether a borrower is experiencing financial difficulty, we perform an evaluation of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under our internal underwriting policy.

Credit Quality Indicators – As part of our on on-going monitoring of the credit quality of our loan portfolios, we track certain credit quality indicators including (a) weighted-average risk grade of commercial loans, (b) the level of classified commercial loans, (c) credit scores of mortgage and installment loan borrowers, (d) financial performance of certain counterparties for payment plan receivables and (e)(d) delinquency history and non-performing loans.

For commercial loans, we use a loan rating system that is similar to those employed by state and federal banking regulators. Loans are graded on a scale of 1 to 12. A description of the general characteristics of the ratings follows:

Rating 1 through 6: These loans are generally referred to as our “non-watch” commercial credits that include very high or exceptional credit fundamentals through acceptable credit fundamentals.

Rating 7 and 8: These loans are generally referred to as our “watch” commercial credits. This rating includesThese ratings include loans to borrowers that exhibit potential credit weakness or downward trends. If not checked or cured these trends could weaken our asset or credit position. While potentially weak, no loss of principal or interest is envisioned with these ratings.

Rating 9: These loans are generally referred to as our ���substandard“substandard accruing” commercial credits. This rating includes loans to borrowers that exhibit a well-defined weakness where payment default is probable and loss is possible if deficiencies are not corrected. Generally, loans with this rating are considered collectible as to both principal and interest primarily due to collateral coverage.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Rating 10 and 11: These loans are generally referred to as our “substandard - non-accrual” and “doubtful” commercial credits. This rating includescredits, respectively. These ratings include loans to borrowers with weaknesses that make collection of debt in full, on the basis of current facts, conditions and values at best questionable and at worst improbable. All of these loans are placed in non-accrual.

Rating 12: These loans are generally referred to as our “loss” commercial credits. This rating includes loans to borrowers that are deemed incapable of repayment and are charged-off.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The following table summarizes loan ratings by loan class for our commercial loan segment:

  Commercial 
  
Non-watch
1-6
  
Watch
7-8
  
Substandard
Accrual
9
  
Non-
Accrual
10-11
  Total 
        (In thousands)       
September 30, 2017               
Income producing - real estate $268,781  $3,037  $312  $72  $272,202 
Land, land development and construction - real estate  67,730   63   -   10   67,803 
Commercial and industrial  474,022   22,217   2,380   706   499,325 
Total $810,533  $25,317  $2,692  $788  $839,330 
Accrued interest included in total $1,991  $80  $9  $-  $2,080 
                     
December 31, 2016                    
Income producing - real estate $282,886  $3,787  $337  $628  $287,638 
Land, land development andconstruction - real estate  51,603   67   -   105   51,775 
Commercial and industrial  449,365   9,788   2,998   4,431   466,582 
Total $783,854  $13,642  $3,335  $5,164  $805,995 
Accrued interest included in total $1,915  $52  $11  $-  $1,978 
  Commercial 
  
Non-watch
1-6
  
Watch
7-8
  
Substandard
Accrual
9
  
Non-
Accrual
10-11
  Total 
        (In thousands)       
September 30, 2016               
Income producing - real estate $268,940  $4,000  $404  $658  $274,002 
Land, land development and construction - real estate  53,559   199   -   211   53,969 
Commercial and industrial  439,036   10,727   6,478   2,517   458,758 
Total $761,535  $14,926  $6,882  $3,386  $786,729 
Accrued interest included in total $1,676  $56  $21  $-  $1,753 
                     
December 31, 2015                    
Income producing - real estate $296,898  $6,866  $1,423  $1,027  $306,214 
Land, land development and construction - real estate  40,844   2,995   243   401   44,483 
Commercial and industrial  371,357   19,502   6,683   2,028   399,570 
Total $709,099  $29,363  $8,349  $3,456  $750,267 
Accrued interest included in total $1,729  $108  $32  $-  $1,869 

For each of our mortgage and installment segment classes, we generally monitor credit quality based on the credit scores of the borrowers. These credit scores are generally updated semi-annually.
 
3029
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The following tables summarize credit scores by loan class for our mortgage and installment loan segments:
 
   Mortgage (1) 
   1-4 Family  
Resort
Lending
  
Home
Equity
1st Lien
  
Home
Equity
2nd Lien
  
Purchased
Loans
  Total 
   (In thousands) 
September 30, 2017                   
800 and above  $62,145  $11,336  $8,491  $8,896  $7,790  $98,658 
750-799   227,676   33,287   15,619   21,092   18,559   316,233 
700-749   130,480   25,629   6,583   13,819   7,978   184,489 
650-699   77,357   12,441   3,304   7,970   429   101,501 
600-649   26,947   4,648   1,090   2,439   -   35,124 
550-599   15,547   2,777   365   1,507   -   20,196 
500-549   8,766   1,404   540   1,319   -   12,029 
Under 500   3,692   89   253   169   -   4,203 
Unknown   9,373   1,668   299   479   120   11,939 
Total  $561,983  $93,279  $36,544  $57,690  $34,876  $784,372 
Accrued interest included in total  $2,134  $374  $165  $260  $93  $3,026 
                          
December 31, 2016                         
800 and above  $36,534  $10,484  $6,048  $8,392  $8,462  $69,920 
750-799   102,382   41,999   10,006   20,113   20,984   195,484 
700-749   69,337   24,727   5,706   12,360   9,115   121,245 
650-699   50,621   13,798   4,106   8,167   437   77,129 
600-649   25,270   5,769   1,674   3,067   -   35,780 
550-599   13,747   3,030   455   1,699   -   18,931 
500-549   9,215   1,438   486   981   -   12,120 
Under 500   5,145   92   255   279   -   5,771 
Unknown   2,290   1,711   280   179   139   4,599 
Total  $314,541  $103,048  $29,016  $55,237  $39,137  $540,979 
Accrued interest included in total  $1,466  $450  $111  $226  $111  $2,364 
  Mortgage (1) 
  1-4 Family  
Resort
Lending
  
Home
Equity
1st Lien
  
Home
Equity
2nd Lien
  
Purchased
Loans
      Total   
  (In thousands) 
September 30, 2016                  
800 and above $32,310  $12,054  $5,590  $8,288  $4,816  $63,058 
750-799  88,959   38,472   9,551   19,103   26,721   182,806 
700-749  60,455   30,934   5,052   11,278   10,831   118,550 
650-699  53,748   13,530   3,690   8,259   -   79,227 
600-649  27,848   6,218   1,365   3,342   -   38,773 
550-599  15,413   2,467   738   1,542   -   20,160 
500-549  7,955   871   484   1,246   -   10,556 
Under 500  5,097   596   172   244   -   6,109 
Unknown  2,177   2,054   1,280   232   143   5,886 
Total $293,962  $107,196  $27,922  $53,534  $42,511  $525,125 
Accrued interest included in total $1,386  $473  $104  $210  $119  $2,292 
                         
December 31, 2015                        
800 and above $28,760  $13,943  $4,374  $7,696  $2,310  $57,083 
750-799  78,802   40,888   7,137   17,405   23,283   167,515 
700-749  56,519   31,980   4,341   11,022   6,940   110,802 
650-699  51,813   17,433   3,203   7,691   -   80,140 
600-649  27,966   4,991   1,467   3,684   -   38,108 
550-599  16,714   3,070   1,027   1,918   -   22,729 
500-549  10,610   1,051   572   1,295   -   13,528 
Under 500  4,708   554   244   265   -   5,771 
Unknown  1,315   2,110   199   282   724   4,630 
Total $277,207  $116,020  $22,564  $51,258  $33,257  $500,306 
Accrued interest included in total $1,396  $477  $87  $196  $114  $2,270 

(1)Credit scores have been updated within the last twelve months.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

   Installment(1) 
   
Home
Equity
1st Lien
  
Home
Equity
2nd Lien
  Boat Lending  
Recreational
Vehicle
Lending
  Other  Total 
   (In thousands) 
September 30, 2017                   
800 and above  $1,085  $869  $26,168  $26,312  $10,655  $65,089 
750-799   1,938   2,721   67,402   48,183   26,546   146,790 
700-749   1,601   2,236   25,945   14,261   16,433   60,476 
650-699   2,193   1,864   9,164   3,627   8,990   25,838 
600-649   1,429   1,429   1,730   838   2,334   7,760 
550-599   1,252   919   468   244   894   3,777 
500-549   616   398   243   125   434   1,816 
Under 500   92   56   64   11   130   353 
Unknown   17   19   219   167   7,040   7,462 
Total  $10,223  $10,511  $131,403  $93,768  $73,456  $319,361 
Accrued interest included in total  $42  $44  $322  $236  $219  $863 
                          
December 31, 2016                         
800 and above  $1,354  $1,626  $21,422  $23,034  $8,911  $56,347 
750-799   2,478   3,334   50,508   35,827   21,918   114,065 
700-749   1,920   2,686   20,045   11,049   13,183   48,883 
650-699   2,852   2,541   7,559   3,205   8,913   25,070 
600-649   1,691   1,775   1,846   821   2,269   8,402 
550-599   1,231   1,063   882   280   833   4,289 
500-549   981   692   440   189   511   2,813 
Under 500   114   220   73   16   211   634 
Unknown   29   21   150   114   5,570   5,884 
Total  $12,650  $13,958  $102,925  $74,535  $62,319  $266,387 
Accrued interest included in total  $54  $59  $264  $203  $191  $771 
(1)Credit scores have been updated within the last twelve months.
Foreclosed residential real estate properties included in other real estate and repossessed assets on our Condensed Consolidated Statements of Financial Condition totaled $1.7 million and $1.9 million at September 30, 2017 and December 31, 2016, respectively.  Retail mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements totaled $1.2 million and $1.0 million at  September 30, 2017 and December 31, 2016, respectively.
 
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

  Installment(1) 
  
Home
Equity
1st Lien
  
Home
Equity
2nd Lien
  
Loans not
Secured by
Real Estate
  Other  Total 
  (In thousands) 
September 30, 2016               
800 and above $1,373  $1,953  $51,471  $108  $54,905 
750-799  3,031   3,558   110,667   680   117,936 
700-749  2,170   2,872   43,616   812   49,470 
650-699  2,690   3,244   18,322   522   24,778 
600-649  2,193   1,668   4,080   281   8,222 
550-599  1,310   1,348   1,690   52   4,400 
500-549  895   631   1,126   48   2,700 
Under 500  134   233   309   25   701 
Unknown  32   11   5,884   35   5,962 
Total $13,828  $15,518  $237,165  $2,563  $269,074 
Accrued interest included in total $58  $57  $582  $20  $717 
                     
December 31, 2015                    
800 and above $1,792  $1,782  $44,254  $58  $47,886 
750-799  4,117   5,931   86,800   531   97,379 
700-749  2,507   3,899   34,789   694   41,889 
650-699  3,508   4,182   16,456   499   24,645 
600-649  2,173   2,153   4,979   200   9,505 
550-599  1,800   1,346   1,997   109   5,252 
500-549  1,056   855   1,170   61   3,142 
Under 500  223   370   385   23   1,001 
Unknown  59   32   3,921   4   4,016 
Total $17,235  $20,550  $194,751  $2,179  $234,715 
Accrued interest included in total $78  $83  $520  $17  $698 

(1)Credit scores have been updated within the last twelve months.

Mepco Finance Corporation (“Mepco”) is a wholly-owned subsidiary of our Bank that operates a vehicle service contract payment plan business throughout the United States. See Note #14 for more information about Mepco’s business. As of September 30, 2016, approximately 33.2% of Mepco’s outstanding payment plan receivables relate to programs in which a third party insurer or risk retention group is obligated to pay Mepco the full refund owing upon cancellation of the related service contract (including with respect to both the portion funded to the service contract seller5.    Shareholders’ Equity and the portion funded to the administrator). These receivables are shown as “Full Refund” in the table below. Another approximately 47.7% of Mepco’s outstanding payment plan receivables as of September 30, 2016, relate to programs in which a third party insurer or risk retention group is obligated to pay Mepco the refund owing upon cancellation only with respect to the unearned portion previously funded by Mepco to the administrator (but not to the service contract seller). These receivables are shown as “Partial Refund” in the table below. The balance of Mepco’s outstanding payment plan receivables relate to programs in which there is no insurer or risk retention group that has any contractual liability to Mepco for any portion of the refund amount. These receivables are shown as “Other” in the table below. For each class of our payment plan receivables we monitor financial information on the counterparties as we evaluate the credit quality of this portfolio.
32Earnings Per Common Share
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The following table summarizes credit ratings of insurer or risk retention group counterparties by class of payment plan receivable:

  Payment Plan Receivables 
  
Full
Refund
  
Partial
Refund
  Other  Total 
  (In thousands) 
September 30, 2016            
AM Best rating            
A+ $-  $8  $-  $8 
A  1,094   13,696   -   14,790 
A-  977   1,110   3,458   5,545 
B+  -   -   2,502   2,502 
Not rated  8,292   50   1   8,343 
Total $10,363  $14,864  $5,961  $31,188 
                 
December 31, 2015                
AM Best rating                
A+ $-  $6  $-  $6 
A  2,712   5,203   -   7,915 
A-  3,418   1,177   6,265   10,860 
Not rated  15,720   93   5   15,818 
Total $21,850  $6,479  $6,270  $34,599 

Although Mepco has contractual recourse against various counterparties for refunds owing upon cancellation of vehicle service contracts, see Note #14 below regarding certain risks and difficulties associated with collecting these refunds.

Foreclosed residential real estate properties included in other real estate and repossessed assets on our Condensed Consolidated Statements of Financial Condition totaled $1.8 million and $2.8 million at September 30, 2016 and December 31, 2015, respectively.  Retail mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements totaled $0.4 million and $1.1 million at  September 30, 2016 and December 31, 2015, respectively.

5.
Segments

Our reportable segments are based upon legal entities.  We currently have two reportable segments:  Independent Bank (“IB” or “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.

In the normal course of business, our IB segment provides funding to our Mepco segment through an intercompany line of credit priced at the prime rate of interest as published in the Wall Street Journal. Our IB segment also provides certain administrative services to our Mepco segment which are reimbursed at an agreed upon rate. These intercompany transactions are eliminated upon consolidation. The only other material intersegment balances and transactions are investments in subsidiaries at the parent entities and cash balances on deposit at our IB segment.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

A summary of selected financial information for our reportable segments follows:

  IB  Mepco  Other(1)  Elimination(2)  Total 
  (In thousands) 
Total assets               
September 30, 2016 $2,476,795  $50,032  $286,672  $(275,180) $2,538,319 
December 31, 2015  2,340,566   57,208   286,936   (275,644)  2,409,066 
                     
For the three months ended September 30,                 
2016                    
Interest income $20,731  $1,014  $5  $(5) $21,745 
Net interest income  19,409   880   (291)  0   19,998 
Provision for loan losses  (176)  1   0   0   (175)
Income (loss) before income tax  9,811   (29)  (406)  (24)  9,352 
Net income (loss)  6,665   (20)  (256)  (16)  6,373 
                     
2015                    
Interest income $18,973  $1,320  $20  $(20) $20,293 
Net interest income  17,964   1,115   (238)  -   18,841 
Provision for loan losses  (238)  (6)  -   -   (244)
Income (loss) before income tax  7,961   (254)  (358)  (24)  7,325 
Net income (loss)  5,455   (168)  (224)  (16)  5,047 
                     
For the nine months ended September 30,                 
2016                    
Interest income $61,190  $3,176  $22  $(22) $64,366 
Net interest income  57,500   2,727   (836)  -   59,391 
Provision for loan losses  (1,436)  (3)  -   -   (1,439)
Income (loss) before income tax  25,971   (339)  (1,103)  (71)  24,458 
Net income (loss)  17,834   (225)  (652)  (46)  16,911 
                     
2015                    
Interest income $55,895  $4,081  $60  $(60) $59,976 
Net interest income  52,864   3,468   (699)  -   55,633 
Provision for loan losses  (1,032)  (5)  -   -   (1,037)
Income (loss) before income tax  23,063   (766)  (1,097)  (71)  21,129 
Net income (loss)  15,623   (437)  (693)  (46)  14,447 
(1)Includes amounts relating to our parent company.
(2)Includes parent company's investment in subsidiaries and cash balances maintained at subsidiary.
6.
Shareholders’ Equity and Earnings Per Common Share

On January 21, 2016,23, 2017, our Board of Directors authorized a share repurchase plan (the “Repurchase Plan”) to buy back up to 5% of our outstanding common stock through December 31, 2016.2017.  On April 26, 2016 our Board of Directors authorized a $5.0 million expansion of the Repurchase Plan. We expect to accomplish the repurchases through open market transactions, though we could affect repurchases through other means, such as privately negotiated transactions.  The timing and amount of any share repurchases will depend on a variety of factors, including, among others, securities law restrictions, the trading price of our common stock, regulatory requirements, potential alternative uses for capital, and our financial performance. The Repurchase Plan does not obligate us to acquire any particular amount of common stock, and it may be modified or suspended at any time at our discretion. We expect to fund any repurchases from cash on hand.  DuringWe did not repurchase any shares of common stock during the nine months ended September 30, 2016, we repurchased 1,153,136 shares of common stock for an aggregate purchase price of $16.9 million leaving $4.4 million to be repurchased under the Repurchase Plan.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

On November 15, 2011, we entered into a Tax Benefits Preservation Plan (the "Preservation Plan") with our stock transfer agent, American Stock Transfer & Trust Company. Our Board of Directors adopted the Preservation Plan in an effort to protect the value to our shareholders of our ability to use deferred tax assets such as net operating loss carry forwards to reduce potential future federal income tax obligations. Under federal tax rules, this value could be lost in the event we experienced an "ownership change," as defined in Section 382 of the Internal Revenue Code. The Preservation Plan attempts to protect this value by reducing the likelihood that we will experience such an ownership change by discouraging any person who is not already a 5% shareholder from becoming a 5% shareholder (with certain limited exceptions).

On November 15, 2011, our Board of Directors declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of our common stock under the terms of the Preservation Plan. The dividend is payable to the holders of common stock outstanding as of the close of business on November 15, 2011, or outstanding at any time thereafter but before the earlier of a "Distribution Date" and the date the Preservation Plan terminates. Each Right entitles the registered holder to purchase from us 1/1000 of a share of our Series C Junior Participating Preferred Stock, no par value per share ("Series C Preferred Stock"). Each 1/1000 of a share of Series C Preferred Stock has economic and voting terms similar to those of one whole share of common stock. The Rights are not exercisable and generally do not become exercisable until a person or group has acquired, subject to certain exceptions and conditions, beneficial ownership of 4.99% or more of the outstanding shares of common stock. At that time, each Right will generally entitle its holder to purchase securities of the Company at a discount of 50% to the current market price of the common stock. However, the Rights owned by the person acquiring beneficial ownership of 4.99% or more of the outstanding shares of common stock would automatically be void. The significant dilution that would result is expected to deter any person from acquiring beneficial ownership of 4.99% or more and thereby triggering the Rights.

To date, none of the Rights have been exercised or have become exercisable because no unpermitted 4.99% or more change in the beneficial ownership of the outstanding common stock has occurred. The Rights will generally expire on the earlier to occur of the close of business on November 15, 2016, and certain other events described in the Preservation Plan, including such date as our Board of Directors determines that the Preservation Plan is no longer necessary for its intended purposes.  On October 25, 2016, the Board of Directors took affirmative action to not renew the Preservation Plan, which will expire on November 15, 2016.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)2017.

A reconciliation of basic and diluted net income per common share follows:

 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
 2016  2015  2016  2015  
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
 (In thousands, except per share amounts)  2017  2016  2017  2016 
       (In thousands, except per share amounts) 
Net income $6,373  $5,047  $16,911  $14,447  $6,859  $6,373  $18,764  $16,911 
                                
Weighted average shares outstanding (1)  21,232   22,673   21,421   22,852   21,334   21,232   21,325   21,421 
Effect of stock options  149   118   150   120   138   149   144   150 
Stock units for deferred compensation plan for non-employee directors  116   112   115   111   121   116   120   115 
Performance share units  59   52   57   42 
Restricted stock units  -   230   46   283   -   -   -   46 
Performance share units  52   -   42   - 
Weighted average shares outstanding for calculation of diluted earnings per share  21,549   23,133   21,774   23,366   21,652   21,549   21,646   21,774 
                                
Net income per common share                                
Basic (1) $0.30  $0.22  $0.79  $0.63  $0.32  $0.30  $0.88  $0.79 
Diluted $0.30  $0.22  $0.78  $0.62  $0.32  $0.30  $0.87  $0.78 

(1)(1)Basic net income per common share includes weighted average common shares outstanding during the period and participating share awards.
 
Weighted average stock options outstanding that were not considered in computing diluted net income per share because they were anti-dilutive totaled 0.03 millionwere zero for both three-monththe three and nine month periods ended September 30, 2016 and 2015, respectively2017, and totaled 0.03 million for both nine-monththe three and nine month periods ended September 30, 2016 and 2015, respectively.2016.

7.6.
Derivative Financial Instruments

We are required to record derivatives on our Condensed Consolidated Statements of Financial Condition as assets and liabilities measured at their fair value.  The accounting for increases and decreases in the value of derivatives depends upon the use of derivatives and whether the derivatives qualify for hedge accounting.
 
3632
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Our derivative financial instruments according to the type of hedge in which they are designated follows:
  September 30, 2017 
  
Notional
Amount
  
Average
Maturity
(years)
  
Fair
Value
 
  (Dollars in thousands) 
          
Cash flow hedge - pay-fixed interest rate swap agreement $15,000   3.9  $105 
             
No hedge designation            
Rate-lock mortgage loan commitments $36,580   0.1  $769 
Mandatory commitments to sell mortgage loans  74,750   0.1   26 
Pay-fixed interest rate swap agreements  52,586   7.1   52 
Pay-variable interest rate swap agreements  52,586   7.1   (52)
Purchased options  3,119   3.8   277 
Written options  3,119   3.8   (277)
Total $222,740   3.5  $795 

  December 31, 2016 
  
Notional
Amount
  
Average
Maturity
(years)
  
Fair
Value
 
  (Dollars in thousands) 
No hedge designation         
Rate-lock mortgage loan commitments $26,658   0.1  $646 
Mandatory commitments to sell mortgage loans  61,954   0.1   630 
Pay-fixed interest rate swap agreements  46,121   8.6   249 
Pay-variable interest rate swap agreements  46,121   8.6   (249)
Purchased options  3,119   4.5   238 
Written options  3,119   4.5   (238)
Total $187,092   4.4  $1,276 

  September 30, 2016 
  
Notional
Amount
  
Average
Maturity
(years)
  
Fair
Value
 
  (Dollars in thousands) 
No hedge designation         
Rate-lock mortgage loan commitments $31,760   0.1  $1,163 
Mandatory commitments to sell mortgage loans  67,672   0.1   (283)
Pay-fixed interest rate swap agreements  48,623   8.8   (2,009)
Pay-variable interest rate swap agreements  48,623   8.8   2,009 
Purchased options  3,119   4.8   216 
Written options  3,119   4.8   (216)
Total $202,916   4.4  $880 
We use variable-rate and short-term fixed-rate (less than 12 months) debt obligations to fund a portion of our balance sheet, which exposes us to variability in interest rates. To meet our asset/liability management objectives, we may periodically enter into derivative financial instruments to mitigate exposure to fluctuations in cash flows resulting from changes in interest rates (“Cash Flow Hedges”).  The Cash Flow Hedge is a pay-fixed interest-rate swap that converts variable-rate cash flows on debt obligations to fixed-rates.

  December 31, 2015 
  
Notional
Amount
  
Average
Maturity
(years)
  
Fair
Value
 
  (Dollars in thousands) 
No hedge designation         
Rate-lock mortgage loan commitments $20,581   0.1  $550 
Mandatory commitments to sell mortgage loans  46,320   0.1   69 
Pay-fixed interest rate swap agreements  27,587   8.0   (497)
Pay-variable interest rate swap agreements  27,587   8.0   497 
Purchased options  2,098   5.7   122 
Written options  2,098   5.7   (122)
Total $126,271   3.7  $619 
We record the fair value of Cash Flow Hedges in accrued income and other assets and accrued expenses and other liabilities on our Condensed Consolidated Statements of Financial Condition.  On an ongoing basis, we adjust our Condensed Consolidated Statements of Financial Condition to reflect the then current fair value of Cash Flow Hedges.  The related gains or losses are reported in other comprehensive income or loss and are subsequently reclassified into earnings, as a yield adjustment in the same period in which the related interest on the hedged items (variable-rate debt obligations) affect earnings.  It is anticipated that approximately $0.03 million, of unrealized losses on Cash Flow Hedges at September 30, 2017 will be reclassified to earnings over the next twelve months.  To the extent that the Cash Flow Hedges are not effective, the ineffective portion of the Cash Flow Hedges is immediately recognized in interest expense.  The maximum term of the Cash Flow Hedge at September 30, 2017 is 3.9 years.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Certain financial derivative instruments have not been designated as hedges. The fair value of these derivative financial instruments has been recorded on our Condensed Consolidated Statements of Financial Condition and is adjusted on an ongoing basis to reflect their then current fair value. The changes in fair value of derivative financial instruments not designated as hedges are recognized in our Condensed Consolidated Statements of Operations.

In the ordinary course of business, we enter into rate-lock mortgage loan commitments with customers (“Rate-Lock Commitments”).  These commitments expose us to interest rate risk.  We also enter into mandatory commitments to sell mortgage loans (“Mandatory Commitments”) to reduce the impact of price fluctuations of mortgage loans held for sale and Rate-Lock Commitments.  Mandatory Commitments help protect our loan sale profit margin from fluctuations in interest rates. The changes in the fair value of Rate-Lock Commitments and Mandatory Commitments are recognized currently as part of net gains on mortgage loans.loans in our Condensed Consolidated Statements of Operations.  We obtain market prices on Mandatory Commitments and Rate-Lock Commitments.  Net gains on mortgage loans, as well as net income may be more volatile as a result of these derivative instruments, which are not designated as hedges.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

During 2015, we began offeringWe currently offer to our deposit customers an equity linked time deposit product (“Altitude CD”).  The Altitude CD is a time deposit that provides the customer a guaranteed return of principal at maturity plus a potential equity return (a written option), while we receive a like stream of funds based on the equity return (a purchased option).  The written and purchased options will generally move in opposite directions resulting in little or no net impact on our Condensed Consolidated Statements of Operations.  All of the written and purchased options in the table above relate to this Altitude CD product.

We have a program that allows commercial loan customers to lock in a fixed rate for a longer period of time than we would normally offer for interest rate risk reasons.  We will enter into a variable rate commercial loan and an interest rate swap agreement with a customer and then enter into an offsetting interest rate swap agreement with an unrelated party.  The interest rate swap agreement fair values will generally move in opposite directions resulting in little or no net impact on our Condensed Consolidated Statements of Operations.  All of the interest rate swap agreements in the table above with no hedge designation relate to this program.

The following tables illustrate the impact that the derivative financial instruments discussed above have on individual line items in the Condensed Consolidated Statements of Financial Condition for the periods presented:

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Fair Values of Derivative Instruments
 
 Asset Derivatives Liability Derivatives 
 
September 30,
2016
 
December 31,
2015
 
September 30,
2016
 
December 31,
2015
 
Balance
Sheet
Location
 
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
 
 (In thousands) 
Derivatives not designated as hedging instruments                
Rate-lock mortgage loan commitmentsOther assets $1,163 Other assets $550 Other liabilities $- Other liabilities $- 
Mandatory commitments to sell mortgage loansOther assets  - Other assets  69 Other liabilities  283 Other liabilities  - 
Pay-fixed interest rate swap agreementsOther assets  - Other assets  - Other liabilities  2,009 Other liabilities  497 
Pay-variable interest rate swap agreementsOther assets  2,009 Other assets  497 Other liabilities  - Other liabilities  - 
Purchased optionsOther assets  216 Other assets  122 Other liabilities  - Other liabilities  - 
Written optionsOther assets  - Other assets  - Other liabilities  216 Other liabilities  122 
Total derivatives  $3,388   $1,238   $2,508   $619 
Asset DerivativesLiability Derivatives
September 30,
2017
December 31,
2016
September 30,
2017
December 31,
2016
 
 Balance
 Sheet
 Location
  
Fair
Value
 
 Balance
 Sheet
 Location
  
Fair
Value
 
Balance
 Sheet
 Location
  
Fair
Value
 
 Balance
 Sheet
 Location
  
Fair
Value
 
 (In thousands) 
Derivatives designated as hedging instruments            
Pay-fixed interest rate swap agreementsOther assets $105 Other assets $- Other  liabilities $- Other liabilities $- 
Derivatives not designated as hedging instruments                    
Rate-lock mortgage loan commitmentsOther assets  769 Other assets  646 Other liabilities  - Other liabilities  - 
Mandatory commitments to sell mortgage loansOther assets  26 Other assets  630 Other liabilities  - Other liabilities  - 
Pay-fixed interest rate swap agreementsOther assets  424 Other assets  493 Other liabilities  372 Other liabilities  244 
Pay-variable interest rate swap agreementsOther assets  372 Other assets  244 Other liabilities  424 Other liabilities  493 
Purchased optionsOther assets  277 Other assets  238 Other liabilities  - Other liabilities  - 
Written optionsOther assets  - Other  assets  - Other liabilities  277 Other liabilities  238 
Total   1,868    2,251    1,073    975 
Total derivatives  $1,973   $2,251   $1,073   $975 
 
3835
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The effect of derivative financial instruments on the Condensed Consolidated Statements of Operations follows:

Three Month Periods Ended September 30,Three Month Periods Ended September 30, 
  Gain (Loss) Recognized in Income 
Gain
Recognized in
Other
Comprehensive
Income
(Effective Portion)
 
 Location of
 Gain (Loss)
 Reclassified
 from
 Accumulated
 Other
 Comprehensive
 Loss into
 Income
 (Effective
 
Loss
Reclassified from
Accumulated Other
Comprehensive
Loss into Income
(Effective Portion)
 
 
 
 
 
 
 
 
 Location of
 Gain (Loss)
 Recognized
Gain (Loss)
Recognized
in Income (1)
 
   Location of Gain (Loss)  
Three Month
Periods Ended
September 30,
  
Nine Month
Periods Ended
September 30,
 2017 2016  Portion) 2017 2016  in Income (1)2017 2016 
  Recognized in Income 2016  2015  2016  2015 (In thousands) 
Cash Flow Hedges               
Pay-fixed interest rate swap agreements $95  $- Interest expense $(5) $-   $5  $- 
Total $95  $-   $(5) $-   $5  $- 
     (In thousands)                           
No hedge designation              No hedge designation                       
Rate-lock mortgage loan commitments Net gains on mortgage loans $264  $281  $613  $386                  Net gains on on mortage loans $(313) $264 
Mandatory commitments to sell mortgage loans Net gains on mortgage loans  94   (745)  (352)  (225)                 Net gains on on mortage loans  2   94 
Pay-fixed interest rate swap agreements Interest income  196   (452)  (1,512)  (492)                 Interest income  52   196 
Pay-variable interest rate swap agreements Interest income  (196)  452   1,512   492                  Interest income  (52)  (196)
Purchased options Interest expense  13   126   94   126                  Interest expense  5   13 
Written options Interest expense  (13)  (126)  (94)  (126)                 Interest expense  (5)  (13)
Total   $358  $(464) $261  $161                    $(311) $358 
(1) For cash flow hedges, this location and amount refers to the ineffective portion.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Nine Month Periods Ended September 30, 
 
 
 
 
 
 
 
 
 
 
 
Gain
Recognized in
Other
Comprehensive
Income
(Effective Portion)
 
 Location of
 Gain (Loss)
 Reclassified
 from
 Accumulated
 Other
 Comprehensive
 Loss into
 Income
 (Effective
 
Loss
Reclassified from
Accumulated Other
Comprehensive
Loss into Income
(Effective Portion)
 
 
 
 
 
 
 
 
 Location of
 Gain (Loss)
 Recognized
 in Income (1)
 
Gain (Loss)
Recognized
in Income (1)
 
  2017  2016  Portion) 2017  2016  2017  2016 
  (In thousands) 
 Cash Flow Hedges                    
Pay-fixed interest rate swap agreements $95  $-  Interest expense $(5) $-   $5  $- 
 Total $95  $-   $(5) $-   $5  $- 
                           
No hedge designation                       
Rate-lock mortgage loan commitments                 Net gains on on mortage loans $123  $613 
Mandatory commitments to sell mortgage loans                 Net gains on on mortage loans  (604)  (352)
Pay-fixed interest rate swap agreements                 Interest income  (197)  (1,512)
Pay-variable interest rate swap agreements                 Interest income  197   1,512 
Purchased options                 Interest expense  39   94 
Written options                 Interest expense  (39)  (94)
Total                                 $(481) $261 

(1) For cash flow hedges, this location and amount refers to the ineffective portion.
8.7.
Intangible Assets

The following table summarizes intangible assets, net of amortization:

  September 30, 2016  December 31, 2015 
  
Gross
Carrying
Amount
  
Accumulated
Amortization
  
Gross
Carrying
Amount
  
Accumulated
Amortization
 
  (In thousands) 
             
Amortized intangible assets - core deposits $6,118  $4,099  $6,118  $3,838 

Amortization of other intangibles has been estimated through 2021 and thereafter in the following table.

  (In thousands) 
    
Three months ending December 31, 2016 $86 
2017  346 
2018  346 
2019  346 
2020  346 
2021 and thereafter  549 
Total $2,019 
 September 30, 2017 December 31, 2016 
 
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
 (In thousands) 
         
Amortized intangible assets - core deposits $6,118  $4,445  $6,118  $4,186 
 
3937
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Amortization of other intangibles has been estimated through 2022 in the following table.
  (In thousands) 
    
Three months ending December 31, 2017 $87 
2018  346 
2019  346 
2020  346 
2021  346 
2022  202 
Total $1,673 

9.8.
Share Based Compensation

We maintain share based payment plans that include a non-employee director stock purchase plan and a long-term incentive plan that permits the issuance of share based compensation, including stock options and non-vested share awards. The long-term incentive plan, which is shareholder approved, permits the grant of additional share based awards for up to 0.20.5 million shares of common stock as of September 30, 2016.2017.  The non-employee director stock purchase plan permits the issuance of additional share based payments for up to 0.2 million shares of common stock as of September 30, 2016.2017. Share based awards and payments are measured at fair value at the date of grant and are expensed over the requisite service period. Common shares issued upon exercise of stock options come from currently authorized but unissued shares.

During each first quarter period ofthe three month periods ended March 31, 2017 and 2016, and 2015, pursuant to our long-term incentive plan, we granted 0.05 million and 0.07 million shares of restricted stock, respectively and 0.02 million and 0.03 million performance stock units (“PSU”), respectively to certain officers.  The shares of restricted stock and PSUs cliff vest after a period of three years.  The performance feature of the PSUs is based on a comparison of our total shareholder return over the three year period starting on the grant date to the total shareholder return over that period for a banking index of our peers. In addition, we issued 0.02 million PSUs and 0.01 million shares of restricted stock to certain officers and employeesNo long term incentive grants were made during the second or third quarterquarters of 2017 or 2016.  The PSUs cliff vest after four and five year periods and the restricted stock cliff vests after one and four year periods.

Our directors may elect to receive a portion of their quarterly cash retainer fees in the form of common stock (either on a current basis or on a deferred basis pursuant to the non-employee director stock purchase plan referenced above). Shares equal in value to that portion of each director’s fees that he or she has elected to receive in stock are issued each quarter and vest immediately.  We issued 0.006 million shares during each nine month period ended September 30, of 2017 and 0.004 million shares to directors during the first nine months of 2016 and 2015, respectively and expensed their value during those same periods.

Total compensation expense recognized for grants pursuant to our long-term incentive plan was $0.3$0.4 million and $1.1$1.2 million during the three and nine month periods ended September 30, 2016,2017, respectively, and was $0.4$0.3 million and $1.1 million during the same periods in 2015,2016, respectively.  The corresponding tax benefit relating to this expense was $0.1 million and $0.4 million for the three and nine month periods ended September 30, 2016,2017, respectively and $0.1 million and $0.4 million for the same periods in 2015.2016. Total expense recognized for non-employee director share based payments was $0.03$0.05 million and $0.09$0.12 million during the three and nine month periods ended September 30, 2016,2017, respectively, and was $0.02$0.03 million and $0.05$0.09 million during the same periods in 2015,2016, respectively.  The corresponding tax benefit relating to this expense was $0.01$0.02 million and $0.03$0.04 million for the three and nine month periods ended September 30, 2016,2017, respectively and $0.01 million and $0.02$0.03 million during the same respective periods in 2015.

At September 30, 2016, the total expected compensation cost related to non-vested stock options, restricted stock and PSUs not yet recognized was $2.2 million.  The weighted-average period over which this amount will be recognized is 2.2 years.2016.
 
4038
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

At September 30, 2017, the total expected compensation cost related to non-vested restricted stock and PSUs not yet recognized was $2.3 million.  The weighted-average period over which this amount will be recognized is 2.2 years.

A summary of outstanding stock option grants and related transactions follows:

 
Number of
Shares
  
Average
Exercise
Price
  
Weighted-
Average
Remaining
Contractual
Term (Years)
  
Aggregated
Intrinsic
Value
  
Number of
Shares
  
Average
Exercise
Price
  
Weighted-
Average
Remaining
Contractual
Term (Years)
  
Aggregated
Intrinsic
Value
 
          (In thousands)           (In thousands) 
Outstanding at January 1, 2016  235,596  $4.94       
Outstanding at January 1, 2017  211,018  $5.05       
Granted  -             -           
Exercised  (16,912)  3.78         (28,963)  4.03       
Forfeited  (664)  6.42         -           
Expired  (2,300)  3.54         -           
Outstanding at September 30, 2016  215,720  $5.04   5.33  $2,544 
Outstanding at September 30, 2017  182,055  $5.21   4.4  $3,175 
                                
Vested and expected to vest at September 30, 2016  215,720  $5.04   5.33  $2,544 
Exercisable at September 30, 2016  215,720  $5.04   5.33  $2,544 
Vested and expected to vest at September 30, 2017  182,055  $5.21   4.4  $3,175 
Exercisable at September 30, 2017  182,055  $5.21   4.4  $3,175 

A summary of outstanding non-vested restricted stock restricted stock units and PSUs and related transactions follows:

  
Number
of Shares
  
Weighted-
Average
Grant Date
Fair Value
 
Outstanding at January 1, 2017  296,422  $14.52 
Granted  68,473   21.07 
Vested  (63,799)  14.91 
Forfeited  (8,510)  15.59 
Outstanding at September 30, 2017  292,586  $15.88 
  
Number
of Shares
  
Weighted-
Average
Grant Date
Fair Value
 
Outstanding at January 1, 2016  261,981  $11.29 
Granted  121,660   15.05 
Vested  (107,795)  7.92 
Forfeited  (4,924)  13.24 
Outstanding at September 30, 2016  270,922  $14.28 

Certain information regarding options exercised during the periods follows:

 
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
 2016  2015  2016  2015  2017  2016  2017  2016 
             (In thousands) 
Intrinsic value $9  $71  $186  $314  $39  $9  $513  $186 
Cash proceeds received $5  $23  $64  $105  $18  $5  $117  $64 
Tax benefit realized $3  $25  $65  $110  $14  $3  $180  $65 
 
4139
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

10.9.
Income Tax

Income tax expense was $3.0$3.2 million and $2.3$3.0 million during the three month periods ended September 30, 20162017 and 2015,2016, respectively and $7.5$8.4 million and $6.7$7.5 million during the nine months ended September 30, 2017 and 2016, and 2015, respectively.   As described in note #2, we adopted ASU 2016-09, “Compensation – Stock Compensation (718) Improvements to Employee Share-Based Payment Accounting” during the second quarter of 2016 which now requires us to recognize for book purposes either income tax expense or benefit relating to excess deficiencies/benefits relating to share-based compensation.  Included in income tax expense for the three and nine month periods ended September 30, 2016 are tax benefits of zero and $0.3 million, respectively due to the vesting of certain share-based compensation grants and the exercise of stock options during the respective periods.

We assess whether a valuation allowance should be established against our deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard.  The ultimate realization of this asset is primarily based on generating future income.  We concluded at both September 30, 20162017 and 2015,2016, that the realization of substantially all of our deferred tax assets continues to be more likely than not.

We did maintainhad maintained a valuation allowance against our deferred tax assets of approximately $1.1 million at both September 30, 2016 and December 31, 2015.2016. This valuation allowance on our deferred tax assets primarily relatesrelated to state income taxes at our Mepco segment.Mepco.  In this instance, we determined that the future realization of these particular deferred tax assets was not more likely than not.  ThisThat conclusion was primarily based on the uncertaintypending sale of Mepco’s future earnings attributable to particular states (givenpayment plan business.  After accounting for the various apportionment criteria) andMay 2017 sale of our payment plan business, all that remained of these deferred tax assets were loss carryforwards that we wrote off against the significant reductionrelated valuation allowance during the second quarter of 2017 as we will no longer be doing business in the size of Mepco’s business.those states.

At both September 30, 20162017 and December 31, 2015,2016, we had approximately $1.0$0.8 million, of gross unrecognized tax benefits.  We do not expect the total amount of unrecognized tax benefits to significantly increase or decrease during the balance of 2016.2017.

11.10.
Regulatory Matters

Capital guidelines adopted by federal and state regulatory agencies and restrictions imposed by law limit the amount of cash dividends our Bank can pay to us. Under these guidelines, the amount of dividends that may be paid in any calendar year is limited to the Bank’s current year net profits, combined with the retained net profits of the preceding two years. Further, the Bank cannot pay a dividend at any time that it has negative undivided profits.  As of September 30, 2016,2017, the Bank had positive undivided profits of $8.7$13.0 million.  We can request regulatory approval for a return of capital from the Bank to the parent company. During the first quarters of 2016 and 2015, we requested regulatory approval for returns of capital from the Bank to the parent company of  $18.0 million and $18.5 million, respectively.  These return of capital requests were approved by our banking regulators on February 24, 2016 and February 13, 2015, respectively and the Bank returned these amounts to the parent company on February 25, 2016 and February 17, 2015, respectively.  It is not our intent to have dividends paid in amounts that would reduce the capital of our Bank to levels below those which we consider prudent and in accordance with guidelines of regulatory authorities.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

We are also subject to various regulatory capital requirements. The prompt corrective action regulations establish quantitative measures to ensure capital adequacy and require minimum amounts and ratios of total, Tier 1, and common equity Tier 1 capital to risk-weighted assets and Tier 1 capital to average assets. Failure to meet minimum capital requirements can result in certain mandatory, and possibly discretionary, actions by regulators that could have a material effect on our consolidated financial statements. Under capital adequacy guidelines, we must meet specific capital requirements that involve quantitative measures as well as qualitative judgments by the regulators. The most recent regulatory filings as of September 30, 20162017 and December 31, 2015,2016, categorized our Bank as well capitalized. Management is not aware of any conditions or events that would have changed the most recent Federal Deposit Insurance Corporation (“FDIC”) categorization.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

On July 2, 2013, the Federal Reserve 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 Dodd-Frank Act.  In general, 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 capital conservation buffer began to phase in on January 1, 2016 with 1.25% and 0.625% added to the minimum ratio for adequately capitalized institutions for 2016.2017 and 2016, respectively and 0.625% will be added each subsequent year until fully phased in during 2019.  This capital conservation buffer is not reflected in the table that follows.  To avoid limits on capital distributions and certain discretionary bonus payments we must meet the minimum ratio for adequately capitalized institutions plus the phased in buffer.  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 implement strict eligibility criteria for regulatory capital instruments. The New Capital Rules also change the methodology for calculating risk-weighted assets to enhance risk sensitivity.  The New Capital Rules became effective for us on January 1, 2015.
 
4341
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Our actual capital amounts and ratios follow:

  Actual  
Minimum for
Adequately Capitalized
Institutions
  
Minimum for
Well-Capitalized
Institutions
 
  Amount  Ratio  Amount  Ratio  Amount  Ratio 
  (Dollars in thousands) 
                   
September 30, 2016                  
Total capital to risk-weighted assets                  
Consolidated $281,310   16.05% $140,243   8.00% NA  NA 
Independent Bank  269,578   15.39   140,116   8.00   175,145   10.00%
                         
Tier 1 capital to risk-weighted assets                        
Consolidated $259,279   14.79% $105,182   6.00% NA  NA 
Independent Bank  247,615   14.14   105,087   6.00   140,116   8.00%
                         
Common equity tier 1 capital to risk-weighted assets                        
Consolidated $233,631   13.33% $78,886   4.50% NA  NA 
Independent Bank  247,615   14.14   78,815   4.50   113,844   6.50%
                         
Tier 1 capital to average assets                        
Consolidated $259,279   10.56% $98,174   4.00% NA  NA 
Independent Bank  247,615   10.09   98,116   4.00   122,645   5.00%
                         
December 31, 2015                        
Total capital to risk-weighted assets                        
Consolidated $278,170   16.65% $133,668   8.00% NA  NA 
Independent Bank  261,894   15.69   133,514   8.00  $166,893   10.00%
                         
Tier 1 capital to risk-weighted assets                        
Consolidated $257,050   15.38% $100,251   6.00% NA  NA 
Independent Bank  240,867   14.43   100,136   6.00  $133,514   8.00%
                         
Common equity tier 1 capital to risk-weighted assets                        
Consolidated $239,271   14.32% $75,188   4.50% NA  NA 
Independent Bank  240,867   14.43   75,102   4.50  $108,480   6.50%
                         
Tier 1 capital to average assets                        
Consolidated $257,050   10.91% $94,217   4.00% NA  NA 
Independent Bank  240,867   10.23   94,145   4.00  $117,682   5.00%
NA - Not applicable
  Actual  
Minimum for
Adequately Capitalized
Institutions
  
Minimum for
Well-Capitalized
Institutions
 
  Amount  Ratio  Amount  Ratio  Amount  Ratio 
  (Dollars in thousands) 
                   
September 30, 2017                  
Total capital to risk-weighted assets                  
Consolidated $307,278   15.14% $162,315   8.00% NA  NA 
Independent Bank  281,228   13.87   162,210   8.00  $202,763   10.00%
                         
Tier 1 capital to risk-weighted assets                        
Consolidated $284,818   14.04% $121,737   6.00% NA  NA 
Independent Bank  258,768   12.76   121,658   6.00  $162,210   8.00%
                         
Common equity tier 1 capital to risk-weighted assets                        
Consolidated $253,101   12.47% $91,302   4.50% NA  NA 
Independent Bank  258,768   12.76   91,243   4.50  $131,796   6.50%
                         
Tier 1 capital to average assets                        
Consolidated $284,818   10.63% $107,154   4.00% NA  NA 
Independent Bank  258,768   9.67   107,022   4.00  $133,778   5.00%
                         
December 31, 2016                        
Total capital to risk-weighted assets                        
Consolidated $286,289   15.86% $144,413   8.00% NA  NA 
Independent Bank  270,855   15.02   144,223   8.00  $180,279   10.00%
                         
Tier 1 capital to risk-weighted assets                        
Consolidated $265,405   14.70% $108,309   6.00% NA  NA 
Independent Bank  249,971   13.87   108,167   6.00  $144,223   8.00%
                         
Common equity tier 1 capital to risk-weighted assets                        
Consolidated $238,996   13.24% $81,232   4.50% NA  NA 
Independent Bank  249,971   13.87   81,126   4.50  $117,181   6.50%
                         
Tier 1 capital to average assets                        
Consolidated $265,405   10.50% $101,112   4.00% NA  NA 
Independent Bank  249,971   9.90   101,019   4.00  $126,274   5.00%
                         
                         
NA - Not applicable                        
 
4442
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The components of our regulatory capital are as follows:

 Consolidated  Independent Bank  Consolidated  Independent Bank 
 
September 30,
2016
  
December 31,
2015
  
September 30,
2016
  
December 31,
2015
  
September 30,
2017
  
December 31,
2016
  
September 30,
2017
  
December 31,
2016
 
 (In thousands)  (In thousands) 
Total shareholders' equity $250,902  $251,092  $263,762  $259,947  $267,710  $248,980  $267,406  $258,814 
Add (deduct)                                
Accumulated other comprehensive (income) loss for regulatory purposes  (2,783)  238   (2,782)  238 
Accumulated other comprehensive (gain) loss for regulatory purposes  (2,140)  3,310   (2,140)  3,310 
Intangible assets  (1,211)  (912)  (1,211)  (912)  (1,338)  (1,159)  (1,338)  (1,159)
Disallowed deferred tax assets  (13,277)  (11,147)  (12,154)  (18,406)  (11,131)  (12,135)  (5,160)  (10,994)
Common equity tier 1 capital  233,631   239,271   247,615   240,867   253,101   238,996   258,768   249,971 
Qualifying trust preferred securities  34,500   34,500   -   -   34,500   34,500   -   - 
Disallowed deferred tax assets  (8,852)  (16,721)  -   -   (2,783)  (8,091)  -   - 
Tier 1 capital  259,279   257,050   247,615   240,867   284,818   265,405   258,768   249,971 
Allowance for loan losses and allowance for unfunded lending commitments limited to 1.25% of total risk-weighted assets  22,031   21,120   21,963   21,027   22,460   20,884   22,460   20,884 
Total risk-based capital $281,310  $278,170  $269,578  $261,894  $307,278  $286,289  $281,228  $270,855 

12.11.
Fair Value Disclosures

FASB ASC topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Valuation is based upon quoted prices for identical instruments traded in active markets. Level 1 instruments include securities traded on active exchange markets, such as the New York Stock Exchange, as well as U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets.

Level 2:  Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 2 instruments include securities traded in less active dealer or broker markets.

Level 3:  Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
 
4543
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

We used the following methods and significant assumptions to estimate fair value:

Securities:  Where quoted market prices are available in an active market, securities (trading or available for sale) are classified as Level 1 of the valuation hierarchy.  Level 1 securities include certain preferred stocks included in our trading portfolio for which there are quoted prices in active markets.  If quoted market prices are not available for the specific security, then fair values are estimated by (1) using quoted market prices of securities with similar characteristics, (2) matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices, or (3) a discounted cash flow analysis whose significant fair value inputs can generally be verified and do not typically involve judgment by management. These securities are classified as Level 2 of the valuation hierarchy and primarily include agency securities, private label mortgage-backed securities, other asset backed securities, municipal securities,obligations of states and political subdivisions, trust preferred securities, corporate securities and foreign government securities.

Loans held for sale:  The fair value of mortgage loans held for sale is based on mortgage backed security pricing for comparable assets (recurring Level 2).

Impaired loans with specific loss allocations based on collateral value:  From time to time, certain loans are considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. We measure our investment in an impaired loan based on one of three methods: the loan’s observable market price, the fair value of the collateral or the present value of expected future cash flows discounted at the loan’s effective interest rate. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, 20162017 and December 31, 2015,2016, all of our impaired loans were evaluated based on either the fair value of the collateral or the present value of expected future cash flows discounted at the loan’s effective interest rate. When the fair value of the collateral is based on an appraised value or when an appraised value is not available we record the impaired loan as nonrecurring Level 3.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments can be significant and thus will typically result in a Level 3 classification of the inputs for determining fair value.

Other real estate:  At the time of acquisition, other real estate is recorded at fair value, less estimated costs to sell, which becomes the property’s new basis. Subsequent write-downs to reflect declines in value since the time of acquisition may occur from time to time and are recorded in net (gains) losses on other real estate and repossessed assetsnon-interest expense-other in the Condensed Consolidated Statements of Operations. The fair value of the property used at and subsequent to the time of acquisition is typically determined by a third party appraisal of the property.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value.
 
4644
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Appraisals for both collateral-dependent impaired loans and other real estate are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by us.  Once received, an independent third party (for commercial properties over $0.25 million) or a member of our Collateral Evaluation Department (for commercial properties under $0.25 million) or a member of our Special Assets Group (for retailresidential properties) reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.   We compare the actual selling price of collateral that has been sold to the most recent appraised value of our properties to determine what additional adjustment, if any, should be made to the appraisal value to arrive at fair value.  For commercial and retailresidential properties we typically discount an appraisal to account for various factors that the appraisal excludes in its assumptions.  These additional discounts generally do not result in material adjustments to the appraised value.

Capitalized mortgage loan servicing rights:  The fair value of capitalized mortgage loan servicing rights is based on a valuation model used by an independent third party that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. Certain model assumptions are generally unobservable and are based upon the best information available including data relating to our own servicing portfolio, reviews of mortgage servicing assumption and valuation surveys and input from various mortgage servicers and, therefore, are recorded as nonrecurring Level 3.  Management evaluates the third party valuation for reasonableness each quarter as part of our financial reporting control processes.  Prior to January 1, 2017, capitalized mortgage loan servicing rights were accounted for using the amortization method of accounting and were measured at fair value on a non-recurring basis.  During the first quarter of 2017, we adopted the fair value method of accounting for our capitalized mortgage loan servicing rights (see note #2) and are now measured at fair value on a recurring basis.

Derivatives:  The fair value of rate-lock mortgage loan commitments and mandatory commitments to sell mortgage loans is based on mortgage backed security pricing for comparable assets (recurring Level 2).  The fair value of interest rate swap agreements is based on a discounted cash flow analysis whose significant fair value inputs can generally be observed in the market place and do not typically involve judgment by management (recurring Level 2).  The fair value of purchased and written options is based on prices of financial instruments with similar characteristics and do not typically involve judgment by management (recurring Level 2).
 
4745
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Assets and liabilities measured at fair value, including financial assets for which we have elected the fair value option, were as follows:
     Fair Value Measurements Using 
  
Fair Value
Measure-
ments
  
Quoted
Prices
in Active
Markets
for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Un-
observable
Inputs
(Level 3)
 
  (In thousands) 
September 30, 2017:            
Measured at Fair Value on a Recurring Basis            
Assets            
Trading securities $347  $347  $-  $- 
Securities available for sale                
U.S. agency  26,626   -   26,626   - 
U.S. agency residential mortgage-backed  136,109   -   136,109   - 
U.S. agency commercial mortgage-backed  10,736   -   10,736   - 
Private label mortgage-backed  26,990   -   26,990   - 
Other asset backed  108,339   -   108,339   - 
Obligations of states and political subdivisions  177,176   -   177,176   - 
Corporate  58,000   -   58,000   - 
Trust preferred  2,800   -   2,800   - 
Foreign government  2,089   -   2,089   - 
Loans held for sale  47,611   -   47,611   - 
Capitalized mortgage loan servicing rights  14,675   -   -   14,675 
Derivatives (1)  1,973   -   1,973   - 
Liabilities                
Derivatives (2)  1,073   -   1,073   - 
                 
Measured at Fair Value on a Non-recurring basis:                
Assets                
Impaired loans (3)                
Commercial                
Income producing - real estate  185   -   -   185 
Land, land development & construction-real estate  11   -   -   11 
Commercial and industrial  878   -   -   878 
Mortgage 1-4 family  509   -   -   509 
Resort lending  207   -   -   207 
Other real estate (4)                
Mortgage 1-4 family  44   -   -   44 
Resort lending  5   -   -   5 
(1)Included in accrued income and other assets
(2)Included in accrued expenses and other liabilities
(3)Only includes impaired loans with specific loss allocations based on collateral value.
(4)Only includes other real estate with subsequent write downs to fair value.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

    Fair Value Measurements Using     Fair Value Measurements Using 
 
Fair Value
Measure-
ments
  
Quoted
Prices
in Active
Markets
for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Un-
observable
Inputs
(Level 3)
  
Fair Value
Measure-ments
  
Quoted
Prices
in Active
Markets
for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Un-observable
Inputs
(Level 3)
 
 (In thousands)  (In thousands) 
September 30, 2016:            
Measured at Fair Value on a Recurring Basis:            
December 31, 2016:            
Measured at Fair Value on a Recurring Basis            
Assets                        
Trading securities $152  $152  $-  $-  $410  $410  $-  $- 
Securities available for sale                                
U.S. agency  29,949   -   29,949   -   28,988   -   28,988   - 
U.S. agency residential mortgage-backed  169,958   -   169,958   -   156,289   -   156,289   - 
U.S. agency commercial mortgage-backed  13,892   -   13,892   -   12,632   -   12,632   - 
Private label mortgage-backed  33,578   -   33,578   -   34,727   -   34,727   - 
Other asset backed  142,188   -   142,188   -   146,709   -   146,709   - 
Obligations of states and political subdivisions  157,989   -   157,989   -   170,899   -   170,899   - 
Corporate  51,455   -   51,455   -   56,180   -   56,180   - 
Trust preferred  2,450   -   2,450   -   2,579   -   2,579   - 
Foreign government  1,653   -   1,653   -   1,613   -   1,613   - 
Loans held for sale  38,008   -   38,008   -   35,946   -   35,946   - 
Derivatives (1)  3,388   -   3,388   -   2,251   -   2,251   - 
Liabilities                                
Derivatives (2)  2,508   -   2,508   -   975   -   975   - 
                                
Measured at Fair Value on a Non-recurring basis:                                
Assets                                
Capitalized mortgage loan servicing rights (3)  10,678   -   -   10,678   8,163   -   -   8,163 
Impaired loans (4)                                
Commercial                                
Income producing - real estate  262   -   -   262   255   -   -   255 
Land, land development & construction-real estate  172   -   -   172   54   -   -   54 
Commercial and industrial  1,558   -   -   1,558   1,342   -   -   1,342 
Mortgage                
1-4 Family  368   -   -   368 
Mortgage 1-4 family  361   -   -   361 
Other real estate (5)                                
Commercial                                
Income producing - real estate (6)  2,963   -   2,963   -   2,863   -   2,863   - 
Land, land development & construction-real estate  176   -   -   176   176   -   -   176 
Mortgage                
1-4 Family  25   -   -   25 
Mortgage 1-4 family  98   -   -   98 
Resort lending  30   -   -   30   133   -   -   133 

(1)Included in accrued income and other assets
(2)Included in accrued expenses and other liabilities
(3)Only includes servicing rights that are carried at fair value due to recognition of a valuation allowance.
(4)Only includes impaired loans with specific loss allocations based on collateral value.
(5)Only includes other real estate with subsequent write downs to fair value.
(6)Level 2 valuation is based on sales price at an auction subsequent to September 30, 2016.a signed purchase agreement.
 
48
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

     Fair Value Measurements Using 
  
Fair Value
Measure-
ments
  
Quoted
Prices
in Active
Markets
for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Un-
observable
Inputs
(Level 3)
 
  (In thousands) 
December 31, 2015:            
Measured at Fair Value on a Recurring Basis:            
Assets            
Trading securities $148  $148  $-  $- 
Securities available for sale                
U.S. agency  47,512   -   47,512   - 
U.S. agency residential mortgage-backed  196,056   -   196,056   - 
U.S. agency commercial mortgage-backed  34,028   -   34,028   - 
Private label mortgage-backed  4,903   -   4,903   - 
Other asset backed  116,904   -   116,904   - 
Obligations of states and political subdivisions  144,984   -   144,984   - 
Corporate  38,614   -   38,614   - 
Trust preferred  2,483   -   2,483   - 
Loans held for sale  27,866   -   27,866   - 
Derivatives (1)  1,238   -   1,238   - 
Liabilities                
Derivatives (2)  619   -   619   - 
                 
Measured at Fair Value on a Non-recurring basis:                
Assets                
Capitalized mortgage loan servicing rights (3)  8,481   -   -   8,481 
Impaired loans (4)                
Commercial                
Income producing - real estate  711   -   -   711 
Land, land development & construction-real estate  40   -   -   40 
Commercial and industrial  1,257   -   -   1,257 
Mortgage                
1-4 Family  421   -   -   421 
Resort lending  129   -   -   129 
Other real estate (5)                
Commercial                
Land, land development & construction-real estate  639   -   -   639 
Commercial and industrial  165   -   -   165 
Mortgage                
1-4 Family  26   -   -   26 
Resort lending  107   -   -   107 
Home equity - 1st lien  14   -   -   14 
Installment                
Home equity - 1st lien  36   -   -   36 

(1)Included in accrued income and other assets
(2)Included in accrued expenses and other liabilities
(3)Only includes servicing rights that are carried at fair value due to recognition of a valuation allowance.
(4)Only includes impaired loans with specific loss allocations based on collateral value.
(5)Only includes other real estate with subsequent write downs to fair value.

There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 20162017 and 2015.2016.
 
4947
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Changes in fair values for financial assets which we have elected the fair value option for the periods presented were as follows:

 
Changes in Fair Values for the Nine-Month
Periods Ended September 30 for Items Measured at
 
 
Changes in Fair Values for the Nine-Month
Periods Ended September 30 for Items Measured at
Fair Value Pursuant to Election of the Fair Value Option
  Fair Value Pursuant to Election of the Fair Value Option 
 2016  2015  2017  2016 
 
Net Gains (Losses)
on Assets
  
Total
Change
in Fair
Values
Included
in Current
Period
  
Net Gains (Losses)
on Assets
  
Total
Change
in Fair
Values
Included
in Current
Period
  
Net Gains (Losses)
on Assets
  Mortgage  
Total
Change
in Fair
Values
Included
in Current
  
Net Gains (Losses)
on Assets
  
Total
Change
in Fair
Values
Included
in Current
 
 Securities  Loans  Earnings  Securities  Loans  Earnings  Securities  
Mortgage
Loans
  
Loan
Servicing, net
  
Period
Earnings
  Securities  
Mortgage
Loans
  
Period
Earnings
 
(In thousands) (In thousands) 
Trading securities $4  $-  $4  $22  $-  $22  $(63) $-  $-  $(63) $4  $-  $4 
Loans held for sale  -   612   612   -   311   311   -   713   -   713   -   612   612 
Capitalized mortgage loan servicing rights  -   -   (2,585)  (2,585)  -   -   - 

For those items measured at fair value pursuant to our election of the fair value option, interest income is recorded within the Condensed Consolidated Statements of Operations based on the contractual amount of interest income earned on these financial assets and dividend income is recorded based on cash dividends received.

The following represent impairment charges recognized during the three and nine month periods ended September 30, 20162017 and 20152016 relating to assets measured at fair value on a non-recurring basis:
●·
Capitalized mortgage loan servicing rights, whose individual strata are measured at fair value, had a carrying amount of $10.7$8.2 million, which is net of a valuation allowance of $4.7 million at September 30, 2016 and had a carrying amount of $8.5 million which is net of a valuation allowance of $3.3$2.3 million, at December 31, 2015.2016.   A recovery (charge) of $0.6 million and $(1.5) million was included in our results of operations for the three and nine month periods ending September 30, 2016, respectively and $(0.9) million and $(0.3) million during the same periods in 2015.2016.
●·
Loans which are measured for impairment using the fair value of collateral for collateral dependent loans had a carrying amount of $4.4$2.5 million, with a valuation allowance of $0.7 million at September 30, 2017, and had a carrying amount of $4.0 million, with a valuation allowance of $2.0 million at September 30, 2016 and had a carrying amount of $5.1 million, with a valuation allowance of $2.5 million at December 31, 2015.2016.  The provision for loan losses included in our results of operations relating to impaired loans was a net expense of $0.1$0.3 million and $1.0$0.1 million for the three month periods ending September 30, 20162017 and 2015,2016, respectively, and a net expense of $0.3$0.5 million and $1.9$0.3 million for the nine month periods ending September 30, 2017 and 2016, and 2015, respectively.
●·
Other real estate, which is measured using the fair value of the property, had a carrying amount of $0.05 million which is net of a valuation allowance of $0.08 million at September 30, 2017, and a carrying amount of $3.2 million, which is net of a valuation allowance of $0.6 million at September 30, 2016 and a carrying amount of $1.0 million which is net of a valuation allowance of $1.7$0.8 million, at December 31, 2015.  2016. An additional charge relating to other real estate measured at fair value of $0.37$0.03 million and $0.41$0.04 million was included in our results of operations during the three and nine month periods ended September 30, 2016,2017, respectively and $0.03$0.37 million and $0.30$0.41 million during the same periods in 2015.2016.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

We had noA reconciliation for all assets or liabilitiesand (liabilities) measured at fair value on a recurring basis that usedusing significant unobservable inputs (Level 3) follows:
  Capitalized Mortgage Loan Servicing Rights 
  
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
  2017  2016  2017  2016 
       
Beginning balance $14,515  $-  $-  $- 
Change in accounting  -   -   14,213   - 
Beginning balance, as adjusted  14,515   -   14,213   - 
Total losses realized and unrealized:                
Included in results of operations  (1,090)  -   (2,585)  - 
Included in other comprehensive income  -   -   -   - 
Purchases, issuances, settlements, maturities and calls  1,250   -   3,047   - 
Transfers in and/or out of Level 3  -   -   -   - 
Ending balance $14,675  $-  $14,675  $- 
                
Amount of total losses for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at September 30 $(1,090) $-  $(2,585) $- 
As discussed above we changed the accounting for capitalized mortgage loan servicing rights during the nine months ended September 30, 2016first quarter of 2017 (see note #2) and 2015.are now measuring valuation on a recurring basis.   The fair value of our capitalized mortgage loan servicing rights has been determined based on a valuation model used by an independent third party as discussed above.  The significant unobservable inputs used in the fair value measurement of the capitalized mortgage loan servicing rights are discount rate, cost to service, ancillary income and float rate.  Significant changes in all four of these assumptions in isolation would result in significant changes to the value of our capitalized mortgage loan servicing rights.  Quantitative information about our Level 3 fair value measurements measured on a recurring basis follows:

  
Asset
Fair
Value
 
Valuation
Technique
 
Unobservable
Inputs
 
Weighted
Average
 
  (In thousands)     
September 30, 2017         
Capitalized mortgage loan servicing rights $14,675 Present value of net Discount rate  10.10%
       servicing revenue Cost to service $81 
         Ancillary income  23 
         Float rate  2.00%
 
5049
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Quantitative information about Level 3 fair value measurements measured on a non-recurring basis follows:

 
Asset
Fair
Value
 
Valuation
Technique
 
Unobservable
Inputs
 
Weighted
Average
  
Asset
Fair
Value
 
Valuation
Technique
 
Unobservable
Inputs
 
Weighted
Average
 
 (In thousands)      (In thousands)     
September 30, 2016         
September 30, 2017         
Impaired loans         
         
Commercial $1,074 Sales comparison approach Adjustment for differences between comparable sales  (2.3)%
           
Mortgage  716 Sales comparison approach Adjustment for differences between comparable sales  0.3 
Other real estate           
Mortgage  49 Sales comparison approach Adjustment for differences between comparable sales  5.8 
        
December 31, 2016           
Capitalized mortgage loan servicing rights $10,678 Present value of net servicing revenue Discount rate  10.06% $8,163 Present value of net servicing revenue Discount rate  10.07%
      Cost to service $83 
     Cost to service $82         Ancillary income  24 
        Ancillary income  24         Float rate  1.97%
        Float rate  1.18%           
Impaired loans                
Commercial (1)  1,787 Sales comparison approach Adjustment for differences between comparable sales  (2.4)%  1,446 Sales comparison approach Adjustment for differences between comparable sales  (1.5)%
Mortgage  368 Sales comparison approach Adjustment for differences between comparable sales  (10.2)  361 Sales comparison approach Adjustment for differences between comparable sales  (4.7)
Other real estate                   
Commercial  176 Sales comparison approach Adjustment for differences between comparable sales  (22.5)  176 Sales comparison  approach Adjustment for differences between comparable sales  (22.5)
Mortgage and installment  55 Sales comparison approach Adjustment for differences between comparable sales  4.6 
           
December 31, 2015           
Capitalized mortgage loan servicing rights $8,481 Present value of net servicing revenue Discount rate  10.04%
     Cost to service $80 
        Ancillary income  24 
        Float rate  1.73%
Impaired loans           
Commercial (1)  1,605 Sales comparison approach Adjustment for differences between comparable sales  (2.1)%
    Income approach Capitalization rate  9.3         
Mortgage  550 Sales comparison approach Adjustment for differences between comparable sales  0.7   231 Sales comparison approach Adjustment for differences between comparable sales  (5.1)
Other real estate        
Commercial  804 Sales comparison approach Adjustment for differences between comparable sales  (3.9)
Mortgage and installment  183 Sales comparison approach Adjustment for differences between comparable sales  75.6 
 
(1)In addition to the valuation techniques and unobservable inputs discussed above, at September 30, 2016 and December 31, 2015,2016, we had an impaired collateral dependent commercial relationship that totaled $0.2 million and $0.4 million, respectively that was primarily secured by collateral other than real estate. Collateral securing this relationship primarily included machinery and equipment and inventory at September 30, 2016 and December 31, 2015.inventory. Valuation techniques at September 30, 2016 and December 31, 2015, included appraisals and discounting restructuring firm valuations based on estimates of value recovery of each particular asset type. Discount rates used ranged from 0% to 100% of stated values.
 
51
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The following table reflects the difference between the aggregate fair value and the aggregate remaining contractual principal balance outstanding for loans held for sale for which the fair value option has been elected for the periods presented.

  
Aggregate
Fair Value
  Difference  
Contractual
Principal
 
  (In thousands) 
Loans held for sale         
September 30, 2016 $38,008  $1,326  $36,682 
December 31, 2015  27,866   714   27,152 
  
Aggregate
Fair Value
  Difference  
Contractual
Principal
 
  (In thousands) 
Loans held for sale         
September 30, 2017 $47,611  $1,150  $46,461 
December 31, 2016  35,946   437   35,509 
50
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

13.12.
Fair Values of Financial Instruments

Most of our assets and liabilities are considered financial instruments. Many of these financial instruments lack an available trading market and it is our general practice and intent to hold the majority of our financial instruments to maturity. Significant estimates and assumptions were used to determine the fair value of financial instruments. These estimates are subjective in nature, involving uncertainties and matters of judgment, and therefore, fair values may not be a precise estimate. Changes in assumptions could significantly affect the estimates.

Estimated fair values have been determined using available data and methodologies that are considered suitable for each category of financial instrument. For instruments with adjustable interest rates which reprice frequently and without significant credit risk, it is presumed that estimated fair values approximate the recorded book balances. Fair value methodologies discussed below do not necessarily represent an exit price in the determination of the fair value of these financial instruments.

Cash and due from banks and interest bearing deposits:  The recorded book balance of cash and due from banks and interest bearing deposits approximate fair value and are classified as Level 1.

Interest bearing deposits - time:  Interest bearing deposits - time have been valued based on a model using a benchmark yield curve plus a base spread and are classified as Level 2.

Securities:  Financial instrument assets actively traded in a secondary market have been valued using quoted market prices.  Trading securities are classified as Level 1 while securities available for sale are classified as Level 2 as described in Note #12.note #11.

Federal Home Loan Bank and Federal Reserve Bank Stockstock:  It is not practicable to determine the fair value of FHLB and FRB Stockstock due to restrictions placed on transferability.

Net loans and loans held for sale:  The fair value of loans is calculated by discounting estimated future cash flows using estimated market discount rates that reflect credit and interest-rate risk inherent in the loans and do not necessarily represent an exit price.  Loans are classified as Level 3.  Impaired loans are valued at the lower of cost or fair value as described in Note #12.note #11.  Loans held for sale are classified as Level 2 as described in Note #12.note #11. Payment plan receivables held for sale are also classified as Level 2 based on a signed purchase agreement as described in note #15.

Accrued interest receivable and payable:  The recorded book balance of accrued interest receivable and payable approximate fair value and are classified at the same Level as the asset and liability they are associated with.
52
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Derivative financial instruments:  The fair value of rate-lock mortgage loan commitments and mandatory commitments to sell mortgage loans is based on mortgage backed security pricing for comparable assets, the fair value of interest rate swap agreements is based on a discounted cash flow analysis whose significant fair value inputs can generally be observed in the market place and do not typically involve judgment by management and the fair value of purchased and written options is based on prices of financial instruments with similar characteristics and do not typically involve judgment by management. Each of these instruments has been classified as Level 2 as described in Note #12.note #11.
51
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Deposits:  Deposits without a stated maturity, including demand deposits, savings, NOW and money market accounts, have a fair value equal to the amount payable on demand.  Each of these instruments is classified as Level 1.  Deposits with a stated maturity, such as certificates of deposittime deposits have generally been valued based on the discounted value of contractual cash flows using a discount rate approximating current market rates for liabilities with a similar maturity resulting in a Level 2 classification.

Federal funds purchased:  The recorded book balance of federal funds purchased, which mature in one day, approximates fair value and is classified as Level 2.

Other borrowings:  Other borrowings have been valued based on the discounted value of contractual cash flows using a discount rate approximating current market rates for liabilities with a similar maturity resulting in a Level 2 classification.

Subordinated debentures:  Subordinated debentures have generally been valued based on a quoted market price of similar instruments resulting in a Level 2 classification.
 
5352
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The estimated recorded book balances and fair values follow:

       Fair Value Using        Fair Value Using 
 
Recorded
Book
Balance
  Fair Value  
Quoted
Prices
in Active
Markets
for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Un-
observable
Inputs
(Level 3)
  
Recorded
Book
Balance
  Fair Value  
Quoted
Prices
in Active
Markets
for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Un-
observable
Inputs
(Level 3)
 
 (In thousands)  (In thousands) 
September 30, 2016               
September 30, 2017               
Assets                              
Cash and due from banks $38,610  $38,610  $38,610  $-  $-  $31,998  $31,998  $31,998  $-  $- 
Interest bearing deposits  75,706   75,706   75,706   -   -   15,605   15,605   15,605   -   - 
Interest bearing deposits - time  7,233   7,272   -   7,272   -   3,489   3,493   -   3,493   - 
Trading securities  152   152   152   -   -   347   347   347   -   - 
Securities available for sale  603,112   603,112   -   603,112   -   548,865   548,865   -   548,865   - 
Federal Home Loan Bank and Federal                                        
Reserve Bank Stock  15,507  NA  NA  NA  NA   15,543  NA  NA  NA  NA 
Net loans and loans held for sale  1,623,319   1,601,113   -   38,008   1,563,105   1,963,227   1,909,662   -   47,611   1,862,051 
Accrued interest receivable  6,973   6,973   2   2,438   4,533   8,740   8,740   -   2,850   5,890 
Derivative financial instruments  3,388   3,388   -   3,388   -   1,973   1,973   -   1,973   - 
                                        
Liabilities                                        
Deposits with no stated maturity (1) $1,743,864  $1,743,864  $1,743,864  $-  $-  $1,808,071  $1,808,071  $1,808,071  $-  $- 
Deposits with stated maturity (1)  463,096   462,297   -   462,297   -   535,690   533,045   -   533,045   - 
Federal funds purchased  3,000   3,000   -   3,000   - 
Other borrowings  11,527   12,702   -   12,702   -   72,849   73,405   -   73,405   - 
Subordinated debentures  35,569   22,223   -   22,223   -   35,569   28,634   -   28,634   - 
Accrued interest payable  630   630   17   613   -   1,105   1,105   40   1,065   - 
Derivative financial instruments  2,508   2,508   -   2,508   -   1,073   1,073   -   1,073   - 
                                        
December 31, 2015                    
December 31, 2016                    
Assets                                        
Cash and due from banks $54,260  $54,260  $54,260  $-  $-  $35,238  $35,238  $35,238  $-  $- 
Interest bearing deposits  31,523   31,523   31,523   -   -   47,956   47,956   47,956   -   - 
Interest bearing deposits - time  11,866   11,858   -   11,858   -   5,591   5,611   -   5,611   - 
Trading securities  148   148   148   -   -   410   410   410   -   - 
Securities available for sale  585,484   585,484   -   585,484   -   610,616   610,616   -   610,616   - 
Federal Home Loan Bank and Federal                                        
Reserve Bank Stock  15,471  NA  NA  NA  NA   15,543  NA  NA  NA  NA 
Net loans and loans held for sale  1,520,346   1,472,613   -   27,866   1,444,747 
Net loans and loans held for sale (2)  1,655,335   1,629,587   -   67,321   1,562,266 
Accrued interest receivable  6,565   6,565   5   1,969   4,591   7,316   7,316   5   2,364   4,947 
Derivative financial instruments  1,238   1,238   -   1,238   -   2,251   2,251   -   2,251   - 
                                        
Liabilities                                        
Deposits with no stated maturity (1) $1,659,743  $1,659,743  $1,659,743  $-  $-  $1,740,601  $1,740,601  $1,740,601  $-  $- 
Deposits with stated maturity (1)  426,220   423,776   -   423,776   -   485,118   483,469   -   483,469   - 
Other borrowings  11,954   13,448   -   13,448   -   9,433   10,371   -   10,371   - 
Subordinated debentures  35,569   23,069   -   23,069   -   35,569   25,017   -   25,017   - 
Accrued interest payable  466   466   21   445   -   932   932   21   911   - 
Derivative financial instruments  619   619   -   619   -   975   975   -   975   - 

(1)Deposits with no stated maturity include reciprocal deposits with a recorded book balance of $9.3$13.5 million and $11.8$7.4 million at September 30, 20162017 and December 31, 2015,2016, respectively. Deposits with a stated maturity include reciprocal deposits with a recorded book balance of $37.3$35.5 million and $38.4$31.3 million at September 30, 20162017 and December 31, 2015,2016, respectively.
(2)Net loans and loans held for sale include $31.4 million of payment plan receivables and commercial loans held for sale at December 31, 2016.
53
Index
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The fair values for commitments to extend credit and standby letters of credit are estimated to approximate their aggregate book balance, which is nominal and therefore are not disclosed.
54
Index
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale the entire holdings of a particular financial instrument.

Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business, the value of future earnings attributable to off-balance sheet activities and the value of assets and liabilities that are not considered financial instruments.

Fair value estimates for deposit accounts do not include the value of the core deposit intangible asset resulting from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.

14.13.
Contingent Liabilities

In December 2016, we reached a tentative settlement regarding litigation initiated against us in Wayne County, Michigan Circuit Court.  The Court issued a preliminary approval of this settlement in the first quarter of 2017.  This litigation concerned checking account transaction sequencing during a period from February 2009 to June 2011.  Under the terms of the settlement, we have agreed to pay $2.2 million and are also responsible for class notification costs and certain other expenses which are estimated to total approximately $0.1 million (these amounts were accrued for and expensed in the fourth quarter of 2016).  We expect the settlement payment to occur in the fourth quarter of 2017 or first quarter of 2018.  Although, we deny any liability associated with this matter and believe we have meritorious defenses to the allegations in the complaint, given the costs and uncertainty of litigation, it was determined that this settlement was in the best interests of the organization.

We are also involved in various other litigation matters in the ordinary course of business. At the present time, we do not believe any of these matters will have a significant impact on our consolidated financial position or results of operations. The aggregate amount we have accrued for losses we consider probable as a result of these litigation matters is immaterial. However, because of the inherent uncertainty of outcomes from any litigation matter, we believe it is reasonably possible we may incur losses in addition to the amounts we have accrued.  At this time, we estimate the maximum amount of additional losses that are reasonably possible is approximately $1.0 million.insignificant.  However, because of a number of factors, including the fact that certain of these litigation matters are still in their early stages, this maximum amount may change in the future.

The litigation matters described in the preceding paragraph primarily include claims that have been brought against us for damages, but do not include litigation matters where we seek to collect amounts owed to us by third parties (such as litigation initiated to collect delinquent loans or vehicle service contract counterparty receivables)loans). These excluded, collection-related matters may involve claims or counterclaims by the opposing party or parties, but we have excluded such matters from the disclosure contained in the preceding paragraph in all cases where we believe the possibility of us paying damages to any opposing party is remote. Risks associated with the likelihood that we will not collect the full amount owed to us, net of reserves, are disclosed elsewhere in this report.

Our Mepco segment conducts its payment plan business activities across the United States. Mepco acquires the payment plans from companies (which we refer to as Mepco’s “counterparties”) at a discount from the face amount of the payment plan. Each payment plan (which are classified as payment plan receivables in our Condensed Consolidated Statements of Financial Condition) permits a consumer to purchase a vehicle service contract by making installment payments, generally for a term of 12 to 30 months, to the sellers of those contracts (one of the “counterparties”). Mepco thereafter collects the payments from consumers. In acquiring the payment plan, Mepco generally funds a portion of the cost to the seller of the service contract and a portion of the cost to the administrator of the service contract. The administrator, in turn, pays the necessary contractual liability insurance policy (“CLIP”) premium to the insurer or risk retention group.
 
55
Index
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Consumers are allowed to voluntarily cancel the service contract at any time and are generally entitled to receive a refund from the administrator of the unearned portion of the service contract at the time of cancellation. As a result, while Mepco does not owe any refund to the consumer, it also does not have any recourse against the consumer for nonpayment of a payment plan and therefore does not evaluate the creditworthiness of the individual consumer. If a consumer stops making payments on a payment plan or exercises the right to voluntarily cancel the service contract, the service contract seller and administrator are each obligated to refund to Mepco the amount necessary to make Mepco whole as a result of its funding of the service contract. In addition, the insurer or risk retention group that issued the CLIP for the service contract often guarantees all or a portion of the refund to Mepco. See Note #4 above for a breakdown of Mepco’s payment plan receivables by the level of recourse Mepco has against various counterparties.

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 actually due to Mepco from its counterparties for cancelled service contracts. Mepco is currently in the process of working to recover these receivables, primarily through negotiated settlements with the counterparties.  In some cases, Mepco requires collateral or guaranties by the principals of the counterparties to secure these refund obligations; however, this is generally only the case when no insurance company is involved to guarantee the repayment obligation of the seller and administrator counterparties. In most cases, there is no collateral to secure the counterparties’ refund obligations to Mepco, but Mepco has the contractual right to offset unpaid refund obligations against amounts Mepco would otherwise be obligated to fund to the counterparties. In addition, even when collateral is involved, the refund obligations of these counterparties are not fully secured. Mepco incurs losses when it is unable to fully recover funds owed to it by counterparties upon cancellation of the underlying service contracts. The sudden failure of one of Mepco’s major counterparties (an insurance company, administrator, or seller/dealer) could expose us to significant losses.

When counterparties do not honor their contractual obligations to Mepco to repay funds, we recognize estimated losses. Mepco pursues collection (including commencing legal action if necessary) of funds due to it under its various contracts with counterparties.  Mepco has had to initiate litigation against certain counterparties, including third party insurers, to collect amounts owed to Mepco as a result of those parties' dispute of their contractual obligations to Mepco.  During the first quarter of 2016, we settled our last significant remaining litigation matter with certain of Mepco’s counterparties.  This settlement resulted in our receipt of a cash payment of $4.0 million on March 31, 2016.  This settlement also resulted in our receipt of an interest-bearing promissory note from one of Mepco’s counterparties for $1.5 million with monthly payments scheduled over a five-year period beginning in May 2016.  Due to the lack of any payment history and limited financial information on this counterparty, we established a full reserve on this promissory note as of March 31, 2016.  A full reserve on the remaining balance ($1.39 million) on this note was maintained at September 30, 2016.   This counterparty has made the first six required monthly payments on the note.  As a longer-term payment history is developed on this note, we will continue to evaluate the need for all or any part of a reserve. Vehicle service contract counterparty receivables, net totaled $2.6 million as of September 30, 2016 compared to $7.2 million as of December 31, 2015.  Expense/(credit) related to vehicle service contract counterparty contingencies included in non-interest expense totaled $(0.039) million and $0.030 million for the three month periods ended September 30, 2016 and 2015, respectively and totaled $(0.010) million and $0.089 million for the nine month periods ended September 30, 2016 and 2015, respectively.  These charges (recoveries) are being classified in non-interest expense because they are associated with a default or potential default of a contractual obligation under our counterparty contracts as opposed to loss on the administration of the payment plan itself.
5654
Index
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
 
Our estimateIn connection with the sale of probable incurredMepco (see note #15), we agreed to contractually indemnify the purchaser from certain losses from vehicle service contract counterparty contingencies requiresit may incur, including as a significant amountresult 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 availableits failure to recover funds due from our counterparties, and our assessmentcollect certain receivables it purchased as part of the amount that may ultimately be collected from counterpartiesbusiness as well as breaches of representations and warranties we made in connection with their contractual obligations.the sale agreement, subject to various limitations. We apply a rigorous process, based upon historical payment plan activity and past experience,have not accrued any liability related to estimate probable incurred losses and quantify the necessary reserves forthese indemnification requirements in 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 applicableSeptember 30, 2017 Condensed Consolidated Statement of Financial Condition date.because we believe the likelihood of having to pay any amount as a result of these indemnification obligations is remote. However, becauseif the purchaser is unable to collect the receivables it purchased from Mepco or otherwise encounters difficulties in operating the business, it is possible it could make one or more claims against us pursuant to the sale agreement. In that event, we may incur expenses in defending any such claims and/or amounts paid to such purchaser to resolve such claims. As of September 30, 2017 these receivables balances had declined to $22.5 million and to date the uncertainty surrounding the numerous and complex assumptionspurchaser has made actual losses could exceed the charges we have taken to date.no claims for indemnification.

The provision for loss reimbursement on sold loans was an expense of $0.02 million and $0.07 million in the third quarter and first nine months of 2017, respectively, compared to an expense of $0.05 million and $0.03 million in the third quarter and first nine months of 2016, respectively. This provision represents our estimate of incurred losses related to mortgage loans that we have sold to investors (primarily Fannie Mae, Freddie Mac, Ginnie Mae and Ginnie Mae)the Federal Home Loan Bank of Indianapolis).  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.  The provision for loss reimbursement on sold loans was an expense (credit) of $0.05 million and $(0.04) million for the three months ended September 30, 2016 and 2015, respectively and $0.03 million and $(0.06) million for the nine month periods ended September 30, 2016 and 2015, respectively.  The small expenses in 2016 are primarily due to establishing specific reserves for pending loss reimbursement claims.  The small credit provisions in 2015 are due primarily to the settlements of certain loss reimbursement claims at slightly lower amounts than what had been specifically reserved for at the end of the respective previous period.  The reserve for loss reimbursements on sold mortgage loans totaled $0.6 million and $0.5 million at both September 30, 20162017 and December 31, 2015,2016, respectively. This reserve is included in accrued expenses and other liabilities in our Condensed 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 September 30, 2016 and December 31, 2015 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.
 
5755
Index
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

15.14.
Accumulated Other Comprehensive Loss (“AOCL”)

A summary of changes in AOCL follows:
  
Unrealized
Gains
(Losses) on
Securities
Available
for Sale
  
Dispropor-
tionate
Tax Effects
from
Securities
Available
for Sale
  
Unrealized
Gains on
Cash Flow
Hedges
  Total 
     (In thousands)       
For the three months ended September 30,             
2017            
Balances at beginning of period $1,986  $(5,798) $-  $(3,812)
Other comprehensive income before reclassifications  95   -   62   157 
Amounts reclassified from AOCL  (5)  -   3   (2)
Net current period other comprehensive income  90   -   65   155 
Balances at end of period $2,076  $(5,798) $65  $(3,657)
                 
2016                
Balances at beginning of period $2,515  $(5,798) $-  $(3,283)
Other comprehensive income before reclassifications  278   -   -   278 
Amounts reclassified from AOCL  (10)  -   -   (10)
Net current period other comprehensive income  268   -   -   268 
Balances at end of period $2,783  $(5,798) $-  $(3,015)
                 
For the Nine months ended September 30,                
2017                
Balances at beginning of period $(3,310) $(5,798) $-  $(9,108)
Cumulative effect of change in accounting  300   -   -   300 
Balances at beginning of period, as adjusted  (3,010)  (5,798)  -   (8,808)
Other comprehensive income before reclassifications  5,167   -   62   5,229 
Amounts reclassified from AOCL  (81)  -   3   (78)
Net current period other comprehensive income  5,086   -   65   5,151 
Balances at end of period $2,076  $(5,798) $65  $(3,657)
                 
2016                
Balances at beginning of period $(238) $(5,798) $-  $(6,036)
Other comprehensive income before reclassifications  3,215   -   -   3,215 
Amounts reclassified from AOCL  (194)  -   -   (194)
Net current period other comprehensive income  3,021   -   -   3,021 
Balances at end of period $2,783  $(5,798) $-  $(3,015)

  
Unrealized
Gains
(Losses) on
Securities
Available
for Sale
  
Dispropor-
tionate
Tax Effects
from
Securities
Available
for Sale
  Total 
For the three months ended September 30,         
2016         
Balances at beginning of period $2,515  $(5,798) $(3,283)
Other comprehensive income before reclassifications  278   -   278 
Amounts reclassified from AOCL  (10)  -   (10)
Net current period other comprehensive income  268   -   268 
Balances at end of period $2,783  $(5,798) $(3,015)
             
2015            
Balances at beginning of period $408  $(5,798) $(5,390)
Other comprehensive income before reclassifications  894   -   894 
Amounts reclassified from AOCL  -   -   - 
Net current period other comprehensive income  894   -   894 
Balances at end of period $1,302  $(5,798) $(4,496)
             
For the nine months ended September 30,            
2016            
Balances at beginning of period $(238) $(5,798) $(6,036)
Other comprehensive income before reclassifications  3,215   -   3,215 
Amounts reclassified from AOCL  (194)  -   (194)
Net current period other comprehensive income  3,021   -   3,021 
Balances at end of period $2,783  $(5,798) $(3,015)
             
2015            
Balances at beginning of period $162  $(5,798) $(5,636)
Other comprehensive income before reclassifications  1,189   -   1,189 
Amounts reclassified from AOCL  (49)  -   (49)
Net current period other comprehensive income  1,140   -   1,140 
Balances at end of period $1,302  $(5,798) $(4,496)
We adopted ASU 2017-08 during the first quarter of 2017 using a modified retrospective approach.  As a result, accumulated other comprehensive loss as of January 1, 2017 was adjusted by $0.30 million (see note #2).
56
Index
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
 (unaudited)

The disproportionate tax effects from securities available for sale arose due to tax effects of other comprehensive income (“OCI”) in the presence of a valuation allowance against our deferred tax assets and a pretax loss from operations.  Generally, the amount of income tax expense or benefit allocated to operations is determined without regard to the tax effects of other categories of income or loss, such as OCI. However, an exception to the general rule is provided when, in the presence of a valuation allowance against deferred tax assets, there is a pretax loss from operations and pretax income from other categories in the current period.  In such instances, income from other categories must offset the current loss from operations, the tax benefit of such offset being reflected in operations.

A summary of reclassifications out of each component of AOCL for the three months ended September 30 follows:
  
Amount
Reclassified
From
  Affected Line Item in Condensed
AOCL Component AOCL  Consolidated Statements of Operations
  (In thousands)  
2017     
Unrealized gains on securities available for sale     
  $8  Net gains on securities
   -  Net impairment loss recognized in earnings
   8  Total reclassifications before tax
   3  Income tax expense
  $5  Reclassifications, net of tax
        
Unrealized gains on cash flow hedges      
  $(5) Interest expense
   (2) Income tax expense
  $(3) Reclassification, net of tax
        
  $2  Total reclassifications for the period, net of tax
        
2016      
Unrealized gains on securities available for sale      
  $15  Net gains on securities
   -  Net impairment loss recognized in earnings
   15  Total reclassifications before tax
   5  Income tax expense
  $10  Reclassifications, net of tax
 
5857
Index
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

A summary of reclassifications out of each component of AOCL for the three months ended September 30 follows:

AOCL Component 
Amount
Reclassified
From
AOCL
 
Affected Line Item in Condensed
Consolidated Statements of Operations
  (In thousands)  
2016     
Unrealized gains on securities available for sale     
  $15 Net gains on securities
   - Net impairment loss recognized in earnings
   15 Total reclassifications before tax
   5 Income tax expense
  $10 Reclassifications, net of tax
        
2015      
Unrealized gains on securities available for sale      
  $- Net gains on securities
   - Net impairment loss recognized in earnings
   - Total reclassifications before tax
   - Income tax expense
  $- Reclassifications, net of tax

A summary of reclassifications out of each component of AOCL for the nine months ended September 30 follows:
  
Amount
Reclassified
From
  Affected Line Item in Condensed
AOCL Component AOCL  Consolidated Statements of Operations
  (In thousands)  
2017     
Unrealized gains on securities available for sale     
  $125  Net gains on securities
   -  Net impairment loss recognized in earnings
   125  Total reclassifications before tax
   44  Income tax expense
  $81  Reclassifications, net of tax
        
      
Unrealized gains on cash flow hedges      
  $(5) Interest expense
   (2) Income tax expense
  $(3) Reclassification, net of tax
        
  $78  Total reclassifications for the period, net of tax
        
2016      
Unrealized gains on securities available for sale      
  $298  Net gains on securities
   -  Net impairment loss recognized in earnings
   298  Total reclassifications before tax
   104  Income tax expense
  $194  Reclassifications, net of tax

AOCL Component 
Amount
Reclassified
From
AOCL
 
Affected Line Item in Condensed
Consolidated Statements of Operations
  (In thousands)  
2016     
Unrealized gains on securities available for sale     
  $298 Net gains on securities
   - Net impairment loss recognized in earnings
   298 Total reclassifications before tax
   104 Income tax expense
  $194 Reclassifications, net of tax
        
2015      
Unrealized gains on securities available for sale      
  $75 Net gains on securities
   - Net impairment loss recognized in earnings
   75 Total reclassifications before tax
   26 Income tax expense
  $49 Reclassifications, net of tax
15.
Payment Plan Receivables and Other Assets Held for Sale

On December 30, 2016 Mepco executed an Asset Purchase Agreement (the “APA”) with Seabury Asset Management LLC (“Seabury”).  Pursuant to the terms of the APA, Mepco sold its payment plan processing business to Seabury effective May 1, 2017.  We received cash totaling $33.4 million and recorded no gain or loss in 2017 as the assets were sold and the liabilities were assumed at book value.
58
Index
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Assets sold and liabilities assumed were as follows:

  
May 1,
2017
  
December 31,
2016
 
  (In thousands) 
Assets sold      
Payment plan receivables $33,128  $30,582 
Commerical loans  525   794 
Other assets  1,765   1,984 
Total assets $35,418  $33,360 
         
Liabilities assumed $1,972  $718 

These assets and liabilities were categorized as “held for sale” in our December 31, 2016 Condensed Consolidated Statement of Financial Condition.  These assets and corresponding liabilities held for sale were carried at the lower of cost or fair value on an aggregate basis.  Fair value adjustments, if any, were recorded in current earnings.
 
59
Index
ITEM 2.

Management’s Discussion and Analysis
of Financial Condition and Results of Operations

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 Condensed Consolidated Financial Statements. We also encourage you to read our 20152016 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.

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. At times, we have experienced a difficult economy in Michigan. Economic conditions in Michigan began to show signs of improvement during 2010.  Generally, these improvements have continued into 2016,2017, albeit at an uneven pace.  There has been an overall decline in the unemployment rate as well as generally improving housing prices and other related statistics (such as home sales and new building permits).  In addition, since early- to mid-2009, we have seen an improvement in our asset quality metrics. In particular, since early 2012, we have generally experienced a decline in non-performing assets, lowerreduced levels of new loan defaults, and reduced levels of loan net charge-offs.

Recent Developments. Effective on January 1, 2017, we adopted the fair value accounting method for capitalized mortgage loan servicing rights.  The adoption of this accounting method resulted in the following changes to the January 1, 2017 beginning balances: an increase in capitalized mortgage loan servicing rights of $0.54 million; a decrease in deferred income taxes of $0.19 million and a decrease in our accumulated deficit of $0.35 million.  See note 2 to the Condensed Consolidated Financial Statements.

On December 30, 2016, the Bank and its wholly-owned subsidiary, Mepco Finance Corporation (“Mepco”), entered into an Asset Purchase Agreement (“APA”) with Seabury Asset Management LLC (“Seabury”).  Pursuant to the terms of the APA, we sold our payment plan processing business, payment plan receivables, and certain other assets to Seabury, who also assumed certain liabilities of Mepco.  These assets and liabilities were categorized as “held for sale” in the December 31, 2016 Condensed Consolidated Statements of Financial Condition.  We also recorded a $0.32 million loss related to the sale of these assets in the fourth quarter of 2016.  This transaction closed on May 18, 2017, with an effective date of May 1, 2017.  As a result of the closing, Mepco sold $33.1 million of net payment plan receivables, $0.5 million of commercial loans, $0.2 million of furniture and equipment and $1.6 million of other assets to Seabury, who also assumed $2.0 million of specified liabilities.  Mepco was renamed IB Holding Company in May 2017 and was liquidated on June 30, 2017, with the remaining assets and liabilities transferred to the Bank.  We do not believe that the sale of the Mepco business and assets will have a significant impact on our future overall financial condition or results of operations.
In the fourth quarter of 2016, we reached a tentative settlement regarding litigation initiated against the Bank in Wayne County, Michigan Circuit Court.  The Court issued a preliminary approval of this settlement in the first quarter of 2017.  This litigation concerned the Bank’s checking account transaction sequencing during a period from February 2009 to June 2011.  Under the terms of the settlement, we have agreed to pay $2.2 million and we are also responsible for class notification costs and certain other expenses which are estimated to total approximately $0.1 million.  We recorded a $2.3 million expense in the fourth quarter of 2016 for this settlement.  We expect the settlement payment to occur in the fourth quarter of 2017 or first quarter of 2018.  Although, we deny any liability associated with this matter and believe we have meritorious defenses to the allegations in the complaint, given the costs and uncertainty of litigation, we determined that this settlement was in the best interests of the organization.

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, 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 2.5% capital conservation buffer is being phased in ratably over a four-year period beginningthat began in 2016 with 0.625%2016.  In 2017, 1.25% is being added to the minimum ratio for adequately capitalized institutions for 2016 and each subsequent year until being fully phased in during 2019.institutions.  To avoid limits on capital distributions and certain discretionary bonus payments we must meet the minimum ratio for adequately capitalized institutions plus the phased in buffer.buffer (now 5.75% in 2017).  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.  Under the New Capital Rules our existing trust preferred securities are grandfathered as qualifying regulatory capital. We were subject to the New Capital Rules beginning on January 1, 2015, and asAs of September 30, 20162017 and December 31, 20152016 we exceeded 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 the third quarter and first nine months of 20162017 as compared to 2015.2016.

Results of Operations

Summary.  We recorded net income of $6.4$6.9 million and $5.0$6.4 million, respectively, during the three months ended September 30, 20162017 and 2015.2016.  The increase in 2017 results as compared to 2016 primarily reflects an increase in net interest income that was partially offset by increases in the provision for loan losses and in non-interest and income tax expenses and a decrease in non-interest income.

We recorded net income on a comparative quarterly basisof $18.8 million and $16.9 million, respectively, during the nine months ended September 30, 2017 and 2016.  The increase in 2017 year-to-date results as compared to 2016 is primarily due primarily to increases in net interest income and non-interest income that were partially offset by increases in the provision for loan losses, non-interest expense and income tax expense.

We recorded net income of $16.9 million and $14.4 million, respectively, during the nine months ended September 30, 2016 and 2015.  The increase in net income on a comparative year-to-date basis is due primarily to an increase in net interest income and decreases in the provision for loan losses (a higher credit) and in non-interest expense that were partially offset by a decrease in non-interest income and an increase in income tax expense.
61

Key performance ratios

  
Three months ended
September 30,
  
Nine months ended
September 30,
 
  2017  2016  2017  2016 
Net income (annualized) to            
Average assets  1.01%  1.02%  0.96%  0.92%
Average common shareholders’ equity  10.27   10.20   9.69   9.19 
                 
Net income per common share                
Basic $0.32  $0.30  $0.88  $0.79 
Diluted  0.32   0.30   0.87   0.78 
  
Three months ended 
September 30,
  
Nine months ended
September 30,
 
  2016  2015  2016  2015 
Net income (annualized) to            
Average assets  1.02%  0.86%  0.92%  0.84%
Average common shareholders’ equity  10.20   7.84   9.19   7.59 
                 
Net income per common share                
Basic $0.30  $0.22  $0.79  $0.63 
Diluted  0.30   0.22   0.78   0.62 

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.

Our net interest income totaled $20.0$22.9 million during the third quarter of 2016,2017, an increase of $1.2$2.9 million, or 6.1%14.6% from the year-ago period.  The quarterlyThis increase in net interest income in 2016 compared to 2015 primarily reflects a $182.3$227.4 million increase in average interest-earning assets that was partially offset byas well as a seven15 basis point decreaseincrease in our tax equivalent net interest income as a percent of average interest-earning assets (the “net interest margin”).

For the first nine months of 2016,2017, net interest income totaled $59.4$65.9 million, an increase of $3.8$6.5 million, or 6.8%10.9% from 2015.2016.  The year-to-dateThis increase in net interest income in 2016 compared to 2015 primarily reflects a $169.4$184.9 million increase in average interest-earning assets that was partially offset by a fouras well as an 10 basis point decreaseincrease in our net interest margin.
The declineincrease in ouraverage interest-earning assets primarily reflects loan growth utilizing funds from increases in deposits and borrowed funds.  The increase in the net interest margin is primarily due toreflects a change in the prolonged low interest rate environment that has pushed our average yield on loans lowermix of average-interest earning assets (higher percentage of loans) as well as a slight increaseincreases in our cost of funds (caused primarily by a higher mix and slightly higher average interest rate on time deposits).

Interest rates have generally been at extremely low levels since 2008 due primarily to the FRB’s monetary policies and its efforts to stimulate the U.S. economy.  This very low interest rate environment has generally had an adverse impact on our net interest margin.   Based on recent announcements by the FRB, short-term interest rates are expected to remain extremely low until at least late-2016 or 2017.  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 risingmarket interest rates.

Our net interest income is also adversely impacted by our level of non-accrual loans.  In the third quarter and first nine months of 20162017 non-accrual loans averaged $10.7$8.6 million and $10.6$9.7 million, respectively compared to $12.9$10.7 million and $13.7$10.6 million, respectively for the same periods in 2015.2016.  In addition, in the third quarter and first nine months of 20162017 we had net recoveries of $0.07$0.28 million and $0.75$0.90 million, respectively, of accrued andpreviously unpaid interest on loans placed on or taken off non-accrual or previously charged-off during each period or on loans previously charged-off compared to net recoveries of $0.16$0.07 million and $0.34$0.75 million, respectively, during the same periods in 2015.2016.
 
Average Balances and Tax Equivalent Rates

  
Three Months Ended
September 30,
 
  2016  2015 
  
Average
Balance
  Interest  
Rate (3)
  
Average
Balance
  Interest  
Rate (3)
 
  (Dollars in thousands) 
Assets (1)
                  
Taxable loans $1,613,189  $18,562   4.59% $1,470,529  $17,834   4.83%
Tax-exempt loans (2)
  3,492   53   6.04   3,740   54   5.73 
Taxable securities  534,319   2,537   1.90   520,805   1,901   1.46 
Tax-exempt securities (2)
  58,694   507   3.46   33,104   347   4.19 
Interest bearing cash  69,603   86   0.49   68,972   70   0.40 
Other investments  15,347   195   5.05   15,231   225   5.86 
Interest Earning Assets  2,294,644   21,940   3.81   2,112,381   20,431   3.85 
Cash and due from banks  34,565           45,477         
Other assets, net  152,793           164,253         
Total Assets $2,482,002          $2,322,111         
                         
Liabilities                        
Savings and interest-bearing checking $1,014,201   284   0.11  $990,229   266   0.11 
Time deposits  438,504   970   0.88   371,501   721   0.77 
Other borrowings  47,227   493   4.15   47,769   465   3.86 
Interest Bearing Liabilities  1,499,932   1,747   0.46   1,409,499   1,452   0.41 
Non-interest bearing deposits  706,282           633,305         
Other liabilities  27,110           23,844         
Shareholders’ equity  248,678           255,463         
                         
Total liabilities and shareholders’ equity $2,482,002          $2,322,111         
                         
Net Interest Income     $20,193          $18,979     
                        
Net Interest Income as a Percent of Average Interest Earning Assets          3.51%          3.58%
  
Three Months Ended
September 30,
 
  2017  2016 
  
Average
Balance
  Interest  
Rate (2)
  
Average
Balance
  Interest  
Rate (2)
 
  (Dollars in thousands) 
Assets                  
Taxable loans $1,908,497  $21,801   4.55% $1,613,189  $18,562   4.59%
Tax-exempt loans (1)
  3,138   47   5.94   3,492   53   6.04 
Taxable securities  474,901   2,765   2.33   534,319   2,537   1.90 
Tax-exempt securities (1)
  90,645   783   3.46   58,694   507   3.46 
Interest bearing cash  29,336   63   0.85   69,603   86   0.49 
Other investments  15,543   200   5.11   15,347   195   5.05 
Interest Earning Assets  2,522,060   25,659   4.05   2,294,644   21,940   3.81 
Cash and due from banks  33,019           34,565         
Other assets, net  142,283           152,793         
Total Assets $2,697,362          $2,482,002         
                         
Liabilities                        
Savings and interest-bearing checking $1,048,289   408   0.15  $1,014,201   284   0.11 
Time deposits  531,226   1,425   1.06   438,504   970   0.88 
Other borrowings  85,219   626   2.91   47,227   493   4.15 
Interest Bearing Liabilities  1,664,734   2,459   0.59   1,499,932   1,747   0.46 
Non-interest bearing deposits  736,291           706,282         
Other liabilities  31,263           27,110         
Shareholders’ equity  265,074           248,678         
Total Liabilities and
Shareholders’ Equity
 $2,697,362          $2,482,002         
                         
Net Interest Income     $23,200          $20,193     
                         
Net Interest Income as a Percent
of Average Interest Earning Assets
          3.66%          3.51%
 
(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%
(3)(2)Annualized
 
Average Balances and Tax Equivalent Rates

 
Nine Months Ended
September 30,
  
Nine Months Ended
September 30,
 
 2016  2015  2017  2016    
 
Average
Balance
  Interest  
Rate (3)
  
Average
Balance
  Interest  
Rate (3)
  
Average
Balance
  Interest  
Rate (2)
  
Average
Balance
  Interest  
Rate (2)
 
 (Dollars in thousands)  (Dollars in thousands) 
Assets (1)
                                    
Taxable loans $1,577,758  $55,255   4.67% $1,446,857  $52,736   4.87% $1,792,381  $61,544   4.59% $1,577,758  $55,255   4.67%
Tax-exempt loans (2)(1)
  3,564   163   6.11   4,097   189   6.17   3,410   145   5.69   3,564   163   6.11 
Taxable securities  532,576   7,261   1.82   518,906   5,528   1.42   499,886   8,300   2.21   532,576   7,261   1.82 
Tax-exempt securities (2)(1)
  50,286   1,320   3.50   32,790   1,021   4.15   85,853   2,264   3.52   50,286   1,320   3.50 
Interest bearing cash  75,121   292   0.52   64,913   194   0.40   42,610   229   0.72   75,121   292   0.52 
Other investments  15,456   592   5.12   17,772   728   5.48   15,543   638   5.49   15,456   592   5.12 
Interest Earning Assets  2,254,761   64,883   3.84   2,085,335   60,396   3.87   2,439,683   73,120   4.00   2,254,761   64,883   3.84 
Cash and due from banks  38,069           44,829           32,492           38,069         
Other assets, net  157,570           167,849           146,753           157,570         
Total Assets $2,450,400          $2,298,013          $2,618,928          $2,450,400         
                                                
Liabilities                                                
Savings and interest-bearing checking $1,018,727   831   0.11  $988,594   792   0.11  $1,051,395   1,007   0.13  $1,018,727   831   0.11 
Time deposits  435,146   2,689   0.83   373,235   2,169   0.78   494,219   3,747   1.01   435,146   2,689   0.83 
Other borrowings  47,405   1,455   4.10   47,930   1,382   3.86   66,392   1,659   3.34   47,405   1,455   4.10 
Interest Bearing Liabilities  1,501,278   4,975   0.44   1,409,759   4,343   0.41   1,612,006   6,413   0.53   1,501,278   4,975   0.44 
Non-interest bearing deposits  677,645           609,192           717,589           677,645         
Other liabilities  25,612           24,581           30,372           25,612         
Shareholders’ equity  245,865           254,481           258,961           245,865         
                        
Total liabilities and shareholders’ equity $2,450,400          $2,298,013          $2,618,928          $2,450,400         
                                                
Net Interest Income     $59,908          $56,053          $66,707          $59,908     
                                                
Net Interest Income as a Percent of Average Interest Earning Assets          3.55%          3.59%          3.65%          3.55%
 
(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%
(3)(2)Annualized
 
Reconciliation of Net Interest Margin, Fully Taxable Equivalent ("FTE")

  
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
  2017  2016  2017  2016 
  (Dollars in thousands)  (Dollars in thousands) 
Net interest income $22,912  $19,998  $65,870  $59,391 
Add:  taxable equivalent adjustment  288   195   837   517 
Net interest income - taxable equivalent $23,200  $20,193  $66,707  $59,908 
Net interest margin (GAAP) (1)
  3.60%  3.47%  3.61%  3.52%
Net interest margin (FTE) (1)
  3.66%  3.51%  3.65%  3.55%
(1)
Annualized

Provision for loan losses.  The provision for loan losses was an expense of $0.6 million and a credit of approximately $0.2 million during both the three months ended September 30, 2017 and 2016, and 2015.respectively. During the nine-month periods ended September 30, 20162017 and 2015,2016, the provision was an expense of $0.8 million and a credit of $1.4 million and $1.0 million, respectively. The provision reflects our assessment of the allowance for loan losses taking into consideration factors such as loan growth, 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 circumstances and other credit risk factors.  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 in the third quarter and first nine months of 2016.2017.

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 recurring source of revenue but they are quite cyclical and thus can be volatile.

Non-interest income totaled $11.7$10.3 million during the three months ended September 30, 2016, an increasethird quarter of $1.62017 compared to $11.7 million from the comparable period in 2015.2016.  For the first nine months of 20162017 non-interest income totaled $31.1 million compared to $29.1 million a $1.0 million decrease fromfor the comparable period in 2015.first nine months of 2016.  The components of non-interest income are as follows:

Non-Interest Income

  
Three months ended
September 30,
  
Nine months ended
September 30,
 
  2016  2015  2016  2015 
 (In thousands) 
Service charges on deposit accounts $3,281  $3,294  $9,164  $9,261 
Interchange income  1,943   2,169   5,797   6,551 
Net gains (losses) on assets:                
Mortgage loans  3,556   1,812   7,727   5,735 
Securities  (45)  45   302   97 
Mortgage loan servicing, net  858   (556)  (454)  476 
Investment and insurance commissions  427   447   1,278   1,380 
Bank owned life insurance  282   304   870   979 
Title insurance fees  319   281   860   874 
Gain on branch sale  -   1,193   -   1,193 
Other  1,087   1,130   3,553   3,522 
Total non-interest income $11,708  $10,119  $29,097  $30,068 

Service charges on deposit accounts declined slightly on both a comparative quarterly and year-to-date basis in 2016 as compared to 2015.  Over the last few years, such service charges have been decreasing, principally due to a decline in non-sufficient funds (“NSF”) occurrences and related NSF fees. We believe the long-term decline in NSF occurrences is due to our customers managing their finances more closely and having real-time access to deposit account information through electronic channels allowing them to reduce NSF activity and avoid the associated fees.

Interchange income decreased on both a comparative quarterly and year-to-date basis in 2016 as compared to 2015.  The decrease in interchange income in 2016 as compared to 2015 primarily results from lower incentives under our Debit Brand Agreement with MasterCard.  In addition, although transaction volume increased 1.8% year-over-year, interchange revenue per transaction declined by 5.3%, primarily due to a higher mix of debit (PIN-based) versus credit (signature-based) transactions.
Non-Interest Income         
          
  
Three months ended
September 30,
     
Nine months ended
September 30,
 
 2017  2016  2017  2016 
  (In thousands)    
Service charges on deposit accounts $3,281  $3,281  $9,465  $9,164 
Interchange income  1,942   1,943   5,869   5,797 
Net gains (losses) on assets:                
Mortgage loans  2,971   3,556   8,886   7,727 
Securities  69   (45)  62   302 
Mortgage loan servicing, net  1   858   668   (454)
Investment and insurance commissions  606   427   1,541   1,278 
Bank owned life insurance  283   282   776   870 
Other  1,151   1,406   3,822   4,413 
Total non-interest income $10,304  $11,708  $31,089  $29,097 
 
Service charges on deposit accounts were unchanged on a comparative quarterly basis and increased on a year-to-date basis in 2017 as compared to 2016.  The year-to-date increase was principally due to higher service charges on commercial accounts and a modest increase in non-sufficient funds occurrences.

Interchange income was unchanged on a comparative quarterly basis and increased slightly on a year-to-date basis in 2017 as compared to 2016.  The year-to-date increase is due primarily to increased debit card transaction activity.

Net gains on mortgage loans decreased on a comparative quarterly basis and increased on both a quarterly and a year to date basis.basis in 2017 as compared to 2016. Mortgage loan activity is summarized as follows:

Mortgage Loan Activity
Mortgage Loan Activity      
       
  
Three months ended
September 30,
  
Nine months ended
September 30,
 
  2017  2016  2017  2016 
  (Dollars in thousands) 
Mortgage loans originated $264,177  $123,124  $657,345  $288,592 
Mortgage loans sold  120,981   89,349   305,386   215,494 
Net gains on mortgage loans  2,971   3,556   8,886   7,727 
Net gains as a percent of mortgage loans sold (“Loan Sales Margin”)  2.46%  3.98%  2.91%  3.59%
Fair value adjustments included in the Loan Sales Margin  (0.22)  0.55   0.08   0.40 

  
Three months ended
September 30,
  
Nine months ended
September 30,
 
  2016  2015  2016  2015 
  (Dollars in thousands) 
Mortgage loans originated $123,124  $79,648  $288,592  $260,744 
Mortgage loans sold  89,349   71,063   215,494   221,957 
Net gains on the sale of mortgage loans  3,556   1,812   7,727   5,735 
Net gains as a percent of mortgage loans sold (“Loan Sales Margin”)  3.98%  2.55%  3.59%  2.58%
Fair value adjustments included in the Loan Sales Margin  0.55   (0.05)  0.40   0.21 

The increasesincrease in mortgage loan originations, sales and net gains (for the year-to-date period) in 20162017 as compared to 2015 are2016 is due primarily to a decreasethe expansion of our mortgage-banking operations.  The decline in mortgage loan interest rates during parts of 2016 that resulted in an increase in  mortgage loan refinance volumes as well as an improving housing market which has resulted in an increase in purchase money mortgage origination volume.

Netnet 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.  Net gains on mortgage loans are also impacted by recording fair value accounting adjustments. Excluding the aforementioned fair value accounting adjustments, the Loan Sales Margin would have been 3.43% and 2.60% in the third quartersquarter of 2017 compared to the third quarter of 2016 and 2015, respectively and 3.19% and 2.37% for the comparative 2016 and 2015 year-to-date periods, respectively. The increasewas due to a decline in the Loan Sales Margin (excluding fair value adjustments) in 2016 was generally due to a widening of primary-to-secondary market pricing spreads as well as a higher content of government (FHA and VA) mortgage loan sales, which generally have higher profit margins than conventional mortgage loan sales. The changes in the fair value accounting adjustments are primarily due to changes in the amount of commitments to originate mortgage loans for sale.  Because of recent increases in longer-term interest rates and competitive factors, we do not expect the significant increase in the Loan Sales Margin that we have experienced in the first nine months of 2016 to continue intodescribed below.

During the last quarter of 2016 or into 2017.and the first half of 2017, we significantly expanded our mortgage-banking operations by adding new employees and opening new loan production offices (Ann Arbor, Brighton, Dearborn, Grosse Pointe, Traverse City and Troy, Michigan and Columbus and Fairlawn, Ohio).  Overall, we have increased average full-time equivalent employees in mortgage lending sales and operations by 80.8% and by 67.0%, in the third quarter and first nine months of 2017, respectively, over the same periods in 2016.  This business expansion has increased net gains on mortgage loans (on a year-to-date basis) and has accelerated the growth of portfolio mortgage loans and mortgage loans serviced for others, leading to increased mortgage loan interest income and mortgage loan servicing revenue.  However, this expansion has also increased non-interest expenses, particularly compensation and employee benefits and occupancy.  In addition, due to higher interest rates, mortgage loan refinance volume has declined in 2017 on an industry-wide basis.  It is important to our future results of operations that we effectively and successfully manage this business expansion.

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 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.
Our Loan Sales Margin is impacted by several factors including competition and the manner in which the loan is sold. Net gains on mortgage loans are also impacted by recording fair value accounting adjustments.  Excluding the aforementioned fair value accounting adjustments, the Loan Sales Margin would have been 2.68% and 3.43% in the third quarters of 2017 and 2016, respectively and 2.83% and 3.19% for the comparative 2017 and 2016 year-to-date periods, respectively.  The decrease in the Loan Sales Margin (excluding fair value adjustments) in 2017 was generally due to a narrowing of primary-to-secondary market pricing spreads due to competitive factors throughout the mortgage banking industry (generally higher mortgage loan interest rates and a decline in refinance volume). The changes in the fair value accounting adjustments are primarily due to changes in the amount of commitments to originate mortgage loans for sale.

Net gains (losses) on securities (losses) gains totaled $(0.045)$0.069 million and $0.302$0.062 million during the three and nine months ended September 30, 2016,2017, respectively, and $0.045$(0.045) million and $0.097$0.302 million for the respective comparable periods in 2015.2016.  The third quarter 20162017 securities net lossesgains were due primarily to a $0.06$0.061 million increase in the fair value of trading securities and $0.008 million of net gains on the sale of $1.8 million of investments.  The year-to-date 2017 securities net gains were due to $0.125 million of net gains on the sale of $9.6 million of investments that were partially offset by a $0.063 million decrease in the fair value of trading securities.  The third quarter 2016 securities net losses were primarily due to a $0.058 million decrease in the fair value of trading securities that was partially offset by $0.013 million of net gains on the sale of $1.1 million of investments.  The year-to-date 2016 securities net gains were due primarily to net gains of $0.298 million on the sale of $56.5 million of investments.  The third quarter 2015 securities net gains were due to an increase in the fair value of our trading securities.  The 2015 year-to-date securities net gains were due to the sale of $11.8 million of investments and an increase in the fair value of our trading securities.  (See “Securities.”)

We recorded no net impairment losses in 2016either 2017 or 20152016 for other than temporary impairment of securities available for sale.  (See “Securities.”)
Mortgage loan servicing generated income of $0.9$0.001 million and a loss of $0.5$0.858 million in the third quarterquarters of 2017 and 2016, respectively. For the first nine months of 2016, respectively,2017, mortgage loan servicing generated income of $0.668 million as compared to a loss of $0.6 million and income of $0.5$0.454 million in the third quarter and first nine months of 2015, respectively. These variances are primarily due to changes2016. This activity is summarized in the valuation allowancefollowing table:

  Three Months Ended  Nine Months Ended 
  9/30/2017  9/30/2016  9/30/2017  9/30/2016 
Mortgage loan servicing: (In thousands)    
Revenue, net $1,091  $1,037  $3,253  $3,087 
Fair value change due to price  (572)  --   (1,075)  -- 
Fair value change due to pay-downs  (518)  --   (1,510)  -- 
Amortization  --   (799)  --   (2,065)
Impairment (charge) recovery  --   620   --   (1,476)
Total $1  $858  $668  $(454)
Effective on andJanuary 1, 2017, we adopted the amortization offair value accounting method for capitalized mortgage loan servicing rights. The period end valuation allowance is based on the valuation of the mortgage loan servicing portfolio. Activity related to capitalized mortgage loan servicing rights is as follows:

Capitalized Mortgage Loan Servicing Rights

 
Three months ended
September 30,
  
Nine months ended
September 30,
  
Three months ended
September 30,
  
Nine months ended
September 30,
 
 2016  2015  2016  2015  2017  2016  2017  2016 
 (In thousands)  (In thousands) 
Balance at beginning of period $10,331  $12,535  $12,436  $12,106  $14,515  $10,331  $13,671  $12,436 
Change in accounting  -   -   542   - 
Balance at beginning of period, as adjusted $14,515  $10,331  $14,213  $12,436 
Originated servicing rights capitalized  896   678   2,153   2,128   1,250   896   3,047   2,153 
Amortization  (799)  (700)  (2,065)  (2,259)  -   (799)  -   (2,065)
Change in valuation allowance  620   (883)  (1,476)  (345)  -   620   -   (1,476)
Change in fair value  (1,090)  -   (2,585)  - 
Balance at end of period $11,048  $11,630  $11,048  $11,630  $14,675  $11,048  $14,675  $11,048 
                                
Valuation allowance at end of period $4,748  $4,118  $4,748  $4,118  $-  $4,748  $-  $4,748 

At September 30, 20162017 we were servicing approximately $1.64$1.77 billion in mortgage loans for others on which servicing rights have been capitalized. This servicing portfolio had a weighted average coupon rate of 4.24%4.18% and a weighted average service fee of approximately 25.525.8 basis points. Remaining capitalizedCapitalized mortgage loan servicing rights at September 30, 20162017 totaled $11.0$14.7 million, representing approximately 6783 basis points on the related amount of mortgage loans serviced for others. The capitalized mortgage loan servicing had an estimated fair market value of $11.1 million at September 30, 2016.

Investment and insurance commissions represent revenues generated on the sale or management of investments and insurance for our customers.  These revenues were relatively unchangedincreased on both a quarterly basis and declined slightly on a year-to-date basis in 20162017 as compared to 2015,2016, due primarilyin part to openincreased product sales representative positions that were not filled until the second quarter of 2016.and growth in assets under management.

Income from bank owned life insurance declinedwas essentially unchanged on both a comparative quarterly basis and declined on a year-to-date basis in 20162017 compared to 2015 reflecting2016.  The year-to-date decline reflects a lower average crediting rate on our 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 $53.8$54.3 million and $54.4$54.0 million at September 30, 20162017 and December 31, 2015,2016, respectively.
Title insurance fees were slightly higher on a comparative quarterly basis and relatively unchanged on a year-to-date basis in 2016 as compared to 2015.  The amount of title insurance fees is primarily a function of the level of mortgage loans that we originated.

Third quarter and year-to-date 2015 results include a net gain of $1.2 million on the sale of our Midland, Michigan branch.

Other non-interest income was relatively unchangeddeclined on both a comparative quarterly and year-to-date basis in 20162017 compared to 2015.2016.  These declines were due in part to lower ATM fees, check charges, rental income on other real estate and swap fees on commercial loans. In addition, the 2016 year-to-date period included a $0.2 million death benefit related to a life insurance policy on a former director.

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 increased by $0.65 million to $22.5 million and decreased by $0.1 million to $65.5 million during the three- and nine-month periods ended September 30, 2016, respectively, compared to the same periods in 2015.structure.
 
Non-interest expense increased by $0.1 million to $22.6 million and by $3.5 million to $68.9 million during the three- and nine-month periods ended September 30, 2017, respectively, compared to the same periods in 2016.  The components of non-interest expense are as follows:

Non-Interest Expense

  
Three months ended
September 30,
 
Nine months ended
September 30,
 
  2016   2015  2016  2015 
   (in thousands) 
Compensation $8,546  $8,419  $24,948  $24,880 
Performance-based compensation  2,174   1,572   5,374   4,604 
Payroll taxes and employee benefits  2,311   2,038   6,590   6,121 
Compensation and employee benefits  13,031   12,029   36,912   35,605 
Data processing  1,971   2,001   6,008   5,958 
Occupancy, net  1,919   1,940   5,982   6,399 
Furniture, fixtures and equipment  990   998   2,939   2,915 
Communications  670   754   2,280   2,184 
Loan and collection  568   816   1,964   2,938 
Advertising  455   406   1,410   1,338 
Legal and professional fees  420   519   1,178   1,352 
FDIC deposit insurance  187   350   852   1,044 
Interchange expense  276   279   809   859 
Credit card and bank service fees  203   197   588   602 
Supplies  178   190   551   619 
Amortization of intangible assets  86   86   260   260 
Net (gains) losses on other real estate and repossessed assets  
263
   
5
   
98
   (173)
Provision for loss reimbursement on sold loans  45   (35)  30   (59)
Costs related to unfunded lending commitments  73   26   6   46 
Vehicle service contract counterparty contingencies  (39)  30   (10)  89 
Other  1,233   1,288   3,612   3,633 
Total non-interest expense $22,529  $21,879  $65,469  $65,609 
  
Three months ended
September 30,
  
Nine months ended
September 30,
 
  2017  2016  2017  2016 
  (In thousands) 
Compensation $8,494  $8,310  $26,872  $24,355 
Performance-based compensation  2,688   2,409   6,819   5,967 
Payroll taxes and employee benefits  2,395   2,312   7,413   6,590 
Compensation and employee benefits  13,577   13,031   41,104   36,912 
Occupancy, net  1,970   1,919   6,032   5,982 
Data processing  1,796   1,971   5,670   6,008 
Furniture, fixtures and equipment  961   990   2,943   2,939 
Communications  685   670   2,046   2,280 
Loan and collection  481   568   1,564   1,964 
Advertising  526   455   1,551   1,410 
Legal and professional  550   420   1,376   1,178 
Interchange expense  294   276   869   809 
FDIC deposit insurance  208   187   608   852 
Supplies  176   178   507   551 
Credit card and bank service fees  105   203   432   588 
Costs related to unfunded lending commitments  92   73   332   6 
Amortization of intangible assets  87   86   260   260 
Net losses on other real estate and repossessed assets  30   263   132   98 
Provision for loss reimbursement on sold loans  15   45   66   30 
Other  1,063   1,194   3,454   3,602 
Total non-interest expense $22,616  $22,529  $68,946  $65,469 

Compensation and employee benefits expenses, in total, increased $1.0$0.5 million or 8.3%, on a quarterly comparative basis and increased $1.3$4.2 million or 3.7%, for the first nine months of 20162017 compared to the same periods in 2015.2016.

Compensation expense increased by $0.1$0.2 million or 1.5%, and by $0.1$2.5 million or 0.3%, in the third quarter and first nine months of 2016,2017, respectively, compared to the same periods in 2015.2016.  Average full-time equivalent employees (“FTEs”) were higherincreased by approximately 1.4%8.4% and  lower by approximately 0.7%8.6% during the third quarter and first nine months of 2016,2017, respectively, compared to the year ago periods.  On a year-to-date basis, theperiods, due primarily to our mortgage banking expansion.  The impact of the slight declineFTE increase was moderated (particularly in the average FTE levelthird quarter of 2017) by an increased amount of compensation that was offset by merit raises granted in 2016.deferred as direct loan origination costs due to higher loan origination levels.

Performance-based compensation increased by $0.6$0.3 million and $0.9 million in the third quarter and first nine months of 2017, respectively, versus the same periods in 2016, due primarily to relative comparative changes in the accrual for anticipated incentive compensation (including our mortgage loan officer retention program) based on our estimated full-year performance as compared to goals.

Payroll taxes and employee benefits increased by $0.1 million and $0.8 million in the third quarter and first nine months of 2016,2017, respectively, compared to the same periods in 2015,2016, due primarily to a higher accrualincreases in payroll taxes, health insurance (year-to-date period only) and employee recruiting costs principally associated with our mortgage banking expansion.

Occupancy, net, increased by $0.05 million for anticipated incentive compensation based on our estimated 2016 performance asboth the third quarter and first nine months of 2017, respectively, compared to goals.the same periods in 2016.  These increases were primarily due to costs associated with the recently opened loan production offices mentioned earlier that were partially offset by reduced occupancy costs related to the sale of our payment plan processing business (Mepco).

69
Payroll taxes and employee benefits increasedData processing expenses decreased by $0.3$0.2 million and $0.5$0.3 million in the third quarter and first nine months of 2016,2017, respectively, compared to the same periods in 2015.2016. These decreases are primarily due to the sale of our payment plan processing business (Mepco).  The quarterly increase is due primarily to increases in medical insurancethird quarter of 2017 also included a $0.1 million refund of certain previously billed and employee trainingexpensed costs as well as a higher employer 401(k) contribution.  The year-to-date increase is due primarily to a higher employer 401(k) contribution and increased employee training costs.  The increased employee training costs primarily relate to a new sales training program implemented in 2016.from our core data processing vendor. 

Data processingFurniture, fixtures and equipment expenses were relatively unchanged in the third quarter and first nine months of 2016, respectively,2017 as compared to the same periods in 2015.  A decline in software amortization expense was offset by the cost of new services added with our core data processing vendor or other outside service providers.2016.

Occupancy, net, wasCommunications expenses were relatively unchanged and decreased by $0.4$0.2 million in the third quarter and first nine months of 2016,2017, respectively, compared to the same periods in 2015.2016.  The 2017 year-to-date declinedecrease is due primarily due to decreases in utility reduced mailing costs, and real estate property taxes (which reflect fewer properties owned due to sales or other dispositions) and lower lease costs for our Mepco Finance Corporation (“Mepco”) Chicago office due to relocating to smaller space inas the fourthfirst quarter of 2015.

Furniture, fixtures2016 included expenses for mailing out new chip enabled debit cards and equipment expenses were relatively unchanged on both a comparative quarterly and year-to-date basis.

Communications expenses declined by $0.1 million and increased by $0.1 million in the third quarter and first nine months of 2016, respectively, compared to the same periods in 2015.  The year-to-date increase in 2016 is due primarily to mailing costs for a new checking account program.deposit product information.

Loan and collection expenses primarily reflect costs related to new lending activity as well as the management and collection of non-performing loans and other problem credits. The quarterly and year-to-date comparative decreases in 2017 versus 2016 are primarily due to the reimbursement of previously incurred expenses related to the resolution and collection of non-accrual or previously charged-off loans.  These expenses have further declined in 2016, which primarily reflects the overall year-over-year decrease in non-performing assets and watch credits. (See “Portfolio Loans and asset quality.”)declines were partially offset by costs related to new lending activity.

Advertising expenses increased slightly on both a quarterly and year-to-date basis in 2016 as compared to 2015, due primarily to the cost of a new checking account acquisition program.

Legal and professional fees decreased on both a comparative quarterly and year-to-date basis in 2017 versus 2016, due primarily to a decline in legal fees at Mepco because of the resolution (in the first quarter of 2016) of counterparty litigation associated with collection matters.direct mailing and strategic sponsorship costs.

FDIC deposit insurance decreasedLegal and professional fees increased on both a comparative quarterly and year-to-date basis in 2017 versus 2016, due primarily to an increase in outsourced internal audit costs, higher consulting fees related to a checking account program and higher legal fees principally associated with employment matters.

Interchange expense primarily represents our third-party cost to process debit card transactions.  This cost increased slightly in 2017 on both a comparative quarterly and year-to-date basis due primarily to higher debit card transaction volume as described above.
FDIC deposit insurance expense increased slightly and decreased on a comparative quarterly and year-to-date basis, respectively, in 2017 versus 2016.  The comparative quarterly increase was due primarily to growth in our total assets.  The comparative year-to-date decrease reflects a decline in our premium rate duringthat became effective in the third quarter of 2016.  At June 30, 2016, the FDIC Deposit Insurance Fund reserve ratio reached 1.15%, which triggered a new assessment method and generally lower deposit insurance premiums for banks with less than $10 billion in assets.

Interchange expenseSupplies expenses were relatively unchanged and decreased slightly on a comparative quarterly and year-to-date basis, respectively, in 2017 versus 2016.  The comparative year-to-date decline was due primarily representsto initiatives with our third-party costvarious vendors to process debitreduce these costs as well as internal “go green” efforts to reduce printing and paper costs.

Credit card transactions.  This cost has declined slightlyand bank service fees decreased in 2017 versus 2016 on both a comparative quarterly and year-to-date basis primarily due primarily to the decline in debit card transaction revenue described above.
Credit card and bank service fees were essentially unchanged on both a comparative quarterly and year-to-date basis as the numbersale of our payment plans being serviced by Mepco in 2016 compared to 2015 was relatively stable.plan processing business (Mepco).

Supplies expenses decreased on both a comparative quarterly and year-to-date basis dueThe changes in costs related to unfunded lending commitments are primarily impacted by changes in the amounts of such commitments to declines at Mepco associated withoriginate portfolio loans as well as (for commercial loan commitments) the outsourcinggrade (pursuant to our loan rating system) of its mailroom operations.such commitments.

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 $2.0$1.7 million and $2.3$1.9 million at September 30, 20162017 and December 31, 2015,2016, respectively. See Note #8#7 to the Condensed Consolidated Financial Statements for a schedule of future amortization of intangible assets.

Net (gains) losses on other real estate and repossessed assets primarily 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.  In general, greater stability in real estate prices during the last few years (with several markets even experiencing price increases) has resulted in modest losses or gains on the sale of other real estate.  We recorded net losses of $0.263 million and $0.098 million in the third quarter and first nine months of 2016, respectively, as compared to a net loss of $0.005 million and a net gain of $0.173 million, respectively, recorded in the same periods in 2015.  The net losses in 2016 primarily reflect a $0.36 million write-down in the third quarter on a group of commercial income-producing properties that were sold at auction.  We expect to close on this sale ($3.0 million balance in other real estate at September 30, 2016) in the fourth quarter of 2016.

The provision for loss reimbursement on sold loans was an expense of $0.015 million and $0.066 million in the third quarter and first nine months of 2017, respectively, compared to an expense of $0.045 million and $0.030 million in the third quarter and first nine months of 2016, respectively, compared to a credit of $0.035 million and a credit of $0.059 million in the third quarter and first nine months of 2015, respectively. This provision represents our estimate of incurred losses related to mortgage loans that we have sold to investors (primarily Fannie Mae, Freddie Mac, Ginnie Mae and Ginnie Mae).  The small expenses in 2016 are primarily due to establishing specific reserves for pending loss reimbursement claims.  The small credit provisions in 2015 are due primarily to the settlementsFederal Home Loan Bank of certain loss reimbursement claims at slightly lower amounts than what had been specifically reserved for at the end of the respective previous period.Indianapolis).  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.  The reserve for loss reimbursements on sold mortgage loans totaled $0.560 million and $0.530$0.56 million at both September 30, 20162017 and December 31, 2015,2016, respectively. This reserve is included in accrued expenses and other liabilities in our Condensed 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 September 30, 2016 and December 31, 2015 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.
 
The changes in costs 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.

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.

In particular, as noted in our Risk Factors included in Part I - Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015, Mepco has had to initiate litigation against certain counterparties, including third party insurers, to collect amounts owed to Mepco as a result of those parties' dispute of their contractual obligations to Mepco.  During the first quarter of 2016, we settled our last significant remaining litigation matter with certain of Mepco’s counterparties.  This settlement resulted in our receipt of a cash payment of $4.0 million on March 31, 2016.  This settlement also resulted in our receipt of an interest-bearing promissory note from one of Mepco’s counterparties for $1.5 million with monthly payments scheduled over a five-year period beginning in May 2016.  Due to the lack of any payment history and limited financial information on this counterparty, we established a full reserve on this promissory note as of March 31, 2016.  A full reserve on the remaining balance ($1.39 million) on this note was maintained at September 30, 2016.   This counterparty has made the first six required monthly payments on the note.  As a longer-term payment history is developed on this note, we will continue to evaluate the need for all or any part of a reserve.  Vehicle service contract counterparty receivables, net totaled $2.6 million as of September 30, 2016 compared to $7.2 million as of December 31, 2015.

In addition, see Note #14 to the Condensed 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.

Other non-interest expenses were relatively unchangeddeclined in both the third quarter and first nine months of 2016, respectively,2017 compared to the same periods in 2015.2016 due primarily to lower temporary employee and insurance costs and lower debit card fraud losses.

Income tax expense.  We recorded an income tax expense of $3.2 million and $8.4 million in the third quarter and the first nine months of 2017, respectively. This compares to an income tax expense of $3.0 million and $7.5 million in the third quarter and the first nine months of 2016, respectively. This compares to an income tax expense of $2.3 million and $6.7 million in the third quarter and the first nine months of 2015, respectively.

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The second quarter and first nine months ofYear-to-date 2016 included a $0.3 million income tax benefit resulting from the adoption of Financial Accounting Standards Board Accounting Standards Update 2016-09 “Compensation – Stock Compensation (718) Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). See Note #2 to during the Condensed Consolidated Financial Statements.second quarter.

Our actual federal income tax expense is different than the amount computed by applying our statutory federal income tax rate to our pre-tax income before income tax primarily due to tax-exempt interest income, and tax-exempt income from the increase in the cash surrender value on life insurance.insurance, and differences in the value of stock awards that vest and stock options that are exercised as compared to the initial fair values that were expensed.

We assess whether a valuation allowance should be established against our deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard.  The ultimate realization of this asset is primarily based on generating future income.  We concluded at both September 30, 2017 and 2016 and 2015,at December 31, 2016, that the realization of substantially all of our deferred tax assets continues to be more likely than not.

We did maintainhad maintained a valuation allowance against our deferred tax assets of approximately $1.1 million at both September 30, 2016 and December 31, 2015.2016. This valuation allowance on our deferred tax assets primarily relatesrelated to state income taxes at our Mepco segment.Mepco.  In this instance, we determined that the future realization of these particular deferred tax assets was not more likely than not.  ThisThat conclusion was primarily based on the uncertaintypending sale of Mepco’s future earnings attributable to particular states (givenpayment plan business.  After accounting for the various apportionment criteria) andMay 2017 sale of our payment plan business, all that remained of these deferred tax assets were loss carryforwards that we wrote off against the significant reductionrelated valuation allowance as of June 30, 2017 as we will no longer be doing business in the size of Mepco’s business.

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

  
Three months ended
September 30,
  
Nine months ended
September 30,
 
  2016  2015  2016  2015 
  (in thousands) 
Independent Bank $6,665  $5,455  $17,834  $15,623 
Mepco  (20)  (168)  (225)  (437)
Other(1)
  (256)  (224)  (652)  (693)
Elimination  (16)  (16)  (46)  (46)
Net income (loss) $6,373  $5,047  $16,911  $14,447 

(1)
Includes amounts relating to our parent company.

The increase in third quarter net income at Independent Bank in 2016 compared to 2015 is primarily due to increases in net interest income and non-interest income that were partially offset by increases in non-interest expense and income tax expense. The increase in year-to-date net income at Independent Bank in 2016 compared to 2015 is primarily due to an increase in net interest income and decreases in the provision for loan losses (a higher credit) and in non-interest expense that were partially offset by a decrease in non-interest income and an increase in income tax expense.  (See “Net interest income,” “Provision for loan losses,” “Non-interest income,” “Non-interest expense,” “Income tax expense,” and “Portfolio Loans and asset quality.”)those states.
 
The improvement in Mepco’s results in 2016 compared to 2015 is primarily due to a decrease in non-interest expenses that was partially offset by a decrease in net interest income as a result of a decline in year-over-year average payment plan receivables.  All of Mepco’s funding is provided by Independent Bank through an intercompany loan (that is eliminated in consolidation).  The rate on this intercompany loan is based on the Prime Rate (currently 3.50%). Mepco might not be able to obtain such favorable funding costs on its own in the open market.

Financial Condition

Summary.  Our total assets increased by $129.3$204.5 million during the first nine months of 2016 due primarily to increases in cash and cash equivalents, securities available for sale and loans.2017.  Loans, excluding loans held for sale ("Portfolio Loans"), totaled $1.61$1.94 billion at September 30, 2016,2017, an increase of $92.3$328.8 million, or 6.1%20.4%, from December 31, 2015.2016.  (See "Portfolio Loans and asset quality.")

Deposits totaled $2.21$2.34 billion at September 30, 2016,2017, compared to $2.09$2.23 billion at December 31, 2015.2016.  The $121.0$118.0 million increase in total deposits during the period is primarily due toreflects growth in checking, savings andall categories, except time deposit account balances.deposits, which declined by $41.3 million.  The decline in time deposits primarily reflects maturities with one municipal customer, where we elected to allow the deposits to run-off rather than rebidding for these funds.

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, collateralized loan obligations, asset-backed securities, corporate securities, and trust preferred securities.securities and foreign government securities (that are denominated in U.S. dollars). 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

     Unrealized    
 
Amortized
Cost
  Gains  Losses 
Fair
Value
 
  (In thousands) 
Securities available for sale            
September 30, 2016 $598,831  $6,313  $2,032  $603,112 
December 31, 2015  585,851   3,152   3,519   585,484 

     Unrealized    
  
Amortized
Cost
  Gains  Losses  
Fair
Value
 
  (In thousands) 
Securities available for sale            
September 30, 2017 $545,672  $5,023  $1,830  $548,865 
December 31, 2016  615,709   2,548   7,641   610,616 
In
We adopted ASU 2017-08 during the first quarter of 2016, we initiated2017 using a modified retrospective approach.  As a result, the useamortized cost of Pacific Investment Management Company LLC (“PIMCO”) to manage an approximately $150securities as of January 1, 2017 was adjusted lower by $0.46 million segment of our securities available for sale.  This segment of our securities available for sale has a similar risk-weighting and duration as our remaining portfolio.(see note #2).
Securities available for sale increaseddeclined by $17.6$61.8 million during the first nine months of 2016 due primarily2017 as these funds were utilized to increases in private label mortgage-backed securities, asset-backed securities, corporate securities and municipal securities. The securities were purchased to utilize a portion of the funds generated from the increase in total deposits. (See “Deposits” and “Liquidity and capital resources.”)

support net Portfolio Loan growth.  Our portfolio of securities available for sale is reviewed quarterly for impairment in value. In performing this review, management considers (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) the impact of changes in market interest rates on the market value of the security and (4) an assessment of whether we intend to sell, or it is more likely than not that we will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. For securities that do not meet 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 incomeincome.  We recorded no impairment losses related to other than temporary impairment on securities available for sale in either the first nine months of 2017 or loss.2016.

Sales of securities were as follows (See “Non-interest income.”):

 Nine months ended
September 30,
  
Nine months ended
September 30,
 
 2016 2015  2017  2016 
 (In thousands)  (In thousands) 
Proceeds $56,451  $11,786 
      
Proceeds (1) $9,594  $56,451 
                
Gross gains $350  $75  $125  $350 
Gross losses  (52)  -   -   (52)
Net impairment charges  -   -   -   - 
Fair value adjustments  4   22   (63)  4 
Net gains $302  $97  $62  $302 

(1)  2017 includes $0.760 million for trades that did not settle until after September 30, 2017.

Portfolio Loans and asset quality.  In addition to the communities served by our Bank branch and loan production office 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 and make whole loan purchases from other financial institutions. In August 2016, we purchased $14.8 million of single-family residential fixed rate mortgage loans from another Michigan-based financial institution.  These mortgage loans were all on properties located in Michigan, had a weighted average interest rate (after a 0.25% servicing fee) of 3.65% and a weighted average remaining contractual maturity of 332 months. In December 2015, we purchased $32.6 million of single-family residential fixed rate jumbo mortgage loans from another Michigan-based financial institution.  These mortgage loans were all on properties located in Michigan, had a weighted average interest rate (after a 0.25% servicing fee) of 3.94% and a weighted average remaining contractual maturity of 344 months.

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. 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 conventional and fixed rate jumbo mortgage loans as Portfolio Loans, while 15- and 30-year fixed-rate obligationsnon-jumbo mortgage loans are generally sold to mitigate exposure to changes in interest rates. (See “Non-interest income.”) Due primarily to the expansion of our mortgage-banking activities and a change in mix in our mortgage loan originations, we are now originating and putting into Portfolio Loans more fixed rate mortgage loans than as compared to past periods.  These fixed rate mortgage loans generally have terms from 15 to 30 years, do not have prepayment penalties and expose us to more interest rate risk.  To date, our interest rate risk profile has not changed significantly.  However, we are carefully monitoring this change in the composition of our Portfolio Loans and the impact of potential future changes in interest rates on our changes in market value of portfolio equity and changes in net interest income. (See “Asset/liability management.”).  As a result, we have added and may continue to add some longer-term borrowings, may utilize derivatives (interest rate swaps and interest rate caps) to manage interest rate risk and may begin to attempt to sell fixed rate jumbo mortgage loans in the future.
Non-performing assets(1)

Non-performing assets(1)
      
 
September 30,
2016
  
December 31,
2015
  
September 30,
2017
  
December 31,
2016
 
 (Dollars in thousands)  (Dollars in thousands) 
Non-accrual loans $10,801  $10,607  $8,410  $13,364 
Loans 90 days or more past due and still accruing interest  -   116   --   -- 
Total non-performing loans  10,801   10,723   8,410   13,364 
Other real estate and repossessed assets  4,989   7,150   2,150   5,004 
Total non-performing assets $15,790  $17,873  $10,560  $18,368 
As a percent of Portfolio Loans                
Non-performing loans  0.67%  0.71%  0.43%  0.83%
Allowance for loan losses  1.37   1.49   1.11   1.26 
Non-performing assets to total assets  0.62   0.74   0.38   0.72 
Allowance for loan losses as a percent of non-performing loans  204.08   210.48   255.39   151.41 
(1)
Excludes loans classified as “troubled debt restructured” that are not past due and vehicle service contract counterparty receivables, net.
Troubled debt restructurings ("TDR")

 September 30, 2016 
 Commercial  Retail  Total 
  (In thousands)         
Performing TDR's $12,642  $62,299  $74,941 
Non-performing TDR's(1)  2,352   3,421
 (2) 
  5,773 
Total $14,994  $65,720  $80,714 
 December 31, 2015         
 Commercial  Retail  Total 
 (In thousands) 
Performing TDR's $13,318  $68,194  $81,512 
Non-performing TDR's(1)  3,041   3,777
 (2) 
  6,818 
Total $16,359  $71,971  $88,330 

(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 increaseddecreased by $0.08$5.0 million, or 0.7%37.1%, during the first nine months of 2016 due principally to an increase in2017.  This decline primarily reflects the pay-off or liquidation of non-performing mortgage loans that was largely offset by declines in non-performing commercial and consumer installment loans.  In general, improvingstable economic conditions in our market areas, as well as our collection and resolution efforts, have resulted in a generally stable or 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 $74.9$63.2 million, or 4.7%3.3% of total Portfolio Loans, and $81.5$70.3 million, or 5.4%4.4% of total Portfolio Loans, at September 30, 20162017 and December 31, 2015,2016, respectively. The decrease in the amount of performing TDRs in the first nine months of 20162017 primarily reflects a decline in retail loanpay-downs and payoffs.  See Note #4 to the Condensed Consolidated Financial Statements for additional information on TDRs.

Other real estate and repossessed assets totaled $5.0$2.2 million at September 30, 2016,2017, compared to $7.2$5.0 million at December 31, 2015.2016.  This decrease is primarily the result of salesthe sale of other real estate beinga group of commercial properties in excessthe second quarter of the migration of non-performing loans secured by real estate into other real estate as the foreclosure process is completed.2017.

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.

The ratio of loan net charge-offs to average Portfolio Loans was a negative 0.08%0.03% (as a result of net recoveries) on an annualized basis in the first nine months of 20162017 compared to 0.03%a negative 0.08% in the first nine months of 2015.2016.  The $1.3$0.5 million declinedecrease in total loan net charge-offsrecoveries is primarily due to declinesa decline in commercial loan and mortgage loan net charge-offs.  The overall decrease in loan net charge-offs primarily reflects a year-over-year reduction in non-performing loans and improvement in collateral liquidation values.recoveries.
 
7775
Allowance for loan losses

 
Nine months ended
September 30,
  
Nine months ended
September 30,
 
 2016  2015  2017  2016 
 Loans  
Unfunded
Commitments
  Loans  
Unfunded
Commitments
  Loans  
Unfunded
Commitments
  Loans  
Unfunded
Commitments
 
 (Dollars in thousands)  (Dollars in thousands) 
Balance at beginning of period $22,570  $652  $25,990  $539  $20,234  $650  $22,570  $652 
Additions (deductions)                                
Provision for loan losses  (1,439)  -   (1,037)  -   806   -   (1,439)  - 
Recoveries credited to allowance  3,623   -   3,418   -   2,998   -   3,623   - 
Loans charged against the allowance  (2,711)  -   (3,767)  -   (2,560)  -   (2,711)  - 
Additions (deductions) included in non-interest expense  -   6   -   46 
Additions included in non-interest expense  -   332   -   6 
Balance at end of period $22,043  $658  $24,604  $585  $21,478  $982  $22,043  $658 
                                
Net loans charged against the allowance to average Portfolio Loans (annualized)  (0.08)%      0.03%    
Net loans charged against the allowance to average Portfolio Loans  (0.03)%      (0.08)%    
Allocation of the Allowance for Loan Losses

 
September 30,
2016
  
December 31,
2015
  
September 30,
2017
  
December 31,
2016
 
 (In thousands)  (In thousands) 
Specific allocations $10,375  $10,983  $7,061  $9,152 
Other adversely rated commercial loans  559   1,053   792   491 
Historical loss allocations  5,566   5,262   6,540   4,929 
Additional allocations based on subjective factors  5,543   5,272   7,085   5,662 
Total $22,043  $22,570  $21,478  $20,234 

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.
 
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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 allowanceAFLL 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 lossesAFLL 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 AFLL.

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’sThe allowance for loan losses is determined in a similar manner as discussed above,increased $1.2 million to $21.5 million at September 30, 2017 from $20.2 million at December 31, 2016 and primarily takes into account historical loss experience and other subjective factors deemed relevantwas equal to Mepco’s payment plan business. Estimated incurred losses associated with Mepco’s outstanding vehicle service contract payment plans are included in1.11% of total Portfolio Loans at September 30, 2017 compared to 1.26% at December 31, 2016.

Three of the provisionfour components of the allowance for loan losses. Mepco recorded a $0.003 million credit and a $0.005 million creditlosses outlined above increased in the first nine months of 2016 and 2015, respectively, for its provision for loan losses.  Mepco’s2017. The allowance for loan losses totaled $0.060related to specific loans decreased $2.1 million and $0.063in 2017 due primarily to a decline in the balance of individually impaired loans as well as charge-offs.  In particular, we received a full payoff in March 2017 on a commercial loan that had a specific reserve of $1.2 million at December 31, 2016. The allowance for loan losses related to other adversely rated commercial loans increased $0.3 million in 2017 primarily due to an increase in the balance of such loans included in this component to $23.2 million at September 30, 2016 and2017 from $11.8 million at December 31, 2015, respectively. Mepco has established procedures2016. The allowance for vehicle service contract payment plan servicing, administrationloan losses related to historical losses increased $1.6 million during 2017 due principally to slight upward adjustments in our probability of default and collections, including the timely cancellationexpected loss rates for commercial loans, an additional component of approximately $0.6 million added for loans secured by commercial real estate due primarily to emerging risks in this sector (such as retail store closings and potential overdevelopment in certain markets) and loan growth. We also extended our historical lookback period to be more representative of the vehicle service contract, in orderprobability of default and account for infrequent migration events and extremely low levels of watch credits.  The allowance for loan losses related to protect our position in the event of payment default or voluntary cancellation by the customer. Mepco has also established proceduressubjective factors increased $1.4 million during 2017 primarily due 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 that the aforementioned risk management policies and procedures will prevent us from the possibility of 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 #14 to the Condensed Consolidated Financial Statements included within this report.loan growth.
 
7977
The allowance for loan losses decreased $0.53 million to $22.04 million at September 30, 2016 from $22.57 million at December 31, 2015 and was equal to 1.37% of total Portfolio Loans at September 30, 2016 compared to 1.49% at December 31, 2015. TwoBy comparison, two of the four components of the allowance for loan losses outlined above declined in the first nine months of 2016. The allowance for loan losses related to specific loans decreased $0.61$0.6 million in 2016 due primarily to a $7.0 million 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 $0.49$0.5 million in 2016 primarily due to a decrease in the balance of such loans included in this component to $13.8 million at September 30, 2016 from $27.8 million at December 31, 2015. The allowance for loan losses related to historical losses increased $0.30$0.3 million during 2016 due principally to loan growth. The allowance for loan losses related to subjective factors increased $0.27$0.3 million during 2016 also primarily due to overall growth of the loan portfolio.

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 $2.21$2.34 billion and $2.09$2.23 billion at September 30, 20162017 and December 31, 2015,2016, respectively.  The $121.0$118.0 million increase in deposits duringin the first nine months of 20162017 is due to growth in checking, savings andall categories of deposits, except time deposit account balances.deposits.  Reciprocal deposits totaled $46.6$49.1 million and $50.2$38.7 million at September 30, 20162017 and December 31, 2015,2016, 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 also added $87.6 million of brokered time deposits during the first nine months of 2017.  This increase, replaced in part, the run-off of time deposits with one municipal customer as described earlier.

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 September 30, 2016,2017, we had approximately $572.4$557.9 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 $11.5$72.8 million and $12.0$9.4 million at September 30, 20162017 and December 31, 2015,2016, respectively.  The increase in other borrowings during the first nine months of 2017 was utilized to fund Portfolio Loan growth.

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 September 30, 2016,2017, our use of such wholesale funding sources (including reciprocal deposits) amounted to approximately $58.2$212.5 million, or 2.6%8.8% 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.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.  We began to again utilize interest-rate swaps in 2014, primarily relating to our commercial lending activities.  During the first nine months of 20162017 and 2015,2016, we entered into $23.0$14.6 million and $16.6$23.0 million (aggregate notional amounts), respectively, 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 $0.4$0.2 million and $0.3$0.4 million of fee income related to these transactions during each of the first nine month periodsmonths of 2017 and 2016, and 2015, respectively.  In September 2017 we also entered into a $15.0 million (notional amount) pay fixed interest rate swap that matures in September 2021.  This fixed pay interest rate swap is hedging short-term Brokered CDs.

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 Condensed Consolidated Statements of Cash Flows categorize these sources and uses into operating, investing and financing activities. We primarily focus our liquidity management on maintaining adequate levels of liquid assets (primarily funds on deposit with the FRB and certain securities available for sale) as well as developing access to a variety of borrowing sources to supplement our deposit gathering activities and provide funds for purchasing securities available for sale 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 facilityfacilities with anotherother commercial bank,banks, and access to the capital markets (for Brokered CDs).
At September 30, 2016,2017, we had $324.1$432.2 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, $1.74$1.81 billion of our deposits at September 30, 2016,2017, 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 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 $11.5$23.4 million as of September 30, 20162017 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.

Effective management of capital resources is critical to our mission to create value for our shareholders. In addition to common stock, our capital structure also currently includes cumulative trust preferred securities.
Capitalization

Capitalization      
 
September 30,
2016
  
December 31,
2015
  
September 30,
2017
  
December 31,
2016
 
 (In thousands)  (In thousands) 
Subordinated debentures $35,569  $35,569  $35,569  $35,569 
Amount not qualifying as regulatory capital  (1,069)  (1,069)  (1,069)  (1,069)
Amount qualifying as regulatory capital  34,500   34,500   34,500   34,500 
Shareholders’ equity                
Common stock  323,303   339,462   324,607   323,745 
Accumulated deficit  (69,386)  (82,334)  (53,240)  (65,657)
Accumulated other comprehensive loss  (3,015)  (6,036)  (3,657)  (9,108)
Total shareholders’ equity  250,902   251,092   267,710   248,980 
Total capitalization $285,402  $285,592  $302,210  $283,480 

We currently have three special purpose entities with $34.5 million of outstanding cumulative trust preferred securities.  These special purpose entities issued common securities and provided cash to our parent company that in turn issued subordinated debentures to these special purpose entities equal to the trust preferred securities and common securities. The subordinated debentures represent the sole asset of the special purpose entities. The common securities and subordinated debentures are included in our Condensed Consolidated Statements of Financial Condition.
 
8280
The FRB has issued rules regarding trust preferred securities as a component of the Tier 1 capital of bank holding companies. The aggregate amount of trust preferred securities (and certain other capital elements) are limited to 25 percent of Tier 1 capital elements, net of goodwill (net of any associated deferred tax liability). The amount of trust preferred securities and certain other elements in excess of the limit can be included in Tier 2 capital, subject to restrictions. At the parent company, all of these securities qualified as Tier 1 capital at September 30, 20162017 and December 31, 2015.2016. Although the Dodd-Frank Act further limited Tier 1 treatment for trust preferred securities, those new limits did not apply to our outstanding trust preferred securities.  Further, the New Capital Rules grandfathered the treatment of our trust preferred securities as qualifying regulatory capital.

Common shareholders’ equity decreased slightlyincreased to $250.9$267.7 million at September 30, 20162017 from $251.1$249.0 million at December 31, 20152016 due primarily to share repurchases and dividends paid that were partially offset by our net income in the first nine months of 2016 and a decline in our accumulated other comprehensive loss.

We resumed a quarterly cash dividend on ourloss that were partially offset by dividends that we paid. Our tangible common stockequity (“TCE”) totaled $266.0 million and $247.0 million, respectively, at those same dates. Our ratio of six cents per share in May 2014TCE to tangible assets was 9.67% and continued to pay regular quarterly dividends9.70% at that amount through August 2015.  In OctoberSeptember 30, 2017 and December 31, 2016, and 2015, our Board of Directors increased the quarterly cash dividend on our common stock to ten cents and eight cents per share, respectively.

For the past several years, the Bank had negative “undivided profits” (i.e. a retained deficit). Under Michigan banking regulations, the Bank was not permitted to pay a dividend when it had a retained deficit.  We can request regulatory approval for a return of capital from the Bank to the parent company. During the first quarter of 2016, we requested regulatory approval for an $18.0 million return of capital from the Bank to the parent company.  This return of capital request was approved by our banking regulators on February 24, 2016  TCE and the Bank returned $18.0 millionratio of capitalTCE to the parent company on February 25, 2016.  In the second quarter of 2016, the Bank returned to a positive retained earnings position.  At September 30, 2016, the Bank had retained earnings of $8.7 million.  In October 2016, the Bank paid a $5.0 million dividend to the parent company.  Also see Note #11 to the Condensed Consolidated Financial Statements included within this report.tangible assets are non-GAAP measures.  TCE represents total common equity less intangible assets.

On January 21, 2016,23, 2017, our Board of Directors authorized a share repurchase plan.  Under the terms of the 20162017 share repurchase plan, we are authorized to buy back up to 5% of our outstanding common stock.    TheThis repurchase plan is authorized to last through December 31, 2016.2017.  We intenddid not repurchase any shares during the first nine months of 2017.

In October 2017 and expect to accomplish the repurchases through open market transactions, though we could effect repurchases through other means, such as privately negotiated transactions.  The timing and amount of any share repurchases will depend on a variety of factors, including, among others, securities law restrictions, the trading price of our common stock, other regulatory requirements, potential alternative uses for capital, and our financial performance. The repurchase program does not obligate us to acquire any particular amount of common stock, and it may be modified or suspended at any time at our discretion.  On April 26, 2016, our Board of Directors authorized a $5.0 million expansion of this repurchase plan.Through October 31, 2016, we repurchased 1,153,136 shares ofincreased the quarterly cash dividend on our common stock pursuant to this plan at an average price of $14.6212 cents and ten cents per share, leaving $4.4 million remaining under this repurchase plan. respectively.
As of September 30, 20162017 and December 31, 2015,2016, our Bank (and holding company) continued to meet the requirements to be considered “well-capitalized” under federal regulatory standards (also see Note #11note #10 to the Condensed Consolidated Financial Statements included within this report).

Asset/liability management.  Interest-rate risk is created by differences in the cash flow characteristics of our assets and liabilities. Options embedded in certain financial instruments, including caps on adjustable-rate loans as well as borrowers’ rights to prepay fixed-rate loans, also create interest-rate risk.

Our asset/liability management efforts identify and evaluate opportunities to structure our statement of financial condition in a manner that is consistent with our mission to maintain profitable financial leverage within established risk parameters. We evaluate various opportunities and alternate asset/liability management strategies carefully and consider the likely impact on our risk profile as well as the anticipated contribution to earnings. The marginal cost of funds is a principal consideration in the implementation of our asset/liability management strategies, but such evaluations further consider interest-rate and liquidity risk as well as other pertinent factors. We have established parameters for interest-rate risk. We regularly monitor our interest-rate risk and report at least quarterly to our board of directors.

We employ simulation analyses to monitor our interest-rate risk profile and evaluate potential changes in our net interest income and market value of portfolio equity that result from changes in interest rates. The purpose of these simulations is to identify sources of interest-rate risk. The simulations do not anticipate any actions that we might initiate in response to changes in interest rates and, accordingly, the simulations do not provide a reliable forecast of anticipated results. The simulations are predicated on immediate, permanent and parallel shifts in interest rates and generally assume that current loan and deposit pricing relationships remain constant. The simulations further incorporate assumptions relating to changes in customer behavior, including changes in prepayment rates on certain assets and liabilities.
 
Changes in Market Value of Portfolio Equity and Net Interest Income

Change in Interest
Rates
 
Market Value
Of Portfolio
Equity(1)
  
Percent
Change
  
Net Interest
Income(2)
  
Percent
Change
 
  (Dollars in thousands) 
September 30, 2016            
200 basis point rise $387,000   11.50% $85,700   7.93%
100 basis point rise  372,400   7.29   83,000   4.53 
Base-rate scenario  347,100   -   79,400   - 
100 basis point decline  314,500   (9.39)  74,700   (5.92)
                 
December 31, 2015                
200 basis point rise $419,600   8.42% $80,700   6.32%
100 basis point rise  407,300   5.25   78,700   3.69 
Base-rate scenario  387,000   -   75,900   - 
100 basis point decline  356,500   (7.88)  72,000   (5.14)
Change in Interest
Rates
 
Market Value
Of Portfolio
Equity(1)
  
Percent
Change
  
Net Interest
Income(2)
  
Percent
Change
 
  (Dollars in thousands) 
September 30, 2017            
200 basis point rise $410,500   (0.02)% $94,100   1.51%
100 basis point rise  415,900   1.29   94,000   1.40 
Base-rate scenario  410,600   -   92,700   - 
100 basis point decline  379,800   (7.50)  87,000   (6.15)
                 
December 31, 2016                
200 basis point rise $427,400   6.90% $84,800   6.94%
100 basis point rise  417,800   4.50   82,500   4.04 
Base-rate scenario  399,800   -   79,300   - 
100 basis point decline  366,000   (8.45)  73,500   (7.31)

(1)Simulation analyses calculate the change in the net present value of our assets and liabilities, including debt and related financial derivative instruments, under parallel shifts in interest rates by discounting the estimated future cash flows using a market-based discount rate. Cash flow estimates incorporate anticipated changes in prepayment speeds and other embedded options.
(2)Simulation analyses calculate the change in net interest income under immediate parallel shifts in interest rates over the next twelve months, based upon a static statement of financial condition, which includes debt and related financial derivative instruments, and do not consider loan fees.

Accounting standards update. See Notenote #2  to  the Condensed Consolidated Financial Statements included elsewhere in this report for details on recently issued accounting pronouncements and their impact on our financial statements.

Fair valuation of financial instruments.  Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) topic 820 - “Fair Value Measurements and Disclosures” (“FASB ASC topic 820”) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

We utilize fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. FASB ASC topic 820 differentiates between those assets and liabilities required to be carried at fair value at every reporting period (“recurring”) and those assets and liabilities that are only required to be adjusted to fair value under certain circumstances (“nonrecurring”). Trading securities, securities available-for-sale,available for sale, loans held for sale, derivatives and derivativescapitalized mortgage loan servicing rights (as of January 1, 2017) are financial instruments recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other financial assets on a nonrecurring basis, such as loans held for investment, capitalized mortgage loan servicing rights (prior to 2017) and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets. See Note #12note #11 to the Condensed Consolidated Financial Statements included within this report for a complete discussion on our use of fair valuation of financial instruments and the related measurement techniques.
 
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 Litigation Matters

As described in “Recent Developments” we settled a litigation matter in December 2016 and recorded a $2.3 million expense in the fourth quarter of 2016.  We are also involved in various other litigation matters in the ordinary course of business. At the present time, we do not believe any of these matters will have a significant impact on our consolidated financial position or results of operations. The aggregate amount we have accrued for losses we consider probable as a result of these litigation matters is immaterial. However, because of the inherent uncertainty of outcomes from any litigation matter, we believe it is reasonably possible we may incur losses in addition to the amounts we have accrued.  At this time, we estimate the maximum amount of additional losses that are reasonably possible is approximately $1.0 million.insignificant.  However, because of a number of factors, including the fact that certain of these litigation matters are still in their early stages, this maximum amount may change in the future.

The litigation matters described in the preceding paragraph primarily include claims that have been brought against us for damages, but do not include litigation matters where we seek to collect amounts owed to us by third parties (such as litigation initiated to collect delinquent loans or vehicle service contract counterparty receivables)loans). These excluded, collection-related matters may involve claims or counterclaims by the opposing party or parties, but we have excluded such matters from the disclosure contained in the preceding paragraph in all cases where we believe the possibility of us paying damages to any opposing party is remote. Risks associated with the likelihood that we will not collect the full amount owed to us, net of reserves, are disclosed elsewhere in this report.

 Critical Accounting Policies

Our accounting and reporting policies are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. Accounting and reporting policies for the allowance for loan losses,AFLL, capitalized mortgage loan servicing rights, vehicle service contract payment plan counterparty contingencies, and income taxes are deemed critical since they involve the use of estimates and require significant management judgments. Application of assumptions different than those that we have used could result in material changes in our consolidated financial position or results of operations.  During the first quarter of 2016, we dropped the assessment of other than temporary impairment of securities available for sale as a critical accounting policy as we do not believe that this assessment will have a material impact on our consolidated financial position or results of operations.  There have been no other material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.2016.
 
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Item 3.

Quantitative and Qualitative Disclosures about Market Risk

See applicable disclosures set forth in “Management’s��Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 under the caption “Asset/liability management.”

Item 4.

Controls and Procedures

(a)Evaluation of Disclosure Controls and Procedures.

With the participation of management, our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a – 15(e) and 15d – 15(e)) for the period ended September 30, 2016,2017, have concluded that, as of such date, our disclosure controls and procedures were effective.

(b)Changes in Internal Controls.

During the quarter ended September 30, 2016,2017, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
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Part II

Item 1A.
Risk Factors
Item 1A.Risk Factors

There have been no material changes to the risk factors disclosed in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2015.2016.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

The Company maintains a Deferred Compensation and Stock Purchase Plan for Non-Employee Directors (the "Plan") pursuant to which non-employee directors can elect to receive shares of the Company's common stock in lieu of fees otherwise payable to the director for his or her service as a director.  A director can elect to receive shares on a current basis or to defer receipt of the shares, in which case the shares are issued to a trust to be held for the account of the director and then generally distributed to the director after his or her retirement from the Board.  Pursuant to this Plan, during the third quarter of 2016,2017, the Company issued 652677 shares of common stock to non-employee directors on a current basis and 1,3251,697 shares of common stock to the trust for distribution to directors on a deferred basis.  The1,705 shares were issued on July 1, 2016,2017, at a price of $14.51$21.75 per share and 669 shares were issued on July 19, 2017 at a price of $21.30 per share, representing aggregate fees of $0.03$0.05 million.   The price per share was the consolidated closing bid price per share of the Company's common stock as of the date of issuance, as determined in accordance with NASDAQ Marketplace Rules.  The Company issued the shares pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933 due to the fact that the issuance of the shares was made on a private basis pursuant to the Plan.

The following table shows certain information relating to repurchases of common stock for the three-months ended September 30, 2016:2017:

Period 
Total Number of
Shares Purchased
  
Average Price
Paid Per Share
  
Total Number of
Shares Purchased
as Part of a
Publicly
Announced Plan
  
Remaining
Number of
Shares Authorized
for Purchase
Under the Plan(1)
 
July 2016  93,271  $14.41   93,271   - 
August 2016  -   -   -   - 
September 2016  -   -   -   - 
Total  93,271  $14.41   93,271   - 
Period 
Total Number of
Shares Purchased (1)
  
Average Price
Paid Per Share
  
Total Number of
Shares Purchased
as Part of a
Publicly
Announced Plan
  
Remaining
Number of
Shares Authorized
for Purchase
Under the Plan
 
July 2017  196  $21.75   -   1,062,905 
August 2017  2,080   20.25   -   1,062,905 
September 2017  132   20.60   -   1,062,905 
Total  2,408  $20.39   -   1,062,905 

(1)Plus an additional $4.4 million.Represents shares withheld from the shares that would otherwise have been issued to certain officers in order to satisfy tax withholding obligations resulting from vesting of restricted stock.
 
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Item 6.
Exhibits
 
(a)The following exhibits (listed by number corresponding to the Exhibit Table as Item 601 in Regulation S-K) are filed with this report:
 
3.1
Restated Articles of Incorporation, effective October 26, 2017.
31.1
Certificate of the Chief Executive Officer of Independent Bank Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
31.2
Certificate of the Chief Financial Officer of Independent Bank Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
32.1
Certificate of the Chief Executive Officer of Independent Bank Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
32.2
Certificate of the Chief Financial Officer of Independent Bank Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
101.INS Instance Document
 101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DateNovember 3, 20162017 By/s/ Robert N. Shuster
   Robert N. Shuster, Principal Financial Officer
    
DateNovember 3, 20162017 By/s/ James J. Twarozynski
   James J. Twarozynski, Principal Accounting Officer
 
 
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