10-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

þ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2006

or

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

Commission file number 0-7818

INDEPENDENT BANK CORPORATION

(Exact name of Registrant as specified in its charter)

MICHIGAN	38-2032782
(State or other jurisdiction of incorporation)	(I.R.S. employer identification no.)
230 W. Main St., P.O. Box 491, Ionia, Michigan	48846
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (616) 527-9450

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 Par Value
(Title of class)

8.25% Cumulative Trust Preferred Securities, $25.00 Liquidation Amount

(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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 þ No o

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b of the Exchange Act). Act. Yes o No þ

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o.

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or non-accelerated filer.

Large accelerated filer o     Accelerated filer þ     Non-accelerated filer o

The aggregate market value of common stock held by non-affiliates of the Registrant as of June 30, 2006, was $531,927,819.

The number of shares outstanding of the Registrant’s common stock as of March 9, 2007 was 22,871,993.

Documents incorporated by reference
Portions of our definitive proxy statement, and annual report, to be delivered to shareholders in connection with the April 24, 2007 Annual Meeting of Shareholders are incorporated by reference into Part I, Part II and Part III of this annual report.

TABLE OF CONTENTS

PART I
	ITEM 1. BUSINESS
	ITEM 1A. RISK FACTORS
	ITEM 1B. UNRESOLVED STAFF COMMENTS
	ITEM 2. PROPERTIES
	ITEM 3. LEGAL PROCEEDINGS
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II.
	ITEM 5. MARKET FOR OUR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
	ITEM 6. SELECTED FINANCIAL DATA
	ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
	ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
	ITEM 9A. CONTROLS AND PROCEDURES
	ITEM 9A.CONTROLS AND PROCEDURES (continued)
	ITEM 9B. OTHER INFORMATION
PART III.
	ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNACE
	ITEM 11.EXECUTIVE COMPENSATION
	ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
	ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
PART IV.
	ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES
	ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
SIGNATURES
EXHIBIT INDEX
Form of Stock Option Agreement
Annual Report
List of Subsidiaries
Consent of Independent Registered Public Accounting Firm
Consent of Independent Registered Public Accounting Firm
Section 302 Certification of Chief Executive Officer
Section 302 Certification of Chief Financial Officer
Section 906 Certification of Chief Executive Officer
Section 906 Certification of Chief Financial Officer

Any statements in this document that are not historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Words such as “expect,” “believe,” “intend,” “estimate,” “project,” “may” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are predicated on management’s beliefs and assumptions based on information known to Independent Bank Corporation’s management as of the date of this document and do not purport to speak as of any other date. Forward-looking statements may include descriptions of plans and objectives of Independent Bank Corporation’s management for future or past operations, products or services, and forecasts of the Company’s revenue, earnings or other measures of economic performance, including statements of profitability, business segments and subsidiaries, and estimates of credit quality trends. Such statements reflect the view of Independent Bank Corporation’s management as of this date with respect to future events and are not guarantees of future performance; involve assumptions and are subject to substantial risks and uncertainties, such as the changes in Independent Bank Corporation’s plans, objectives, expectations and intentions. Should one or more of these risks materialize or should underlying beliefs or assumptions prove incorrect, the Company’s actual results could differ materially from those discussed. Factors that could cause or contribute to such differences are changes in interest rates, changes in the accounting treatment of any particular item, the results of regulatory examinations, changes in industries where the Company has a concentration of loans, changes in the level of fee income, changes in general economic conditions and related credit and market conditions, and the impact of regulatory responses to any of the foregoing. Forward-looking statements speak only as of the date they are made. Independent Bank Corporation does not undertake to update forward-looking statements to reflect facts; circumstances, assumptions or events that occur after the date the forward-looking statements are made. For any forward-looking statements made in this document, Independent Bank Corporation claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

PART I

ITEM 1. BUSINESS

Independent Bank Corporation was incorporated under the laws of the State of Michigan on September 17, 1973, for the purpose of becoming a bank holding company. We are registered under the Bank Holding Company Act of 1956, as amended, and own the outstanding stock of four banks (the “Banks”) which are all organized under the laws of the State of Michigan.

Aside from the stock of our Banks, we have no other substantial assets. We conduct no business except for the provision of certain management and operational services to our Banks, the collection of fees and dividends from our Banks and the payment of dividends to our shareholders. Certain employee retirement plans (including employee stock ownership and deferred compensation plans) as well as health and other insurance programs have been established by us. The proportional costs of these plans are borne by each of our Banks and their respective subsidiaries.

We have no material patents, trademarks, licenses or franchises except the corporate franchises of our Banks which permit them to engage in commercial banking pursuant to Michigan law.

The following table shows each of our Banks and their total deposits and loans as of December 31, 2006:

	Main Office	Total		Total
Bank	Location	Deposits		Loans
Independent Bank (1)	Bay City	$	909,399,000	$	926,269,000
Independent Bank West Michigan	Grand Rapids		669,633,000		646,084,000
Independent Bank South Michigan	East Lansing		431,109,000		354,517,000
Independent Bank East Michigan	Troy		609,302,000		556,525,000

(1) Total deposits and total loans excludes those amounts classified to discontinued operations.

1

ITEM 1. BUSINESS (Continued)

On January 15, 2007 we sold substantially all of the assets of Mepco Finance Corporation’s, formerly known as Mepco Insurance Premium Financing, Inc., (“Mepco”) insurance premium finance business to Premium Financing Specialists, Inc. (“PFS”). We received $176.0 million of cash that was utilized to payoff Brokered CD’s and short-term borrowings at Mepco’s parent company, Independent Bank. Under the terms of the sale, PFS also assumed approximately $11.7 million in liabilities. In the fourth quarter of 2006, we recorded a loss of $0.2 million and accrued for approximately $1.1 million of expenses related to the disposal of this business. We also allocated $4.1 million of goodwill and $0.3 million of other intangible assets to this business. Revenues and expenses associated with Mepco’s insurance premium finance business have been presented as discontinued operations in the Consolidated Statements of Operations. Likewise, the assets and liabilities associated with this business have been reclassified to discontinued operations in the Consolidated Statements of Financial Condition.

We expect to complete the acquisition of ten branches with total deposits of approximately $235 million from TCF National Bank in March 2007. These branches are located in or near Battle Creek, Bay City and Saginaw, Michigan. We anticipate using the proceeds from these deposits to payoff higher costing short term borrowings and brokered certificates of deposit.

Our Banks transact business in the single industry of commercial banking. Most of our Banks’ offices provide full-service lobby and drive-thru services in the communities which they serve. Automatic teller machines are also provided at most locations.

Our Banks’ activities cover all phases of commercial banking, including checking and savings accounts, commercial lending, direct and indirect consumer financing, mortgage lending and safe deposit box services. Our Banks’ mortgage lending activities are primarily conducted through separate mortgage bank subsidiaries. We also provide payment plans to consumers to purchase extended automobile warranties through Mepco. In addition, our Banks offer title insurance services through a separate subsidiary and provide investment and insurance services through a third party agreement with PrimeVest Financial Services, Inc. Our Banks do not offer trust services. Our principal markets are the rural and suburban communities across lower Michigan that are served by our Banks’ branch networks. The local economies of the communities served by our Banks are relatively stable and reasonably diversified. Our Banks serve their markets through their four main offices and a total of 89 branches, 4 drive-thru facilities and 18 loan production offices.

Our Banks compete with other commercial banks, savings and loan associations, credit unions, mortgage banking companies, securities brokerage companies, insurance companies, and money market mutual funds. Many of these competitors have substantially greater resources than we do and offer certain services that we do not currently provide. Such competitors may also have greater lending limits than our Banks. In addition, non-bank competitors are generally not subject to the extensive regulations applicable to us.

Price (the interest charged on loans and/or paid on deposits) remains a principal means of competition within the financial services industry. Our Banks also compete on the basis of service and convenience, utilizing the strengths and benefits of our decentralized structure in providing financial services.

The principal sources of revenue, on a consolidated basis, are interest and fees on loans, other interest income and non-interest income. The sources of revenue for the three most recent years are as follows:

	2006			2005			2004
Interest and fees on loans		74.1	%		71.2	%		68.3	%
Other interest income		8.8			10.7			11.8
Non-interest income		17.1			18.1			19.9
		100.0	%		100.0	%		100.0	%

As of December 31, 2006, we had 1,099 full-time employees and 261 part-time employees.

2

ITEM 1. BUSINESS (Continued)

Supervision and Regulation

The following is a summary of certain statutes and regulations affecting us. This summary is qualified in its entirety by reference to the particular statutes and regulations. A change in applicable laws or regulations may have a material effect on us and our Banks.

General

Financial institutions and their holding companies are extensively regulated under Federal and state law. Consequently, our growth and earnings performance can be affected not only by management decisions and general and local economic conditions, but also by the statutes administered by, and the regulations and policies of, various governmental regulatory authorities. Those authorities include, but are not limited to, the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Federal Deposit Insurance Corporation (the “FDIC”), the Michigan Office of Financial and Insurance Services, Division of Financial Institutions (the “OFIS”), the Internal Revenue Service, and state taxing authorities. The effect of such statutes, regulations and policies and any changes thereto can be significant and cannot be predicted.

Federal and state laws and regulations generally applicable to financial institutions and their holding companies regulate, among other things, the scope of business, investments, reserves against deposits, capital levels, lending activities and practices, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to us establishes a comprehensive framework for our operations and is intended primarily for the protection of the FDIC’s deposit insurance funds, the depositors of our Banks, and the public, rather than our shareholders.

Federal law and regulations establish supervisory standards applicable to the lending activities of our Banks, including internal controls, credit underwriting, loan documentation and loan-to-value ratios for loans secured by real property.

Independent Bank Corporation

General. We are a bank holding company and, as such, are registered with, and subject to regulation by, the Federal Reserve under the Bank Holding Company Act, as amended (the “BHCA”). Under the BHCA, we are subject to periodic examination by the Federal Reserve, and are required to file periodic reports of operations and such additional information as the Federal Reserve may require.

In accordance with Federal Reserve policy, a bank holding company is expected to act as a source of financial strength to its subsidiary banks and to commit resources to support the subsidiary banks in circumstances where the bank holding company might not do so absent such policy.

In addition, if the OFIS deems a bank’s capital to be impaired, the OFIS may require a bank to restore its capital by special assessment upon a bank holding company, as the bank’s sole shareholder. If the bank holding company were to fail to pay such assessment, the directors of that bank would be required, under Michigan law, to sell the shares of that bank stock owned by the bank holding company to the highest bidder at either public or private auction and use the proceeds of the sale to restore the bank’s capital.

Any capital loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Investments and Activities. In general, any direct or indirect acquisition by a bank holding company of any voting shares of any bank which would result in the bank holding company’s direct or indirect ownership or control of more than 5% of any class of voting shares of such bank, and any merger or consolidation of the bank holding company with another bank holding company, will require the prior written approval of the Federal Reserve under the BHCA. In acting on such applications, the Federal Reserve must consider various statutory factors including the

3

ITEM 1. BUSINESS (Continued)

effect of the proposed transaction on competition in relevant geographic and product markets, and each party’s financial condition, managerial resources, and record of performance under the Community Reinvestment Act.

In addition and subject to certain exceptions, the Change in the Bank Control Act (“Control Act”) and regulations promulgated thereunder by the Federal Reserve, require any person acting directly or indirectly, or through or in concert with one or more persons, to give the Federal Reserve 60 days’ written notice before acquiring control of a bank holding company. Transactions which are presumed to constitute the acquisition of control include the acquisition of any voting securities of a bank holding company having securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, if, after the transaction, the acquiring person (or persons acting in concert) owns, controls or holds with power to vote 25% or more of any class of voting securities of the institution. The acquisition may not be consummated subsequent to such notice if the Federal Reserve issues a notice within 60 days, or within certain extensions of such period, disapproving the acquisition.

The merger or consolidation of an existing bank subsidiary of a bank holding company with another bank, or the acquisition by such a subsidiary of the assets of another bank, or the assumption of the deposit and other liabilities by such a subsidiary requires the prior written approval of the responsible Federal depository institution regulatory agency under the Bank Merger Act, based upon a consideration of statutory factors similar to those outlined above with respect to the BHCA. In addition, in certain cases an application to, and the prior approval of, the Federal Reserve under the BHCA and/or OFIS under Michigan banking laws, may be required.

With certain limited exceptions, the BHCA prohibits any bank holding company from engaging, either directly or indirectly through a subsidiary, in any activity other than managing or controlling banks unless the proposed non-banking activity is one that the Federal Reserve has determined to be so closely related to banking as to be a proper incident thereto. Under current Federal Reserve regulations, such permissible non-banking activities include such things as mortgage banking, equipment leasing, securities brokerage, and consumer and commercial finance company operations. Well-capitalized and well-managed bank holding companies may, however, engage de novo in certain types of non-banking activities without prior notice to, or approval of, the Federal Reserve, provided that written notice of the new activity is given to the Federal Reserve within 10 business days after the activity is commenced. If a bank holding company wishes to engage in a non-banking activity by acquiring a going concern, prior notice and/or prior approval will be required, depending upon the activities in which the company to be acquired is engaged, the size of the company to be acquired and the financial and managerial condition of the acquiring bank company.

Eligible bank holding companies that elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance activities and any other activity that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature, incidental to any such financial activity or complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. The Bank Holding Company Act generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank or financial holding companies. While we believe we are eligible to elect to operate as a financial holding company, as of the date of this filing, we have not applied for approval to operate as a financial holding company.

Capital Requirements. The Federal Reserve uses capital adequacy guidelines in its examination and regulation of bank holding companies. If capital falls below minimum guidelines, a bank holding company may, among other things, be denied approval to acquire or establish additional banks or non-bank businesses.

The Federal Reserve’s capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: (i) a leverage capital requirement expressed as a percentage of total assets, and (ii) a risk-based requirement expressed as a percentage of total risk-weighted assets. The leverage capital requirement consists of a minimum ratio of Tier 1 capital (which consists principally of shareholders’ equity) to total assets of 3% for the most highly rated companies with minimum requirements of 4% to 5% for all others. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, of which at least one-half must be Tier 1 capital.

The risk-based and leverage standards presently used by the Federal Reserve are minimum requirements, and higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking

4

ITEM 1. BUSINESS (Continued)

organizations. The Federal Reserve has not advised us of any specific minimum Tier 1 Capital leverage ratio applicable to us.

Included in our Tier 1 capital is $62.4 million of trust preferred securities (classified on our balance sheet as “Subordinated debentures”). In March 2005, the Federal Reserve Board issued a final rule that would retain trust preferred securities in the Tier 1 capital of bank holding companies. After a transition period ending March 31, 2009, the aggregate amount of trust preferred securities and certain other capital elements would be limited to 25 percent of Tier 1 capital elements, net of goodwill (less any associated deferred tax liability). The amount of trust preferred securities and certain other elements in excess of the limit could be included in the Tier 2 capital, subject to restrictions. Based upon our existing levels of Tier 1 capital, trust preferred securities and goodwill, this final Federal Reserve Board rule would have no impact on our Tier 1 capital to average assets ratio at December 31, 2006.

The Federal bank regulatory agencies are required biennially to review risk-based capital standards to ensure that they adequately address interest rate risk, concentration of credit risk and risks from non-traditional activities.

Dividends. Most of our revenues are received in the form of dividends paid by our Banks. Thus, our ability to pay dividends to our shareholders is indirectly limited by statutory restrictions on the ability of our Banks to pay dividends. Further, in a policy statement, the Federal Reserve has expressed its view that a bank holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income or which can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. Additionally, the Federal Reserve possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. Similar enforcement powers over subsidiary banks are possessed by the FDIC. The “prompt corrective action” provisions of federal law and regulation authorizes the Federal Reserve to restrict the amount of dividends that an insured bank can pay which fails to meet specified capital levels.

In addition to the restrictions on dividends imposed by the Federal Reserve, the Michigan Business Corporation Act provides that dividends may be legally declared or paid only if after the distribution, a corporation can pay its debts as they come due in the usual course of business and its total assets equal or exceed the sum of its liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of any holders of preferred stock whose preferential rights are superior to those receiving the distribution. We do not have any holders of preferred stock.

Federal Securities Regulation. Our common stock is registered with the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We are therefore subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act. The Sarbanes-Oxley Act of 2002 provides for numerous changes to the reporting, accounting, corporate governance and business practices of companies as well as financial and other professionals who have involvement with the U.S. public markets.

Our Banks

General. Our Banks are Michigan banking corporations and their deposit accounts are insured by the Deposit Insurance Fund (“DIF”) of the FDIC. As DIF-insured Michigan chartered banks, our Banks are subject to the examination, supervision, reporting and enforcement requirements of the OFIS, as the chartering authority for Michigan banks, and the FDIC, as administrator of the DIF. These agencies and the federal and state laws applicable to our Banks and their operations, extensively regulate various aspects of the banking business including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and on deposits, the maintenance of non-interest bearing reserves on deposit accounts, and the safety and soundness of banking practices.

Deposit Insurance. As an FDIC-insured institution, we are required to pay deposit insurance premium assessments to the FDIC. The federal deposit insurance system was overhauled in 2006 as a result of the enactment of The Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”), which was signed into law in February of 2006.

5

ITEM 1. BUSINESS (Continued)

Pursuant to the Reform Act, the FDIC has modified its risk-based assessment system for deposit insurance premiums. Under the new system, all insured depository institutions are placed into one of four categories and assessed insurance premiums based primarily on their level of capital and supervisory evaluations.

The Reform Act requires the FDIC to establish assessment rates for insured depository institutions at levels that will maintain the Deposit Insurance Fund at a Designated Reserve Ratio (DRR) selected by the FDIC within a range of 1.15% to 1.50%. The Reform Act allows the FDIC to manage the pace at which the reserve ratio varies within this range. Effective January 1, 2007, the FDIC established the DRR at 1.25% and adopted new premium rates for 2007.

Banks that have not been paying any deposit insurance premiums for the past 10 years will now be required to pay premiums of 5 to 7 basis points (calculated against the bank’s deposit base) in 2007. Under the new rate schedule, most well-capitalized banks will pay 5 to 7 basis points annually. That rate increases to 43 basis points for banks that pose significant supervisory concerns. Premiums will be assessed and collected quarterly by the FDIC.

These premiums will be initially offset for certain eligible institutions by a one-time assessment credit granted in recognition of historical contributions made by the eligible institutions to the deposit fund. The credit may be applied against the institution’s 2007 assessment, and for the three years thereafter, the institution may apply the credit against up to 90% of its assessment. Preliminary estimates are that our four Banks will qualify for aggregate credits of approximately $1,689,000; this is an estimate only and is subject to final confirmation by the FDIC.

FICO Assessments. Our Banks, as members of the DIF, are subject to assessments to cover the payments on outstanding obligations of the financing corporation (“FICO”). FICO was created to finance the recapitalization of the Federal Savings and Loan Insurance Corporation, the predecessor to the FDIC’s Savings Association Insurance Fund (the “SAIF”), which was created to insure the deposits of thrift institutions and was merged with the Bank Insurance Fund into the newly formed DIF in 2006. From now until the maturity of the outstanding FICO obligations in 2019, DIF members will share the cost of the interest on the FICO bonds on a pro rata basis. It is estimated that FICO assessments during this period will be approximately 0.012% of deposits.

OFIS Assessments. Michigan banks are required to pay supervisory fees to the OFIS to fund the OFIS’s operations. The amount of supervisory fees paid by a bank is based upon the bank’s total assets.

Capital Requirements. The FDIC has established the following minimum capital standards for state-chartered, FDIC-insured non-member banks, such as our Banks: a leverage requirement consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated banks with minimum requirements of 4% to 5% for all others, and a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. Tier 1 capital consists principally of shareholders’ equity. These capital requirements are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions. For example, FDIC regulations provide that higher capital may be required to take adequate account of, among other things, interest rate risk and the risks posed by concentrations of credit, nontraditional activities or securities trading activities.

Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators’ powers depends on whether the institution in question is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized.” Federal regulations define these capital categories as follows:

	Total	Tier 1
	Risk-Based	Risk-Based
	Capital Ratio	Capital Ratio	Leverage Ratio
Well capitalized	10% or above	6% or above	5% or above
Adequately capitalized	8% or above	4% or above	4% or above
Undercapitalized	Less than 8%	Less than 4%	Less than 4%
Significantly undercapitalized	Less than 6%	Less than 3%	Less than 3%
Critically undercapitalized	—	—	A ratio of tangible equity to total assets of 2% or less

6

ITEM 1. BUSINESS (Continued)

At December 31, 2006, each of our Bank’s ratios exceeded minimum requirements for the well-capitalized category.

Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rates the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution.

In general, a depository institution may be reclassified to a lower category than is indicated by its capital levels if the appropriate federal depository institution regulatory agency determines the institution to be otherwise in an unsafe or unsound condition or to be engaged in an unsafe or unsound practice. This could include a failure by the institution, following receipt of a less-than-satisfactory rating on its most recent examination report, to correct the deficiency.

Dividends. Under Michigan law, banks are restricted as to the maximum amount of dividends they may pay on their common stock. Our Banks may not pay dividends except out of their net income after deducting their losses and bad debts. A Michigan state bank may not declare or pay a dividend unless the bank will have a surplus amounting to at least 20% of its capital after the payment of the dividend.

Federal law generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. The FDIC may prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the FDIC. In addition, the FDIC may prohibit the payment of dividends by the bank, if such payment is determined, by reason of the financial condition of the bank, to be an unsafe and unsound banking practice.

Insider Transactions. Our Banks are subject to certain restrictions imposed by the Federal Reserve Act on “covered transactions” with us or our subsidiaries on investments in our stock or other securities issued by us or our subsidiaries and the acceptance of our stock or other securities issued by us or our subsidiaries as collateral for loans. Certain limitations and reporting requirements are also placed on extensions of credit by our Banks to their directors and officers, to our directors and officers and those of our subsidiaries, to our principal shareholders, and to “related interests” of such directors, officers and principal shareholders. In addition, federal law and regulations may affect the terms upon which any person becoming one of our directors or officers or a principal shareholder may obtain credit from banks with which our Banks maintain a correspondent relationship.

Safety and Soundness Standards. Pursuant to FDICIA, the FDIC adopted guidelines to establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines establish standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.

Investment and Other Activities. Under federal law and FDIC regulations, FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. FDICIA, as implemented by FDIC regulations, also prohibits FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging as a principal in any activity that is not permitted for a national bank or its subsidiary, respectively, unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines the activity would not pose a significant risk to the deposit insurance fund of which the bank is a member. Impermissible investments and activities must be otherwise divested or discontinued within certain time frames set by the FDIC in accordance with FDICIA. These restrictions are not currently expected to have a material impact on the operations of our Banks.

7

ITEM 1. BUSINESS (Continued)

Consumer Banking. Our Banks’ business includes making a variety of types of loans to individuals. In making these loans, our Banks are subject to State usury and regulatory laws and to various Federal statutes, including the privacy of consumer financial information provisions of the Gramm Leach-Bliley Act and regulations promulgated thereunder, the Equal Credit Opportunity Act, Fair Credit Reporting Act, Truth in Lending Act, Real Estate Settlement Procedures Act, and Home Mortgage Disclosure Act, and the regulations promulgated thereunder, which prohibit discrimination, specify disclosures to be made to borrowers regarding credit and settlement costs, and regulate the mortgage loan servicing activities of our Banks, including the maintenance and operation of escrow accounts and the transfer of mortgage loan servicing. In receiving deposits, our Banks are subject to extensive regulation under state and Federal law and regulations, including the Truth in Savings Act, the Expedited Funds Availability Act, the Bank Secrecy Act, the Electronic Funds Transfer Act, and the Federal Deposit Insurance Act. Violation of these laws could result in the imposition of significant damages and fines upon our Banks and their respective directors and officers.

Branching Authority. Michigan banks, such as our Banks, have the authority under Michigan law to establish branches anywhere in the State of Michigan, subject to receipt of all required regulatory approvals.

Banks may establish interstate branch networks through acquisitions of other banks. The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed only if specifically authorized by state law.

Michigan permits both U.S. and non-U.S. banks to establish branch offices in Michigan. The Michigan Banking Code permits, in appropriate circumstances and with the approval of the OFIS (1) acquisition of Michigan banks by FDIC-insured banks, savings banks or savings and loan associations located in other states, (2) sale by a Michigan bank of branches to an FDIC-insured bank, savings bank or savings and loan association located in a state in which a Michigan bank could purchase branches of the purchasing entity, (3) consolidation of Michigan banks and FDIC-insured banks, savings banks or savings and loan associations located in other states having laws permitting such consolidation, (4) establishment of branches in Michigan by FDIC-insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting a Michigan bank to establish a branch in such jurisdiction, and (5) establishment by foreign banks of branches located in Michigan.

Mepco Finance Corporation.

Our subsidiary, Mepco Finance Corporation, is engaged in the business of administering a payment plan program for consumers throughout the United States who have purchased a vehicle service contract and choose to pay the purchase price in installments. In the typical transaction, no interest or other finance charge is charged to these consumers. As a result, Mepco is generally not subject to regulation under consumer lending laws. However, Mepco is subject to various federal and state laws designed to protect consumers, including laws against unfair and deceptive trade practices and laws regulating Mepco’s payment processing activities, such as the Electronic Funds Transfer Act.

In addition, although Mepco sold its insurance premium finance business in January of 2007 and no longer originates insurance premium finance loans, it engaged in this business in 2006 and agreed to service the insurance premium finance loans sold in January 2007 until their maturity. In connection with these servicing activities, Mepco is subject to extensive state regulation, including various rules regarding the cancellation of the insurance policy(ies) being financed upon nonpayment by the insured.

Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available free of charge through our website at www.ibcp.com as soon as reasonably practicable after filing with the SEC.

8

ITEM 1. BUSINESS — STATISTICAL DISCLOSURE

I. (A) DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS’ EQUITY;

    (B) INTEREST RATES AND INTEREST DIFFERENTIAL

    (C) INTEREST RATES AND DIFFERENTIAL

The information set forth in the tables captioned “Average Balances and Tax Equivalent Rates” and “Change in Tax Equivalent Net Interest Income” of our annual report, to be delivered to shareholders in connection with the April 24, 2007 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K) is incorporated herein by reference.

II. INVESTMENT PORTFOLIO

    (A) The following table sets forth the book value of securities at December 31:

	2006		2005		2004
			(in thousands)
Available for sale
U.S. Treasury	$	4,914	$	4,873	$	9,924
States and political subdivisions		244,284		257,840		244,488
Mortgage-backed		130,195		162,461		222,454
Other asset-backed		12,508		15,339		23,577
Trust preferred		11,259		12,498		19,916
Preferred stock		29,625		28,337		25,913
Corporate						2,000
Other		2,000		2,099		2,636
Total	$	434,785	$	483,447	$	550,908

9

ITEM 1. BUSINESS — STATISTICAL DISCLOSURE (Continued)

II. INVESTMENT PORTFOLIO (Continued)

     (B) The following table sets forth contractual maturities of securities at December 31, 2006 and the weighted average yield of such securities:

						Maturing					Maturing
	Maturing					After One					After Five					Maturing
	Within					But Within					But Within					After
	One Year					Five Years					Ten Years					Ten Years
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
	(dollars in thousands)
Available for sale
U.S. Treasury	$	4,914		3.09	%
States and political subdivisions		14,543		7.46		$	58,708		6.98	%	$	65,646		7.09	%	$	105,387		6.40	%
Mortgage-backed		15		5.53			126,652		4.95			3,349		4.71			179		8.04
Other asset-backed							11,018		6.44								1,490		7.72
Trust preferred																	11,259		7.34
Preferred stock																	29,625		7.30
Corporate Other securities		—					—					—					2,000		4.22
Total	$	19,472		6.36	%	$	196,378		5.64	%	$	68,995		6.97	%	$	149,940		6.63	%
Tax equivalent adjustment for calculations of yield	$	380				$	1,432				$	1,628				$	2,943

The rates set forth in the tables above for obligations of state and political subdivisions and preferred stock have been restated on a tax equivalent basis assuming a marginal tax rate of 35%. The amount of the adjustment is as follows:

	Tax-Exempt						Rate on Tax
Available for sale	Rate			Adjustment			Equivalent Basis
Under 1 year		4.85	%		2.61	%		7.46	%
1-5 years		4.54			2.44			6.98
5-10 years		4.61			2.48			7.09
After 10 years		4.42			2.18			6.60

10

ITEM 1. BUSINESS — STATISTICAL DISCLOSURE (Continued)

III. LOAN PORTFOLIO

     (A) The following table sets forth total loans outstanding at December 31:

	2006		2005		2004		2003		2002
	(in thousands)
Loans held for sale	$	31,846	$	28,569	$	38,756	$	32,642	$	129,577
Real estate mortgage		865,522		852,742		773,609		681,602		601,799
Commercial		1,083,921		1,030,095		931,251		603,558		536,715
Installment		350,273		304,053		266,042		234,562		242,928
Finance receivables		183,679		185,427		115,580		55,333
Total Loans	$	2,515,241	$	2,400,886	$	2,125,238	$	1,607,697	$	1,511,019

     The loan portfolio is periodically and systematically reviewed, and the results of these reviews are reported to the Boards of Directors of our banks. The purpose of these reviews is to assist in assuring proper loan documentation, to facilitate compliance with consumer protection laws and regulations, to provide for the early identification of potential problem loans (which enhances collection prospects) and to evaluate the adequacy of the allowance for loan losses.

     (B) The following table sets forth scheduled loan repayments (excluding 1-4 family residential mortgages and installment loans) at December 31, 2006:

			Due
	Due		After One		Due
	Within		But Within		After
	One Year		Five Years		Five Years		Total
	(in thousands)
Real estate mortgage	$	78,483	$	59,219	$	6,859	$	144,561
Commercial		555,613		454,357		73,951		1,083,921
Finance receivables		98,546		85,133				183,679
Total	$	732,642	$	598,709	$	80,810	$	1,412,161

     The following table sets forth loans due after one year which have predetermined (fixed) interest rates and/or adjustable (variable) interest rates at December 31, 2006:

	Fixed		Variable
	Rate		Rate		Total
	(in thousands)
Due after one but within five years	$	541,048	$	57,661	$	598,709
Due after five years		77,297		3,513		80,810
Total	$	618,345	$	61,174	$	679,519

11

ITEM 1. BUSINESS — STATISTICAL DISCLOSURE (Continued)

III. LOAN PORTFOLIO (Continued)

     (C) The following table sets forth non-performing loans at December 31:

	2006		2005		2004		2003		2002
	(in thousands)
(a) Loans accounted for on a non-accrual basis (1, 2)	$	35,683	$	11,546	$	11,119	$	8,316	$	5,738
(b) Aggregate amount of loans ninety days or more past due (excludes loans in (a) above)		3,479		4,862		3,123		3,284		3,961
(c) Loans not included above which are “troubled debt restructurings” as defined in Statement of Financial Accounting Standards No. 15 (2)		60		84		218		335		270
Total non-performing loans	$	39,222	$	16,492	$	14,460	$	11,935	$	9,969

(1)	The accrual of interest income is discontinued when a loan becomes 90 days past due and the borrower’s capacity to repay the loan and collateral values appear insufficient. Non-accrual loans may be restored to accrual status when interest and principal payments are current and the loan appears otherwise collectible.
(2)	Interest in the amount of $1,945,000 would have been earned in 2006 had loans in categories (a) and (c) remained at their original terms; however, only $426,000 was included in interest income for the year with respect to these loans.

     Other loans of concern identified by the loan review department which are not included as non-performing totaled approximately $2,100,000 at December 31, 2006. These loans involve circumstances which have caused management to place increased scrutiny on the credits and may, in some instances, represent an increased risk of loss to our Banks.

     At December 31, 2006, there was no concentration of loans exceeding 10% of total loans which is not already disclosed as a category of loans in this section “Loan Portfolio” (Item III(A)).

     There were no other interest-bearing assets at December 31, 2006, that would be required to be disclosed above (Item III(C)), if such assets were loans.

     There were no foreign loans outstanding at December 31, 2006.

12

ITEM 1. BUSINESS — STATISTICAL DISCLOSURE (Continued)

IV. SUMMARY OF LOAN LOSS EXPERIENCE

     (A) The following table sets forth loan balances and summarizes the changes in the allowance for loan losses for each of the years ended December 31:

	2006		2005		2004
	(dollars in thousands)
Total loans outstanding at the end of the year (net of unearned fees)	$	2,515,241	$	2,400,886	$	2,125,238
Average total loans outstanding for the year (net of unearned fees)	$	2,472,091	$	2,268,846	$	1,893,007

				Unfunded					Unfunded						Unfunded
	Loan			Commitments		Loan			Commitments			Loan			Commitments
	Losses					Losses						Losses
Balance at beginning of year	$	22,420		$	1,820	$	24,162		$	1,846		$	16,455		$	892
Loans charged-off
Real estate mortgage		2,660					1,611						677
Commercial		6,214					5,141						849
Installment		4,913					4,246						3,194
Finance receivables		274					94						112
Total loans charged-off		14,061					11,092						4,832
Recoveries of loans previously charged-off
Real estate mortgage		215					97						39
Commercial		496					226						190
Installment		1,526					1,195						1,012
Finance receivables
Total recoveries		2,237					1,518						1,241
Net loans charged-off		11,824					9,574						3,591
Additions to allowance charged to operating expense		16,283			61		7,832			(26	)		3,062			954
Allowance on loans from businesses acquired													8,236
Balance at end of year	$	26,879		$	1,881	$	22,420		$	1,820		$	24,162		$	1,846
Net loans charged-off as a percent of average loans outstanding (includes loans held for sale) for the year		.48	%				.42	%					.19	%
Allowance for loan losses as a percent of loans outstanding (includes loans held for sale) at the end of the year		1.07					.93						1.14

13

ITEM 1. BUSINESS — STATISTICAL DISCLOSURE (Continued)

IV. SUMMARY OF LOAN LOSS EXPERIENCE (Continued)

	2003		2002
	(dollars in thousands)
Total loans outstanding at the end of the year (net of unearned fees)	$	1,607,697	$	1,511,019
Average total loans outstanding for the year (net of unearned fees)	$	1,569,844	$	1,437,925

				Unfunded					Unfunded
	Loan			Commitments		Loan			Commitments
	Losses					Losses
Balance at beginning of year	$	15,830		$	875	$	15,286		$	881
Loans charged-off Real estate mortgage		413					626
Commercial		1,628					1,002
Installment		2,412					2,129
Finance receivables		83
Total loans charged-off		4,536					3,757
Recoveries of loans previously charged-off
Real estate mortgage		115					46
Commercial		216					73
Installment		756					614
Finance receivables		—					—
Total recoveries		1,087					733
Net loans charged-off		3,449					3,024
Additions to allowance charged to operating expense		3,826			17		3,568			(6	)
Allowance on loans from business acquired		248
Balance at end of year	$	16,455		$	892	$	15,830		$	875
Net loans charged-off as a percent of average loans outstanding (includes loans held for sale) for the year		.22	%				.21	%
Allowance for loan losses as a percent of loans outstanding (includes loans held for sale) at the end of the year		1.02					1.05

     The allowance for loan losses reflected above is a valuation allowance in its entirety and the only allowance available to absorb probable loan losses.

     Further discussion of the provision and allowance for loan losses (a critical accounting policy) as well as non-performing loans, is presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our annual report, to be delivered to shareholders in connection with the April 24, 2007 Annual Meeting of Shareholders (as filed as exhibit 13 to this report on Form 10-K) is incorporated herein by reference.

14

ITEM 1. BUSINESS — STATISTICAL DISCLOSURE (Continued)
IV. SUMMARY OF LOAN LOSS EXPERIENCE (Continued)

     (B) Our Banks have allocated the allowance for loan losses to provide for the possibility of losses being incurred within the categories of loans set forth in the table below. The amount of the allowance that is allocated and the ratio of loans within each category to total loans at December 31 follows:

	2006					2005					2004
			Percent					Percent					Percent
	Allowance		of Loans to			Allowance		of Loans to			Allowance		of Loans to
	Amount		Total Loans			Amount		Total Loans			Amount		Total Loans
						(dollars in thousands)
Commercial	$	15,010		43.1	%	$	11,735		42.9	%	$	13,640		43.8	%
Real estate mortgage		1,645		35.7			1,156		36.7			988		38.2
Installment		2,469		13.9			2,835		12.7			2,769		12.5
Finance receivables		292		7.3			293		7.7			394		5.5
Unallocated		7,463					6,401					6,371
Total	$	26,879		100.0	%	$	22,420		100.0	%	$	24,162		100.0	%

	2003					2002
			Percent					Percent
	Allowance		of Loans to			Allowance		of Loans to
	Amount		Total Loans			Amount		Total Loans
			(dollars in thousands)
Commercial	$	8,088		37.6	%	$	7,543		35.5	%
Real estate mortgage		442		44.4			464		48.4
Installment		1,299		14.6			1,311		16.1
Finance receivables		349		3.4
Unallocated		6,277					6,512
Total	$	16,455		100.0	%	$	15,830		100.0	%

15

ITEM 1. BUSINESS — STATISTICAL DISCLOSURE (Continued)
V. DEPOSITS

     The following table sets forth average deposit balances and the weighted-average rates paid thereon for the years ended December 31:

	2006					2005					2004
	Average					Average					Average
	Balance		Rate			Balance		Rate			Balance		Rate
						(dollars in thousands)
Non-interest bearing demand	$	279,279				$	283,670				$	240,800
Savings and NOW		864,528		1.57	%		871,599		0.96	%		805,885		0.56	%
Time deposits		1,405,850		4.32			1,087,830		3.09			817,615		2.67
Total	$	2,549,657		2.91	%	$	2,243,099		1.87	%	$	1,864,300		1.41	%

     The following table summarizes time deposits in amounts of $100,000 or more by time remaining until maturity at December 31, 2006:

	(in thousands)
Three months or less (1)	$	221,998
Over three through six months		131,401
Over six months through one year		91,639
Over one year		608,282
Total	$	1,053,320

⁽¹⁾ Excludes time deposits of $165,496 that has been allocated to discontinued operations.

VI. RETURN ON EQUITY AND ASSETS

     The ratio of net income to average shareholders’ equity and to average total assets, and certain other ratios, for the years ended December 31 follow:

	2006			2005			2004			2003			2002
Income from continuing operations as a percent of
Average common equity		13.06	%		18.63	%		20.30	%		24.47	%		21.34	%
Average total assets		0.99			1.42			1.48			1.66			1.52
Net income as a percent of
Average common equity		12.82			19.12			19.42			24.89			21.34
Average total assets		0.97			1.45			1.42			1.69			1.52
Dividends declared per share as a percent of diluted net income per share		54.55			36.04			35.93			31.18			30.77
Average shareholders’ equity as a percent of average total assets		7.60			7.61			7.31			6.80			7.14

     Additional performance ratios are set forth in Selected Consolidated Financial Data in our annual report, to be delivered to shareholders in connection with the April 24, 2007 Annual Meeting of Shareholders (as filed as exhibit 13 to this report on Form 10-K) is incorporated herein by reference. Any significant changes in the current trend of the above ratios are reviewed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our annual report, to be delivered to shareholders in connection with the April 24, 2007 Annual Meeting of Shareholders (as filed as exhibit 13 to this report on Form 10-K) is incorporated herein by reference.

VII. SHORT-TERM BORROWINGS

     Short-term borrowings are discussed in note 9 to the consolidated financial statements incorporated herein by reference in Item 8, Part II of this report.

16

ITEM 1A. RISK FACTORS

We have credit risk inherent in our asset portfolios, and our allowance for loan losses may not be sufficient to cover actual loan losses. Our loan customers may not repay their loans according to their respective terms, and the collateral securing the payment of these loans may be insufficient to assure repayment. We may experience significant credit losses which could have a material adverse effect on our operating results. We make various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the size of the allowance for loan losses, we rely on our experience and our evaluation of current economic conditions. If our assumptions or judgments prove to be incorrect, our current allowance for loan losses may not be sufficient to cover certain loan losses inherent in our loan portfolio, and adjustments may be necessary to account for different economic conditions or adverse developments in our loan portfolio. Material additions to our allowance would materially decrease our net income.

In the near term, our strategy is to continue to expand our commercial lending activities in the markets in which we currently operate. We may also pursue opportunities to expand into new markets outside our traditional markets by establishing offices staffed by commercial loan officers who come to us from other commercial banks in these new markets. We cannot be sure that our loan loss experience with any new borrowers in these newer markets will be consistent with our loan loss experience in our traditional markets. Our actual loan loss experience in these markets may cause us to increase our reserves.

In addition, federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize additional loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs required by these regulatory agencies could have a material adverse effect on our results of operations and financial condition.

We have credit risk inherent in our securities portfolio. We maintain diversified securities portfolios, which include obligations of the U.S. Treasury and government-sponsored agencies as well as securities issued by states and political subdivisions, corporate securities, mortgage-backed securities, and asset-backed securities. We also invest in capital securities, which include preferred stocks and trust preferred securities. We seek to limit credit losses in our securities portfolios by generally purchasing only highly rated securities (rated “AA” or higher by a major debt rating agency) or by conducting significant due diligence on the issuer for unrated securities. However, we may, in the future, experience losses in our securities portfolio which may result in charges that could materially adversely affect our results of operations.

The operation of our warranty payment plan business is relatively new to us, involves unique operational risks, and could expose us to significant losses. One of our subsidiaries, Mepco Finance Corporation, is engaged in the business of providing payment plans to consumers to purchase vehicle warranties on a national basis. The receivables generated in this business involve a different, and generally higher, level of risk of delinquency or collection than generally associated with the loan portfolios of our banks. Mepco also faces unique operational and internal control challenges due to the relatively rapid turnover of its portfolio and high volume of new payment plans.

We acquired Mepco in April of 2003 and therefore have only limited experience in operating a finance company of this nature. Our future performance may be adversely affected if we fail to successfully manage Mepco. Mepco’s business is highly specialized, and its success will depend largely on the continued services of its executives and other key employees familiar with its business.

In addition, because financing in this market is conducted primarily through relationships with unaffiliated automobile warranty administrators and because the customers are located nationwide, risk management and general supervisory oversight is generally more difficult than in our banks. The risk of third party fraud is also higher as a result of these factors. Acts of fraud are difficult to detect and deter, and we cannot assure investors that the risk management procedures and controls will prevent losses from fraudulent activity. Although we have an internal control system at Mepco, we may be exposed to the risk of significant loss in this business.

Our mortgage-banking revenues are susceptible to substantial variations dependent largely upon factors that we do not control, such as market interest rates. A meaningful portion of our revenues are derived from gains on the sale of real estate mortgage loans. These net gains primarily depend on the volume of loans we sell, which in turn depends on our ability to originate real estate mortgage loans and the demand for fixed-rate obligations and other loans that

17

ITEM 1A. RISK FACTORS (continued)

are outside of our established interest-rate risk parameters. Net gains on real estate mortgage loans are also dependent upon economic and competitive factors as well as our ability to effectively manage exposure to changes in interest rates. Consequently, they can often be a volatile part of our overall revenues. As we have experienced in the last two years, as market interest rates continue to stabilize and/or rise, our level of mortgage loan refinancing activity has declined, resulting in lower levels of real estate mortgage loan originations, sales, and gains on such sales.

Fluctuations in interest rates could reduce our profitability. We realize income primarily from the difference between interest earned on loans and investments and the interest paid on deposits and borrowings. Our interest income and interest expense are affected by general economic conditions and by the policies of regulatory authorities. While we have taken measures intended to manage the risks of operating in a changing interest rate environment, there can be no assurance that these measures will be effective in avoiding undue interest rate risk. We expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to our position, this “gap” will work against us, and our earnings may be negatively affected.

We are unable to predict fluctuations of market interest rates, which are affected by, among other factors, changes in the following:

– inflation or deflation rates;

– levels of business activity;

– recession;

– unemployment levels;

– money supply;

– domestic or foreign events; and

– instability in domestic and foreign financial markets.

Changes in accounting standards could impact our reported earnings. Financial accounting and reporting standards are periodically changed by the Financial Accounting Standards Board (FASB), the SEC, and other regulatory authorities. Such changes affect how we are required to prepare and report our consolidated financial statements. These changes are often hard to predict and may materially impact our reported financial condition and results of operations. In some cases, we may be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.

Our operations may be adversely affected if we are unable to secure adequate funding; our use of wholesale funding sources exposes us to liquidity risk and potential earnings volatility. We rely on wholesale funding, including our revolving credit facility, Federal Home Loan Bank borrowings, and brokered deposits, to augment our core deposits to fund our business. Because wholesale funding sources are affected by general market conditions, the availability of funding from wholesale lenders may be dependent on the confidence these investors have in our commercial and consumer finance operations. The continued availability to us of these funding sources is uncertain, and brokered deposits may be difficult for us to retain or replace at attractive rates as they mature. Our liquidity will 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. We may not have sufficient liquidity to continue to fund new loans, and we may need to liquidate loans or other assets unexpectedly, in order to repay obligations as they mature.

We rely heavily on our management team, and the unexpected loss of key managers may adversely affect our operations. Our success to date has been influenced strongly by our ability to attract and to retain senior management experienced in banking and financial services. Our ability to retain executive officers and the current management teams of each of our lines of business will continue to be important to successful implementation of our strategies. We do not have employment or non-compete agreements with any of these key employees. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business and financial results.

18

ITEM 1A. RISK FACTORS (continued)

Competition with other financial institutions could adversely affect our profitability. We face vigorous competition from banks and other financial institutions, including savings and loan associations, savings banks, finance companies, and credit unions. A number of these banks and other financial institutions have substantially greater resources and lending limits, larger branch systems, and a wider array of banking services. To a limited extent, we also compete with other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies, and insurance companies, which are not subject to the same degree of regulation as that imposed on bank holding companies. As a result, these non-bank competitors may have an advantage over us in providing certain services, and this competition may reduce or limit our margins on banking services, reduce our market share, and adversely affect our results of operations and financial condition.

Changes in economic conditions could adversely affect our loan portfolio. Our success depends to a great extent upon the general economic conditions in Michigan’s lower peninsula. We have in general experienced a slowing economy in Michigan since 2001. Unlike larger banks that are more geographically diversified, we provide banking services to customers primarily in Michigan’s lower peninsula. Our loan portfolio, the ability of the borrowers to repay these loans and the value of the collateral securing these loans will be impacted by local economic conditions.

An economic slowdown could have many adverse consequences, including the following:

– Loan delinquencies may increase;

– Problem assets and foreclosures may increase;

– Demand for our products and services may decline; and

– Collateral for our loans may decline in value, in turn reducing customers’ borrowing power and reducing the value of assets and collateral associated with existing loans.

In particular during 2006 our level of non-performing loans, net loan charge-offs, loan delinquencies and provision for loan losses all increased over the prior year.

We may be unable to maintain our historical growth rate, which may adversely impact our results of operation and financial condition. To achieve our growth, we have opened additional branches and acquired other financial institutions and branches. We may be unable to sustain our historical rate of growth or may not even be able to grow at all, and we may encounter difficulties obtaining the funding and capital necessary to support our growth. Various factors, such as economic conditions, competition, and regulatory considerations, may impede or prohibit the opening of new branch offices. In addition, we may have difficulty identifying suitable financial institutions and other non-banking entities that we desire to acquire that are available for sale. Further, our inability to attract and retain experienced bankers may adversely affect our internal growth. A significant decrease in our historical rate of growth may adversely impact our results of operations and financial condition.

We operate in a highly regulated environment and may be adversely affected by changes in federal and local laws and regulations. We are subject to extensive regulation, supervision, and examination by federal and state banking authorities. Any change in applicable regulations or federal or state legislation could have a substantial impact on us and our banks and their operations. Additional legislation and regulations may be enacted or adopted in the future that could significantly affect our powers, authority, and operations, which could increase our costs of doing business and, as a result, give an advantage to our competitors who may not be subject to similar legislative and regulatory requirements. Further, regulators have significant discretion and power to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding companies in the performance of their supervisory and enforcement duties. The exercise of regulatory power may have a negative impact on our results of operations and financial condition.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

19

We and our Banks operate a total of 122 facilities in Michigan and 1 facility in Chicago, Illinois. The individual properties are not materially significant to us or our Banks’ business or to the consolidated financial statements.

With the exception of the potential remodeling of certain facilities to provide for the efficient use of work space or to maintain an appropriate appearance, each property is considered reasonably adequate for current and anticipated needs.

ITEM 3. LEGAL PROCEEDINGS

Due to the nature of our business, our Banks are often subject to numerous legal actions. These legal actions, whether pending or threatened, arise through the normal course of business and are not considered unusual or material.

In May 2004, we received an unsolicited anonymous letter regarding certain business practices at Mepco, which was acquired in April 2003 and is now a wholly-owned subsidiary of Independent Bank. We processed this letter in compliance with our Policy Regarding the Resolution of Reports on the Company’s Accounting, Internal Controls and Other Business Practices. Under the direction of our Audit Committee, special legal counsel was engaged to investigate the matters raised in the anonymous letter. This investigation was completed during the first quarter of 2005 and we have determined that any amounts or issues relating to the period after our April 2003 acquisition of Mepco were not significant. The terms of the agreement under which we acquired Mepco, obligates the former shareholders of Mepco to indemnify us for existing and resulting damages and liabilities from pre-acquisition activities at Mepco.

The potential amount of liability related to periods prior to our April 2003 acquisition date has been determined to not exceed approximately $4.0 million. This potential liability primarily encompasses funds that may be due to former customers of Mepco related to loan overpayments or unclaimed funds that may be subject to escheatment. Prior to our acquisition, Mepco had erroneously recorded these amounts as revenue over a period of several years. The final liability may, however, be less, depending on the facts related to each loan account, the application of the law to those facts and the applicable state escheatment requirements for unclaimed funds. In the second quarter of 2004 we recorded a liability of $2.7 million with a corresponding charge to earnings (included in non-interest expenses) for potential amounts due to third parties (either former loan customers or to states for the escheatment of unclaimed funds). We have been engaged in a process of reviewing individual account records at Mepco to determine the appropriate amount (if any) due to a customer. As of December 31, 2006 we had sent out approximately $2.6 million as a result of this review process and $1.4 million remains accrued at that date.

On March 16, 2006, we entered into a settlement agreement with the former shareholders of Mepco, (the “Former Shareholders”) and Edward, Paul, and Howard Walder (collectively referred to as the “Walders”) for purposes of resolving and dismissing all pending litigation between the parties. Under the terms of the settlement, on April 3, 2006, the Former Shareholders paid us a sum of $2.8 million, half of which was paid in the form of cash and half of which was paid in shares of our common stock. In return, we released 90,766 shares of Independent Bank Corporation common stock held pursuant to an escrow agreement among the parties that was previously entered into for the purpose of funding certain contingent liabilities that were, in part, the subject of the pending litigation. As a result of settlement of the litigation, we recorded other income of $2.8 million and an additional claims expense of approximately $1.7 million (related to the release of the shares held in escrow) in the first quarter of 2006.

The settlement covers both the claim filed by the Walders against Independent Bank Corporation and Mepco in the Circuit Court of Cook County, Illinois, as well as the litigation filed by Independent Bank Corporation and Mepco against the Walders in the Ionia County Circuit Court of Michigan.

As permitted under the terms of the merger agreement under which we acquired Mepco, on April 3, 2006, we paid the accelerated earn-out payments for the last three years of the performance period ending April 30, 2008. Those payments totaled approximately $8.9 million. Also, under the terms of the merger agreement, the second year of the earn out for the year ended April 30, 2005, in the amount of $2.7 million was paid on March 21, 2006. As a result of the settlement and these payments, no future payments are due under the terms of the merger agreement under which we acquired Mepco.

20

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

21

ADDITIONAL ITEM — EXECUTIVE OFFICERS

Our executive officers are appointed annually by our Board of Directors at the meeting of Directors preceding the Annual Meeting of Shareholders. There are no family relationships among these officers and/or our Directors nor any arrangement or understanding between any officer and any other person pursuant to which the officer was elected.

The following sets forth certain information with respect to our executive officers at March 9, 2007.

		First elected
		as an executive
Name (Age)	Position	officer
Michael M. Magee, Jr. (51)	President, Chief Executive Officer and Director		1993
Robert N. Shuster (49)	Executive Vice President and Chief Financial Officer		1999
Edward B. Swanson (53)	President and Chief Executive Officer – Independent Bank South Michigan		1989
William B. Kessel (42)	President and Chief Executive Officer – Independent Bank		2004
Ronald L. Long (47)	President and Chief Executive Officer – Independent Bank East Michigan		1993
David C. Reglin (47)	President and Chief Executive Officer – Independent Bank West Michigan		1998
Peter R. Graves (49)	Senior Vice President, Commercial Loans Independent Bank Corporation		1999
Richard E. Butler (55)	Senior Vice President, Operations – Independent Bank Corporation		1998
James J. Twarozynski (41)	Senior Vice President, Controller – Independent Bank Corporation		2002
Charles F. Schadler (58)	Senior Vice President, Internal Auditor Independent Bank Corporation		2005
Laurinda M. Neve (55)	Senior Vice President, Human Resources Independent Bank Corporation		2007

Prior to being named as President and Chief Executive Officer on January 1, 2005, Mr. Magee was Executive Vice President and COO since 2004 and prior to that was President and Chief Executive Officer of Independent Bank since 1993.

Prior to being named President and Chief Executive Officer of Independent Bank in 2004, Mr. Kessel was Senior Vice President since 1996.

Prior to being named Senior Vice President in 2002, Mr. Twarozynski was Vice President and Controller.

Prior to being named Senior Vice President in 2005, Mr. Schadler was Vice President and Internal Auditor.

Prior to being named Senior Vice President in 2007, Ms. Neve was Vice President and Human Resources Director.

22

PART II.

ITEM 5. MARKET FOR OUR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The information set forth under the caption “Quarterly Summary “ in our annual report, to be delivered to shareholders in connection with the April 24, 2007 Annual Meeting of Shareholders (as filed as exhibit 13 to this report on Form 10-K) is incorporated herein by reference.

The following table shows certain information relating to purchases of common stock for the three-months ended December 31, 2006 pursuant to our share repurchase plan:

							Remaining
					Total Number of		Number of
					Shares Purchased		Shares
					as Part of a		Authorized for
	Total Number of		Average Price		Publicly		Purchase Under
Period	Shares Purchased		Paid Per Share		Announced Plan(2)		the Plan(3)
October 2006(1)		455	$	23.90		455
November 2006
December 2006(1)		1,305		25.29		1,305
Total		1,760	$	24.93		1,760		0

(1)	All of the shares purchased were used to fund our Deferred Compensation and Stock Purchase Plan for Non-employee Directors.
(2)	Shares were purchased pursuant to a stock repurchase plan, announced November 21, 2005, authorizing the purchase up to 750,000 shares of our common stock. The repurchase plan expired on December 31, 2006.
(3)	Our board of directors authorized a new stock repurchase plan which authorizes the purchase up to 750,000 shares of our common stock. This repurchase plan expires on December 31, 2007.

ITEM 6. SELECTED FINANCIAL DATA

The information set forth under the caption “Selected Consolidated Financial Data” in our annual report, to be delivered to shareholders in connection with the April 24, 2007 Annual Meeting of Shareholders (as filed as exhibit 13 to this report on Form 10-K) is incorporated herein by reference.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information set forth under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report, to be delivered to shareholders in connection with the April 24, 2007 Annual Meeting of Shareholders (as filed as exhibit 13 to this report on Form 10-K) is incorporated herein by reference.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Asset/liability management” in our annual report, to be delivered to shareholders in connection with the April 24, 2007 Annual Meeting of Shareholders (as filed as exhibit 13 to this report on Form 10-K) is incorporated herein by reference.

23

PART II.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following consolidated financial statements, management’s report on internal controls, and the independent auditor’s reports are set forth in our annual report, to be delivered to shareholders in connection with the April 24, 2007 Annual Meeting of Shareholders (as filed as exhibit 13 to this report on Form 10-K) is incorporated herein by reference.

Management’s Annual Report on Internal Controls Over Financial Reporting

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Financial Condition at

  December 31, 2006 and 2005

Consolidated Statements of Operations for the years ended

  December 31, 2006, 2005 and 2004

Consolidated Statements of Shareholders’ Equity

  for the years ended December 31, 2006, 2005 and 2004

Consolidated Statements of Comprehensive Income

  for the years ended December 31, 2006, 2005 and 2004

Consolidated Statements of Cash Flows for the years ended

  December 31, 2006, 2005 and 2004

Notes to Consolidated Financial Statements

The supplementary data required by this item set forth under the caption “Quarterly Financial Data” in our annual report, to be delivered to shareholders in connection with the April 24, 2007 Annual Meeting of Shareholders (as filed as exhibit 13 to this report on Form 10-K) is incorporated herein by reference.

The portions of our annual report, to be delivered to shareholders in connection with the April 24, 2007 Annual Meeting of Shareholders (as filed as exhibit 13 to this report on Form 10-K) which are not specifically incorporated by reference as part of this Form 10-K are not deemed to be a part of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES

1.

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 – 15e and 15d – 15e) as of the year ended December 31, 2006 (the “Evaluation Date”), have concluded that, as of such date, our disclosure controls and procedures were effective.

2.

Management’s Annual Report on Internal Control Over Financial Reporting under Item 8 hereof is included in the 2006 Annual Report under the caption “Management’s Annual Report on Internal Control over Financial Reporting” and is incorporated herein by reference. The Company’s registered public accounting firm’s attestation on that Report is also included in the 2006 Annual Report under the first captioned “Report of Independent Registered Public Accounting Firm” under item 8 hereof and is incorporated herein by reference.

24

ITEM 9A. CONTROLS AND PROCEDURES (continued)

3. There were no changes in our internal control over financial reporting during the quarter ended December 31, 2006, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNACE

DIRECTORS — The information with respect to our Directors, set forth under the captions “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement, to be delivered to shareholders in connection with the April 24, 2007 Annual Meeting of Shareholders is incorporated herein by reference.

EXECUTIVE OFFICERS — Reference is made to additional item under Part I of this report on Form 10-K.

CODE OF ETHICS — We have adopted a Code of Ethics for our Chief Executive Officer and Senior Financial Officers. A copy of our Code of Ethics is posted on our website at www.ibcp.com, under Investor Relations, and a printed copy is available upon request by writing to our Chief Financial Officer, Independent Bank Corporation, P.O. Box 491, Ionia, Michigan 48846.

CORPORATE GOVERNANCE – Matter relating to certain functions and the composition of our board committees, set forth under the caption “Board Committees Functions” in our definitive proxy statement, to be delivered to shareholders in connection with the April 24, 2007 Annual Meeting of Shareholders is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information set forth under the captions “Executive Compensation”, “Compensation of Directors” and “Compensation Committee Report” in our definitive proxy statement, to be delivered to shareholders in connection with the April 24, 2007 Annual Meeting of Shareholders is incorporated herein by reference. Information under the caption “Compensation Committee Report” in our definitive proxy statement is not deemed to be filed with the Securities and Exchange Commission.

25

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information set forth under the captions “Voting Securities and Record Date”, “Election of Directors” and “Securities Ownership of Management” in our definitive proxy statement, to be delivered to shareholders in connection with the April 24, 2007 Annual Meeting of Shareholders is incorporated herein by reference. Information under the caption “Shareholder Return Performance Graph” in our definitive proxy statement is not incorporated by reference herein and is not deemed to be filed with the Securities and Exchange Commission.

We maintain certain equity compensation plans under which our common stock is authorized for issuance to employees and directors, including our Non-employee Director Stock Option Plan, Employee Stock Option Plan and Long-Term Incentive Plan.

The following sets forth certain information regarding our equity compensation plans as of December 31, 2006.

					(c)
					Number of securities
	(a)				remaining available for
	Number of securities		(b)		future issuance under
	to be issued upon		Weighted-average		equity compensation
	exercise of outstanding		exercise price of		plans (excluding
	options, warrants		outstanding options,		securities reflected
Plan Category	and rights		warrants and rights		in column (a))
Equity compensation plans approved by security holders		1,481,000	$	19.82		524,000
Equity compensation plan not approved by security holders	None				None

PART III.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information set forth under the captions “Transactions Involving Management” and “Determination of Independence of Board Members” in our definitive proxy statement, to be delivered to shareholders in connection with the April 24, 2007 Annual Meeting of Shareholders is incorporated herein by reference.

PART IV.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information set forth under the caption “Audit Matters and Our Relationship With Our Independent Auditors” in our definitive proxy statement, to be delivered to shareholders in connection with the April 24, 2007 Annual Meeting of Shareholders is incorporated herein by reference. Information under the caption “Report of our Audit Committee” in our definitive proxy statement is not deemed to be filed with the Securities and Exchange Commission.

26

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)	1.	Financial Statements All of our financial statements are incorporated herein by reference as set forth in the annual report to be delivered to shareholders in connection with the April 24, 2007 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K.)
	2.	Financial Statement Schedules Report of predecessor accountant (KPMG LLP)
	3.	Exhibits (Numbered in accordance with Item 601 of Regulation S-K) The Exhibit Index is located on the final page of this report on Form 10-K.

27

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, we have duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, dated March 9, 2007.

INDEPENDENT BANK CORPORATION

s/Michael M. Magee, Jr.	Michael M. Magee, Jr., President and Chief Executive Officer
	(Principal Executive Officer)
s/Robert N. Shuster	Robert N. Shuster, Executive Vice President and Chief Financial
	Officer (Principal Financial Officer)
s/James J. Twarozynski	James J. Twarozynski, Senior Vice President and Controller
	(Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on our behalf and in the capacities and on the dates indicated. Each director whose signature appears below hereby appoints Michael M. Magee, Jr. and Robert N. Shuster and each of them severally, as his or her attorney-in-fact, to sign in his or her name and on his or her behalf, as a director, and to file with the Commission any and all amendments to this Report on Form 10-K.

Donna J. Banks, Director	s/Donna J. Banks	March 7, 2007
Jeffrey A. Bratsburg, Director	s/Jeffrey A. Bratsburg	March 9, 2007
Stephen L. Gulis, Jr., Director	s/Stephen L. Gulis, Jr.	March 5, 2007
Terry L. Haske, Director	s/Terry L. Haske	March 5, 2007
Robert L. Hetzler, Director
Michael M. Magee, Jr., Director	s/Michael M. Magee, Jr.	March 6, 2007
James E. McCarty, Director	s/James E. McCarty	March 5, 2007
Charles A. Palmer, Director	s/Charles A. Palmer	March 8, 2007
Charles C. Van Loan, Director	s/Charles C. Van Loan	March 12, 2007

28

Financial Statement Schedules

Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Independent Bank Corporation:

We have audited the accompanying consolidated statements of operations, shareholders’ equity, comprehensive income, and cash flows of Independent Bank Corporation and subsidiaries for the year ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Independent Bank Corporation for the year ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

As described in note 24 to the consolidated financial statements, the Company retrospectively applied the effects of adjustments related to a change in accounting reflecting discontinued operations.

/s/ KPMG LLP

Detroit, Michigan
March 4, 2005, except for notes 1, 5, 6, 7, 8, 12, 13, 14, 17, 18, 22, 23, and 24

     as to which the date is March 1, 2007

29

EXHIBIT INDEX

Exhibit number and description
EXHIBITS FILED HEREWITH

10	Form stock option agreement under our Long-term Incentive Plan.
13	Annual report, relating to the April 24, 2007 Annual Meeting of Shareholders. This annual report will be delivered to our shareholders in compliance with Rule 14(a)-3 of the Securities Exchange Act of 1934, as amended.
21	List of Subsidiaries.
23.1	Consent of Independent Registered Public Accounting Firm (Crowe Chizek and Company LLC)
23.2	Consent of Independent Registered Public Accounting Firm (KPMG LLP)
24	Power of Attorney (Included on page 28).
31.1	Certificate of the Chief Executive Officer of Independent Bank Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certificate of the Chief Financial Officer of Independent Bank Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certificate of the Chief Executive Officer of Independent Bank Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certificate of the Chief Financial Officer of Independent Bank Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

EXHIBITS INCORPORATED BY REFERENCE

2.1	Agreement and plan of merger between Independent Bank Corporation and Midwest Guaranty Bancorp, Inc., dated February 4, 2004 (incorporated herein by reference to Appendix A to our Form S-4 Registration Statement dated March 23, 2004, filed under Registration No. 333-113854).
2.2	Agreement and plan of merger between Independent Bank Corporation and North Bancorp, Inc., dated March 4, 2004 (incorporated herein by reference to Appendix A to our amended Form S-4 Registration Statement dated May 21, 2004, filed under Registration No. 333-114782).
3.1	Restated Articles of Incorporation (incorporated herein by reference to Exhibit 3(i) to our report on Form 10-Q for the quarter ended June 30, 1994).
3.1(a)	Amendments to Article III and Article VI of the Articles of Incorporation (incorporated herein by reference to Exhibit 3.1(a) to our report on Form 10-K for the year ended December 31, 2000).
3.2	Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3(ii) to our report on Form 10-Q for the quarter ended June 30, 1994).
4.1	Certificate of Trust of IBC Capital Finance II dated February 26, 2003 (incorporated herein by reference to Exhibit 4.1 to our report on Form 10-Q for the quarter ended March 31, 2003).

30

EXHIBIT INDEX (Continued)

4.2 Amended and Restated Trust Agreement of IBC Capital Finance II dated March 19, 2003 (incorporated herein by referrence to Exhibit 4.2 to our report on Form 10-Q for the quarter ended March 31, 2003).

4.3 Preferred Securities Certificate of IBC Capital Finance II dated March 19, 2003 (incorporated herein by reference to Exhibit 4.3 to our report on Form 10-Q for the quarter ended March 31, 2003).

4.4 Preferred Securities Guarantee Agreement dated March 19, 2003 (incorporated herein by reference to Exhibit 4.4 to our report on Form 10-Q for the quarter ended March 31, 2003).

4.5 Agreement as to Expenses and Liabilities dated March 19, 2003 (incorporated herein by reference to Exhibit 4.5 to our report on Form 10-Q for the quarter ended March 31, 2003).

4.6 Indenture dated March 19, 2003 (incorporated herein by reference to Exhibit 4.6 to our report on Form 10-Q for the quarter ended March 31, 2003).

4.7 8.25% Junior Subordinated Debenture of Independent Bank Corporation dated March 19, 2003 (incorporated herein by reference to Exhibit 4.6 to our report on Form 10-Q for the quarter ended March 31, 2003).

10.1^* Deferred Benefit Plan for Directors (incorporated herein by reference to Exhibit 10(C) to our report on Form 10-K for the year ended December 31, 1984).

10.2 The form of Indemnity Agreement approved by our shareholders at its April 19, 1988 Annual Meeting, as executed with all of the Directors of the Registrant (incorporated herein by reference to Exhibit 10(F) to our report on Form 10-K for the year ended December 31, 1988).

10.3^* Non-Employee Director Stock Option Plan, as amended, approved by our shareholders at its April 15, 1997 Annual Meeting (incorporated herein by reference to Exhibit 4 to our Form S-8 Registration Statement dated July 28, 1997, filed under registration No. 333-32269).

10.4^* Employee Stock Option Plan, as amended, approved by our shareholders at its April 17, 2000 Annual Meeting (incorporated herein by reference to Exhibit 4 to our Form S-8 Registration Statement dated October 8, 2000, filed under registration No. 333-47352).

10.5 The form of Management Continuity Agreement as executed with executive officers and certain senior managers (incorporated herein by reference to Exhibit 10 to our report on Form 10-K for the year ended December 31, 1998).

10.6 Agreement and Plan of Merger by and among Independent Bank Corporation, IBC Merger Co., Mepco Insurance Premium Financing, Inc., and the shareholders of Mepco Insurance Premium Financing, Inc., dated February 24, 2003 (incorporated herein by reference to Exhibit 99.2 to our Form 8-K dated February 24, 2003).

10.7 Escrow Agreement, dated September 30, 2004, made by and among Independent Bank Corporation, The Edward M. Walder Trust and The Paul M. Walder Trust, and J.P. Morgan Trust Company, N.A.

10.8^* Independent Bank Corporation Long-term Incentive Plan, as amended through April 26, 2005, (incorporated herein by reference to Exhibit 10 to our report on Form 10-K for the year ended December 31, 2005).

^* Represents a compensation plan.

31

EX-10

INDEPENDENT BANK CORPORATION	Exhibit 10
LONG-TERM INCENTIVE PLAN
(EMPLOYEE OPTION)

STOCK OPTION AGREEMENT

     OPTION AGREEMENT made this                      day of                                          ,                     , between INDEPENDENT BANK CORPORATION (the “Company”) and                                         , an employee of the Company or one of its subsidiaries (the “Employee”), pursuant to the Independent Bank Corporation Long-Term Incentive Plan, as amended (the “Plan”).

IT IS AGREED AS FOLLOWS:

     1. Grant of Option. Pursuant to the Plan, the Company hereby grants to the Employee the option to purchase                     shares of the Company’s common stock, par value $1.00 per share, on the terms and conditions herein set forth (the “Option”).                      of the shares covered by this Option shall be considered and hereby are designated as incentive stock options (“ISOs”) qualifying under the provisions of Section 422A of the Internal Revenue Code of 1986, as amended, and the remaining shares, if any, are designated as non-ISOs. Upon exercise of any portion or all of this Option the Employee shall give notice to the Company as to whether he or she is exercising the ISO or non-ISO portion of this Option (if such a distinction has been made by the Company hereunder), or a combination thereof. Upon such exercise, the Company shall issue separate stock certificates to the Employee, one for the ISO stock and one for the non-ISO stock. The Company and the Employee agree to take any other action which may be necessary to identify clearly the ISO and non-ISO, if any, portions of this Option.

     2. Purchase Price. The purchase price of the shares covered by this Option shall be $                     per share. The price represents one hundred percent (100%) of the fair market value of a share of the Company’s common stock on this date (or higher if required by the Plan).

     3. Term of Option. The term of this Option shall be for a period of                      years from the date hereof, subject in each case to earlier termination as provided in subsequent paragraphs of this Agreement. [ENTER VESTING SCHEDULE – IF ANY]

     4. Exercise of Option. This Option may be exercised at any time and from time to time, as to any part or all of the shares covered hereby, but not as to less than 100 shares at any one time, unless the number purchased is the total number at that time purchasable under this Option. This Option shall be exercised by written notice to the Company. The notice shall state the number of shares with respect to which the Option is being exercised, shall be signed by the person exercising this Option, and shall be accompanied by payment of the full purchase price of the shares. This Option agreement shall be submitted to the Company with the notice for purposes of recording the shares being purchased, if exercised in part, or for purposes of cancellation if all shares then subject to this Option are being purchased. In the event the Option shall be exercised pursuant to paragraph 7(c) hereof by any person other than the Employee, such notice shall be accompanied by appropriate proof of the right of such person to exercise the Option. Payment of the purchase price shall be made by: (a) cash, check, bank draft, or money order, payable to the order of the Company; (b) the delivery by the Employee of unencumbered shares of common stock of the Company with a fair market value on the date of exercise equal to the total purchase price of the shares to be purchased (and which have been owned by Optionee for a period of at least six consecutive months); (c) the reduction in the number of shares issuable upon exercise (based on the fair market value of the shares on the date of exercise); or (d) a combination of (a), (b), and (c). Upon exercise of all or a portion of this Option, the Company shall issue to the Employee a stock certificate representing the number of shares with respect to which this Option was exercised.

     5. Tax Withholding. The exercise of this Option is subject to the satisfaction of withholding tax or other withholding liabilities, if any, under federal, state and local laws in connection with such exercise or the delivery or purchase of shares pursuant hereto. The exercise of this Option shall not be effective unless applicable withholding shall have been effected or obtained in the following manner or in any other manner acceptable to the Committee. Unless otherwise prohibited by the Committee, Optionee may satisfy any such withholding tax obligation by any of the following means or by a combination of such means: (a) tendering a cash payment; (b) authorizing the Company to withhold from the shares otherwise issuable to Optionee as a result of the exercise of this Option a number of shares having a fair market value as of the date that the amount of tax to be withheld is to be determined (“Tax Date”), which shall be the date of exercise of the Option, less than or equal to the amount of the withholding tax obligation; or (c) delivering to the Company unencumbered shares of the Company’s common stock owned by Optionee having a fair market value, as of the Tax Date, less than or equal to the amount of the withholding tax obligation.

     6. Transferability of Option. Except as provided below, this Option shall not be sold, transferred, assigned, pledged or hypothecated in any way, shall not be assignable by operation of law, and shall not be subject to execution, levy, attachment or similar process. Except as provided below, any attempted sale, transfer, assignment, pledge, hypothecation or other disposition of this Option contrary to the terms hereof, and any execution, levy, attachment or similar process upon the Option, shall be null and void and without effect. To the extent that this Option is not designated as an ISO, this Option may be transferred to (a) Employee’s spouse, children or grandchildren (each an “Immediate Family Member”), (b) a trust or trusts for the exclusive benefit of an Immediate Family Member, or (c) a partnership or limited liability company whose only partners or members are Immediately Family Members. Each of the persons and entities listed above are referred to as a “Permitted Transferee.” Options may be transferred to a Permitted Transferee provided that there may be no consideration for the transfer. Following any transfer, this Option shall continue to be subject to the same terms and conditions immediately prior to transfer.

     7. Termination of Employment.

     (a) Termination of Employment for Reasons Other Than Retirement, Disability or Death. If the Employee ceases to be employed by the Company for any reason other than retirement or on account of disability or death, this Option shall, to the extent rights to purchase shares hereunder have accrued at the date of such termination and shall not have been fully exercised, be exercisable, in whole or in part, at any time within a period of three (3) months following cessation of the Employee’s employment, subject, however, to prior expiration of the term of this Option and any other limitations upon its exercise in effect at the date of exercise.

     (b) Termination of Employment for Retirement or Disability. If the Employee ceases to be employed by the Company by reason of Retirement or on account of disability, this Option shall, to the extent rights to purchase shares hereunder have accrued at the date of such retirement and have not been fully exercised, be exercisable, in whole or in part, prior to expiration of the term of this Option, subject to any other limitations imposed by the Plan. If the Employee dies after such disability or Retirement, this Option shall be exercisable in accordance with paragraph 7(c) hereof.

     (c) Termination of Employment for Death. Upon the Employee’s death, this Option shall, to the extent rights to purchase shares hereunder have accrued at the date of death and shall not have been fully exercised, be exercisable, in whole or in part, by the personal representative of the Employee’s estate, by any person or persons who shall have acquired this Option directly

2

from the Employee by bequest or inheritance or a Permitted Transferee at any time within one (1) year after his or her death, subject to the earlier expiration of this Option.

     (d) Termination of Option. If this Option is not exercised within whichever of the exercise periods specified in paragraph 7(a), 7(b) or 7(c) is applicable, this Option shall terminate upon expiration of such exercise period.

     8. Changes in Capital Structure. The number of shares covered by this Option, and the price per share, shall be proportionately adjusted for any increase or decrease in the number of issued shares of common stock of the Company resulting from any combination of shares or the payment of a stock dividend on the Company’s common stock or any other increase or decrease in the number of such shares effected without receipt of consideration by the Company.

     If the Company shall be the surviving corporation in any merger or consolidation, or if the Company is merged into a wholly owned subsidiary solely for purposes of changing the Company’s state of incorporation, this Option shall pertain to and apply to the securities to which a holder of the same number of shares as are then subject to this Option would have been entitled. A dissolution or liquidation of the Company or a merger or consolidation in which the Company is not the surviving corporation, except as above provided, shall cause this Option to immediately vest and become exercisable in full, and the Employee shall in such event have the right immediately prior to such dissolution or liquidation, or merger or consolidation in which the Company is not the surviving corporation, to exercise this Option in whole or in part.

     In the event of a change in the common stock of the Company as presently constituted, which is limited to a change of all its authorized shares into the same number of shares with a different par value or without par value, the shares resulting from any such change shall be deemed to be the shares subject to this Option.

     Except as expressly provided in this paragraph 8, the Employee shall have no rights by reason of: (i) any subdivision or combination of shares of stock of any class; (ii) the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class; or (iii) any dissolution, liquidation, merger or consolidation or spinoff of assets or stock of another corporation. Except as provided in this paragraph 8, any issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of stock subject to this Option.

     The grant of this Option shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets.

     9. Rights as a Shareholder. Neither the Employee nor a transferee of this Option shall have any rights as a shareholder with respect to any shares covered hereby until the date he or she shall have become the holder of record of such shares. No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date on which he or she shall have become the holder of record thereof, except as provided in paragraph 8 hereof.

     10. Modification, Extension and Renewal. Subject to the terms and conditions and within the limitations of the Plan, the Committee, subject to approval of the Board of Directors, may modify or renew this Option, or accept its surrender (to the extent not theretofore exercised) and authorize the granting of a new option or options in substitution therefor (to the extent not theretofore exercised).

3

Notwithstanding the foregoing, no modification shall, without the consent of the Employee, alter or impair any rights or obligations hereunder.

     11. Postponement of Delivery of Shares and Representations. The Company, in its discretion, may postpone the issuance and/or delivery of shares upon any exercise of this Option until completion of such stock exchange listing, or registration, or other qualification of such shares under any state and/or federal law, rule or regulation as the Company may consider appropriate, and may require any person exercising this Option to make such representations, including a representation that it is the Employee’s intention to acquire shares for investment and not with a view to distribution thereof, and furnish such information as it may consider appropriate in connection with the issuance or delivery of the shares in compliance with applicable laws, rules and regulations. In such event, no shares shall be issued to such holder unless and until the Company is satisfied with the accuracy of any such representations.

     12. Subject to Plan. This Option is subject to the terms and provisions of the Plan. If any inconsistency exists between the provisions of this Agreement and the Plan, the Plan shall govern.

     13. ISO Stock Option. Any provision of this Option or the Plan to the contrary notwithstanding, neither the Company, the Company’s Board of Directors nor the Committee shall have any authority to take any action or to do anything which would cause the shares designated herein as ISOs to fail to qualify as ISOs within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended.

     IN WITNESS WHEREOF, this Stock Option Agreement has been executed the date first above written.

INDEPENDENT BANK CORPORATION

By

     Its

EMPLOYEE

4

RECORD OF EXERCISE

			Shares Subject
			to Option
Date	Number of Shares	Price Per Share	After Exercise

5

EX-13

CONTENTS

Selected Consolidated Financial Data	16
Management’s Discussion and Analysis	17
Management’s Annual Report on Internal Control Over Financial Reporting	40
Report of Independent Registered Public Accounting Firm	41
Report of Independent Registered Public Accounting Firm	42
Consolidated Financial Statements	43
Notes to Consolidated Financial Statements	47
Quarterly Data	84
Officers and Directors	85

15

SELECTED CONSOLIDATED FINANCIAL DATA

	Year Ended December 31,
	2006			2005			2004			2003			2002
	(Dollars in thousands, except per share amounts)
SUMMARY OF OPERATIONS
Interest income	$	216,895		$	193,035		$	154,226		$	134,361		$	129,815
Interest expense		93,698			63,099			42,990			43,481			48,008
Net interest income		123,197			129,936			111,236			90,880			81,807
Provision for loan losses		16,344			7,806			4,016			3,843			3,562
Net gains on the sale of real estate mortgage loans		4,593			5,370			5,956			16,269			8,178
Other non-interest income		40,257			37,456			32,304			26,251			22,733
Non-interest expenses		106,216			101,785			90,455			79,281			68,293
Income from continuing operations before income tax		45,487			63,171			55,025			50,276			40,863
Income tax expense		11,662			17,466			14,713			13,322			11,396
Income from continuing operations		33,825			45,705			40,312			36,954			29,467
Discontinued operations, net of tax		(622	)		1,207			(1,754	)		638
Net income	$	33,203		$	46,912		$	38,558		$	37,592		$	29,467
PER COMMON SHARE DATA (1)
Income from continuing operations
Basic	$	1.48		$	1.96		$	1.79		$	1.71		$	1.33
Diluted		1.45			1.92			1.75			1.67			1.30
Net income
Basic	$	1.45		$	2.01		$	1.71		$	1.74		$	1.33
Diluted		1.43			1.97			1.67			1.70			1.30
Cash dividends declared		0.78			0.71			0.60			0.53			0.40
Book value		11.29			10.75			9.86			7.53			6.40
SELECTED BALANCES
Assets	$	3,429,898		$	3,355,848		$	3,094,027		$	2,361,014		$	2,058,975
Loans		2,483,395			2,372,317			2,086,482			1,575,055			1,381,442
Allowance for loan losses		26,879			22,420			24,162			16,455			15,830
Deposits		2,602,791			2,474,239			2,063,707			1,621,086			1,535,603
Shareholders’ equity		258,167			248,259			230,292			162,216			138,047
Long-term debt		3,000			5,000			7,000
SELECTED RATIOS
Tax equivalent net interest income to average interest earning assets		4.41	%		4.85	%		4.89	%		4.80	%		4.75	%
Income from continuing operations to Average equity		13.06			18.63			20.30			24.47			21.34
Average assets		0.99			1.42			1.48			1.66			1.52
Net income to
Average equity		12.82			19.12			19.42			24.89			21.34
Average assets		0.97			1.45			1.42			1.69			1.52
Average shareholders’ equity to average assets		7.60			7.61			7.31			6.80			7.14
Tier 1 capital to average assets		7.62			7.40			7.36			7.91			6.85
Non-performing loans to Portfolio Loans		1.58			0.70			0.69			0.76			0.72

(1) Per share data has been adjusted for 5% stock dividends in 2006, 2005 and 2002, a 10% stock dividend in 2003, and a three-for-two stock split in 2002.

16

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

Any statements in this document that are not historical facts are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Words such as “expect,” “believe,” “intend,” “estimate,” “project,” “may” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are predicated on management’s beliefs and assumptions based on information known to Independent Bank Corporation’s management as of the date of this document and do not purport to speak as of any other date. Forward-looking statements may include descriptions of plans and objectives of Independent Bank Corporation’s management for future or past operations, products or services, and forecasts of the Company’s revenue, earnings or other measures of economic performance, including statements of profitability, business segments and subsidiaries, and estimates of credit quality trends. Such statements reflect the view of Independent Bank Corporation’s management as of this date with respect to future events and are not guarantees of future performance; involve assumptions and are subject to substantial risks and uncertainties, such as the changes in Independent Bank Corporation’s plans, objectives, expectations and intentions. Should one or more of these risks materialize or should underlying beliefs or assumptions prove incorrect, the Company’s actual results could differ materially from those discussed. Factors that could cause or contribute to such differences are changes in interest rates, changes in the accounting treatment of any particular item, the results of regulatory examinations, changes in industries where the Company has a concentration of loans, changes in the level of fee income, changes in general economic conditions and related credit and market conditions, and the impact of regulatory responses to any of the foregoing. Forward-looking statements speak only as of the date they are made. Independent Bank Corporation does not undertake to update forward-looking statements to reflect facts; circumstances, assumptions or events that occur after the date the forward-looking statements are made. For any forward-looking statements made in this document, Independent Bank Corporation claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

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

RESULTS OF OPERATIONS

Summary.  Income from continuing operations totaled $33.8 million in 2006 compared to $45.7 million in 2005 and $40.3 million in 2004. On January 15, 2007, Mepco Insurance Premium Financing, Inc., now known as Mepco Finance Corporation (“Mepco”), a wholly-owned subsidiary of IBC, sold substantially all of its assets related to the insurance premium finance business to Premium Financing Specialists, Inc. (“PFS”). Mepco will continue to own and operate its warranty payment plan business. The assets, liabilities and operations of Mepco’s insurance premium finance business have been reclassified as discontinued operations and all periods presented have been restated for this reclassification. The decline in income from continuing operations in 2006 is due primarily to a decline in net interest income and an increase in the provision for loan losses and increases in certain components of non-interest expense.

Net income totaled $33.2 million in 2006 compared to $46.9 million in 2005 and $38.6 million in 2004. 2006, 2005 and 2004 results include the operations of Midwest Guaranty Bancorp, Inc. since the May 31, 2004, date of acquisition and include the operations of North Bancorp, Inc. since the July 1, 2004, date of acquisition.

We expect to complete the acquisition of ten branches with total deposits of approximately $235 million from TCF National Bank in March 2007. These branches are located in or near Battle Creek, Bay City and Saginaw, Michigan. As a result of this acquisition we would expect that our interest expense as a percentage of average interest earning assets (our “Cost of Funds”) will decline in 2007. We anticipate using the proceeds from these deposits to payoff higher costing short term borrowings and brokered certificates of deposit (“Brokered CD’s”). We also anticipate that the acquisition of these branches will result in an increase in non-interest income, particularly

17

service charges on deposit accounts and VISA check card interchange income. However, non-interest expenses will also increase in 2007 due to compensation and benefits for the employees at these branches as well as occupancy, furniture and equipment, data processing, communications, supplies and advertising expenses. We are paying an 11.5% premium of deposit balances or approximately $27.0 million (based upon anticipated deposit levels) to acquire these branches. This will result in an increase in the amount of amortization of intangible assets in 2007. In addition, we are paying $4.25 million for the personal property and real estate associated with these branches. Further, we will incur certain costs during the first quarter of 2007 related to the conversion of the acquired branches onto our data processing system.

KEY PERFORMANCE RATIOS

	Year Ended December 31,
	2006			2005			2004
Income from continuing operations to
Average equity		13.06	%		18.63	%		20.30	%
Average assets		0.99			1.42			1.48
Net income to
Average equity		12.82	%		19.12	%		19.42	%
Average assets		0.97			1.45			1.42
Income per share from continuing operations
Basic	$	1.48		$	1.96		$	1.79
Diluted		1.45			1.92			1.75
Net income per share
Basic	$	1.45		$	2.01		$	1.71
Diluted		1.43			1.97			1.67

We believe that our earnings per share growth rate over a long period of time (five years or longer) is the best single measure of our performance. We strive to achieve an average annual long term earnings per share growth rate of approximately 10%. Accordingly, our focus is on long-term results, taking into consideration certain components of our revenues that are cyclical in nature (such as mortgage banking) which can cause fluctuations in our earnings per share from year to year. Our primary strategies for achieving long-term growth in earnings per share include: earning asset growth (both organic and through acquisitions), diversification of revenues (within the financial services industry), effective capital management (efficient use of our shareholders’ equity) and sound risk management (credit, interest rate, liquidity and regulatory risks). As we have grown in size, and also considering the relatively low economic growth rates in Michigan (our primary market for banking), we believe that achieving a 10% average annual long term growth rate in earnings per share will be challenging without future acquisitions. Based on these standards, we did not meet our profitability objectives in 2006. Erosion in our net interest margin, slowing growth in interest earning assets and a significant increase in our provision for loan losses were the primary factors contributing to reduced profitability in 2006. Our discussion and analysis of results of operations and financial condition will focus on these elements.

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 tax equivalent 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.

Tax equivalent net interest income totaled $129.8 million during 2006, compared to $136.3 million and $116.9 million during 2005 and 2004, respectively. We review yields on certain asset categories and our net interest margin on a fully taxable equivalent basis. In this presentation, net interest income is adjusted to reflect tax-exempt

18

interest income on an equivalent before tax basis. This measure ensures comparability of net interest income arising from both taxable and tax-exempt sources. The adjustments to determine tax equivalent net interest income were $6.6 million, $6.4 million and $5.7 million in 2006, 2005 and 2004, respectively, and were computed using a 35% tax rate. The decrease in tax equivalent net interest income in 2006 compared to 2005 reflects a 44 basis point decline in our tax equivalent net interest income as a percent of average interest-earning assets (“Net Yield”) that was partially offset by a $131.1 million increase in average interest-earning assets. The decline in our Net Yield during 2006 primarily reflects the adverse impact of higher short term interest rates and the flat yield curve environment. Although our yield on average interest earnings assets rose by 50 basis points in 2006 this did not keep pace with the rise in our cost of funds. The higher short term interest rates pushed our funding costs up and also caused some migration by our deposit customers out of lower cost core deposits (such as checking and savings accounts) into higher costing short term certificates of deposit. In addition, higher levels of non-performing loans in 2006 also adversely impacted our level of tax equivalent net interest income.

A continuation of the flat yield curve environment presents an impediment to future increases in our tax equivalent net interest income without strong growth in interest-earning assets. However, weak economic conditions in Michigan as well as a highly competitive climate that has adversely impacted loan pricing, create a very challenging environment for originating loans that meet our objectives for both credit quality and profit margin.

The increase in tax equivalent net interest income in 2005 compared to 2004 reflects a $424.9 million increase in average interest-earning assets that was partially offset by a 4 basis point decrease in our Net Yield. The increase in average interest-earning assets is due to 2005 representing a full year with our Midwest and North acquisitions as well as growth in loans. The decline in the Net Yield reflects the impact of the rise in short term interest rates and flattening yield curve during 2005.

19

AVERAGE BALANCES AND TAX EQUIVALENT RATES

	2006							2005							2004
	Average							Average							Average
	Balance		Interest		Rate			Balance		Interest		Rate			Balance		Interest		Rate
	(Dollars in thousands)
ASSETS
Taxable loans (1)	$	2,464,798	$	193,606		7.85	%	$	2,262,647	$	167,551		7.41	%	$	1,885,370	$	131,196		6.96	%
Tax-exempt loans (1,2)		7,293		509		6.98			6,199		454		7.32			7,637		507		6.64
Taxable securities		207,456		11,108		5.35			271,770		13,588		5.00			266,704		12,497		4.69
Tax-exempt securities (2)		248,495		17,484		7.04			255,333		17,142		6.71			212,441		14,914		7.02
Other investments		16,366		802		4.90			17,350		713		4.11			16,283		765		4.70
Interest earning assets — continuing operations		2,944,408		223,509		7.59			2,813,299		199,448		7.09			2,388,435		159,879		6.69
Cash and due from banks		53,844							57,912							55,728
Taxable loans — discontinued operations		198,335							161,111							119,174
Other assets, net		210,190							192,840							153,245
Total assets	$	3,406,777						$	3,225,162						$	2,716,582
LIABILITIES
Savings and NOW	$	864,528		13,604		1.57		$	871,599		8,345		0.96		$	805,885		4,543		0.56
Time deposits		1,405,850		60,686		4.32			1,087,830		33,560		3.09			817,615		21,796		2.67
Long-term debt		4,240		205		4.83			6,240		287		4.60			4,549		177		3.89
Other borrowings		329,175		19,203		5.83			501,763		20,907		4.17			480,956		16,474		3.43
Interest bearing liabilities- continuing operations		2,603,793		93,698		3.60			2,467,432		63,099		2.56			2,109,005		42,990		2.04
Demand deposits		279,279							283,670							240,800
Time deposits — discontinued operations		172,317							138,897							94,670
Other liabilities		92,451							89,781							73,574
Shareholders’ equity		258,937							245,382							198,533
Total liabilities and shareholders’ equity	$	3,406,777						$	3,225,162						$	2,716,582
Net interest income			$	129,811						$	136,349						$	116,889
Net interest income as a percent of average interest earning assets						4.41	%						4.85	%						4.89	%

(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%.

20

CHANGE IN TAX EQUIVALENT NET INTEREST INCOME

	2006 Compared to 2005									2005 Compared to 2004
	Volume			Rate			Net			Volume			Rate			Net
	(In thousands)
Increase (decrease) in interest income (1)
Taxable loans (2)	$	15,511		$	10,544		$	26,055		$	27,529		$	8,826		$	36,355
Tax-exempt loans (2,3)		77			(22	)		55			(102	)		49			(53	)
Taxable securities		(3,391	)		911			(2,480	)		241			850			1,091
Tax-exempt securities (3)		(467	)		809			342			2,903			(675	)		2,228
Other investments		(42	)		131			89			48			(100	)		(52	)
Total interest income		11,688			12,373			24,061			30,619			8,950			39,569
Increase (decrease) in interest expense (1)
Savings and NOW		(68	)		5,327			5,259			397			3,405			3,802
Time deposits		11,467			15,659			27,126			7,971			3,793			11,764
Long-term debt		(96	)		14			(82	)		74			36			110
Other borrowings		(8,521	)		6,817			(1,704	)		738			3,695			4,433
Total interest expense		2,782			27,817			30,599			9,180			10,929			20,109
Net interest income	$	8,906		$	(15,444	)	$	(6,538	)	$	21,439		$	(1,979	)	$	19,460

(1)	The change in interest due to changes in both balance and rate has been allocated to change due to balance and change due to rate in proportion to the relationship of the absolute dollar amounts of change in each.
(2)	All domestic.
(3)	Interest on tax-exempt loans and securities is presented on a fully tax equivalent basis assuming a marginal tax rate of 35%.

COMPOSITION OF AVERAGE INTEREST EARNING ASSETS AND INTEREST BEARING
LIABILITIES

	Year Ended December 31,
	2006			2005			2004
As a percent of average interest earning assets
Loans — all domestic		84.0	%		80.6	%		79.3	%
Other interest earning assets		16.0			19.4			20.7
Average interest earning assets		100.0	%		100.0	%		100.0	%
Savings and NOW		29.4	%		31.0	%		33.8	%
Time deposits		17.3			16.3			18.4
Brokered CDs		30.4			22.4			15.8
Other borrowings and long-term debt		11.3			18.0			20.3
Average interest bearing liabilities		88.4	%		87.7	%		88.3	%
Earning asset ratio		86.4	%		87.2	%		87.9	%
Free-funds ratio		11.6			12.3			11.7

Provision for loan losses.  The provision for loan losses was $16.3 million during 2006 compared to $7.8 million and $4.0 million during 2005 and 2004, respectively. Changes in the provision for loan losses reflect our assessment of the allowance for loan losses. The increases in the provision for loan losses since 2004 principally reflect a rise in the level of net loan charge-offs and non-performing loans. While we use relevant information to

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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.”)

Non-interest income.  Non-interest income is a significant element in assessing our results of operations. On a long-term basis we are attempting to grow non-interest income in order to diversify our revenues within the financial services industry. We regard net gains on real estate mortgage loan sales as a core recurring source of revenue but they are quite cyclical and volatile. We regard net gains (losses) on securities as a “non-operating” component of non-interest income. As a result, we believe it is best to evaluate our success in growing non-interest income and diversifying our revenues by also comparing non-interest income when excluding net gains (losses) on assets (real estate mortgage loans and securities). In addition, 2006 included non-recurring income of $2.8 million related to the settlement of litigation with the former owners of Mepco (See “Litigation Matters.”).

Non-interest income totaled $44.9 million during 2006 compared to $42.8 million and $38.3 million during 2005 and 2004, respectively. Excluding net gains and losses on asset sales and the aforementioned income related to the settlement of litigation, non-interest income grew by 3.7% to $37.3 million during 2006 and by 14.4% to $36.0 million during 2005.

NON-INTEREST INCOME

	Year Ended December 31,
	2006		2005		2004
	(In thousands)
Service charges on deposit accounts	$	19,936	$	19,342	$	17,551
Net gains on assets
Real estate mortgage loans		4,593		5,370		5,956
Securities		171		1,484		856
VISA check card interchange income		3,432		2,778		2,054
Mepco litigation settlement		2,800
Title insurance fees		1,724		1,962		2,036
Bank owned life insurance		1,628		1,554		1,486
Manufactured home loan origination fees and commissions		884		1,216		1,264
Mutual fund and annuity commissions		1,291		1,348		1,260
Real estate mortgage loan servicing fees, net		2,440		2,627		1,427
Other		5,951		5,145		4,370
Total non-interest income	$	44,850	$	42,826	$	38,260

Service charges on deposit accounts totaled $19.9 million during 2006, compared to $19.3 million and $17.6 million during 2005 and 2004, respectively. The increases in such service charges principally relate to growth in checking accounts as a result of deposit account promotions, including direct mail solicitations. The growth in 2006 and 2005 also reflects our acquisitions of two banks in the middle of 2004. We opened approximately 25,000 new checking accounts in 2006 compared to approximately 26,000 in 2005 and 23,000 in 2004.

Net gains on the sale of real estate mortgage loans are generally a function of the volume of loans sold. We realized net gains of $4.6 million on the sale of such loans during 2006, compared to $5.4 million and $6.0 million during 2005 and 2004, respectively. The volume of loans sold is dependent upon our ability to originate real estate mortgage loans as well as the demand for fixed-rate obligations and other loans that we cannot profitably fund within established interest-rate risk parameters. (See “Portfolio Loans and asset quality.”) Net gains on real estate 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. In 2006, approximately 40% of the $525.8 million of real estate mortgage loans originated was the result of refinancing activity. We estimate that refinancing activities accounted for approximately 43% and 46% of the real estate mortgage loans originated during 2005 and 2004, respectively.

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NET GAINS ON THE SALE OF REAL ESTATE MORTGAGE LOANS

	Year Ended December 31,
	2006			2005			2004
	(Dollars in thousands)
Real estate mortgage loans originated	$	525,849		$	678,409		$	687,894
Real estate mortgage loans sold		281,285			377,265			385,445
Real estate mortgage loans sold with servicing rights released		41,494			44,274			53,082
Net gains on the sale of real estate mortgage loans		4,593			5,370			5,956
Net gains as a percent of real estate mortgage loans sold		1.63	%		1.42	%		1.55	%
SFAS #133 adjustments included in the Loan Sale Margin		0.05			0.00			0.00

Net gains as a percentage of real estate mortgage loans sold (our “Loan Sales Margin”) are impacted by several factors including competition and the manner in which the loan is sold (with servicing rights retained or released). Our decision to sell or retain real estate mortgage loan servicing rights is primarily influenced by an evaluation of the price being paid for real estate mortgage loan servicing by outside third parties compared to our calculation of the economic value of retaining such servicing. The sale of real estate mortgage loan servicing rights may result in declines in real estate mortgage loan servicing income in future periods. Gains on the sale of real estate mortgage loans can be impacted by recording changes in the fair value of certain derivative instruments pursuant to Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (“SFAS #133”). Excluding the aforementioned SFAS #133 adjustments, the Loan Sales Margin would have been 1.58% in 2006, 1.42% in 2005 and 1.55% in 2004.

The purchase or sale of securities is dependent upon our assessment of investment and funding opportunities as well as asset/liability management needs. We sold securities with an aggregate market value of $1.3 million during 2006 compared to $54.6 million and $57.4 million during 2005 and 2004, respectively (See “Securities.”). The $0.2 million of net securities gains in 2006 is due to the sale of a preferred stock. We recorded no other than temporary impairment charges in 2006. The $1.5 million of net securities gains in 2005 is principally comprised of a gain of $0.3 million on the sale of a trust preferred security and gains of $1.4 million from the liquidation of our portfolio of four different community bank stocks which we owned at the holding company. We also recorded $0.4 million in other than temporary impairment charges in 2005. The $0.9 million of securities gains in 2004 were net of $1.6 million in other than temporary impairment charges (thus we actually had net gains on securities sales of approximately $2.5 million). Approximately $1.4 million of the other than temporary impairment charges related to our Fannie Mae and Freddie Mac preferred stock portfolio. These preferred stocks are perpetual (i.e. they have no stated maturity date) and as a result they are treated like equity securities for purposes of impairment analysis. In addition, we recorded other than temporary impairment charges of $0.2 million on a mobile home asset backed security (See “Securities”). The net gains on sales of securities in 2004 relate primarily to the sale or call of U.S. Treasury, mortgage-backed, corporate and trust preferred securities.

GAINS AND LOSSES ON SECURITIES

	Year Ended December 31,
	Proceeds		Gains		Losses (1)		Net
2006	$	1,283	$	171			$	171
2005		54,556		2,102	$	618		1,484
2004		57,441		2,540		1,684		856

(1) The losses include impairment charges of $0.4 million and $1.6 million in 2005 and 2004 respectively.

VISA check card interchange income increased to $3.4 million in 2006 compared to $2.8 million in 2005 and $2.1 million in 2004. These results can be primarily attributed to an increase in the size of our card base due to growth in checking accounts as well as the two bank acquisitions completed in mid-2004. In addition, the frequency of use of our VISA check card product by our customer base has increased. We are introducing a rewards program at all of our banks in 2007 to attempt to further increase the frequency of use of our VISA check card product by our customers.

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Title insurance fees totaled $1.7 million in 2006 and $2.0 million in both 2005 and 2004. The fluctuation in title insurance fees is primarily a function of the level of real estate mortgage loans that we originated.

Real estate mortgage loan servicing generated revenue of $2.4 million in 2006 compared to revenue of $2.6 million in 2005 and $1.4 million in 2004. These yearly comparative increases or decreases are primarily due to changes in the valuation allowance on capitalized real estate mortgage loan servicing rights and the level of amortization of this asset. The period end valuation allowance is based on a third-party valuation of our real estate mortgage loan servicing portfolio and the amortization is primarily impacted by prepayment activity.

CAPITALIZED REAL ESTATE MORTGAGE LOAN SERVICING RIGHTS

	2006			2005			2004
	(In thousands)
Balance at January 1,	$	13,439		$	11,360		$	8,873
Servicing rights acquired								1,138
Originated servicing rights capitalized		2,862			3,247			3,341
Amortization		(1,462	)		(1,923	)		(1,948	)
(Increase)/decrease in valuation allowance		(57	)		755			(44	)
Balance at December 31,	$	14,782		$	13,439		$	11,360
Valuation allowance at December 31,	$	68		$	11		$	766

At December 31, 2006 we were servicing approximately $1.56 billion in real estate mortgage loans for others on which servicing rights have been capitalized. This servicing portfolio had a weighted average coupon rate of 5.99% and a weighted average service fee of approximately 26 basis points. Remaining capitalized real estate mortgage loan servicing rights at December 31, 2006 totaled $14.8 million, representing approximately 95 basis points on the related amount of real estate mortgage loans serviced for others. The capitalized real estate mortgage loan servicing had an estimated fair market value of $19.5 million at December 31, 2006.

In August 2002 we acquired $35.0 million in separate account bank owned life insurance on which we earned $1.6 million in 2006, $1.6 million in 2005 and $1.5 million in 2004, as a result of increases in cash surrender value.

Mutual fund and annuity commissions have been relatively flat over the 2004 to 2006 time period. Although our total sales production increased by 23% in 2006 compared to 2005, revenues were down slightly as we are moving to more fee based programs and away from traditional retail investment products that generate higher initial one-time commissions. This transition to fee based programs has had somewhat of an adverse impact on current revenues. However, we believe this transition will produce a more sustainable long-term revenue stream over time and we will therefore be less reliant on new transaction volume.

Manufactured home loan origination fees and commissions have generally been declining over the past few years and declined by 27.3% in 2006 compared to 2005. This industry has faced a challenging environment as several buyers of this type of loan have exited the market or materially altered the guidelines under which they will purchase such loans. In addition, relatively low interest rates for real estate mortgage loans have made traditional housing more affordable and reduced the demand for manufactured homes. Finally, regulatory changes have reduced the opportunity to generate revenues on the sale of insurance related to this type of lending. At the present time we do not anticipate any significant improvement in the circumstances adversely impacting manufactured home lending as outlined above. (See “Non-interest expense” regarding goodwill impairment charges that we recorded in 2006 at our manufactured home loan origination subsidiary.)

Other non-interest income rose to $6.0 million in 2006 from $5.1 million in 2005 and $4.4 million in 2004. Increases in ATM fees, check printing charges and PMI reinsurance revenues have accounted for the majority of this growth. The growth is generally reflective of the overall expansion of the organization in terms of numbers of customers and accounts.

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Non-interest expense.  Non-interest expense is an important component of our results of operations. However, we primarily focus on revenue growth, and while we strive to efficiently manage our cost structure, our non-interest expenses will generally increase from year to year because we are expanding our operations through acquisitions and by opening new branches and loan production offices.

Non-interest expense totaled $106.2 million during 2006, compared to $101.8 million and $90.5 million during 2005 and 2004, respectively. 2006 non-interest expense includes $3.6 million of goodwill impairment charges and a $2.4 million loss on the write-off of a receivable from a counter party in Mepco’s warranty payment plan business. Excluding these two unusual items, non-interest expense in 2006 actually declined from 2005 due principally to a reduced level of performance based compensation. The aforementioned two bank acquisitions in mid-2004 as well as growth associated with new branch offices and loan production offices account for much of the increases in non-interest expense in 2005 compared to 2004.

NON-INTEREST EXPENSE

	Year Ended December 31,
	2006		2005		2004
	(In thousands)
Compensation	$	37,597	$	35,229	$	33,266
Performance-based compensation and benefits		3,200		6,844		4,363
Other benefits		10,004		10,074		9,537
Compensation and benefits		50,801		52,147		47,166
Occupancy, net		9,626		8,590		7,342
Furniture, fixtures and equipment		7,057		6,812		5,956
Data processing		5,619		4,905		4,324
Advertising		3,997		4,311		3,662
Credit card and bank service fees		3,839		2,952		2,089
Loan and collection		3,610		4,102		3,500
Goodwill impairment		3,575
Communications		3,556		3,724		3,333
Amortization of intangible assets		2,423		2,529		2,123
Supplies		2,113		2,247		2,091
Legal and professional		1,853		2,509		2,597
Loss on receivable from warranty payment plan seller		2,400
Other		5,747		6,957		6,272
Total non-interest expense	$	106,216	$	101,785	$	90,455

The decrease in compensation and employee benefits in 2006 compared to 2005 is due primarily to a $3.6 million decline in performance based compensation. This decline is due to a decrease in incentive (bonus) payments and a reduced employee stock ownership plan contribution. These reductions are directly attributable to our reduced level of earnings in 2006. Salaries increased by $2.4 million or 6.7% in 2006 compared to 2005 due to merit increases effective as of the start of the year and employees added primarily as a result of new branches.

The increase in compensation and benefits in 2005 compared to 2004 is primarily attributable to an increased number of employees resulting from acquisitions and the addition of new branch and loan production offices as well as to merit pay increases and increases in certain employee benefit costs such as health care insurance. Performance based compensation and benefits were higher in 2005 compared to 2004 due primarily to the funding level for our employee stock ownership plan and lower incentive compensation in 2004 (reflecting a decline in earnings per share that year). In addition, compensation expense in 2004 includes $1.0 million in severance expense related to the termination of employment contracts for three executives at Mepco. An additional $1.3 million in severance expense for these executives was allocated to discontinued operations. In general we do not provide employment

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contracts for our employees, and substantially all of our employees are employed on an “at will” basis. The aforementioned employment contracts were executed in April 2003 as part of our acquisition of Mepco.

We maintain performance-based compensation plans. In addition to commissions and cash incentive awards, such plans include employee stock ownership and employee stock option plans. Stock options granted during 2005 and in prior years did not require the recognition of any expense in our consolidated statements of operations during those periods. In December 2004 the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 123 (revised 2004), “Share-Based Payment” (“SFAS #123R”). In general this accounting pronouncement requires that all share-based payments to employees, including grants of employee stock options, be recognized in the financial statements based on their fair values. This requirement applied to us beginning on January 1, 2006. Since we did not issue any new share based payments in 2006, SFAS #123R did not have any material impact on our results of operations.

Occupancy, furniture, fixtures and equipment, and data processing expenses all generally increased over the periods presented as a result of the growth of the organization through acquisitions and the opening of new branch and loan production offices.

Advertising, communications and supplies expenses declined in 2006 compared to 2005 due primarily to efforts to reduce discretionary expenses as a result of our reduced earnings. These categories of expenses increased in 2005 compared to 2004 due primarily to new branch and loan production offices and the two bank acquisitions completed in mid-2004.

Credit cards and bank service fee expenses increased in each year presented primarily due to growth in the number of warranty payment plans at Mepco.

The changes in loan and collection expense reflects costs associated with holding or disposal of other real estate and collection costs related to non-performing or delinquent loans. Even though non-performing loans increased in 2006, loan and collection costs declined due primarily to efforts to reduce these costs and perform more collection related tasks internally. Because of the higher level of non-performing loans at the end of 2006 we would expect these costs to increase in 2007 over 2006 levels.

During 2006 we recorded $3.6 million of goodwill impairment charges. A $2.4 million goodwill impairment charge was recorded at Mepco as a result of a valuation performed to allocate intangibles between the business Mepco is retaining (providing payment plans to consumers to pay for the purchase of vehicle service contracts or extended warranties over time) and the business that was sold in January 2007 (insurance premium finance business). Approximately $4.4 million of intangibles was allocated to the insurance premium finance business and is included in assets of discontinued operations at December 31, 2006. After this allocation, $19.5 million of intangibles remained at Mepco that were valued at $17.1 million which resulted in the goodwill impairment charge of $2.4 million. In addition, we also recorded a goodwill impairment charge of $1.2 million related to First Home Financial (“FHF”) which was acquired in 1998. FHF is a loan origination company based in Grand Rapids, Michigan that specializes in the financing of manufactured homes located in mobile home parks or communities. Revenues and profits have declined at FHF over the last few years and have continued to decline during 2006. (See “Non-interest income.”) Based on the fair value of FHF the goodwill associated with this entity was reduced from $1.5 million to $0.3 million during 2006. The aforementioned goodwill impairment charges are not tax deductible, so no income tax benefit is associated with the $3.6 million 2006 charge.

In 2006 we recorded a $2.4 million loss related to a receivable due from one of Mepco’s warranty business counterparties which is comprised of $1.6 million in balance due that was charged off and $0.8 million in discount for imputed future interest. Although this counter party has been making periodic payments on the balance owed to Mepco, a long-term agreement for the repayment of all sums due that is satisfactory to Mepco has not yet been reached. As a result of this development along with the potential for future litigation, Mepco recorded the aforementioned loss. Mepco will vigorously pursue collection of the amounts due from this counter-party. (See “Portfolio loans and asset quality.”)

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The decline in legal and professional expenses in 2006 compared to the prior two years is primarily due to those prior two years including certain Mepco related litigation or investigation costs. 2005 included $0.4 million of legal fees related to litigation involving certain of the former owners of Mepco and 2004 included $0.8 million in costs related to the Mepco investigation. (See “Litigation Matters.”)

Other non-interest expense decreased to $5.7 million in 2006 compared to $7.0 million in 2005 and was $6.3 million in 2004. The decline in 2006 compared to 2005 was primarily due to a decrease in Michigan Single Business tax. The increase in 2005 compared to 2004 is primarily due to growth of the organization through acquisitions and the opening of new branch and loan production offices as well as certain costs associated with the realignment of several full service branches between our subsidiary banks.

Our income tax expense has changed generally commensurate with the changes in pre-tax income from continuing operations. Our actual federal income tax expense is lower than the amount computed by applying our statutory federal income tax rate to our pre-tax income from continuing operations primarily due to tax-exempt interest income. Our overall effective income tax rate was 25.6%, 27.6% and 26.7% in 2006, 2005 and 2004, respectively. The decrease in the overall effective income tax rate in 2006 compared to 2005 and 2004 is principally attributed to tax exempt interest income representing a much higher percentage of pre-tax income from continuing operations in 2006.

Discontinued operations, net of tax.  On January 15, 2007 we sold substantially all of the assets of Mepco’s insurance premium finance business to Premium Financing Specialists, Inc. (“PFS”). We received $176.0 million of cash that was utilized to payoff Brokered CD’s and short-term borrowings at Mepco’s parent company, Independent Bank. Under the terms of the sale, PFS also assumed approximately $11.7 million in liabilities. In the fourth quarter of 2006, we recorded a loss of $0.2 million and accrued for approximately $1.1 million of expenses related to the disposal of this business. We also allocated $4.1 million of goodwill and $0.3 million of other intangible assets to this business. Revenues and expenses associated with Mepco’s insurance premium finance business have been presented as discontinued operations in the Consolidated Statements of Operations. Likewise, the assets and liabilities associated with this business have been reclassified to discontinued operations in the Consolidated Statements of Financial Condition. We have elected to not make any reclassifications in the Consolidated Statements of Cash Flows. Prior to the December 2006 announced sale, our insurance premium finance business was included in the Mepco segment.

FINANCIAL CONDITION

Summary.  Our total assets grew to $3.43 billion at December 31, 2006, from $3.36 billion at December 31, 2005. The growth in total assets primarily reflects an increase in loans. Loans, excluding loans held for sale (“Portfolio Loans”) increased $111.1 million in 2006 due to growth in commercial, real estate mortgage and installment loans. Total deposits increased $128.6 million in 2006 primarily as a result of an increase in time deposits. Assets related to discontinued operations totaled $189.4 million and $188.1 million at December 31, 2006 and 2005, respectively.

Securities.  We maintain diversified securities portfolios, which include obligations of the U.S. Treasury and government-sponsored agencies as well as securities issued by states and political subdivisions, corporate securities, mortgage-backed securities and asset-backed securities. We also invest in capital securities, which include preferred stocks and trust preferred securities. We regularly evaluate asset/liability management needs and attempt to maintain a portfolio structure that provides sufficient liquidity and cash flow. We believe that the unrealized losses on securities available for sale are temporary in nature and due primarily to changes in interest rates and are expected to be recovered within a reasonable time period. We also believe that we have the ability to hold securities with unrealized losses to maturity or until such time as the unrealized losses reverse. During 2006 we did not record any impairment charges on securities. During 2005 we recorded a $0.2 million impairment charge on Fannie Mae and Freddie Mac preferred securities and a $0.2 million impairment charge on a mobile home asset-backed security. During 2004 we recorded a $1.4 million impairment charge on Fannie Mae and Freddie Mac preferred securities and a $0.2 million impairment charge on a mobile home asset-backed security. In these instances we believe that the decline in value is directly due to matters other than changes in interest rates (such as underlying collateral deficiencies or financial difficulties or other challenges encountered by the issuer), are not

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expected to be recovered within a reasonable timeframe based upon available information and are therefore other than temporary in nature. (See “Non-interest income” and “Asset/liability management.”)

SECURITIES

	Amortized		Unrealized				Fair
	Cost		Gains		Losses		Value
	(In thousands)
Securities available for sale
December 31, 2006	$	430,262	$	7,367	$	2,844	$	434,785
December 31, 2005		479,713		8,225		4,491		483,447

Securities available for sale declined in 2006 because the flat yield curve has created a difficult environment for constructing investment security transactions that meet our profitability objectives. Generally we cannot earn the same interest-rate spread on securities as we can on Portfolio Loans. As a result, purchases of securities will tend to erode some of our profitability measures such as our Net Yield and our return on assets. We would expect securities available for sale to decline further in 2007 if the flat yield curve environment persists.

At December 31, 2006 and 2005 we had $12.5 million and $15.3 million, respectively, of asset-backed securities included in securities available for sale. All of our asset-backed securities at December 31, 2006 and 2005 were backed by mobile home loans and these were all rated as investment grade (by the major rating agencies) except for one mobile home loan asset-backed security with a balance of $1.5 million and $1.8 million at December 31, 2006 and 2005, respectively, that was down graded during 2004 to a below investment grade rating. During 2005 we recorded impairment charges of $0.2 million on this security due primarily to some credit related deterioration on the underlying mobile home loan collateral (we recorded no impairment charges in 2006). We continue to closely monitor this particular security as well as our entire mobile home loan asset-backed securities portfolio. We do not foresee, at the present time, any risk of loss (related to credit issues) with respect to any of our other asset-backed securities.

Portfolio Loans and asset quality.  We believe that our decentralized loan origination structure provides important advantages in serving the credit needs of our principal lending markets. In addition to the communities served by our bank branch networks, principal lending markets include nearby communities and metropolitan areas. Subject to established underwriting criteria, we also participate in commercial lending transactions with certain non-affiliated banks and may also purchase real estate mortgage loans from third-party originators.

LOAN PORTFOLIO COMPOSITION

	December 31,
	2006		2005
	(In thousands)
Real estate(1)
Residential first mortgages	$	722,495	$	670,127
Residential home equity and other junior mortgages		239,609		233,057
Construction and land development		254,570		273,811
Other(2)		699,812		635,010
Finance receivables		183,679		185,427
Consumer		178,826		182,902
Commercial		196,541		185,210
Agricultural		7,863		6,773
Total loans	$	2,483,395	$	2,372,317

(1)	Includes both residential and non-residential commercial loans secured by real estate.
(2)	Includes loans secured by multi-family residential and non-farm, non-residential property.

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Our 2003 acquisition of Mepco added financing of insurance premiums for businesses and payment plans to purchase vehicle service contracts for consumers (warranty finance) to our lending activities. These are relatively new lines of business for us and expose us to new risks. Mepco conducts its lending activities across the United States. Mepco generally does not evaluate the creditworthiness of the individual customer but instead primarily relies on the loan collateral (the unearned insurance premium or vehicle service contract) in the event of default. As a result, we have established and monitor counterparty concentration limits in order to manage our collateral exposure. The counterparty concentration limits are primarily based on the AM Best rating and statutory surplus level for an insurance company and on other factors including financial evaluation and distribution of concentrations for warranty administrators and warranty sellers/dealers. The sudden failure of one of Mepco’s major counterparties (an insurance company or warranty administrator) could expose us to significant losses. In January 2007 we sold Mepco’s insurance premium finance business and as a result the assets, liabilities, revenues and expenses related to this line of business have been reclassified as discontinued operations.

Mepco also has established procedures for loan servicing and collections, including the timely cancellation of the insurance policy or vehicle service contract in order to protect our collateral position in the event of default. Mepco also has established procedures to attempt to prevent and detect fraud since the loan origination activities and initial customer contact is entirely done through unrelated third parties (primarily insurance agents and automobile warranty administrators or direct marketers). 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.

Although the management and board of directors of each of our banks retain authority and responsibility for credit decisions, we have adopted uniform underwriting standards. Further, our loan committee structure as well as the centralization of commercial loan credit services and the loan review process, provides requisite controls and promotes compliance with such established underwriting standards. Such centralized functions also facilitate compliance with consumer protection laws and regulations. There can be no assurance that the aforementioned centralization of certain lending procedures and the use of uniform underwriting standards will prevent us from the possibility of incurring significant credit losses in our lending activities and in fact the provision for loan losses increased significantly in 2006.

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 and balloon real estate mortgage loans as Portfolio Loans, while 15- and 30-year, fixed-rate obligations are generally sold to mitigate exposure to changes in interest rates. (See “Non-interest income.”)

The increase in commercial loans (including real estate other in the table above) during 2006 principally reflects our emphasis on lending opportunities within this category of loans and an increase in commercial lending staff. Loans secured by real estate comprise the majority of new commercial loans. The growth in real estate mortgage and installment loans principally reflects the overall growth in our banking operations as we have added new branches and loan production offices over the past few years. Loan growth slowed in 2006 compared to the prior few years due principally to weakness in the Michigan economy and intense price competition in our banking markets.

Future growth of overall Portfolio Loans is dependent upon a number of competitive and economic factors. Declines in Portfolio Loans or competition leading to lower relative pricing on new Portfolio Loans could adversely impact our future operating results. We continue to view loan growth consistent with prevailing quality standards as a major short- and long-term challenge.

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NON-PERFORMING ASSETS

	December 31,
	2006			2005			2004
	(Dollars in thousands)
Non-accrual loans	$	35,683		$	11,546		$	11,119
Loans 90 days or more past due and still accruing interest		3,479			4,862			3,123
Restructured loans		60			84			218
Total non-performing loans		39,222			16,492			14,460
Other real estate		3,153			2,147			2,113
Total non-performing assets	$	42,375		$	18,639		$	16,573
As a percent of Portfolio Loans
Non-performing loans		1.58	%		0.70	%		0.69	%
Allowance for loan losses		1.08			0.95			1.16
Non-performing assets to total assets		1.24			0.56			0.54
Allowance for loan losses as a percent of non-performing loans		69			136			167

Non-performing loans totaled $39.2 million at December 31, 2006, a $22.7 million increase from December 31, 2005. The rise in non-performing loans in 2006 was primarily concentrated in the commercial loan and real estate mortgage loan portfolios. Non-performing commercial loans rose by $16.4 million in 2006. This is principally due to 19 commercial loans with balances totaling $18.1 million at December 31, 2006 becoming non-performing during the year. The five largest non-performing commercial loans have balances of $3.7 million, $3.4 million, $2.7 million, $1.2 million and $1.1 million, respectively, at December 31, 2006. Charge-offs or specific allowances have been recorded on these loans based on a current assessment of collateral values, taking into account disposal costs. The substantive majority of these 19 aforementioned commercial loans are collateralized by real estate and several are development loans. The inability of many of these borrowers to perform under the terms of the loan agreement is often associated with slowing sales of real estate in the State of Michigan. The amount of allowance for loan losses allocated to non-performing commercial loans at December 31, 2006 was $2.6 million.

The growth in consumer and real estate mortgage non-performing loans primarily reflects weak economic conditions in Michigan which have resulted in increased delinquencies, bankruptcies and foreclosures. Other real estate and repossessed assets totaled $3.2 million at December 31, 2006 compared to $2.1 million at December 31, 2005.

Non-performing loans do not include $3.2 million (net of charge-off and discount) that is due from a counter party in Mepco’s warranty payment plan business (See “Non-interest expense.” regarding the charge off recorded on this receivable during 2006).

Beginning in approximately the second quarter of 2005, non-performing loans increased sharply due primarily to certain commercial loans becoming 90 days or more past due. As a result of this rise in non-performing commercial loans, during the fourth quarter of 2005 we sold (without recourse) $9.3 million of non-performing loans and $2.4 million of other loans of concern (which were performing at the time of sale). These loan sales returned our overall level of non-performing loans as a percent of Portfolio Loans at December 31, 2005 to a level more consistent with prior years.

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.

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ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

	December 31,
	2006		2005		2004
	(In thousands)
Specific allocations	$	2,631	$	1,418	$	2,874
Other adversely rated loans		9,303		8,466		9,395
Historical loss allocations		7,482		6,135		5,522
Additional allocations based on subjective factors		7,463		6,401		6,371
Total	$	26,879	$	22,420	$	24,162

In determining the allowance and the related provision for credit 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 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, mix and/or the general terms of the loan portfolios.

The first element reflects our estimate of probable losses based upon our systematic review of specific loans. These estimates are based upon a number of objective factors, such as payment history, financial condition of the borrower, and discounted collateral exposure.

The second element reflects the application of our loan rating system. This rating system is similar to those employed by state and federal banking regulators. 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 losses incurred. The lower the rating assigned to a loan or category, the greater the allocation percentage that is applied.

The third element is determined by assigning allocations based principally upon the ten-year average of loss experience for each type of loan. Recent years are weighted more heavily in this average. Average losses may be further adjusted based on the current delinquency rate. Loss analyses are conducted at least annually.

The fourth element is based on factors that cannot be associated with a specific credit or loan category and reflects our attempt to ensure that the overall allowance for loan losses appropriately reflects a margin for the imprecision necessarily inherent in the estimates of expected credit losses. We consider a number of subjective factors when determining the unallocated portion, including local and general economic business factors and trends, portfolio concentrations and changes in the size, mix and the general terms of the loan portfolios. (See “Provision for credit losses.”)

Mepco’s allowance for loan losses is determined in a similar manner as discussed above and primarily takes into account historical loss experience, unsecured exposure, loan type and other subjective factors deemed relevant to their lending activities.

The allowance for loan losses increased to 1.08% of total Portfolio Loans at December 31, 2006 from 0.95% at December 31, 2005. This increase reflects increases in each of the four components of the allowance for loan losses outlined above. The allowance for loan losses related to specific loans increased due to the rise in non-performing loans described earlier. The allowance for loan losses related to other adversely rated loans increased primarily due to a rise in the balance of these loans. The allowance for loan losses related to historical losses increased due to a rise in net loan charge-offs particularly in the past two years. The allowance for loan losses related to subjective factors increased primarily due to weaker economic conditions in Michigan that have contributed to higher levels of non-performing loans and net loan charge-offs.

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ALLOWANCE FOR LOSSES ON LOANS AND UNFUNDED COMMITMENTS

	2006					2005						2004
	Loan			Unfunded		Loan			Unfunded			Loan			Unfunded
	Losses			Commitments		Losses			Commitments			Losses			Commitments
	(In thousands)
Balance at beginning of year	$	22,420		$	1,820	$	24,162		$	1,846		$	16,455		$	892
Allowance on loans acquired													8,236
Provision charged to operating expense		16,283			61		7,832			(26	)		3,062			954
Recoveries credited to allowance		2,237					1,518						1,241
Loans charged against the allowance		(14,061	)				(11,092	)					(4,832	)
Balance at end of year	$	26,879		$	1,881	$	22,420		$	1,820		$	24,162		$	1,846
Net loans charged against the allowance to average
Portfolio Loans		0.48	%				0.43	%					0.19	%

Net loan charge-offs increased to $11.8 million (0.48% of average Portfolio Loans) in 2006 from $9.6 million (0.43% of average Portfolio Loans) in 2005. This increase is primarily due to a $0.8 million rise in commercial loan and $0.9 million rise in real estate mortgage loan net charge-offs in 2006 compared to 2005. The majority of these loans were secured by real estate and the increased levels of net loan charge-offs primarily reflects weaker real estate values in Michigan in 2006. In addition, 2006 net loan charge-offs include a $2.1 million charge-off on a $3.5 million commercial lending relationship collateralized with accounts receivables, inventory, equipment and real estate and was originated in June 2004. We have determined that this borrower transferred, diverted or misrepresented the amount of assets collateralizing this loan in contravention of the loan documents. As a result, based on an assessment of the existing collateral, $2.1 million of this loan was charged off in the third quarter of 2006 leaving a remaining balance in non-performing loans of $1.4 million. We are in the process of liquidating the collateral securing this loan. At the present time, no additional loss is expected on this credit. Net loan charge-offs in the installment loan portfolio increased by $0.3 million in 2006 compared to 2005.

Deposits and borrowings.  Our competitive position within many of the markets served by our branch networks limits our ability to materially increase deposits without adversely impacting the weighted-average cost of core deposits. Accordingly, we principally compete on the basis of convenience and personal service, while employing pricing tactics that are intended to enhance the value of core deposits.

To attract new core deposits, we have implemented a high-performance checking program that utilizes a combination of direct mail solicitations, in-branch merchandising, gifts for customers opening new checking accounts or referring business to our banks and branch staff sales training. This program has generated increases in customer relationships as well as deposit service charges. Over the past two to three 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. Despite these efforts our core deposit growth has not kept pace with the growth of our Portfolio Loans. We view long-term core deposit growth as a significant challenge. Core deposits generally provide a more stable and lower cost source of funds than alternative sources such as short-term borrowings. As a result, the continued funding of Portfolio Loan growth with alternative sources of funds (as opposed to core deposits) may erode certain of our profitability measures, such as return on assets, and may also adversely impact our liquidity. (See “Liquidity and capital resources.”)

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ALTERNATE SOURCES OF FUNDS

	December 31,
	2006							2005
			Average							Average
	Amount		Maturity		Rate			Amount		Maturity		Rate
	(Dollars in thousands)
Brokered CDs (1, 2)	$	1,055,010		1.9 years		4.72	%	$	1,009,804		1.8 years		3.79	%
Fixed-rate FHLB advances (1,3)		58,272		4.6 years		5.66			51,525		6.2 years		5.65
Variable-rate FHLB advances (1)		2,000		0.5 years		5.31			25,000		0.5 years		4.18
Securities sold under agreements to repurchase (1)		83,431		0.1 years		5.34			137,903		0.1 years		4.41
Federal funds purchased		84,081		1 day		5.40			80,299		1 day		4.23
Total	$	1,282,794		1.8 years		4.85	%	$	1,304,531		1.7 years		3.96	%

(1)	Certain of these items have had their average maturity and rate altered through the use of derivative instruments, including pay-fixed and pay-variable interest-rate swaps.
(2)	Includes brokered CD’s related to discontinued operations of $165,496 and $166,818, at December 31, 2006 and 2005, respectively.
(3)	Advances totaling $10 million at both December 31, 2006 and 2005, respectively, have provisions that allow the FHLB to convert fixed-rate advances to adjustable rates prior to stated maturity.

We have implemented strategies that incorporate federal funds purchased, other borrowings and Brokered CDs to fund a portion of our purchases of securities available for sale and support the growth of Portfolio Loans. The use of such alternate sources of funds supplements our core deposits and is an integral part of our asset/liability management efforts.

Other borrowed funds, principally advances from the Federal Home Loan Bank (the “FHLB”) and securities sold under agreements to repurchase (“Repurchase Agreements”), totaled $163.7 million at December 31, 2006, compared to $227.0 million a year earlier. This decrease reflects a $54.5 million decrease in Repurchase Agreements and a $16.3 million decrease in FHLB advances. The decline in Repurchase Agreements is principally associated with the decline in certain categories of securities available for sale which serve as collateral on these borrowing arrangements. The decline in FHLB advances is due primarily to the payoff of maturing advances with funds from Brokered CD’s which generally had more favorable pricing characteristics during 2006.

In addition to the pay down of borrowed funds, the increase in Brokered CDs was also utilized to fund loan growth. In determining our borrowing sources, we primarily evaluate the interest cost, payment terms, facility structure and collateral requirements. (also see “Liquidity and capital resources.”)

We employ derivative financial instruments to manage our exposure to changes in interest rates. At December 31, 2006, we employed interest-rate swaps with an aggregate notional amount of $613.4 million and interest rate caps with an aggregate notional amount of $290.5 million.

Liquidity and capital resources.  Liquidity risk is the risk of being unable to timely meet obligations as they come due at a reasonable funding cost or without incurring unacceptable losses. Our liquidity management involves the measurement and monitoring of a variety of sources and uses of funds. Our Consolidated Statements of Cash Flows categorize these sources and uses into operating, investing and financing activities. We primarily focus our liquidity management on developing access to a variety of borrowing sources to supplement our deposit gathering activities and provide funds for growing our investment and loan portfolios as well as to be able to respond to unforeseen liquidity needs.

Our sources of funds include a stable deposit base, secured advances from the Federal Home Loan Bank of Indianapolis, both secured and unsecured federal funds purchased borrowing facilities with other commercial banks, an unsecured holding company credit facility and access to the capital markets (for trust preferred securities and Brokered CD’s).

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At December 31, 2006, we had $749.7 million of time deposits that mature in 2007. Historically, a majority of these maturing time deposits are renewed by our customers or are Brokered CD’s that we expect to replace. Additionally $1.158 billion of our deposits at December 31, 2006, 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 over time as a result of our marketing and promotional activities and adding new bank branch locations. There can be no assurance that historical patterns of renewing time deposits or overall growth in deposits will continue in the future.

We have developed contingency funding plans that stress tests our liquidity needs that may arise from certain events such as an adverse credit event, rapid loan growth or a disaster recovery situation. Our liquidity management also includes periodic monitoring of each bank that segregates assets between liquid and illiquid and classifies liabilities as core and non-core. This analysis compares our total level of illiquid assets to our core funding. It is our goal to have core funding sufficient to finance illiquid assets.

Over the past several years our Portfolio Loans have grown more rapidly than our core deposits. In addition, much of this growth has been in loan categories that cannot generally be used as collateral for FHLB advances (such as commercial loans and finance receivables). As a result, we have become more dependent on wholesale funding sources (such as brokered CD’s and Repurchase Agreements). The proceeds from the sale of our insurance premium finance business in January 2007 were utilized to pay off maturing Brokered CD’s or short-term borrowings. In addition, the proceeds from the assumption of deposits in the pending acquisition of ten branches (which is expected to close in March 2007) are also expected to be utilized to pay off maturing Brokered CD’s or short-term borrowings. These two transactions are expected to improve our liquidity by reducing wholesale funding sources.

In the normal course of business, we enter into certain contractual obligations. Such obligations include obligations to make future payments on debt and lease arrangements, contractual commitments for capital expenditures, and service contracts. The table below summarizes our significant contractual obligations at December 31, 2006.

CONTRACTUAL COMMITMENTS

							After
	1 Year or Less		1-3 Years		3-5 Years		5 Years		Total
	(Dollars in thousands)
Time deposit maturities	$	749,723	$	390,301	$	239,638	$	64,956	$	1,444,618
Federal funds purchased and other borrowings		201,487		16,969		9,250		20,056		247,762
Subordinated debentures								64,197		64,197
Operating lease obligations		1,274		1,274		965		4,551		8,064
Purchase obligations (1)		1,220		2,440		2,440		407		6,507
Total	$	953,704	$	410,984	$	252,293	$	154,167	$	1,771,148

(1) Includes contracts with a minimum annual payment of $1.0 million and are not cancellable within one year.

Effective management of capital resources is critical to our mission to create value for our shareholders. The cost of capital is an important factor in creating shareholder value and, accordingly, our capital structure includes unsecured debt and cumulative trust preferred securities.

We believe that a diversified portfolio of quality loans will provide superior risk-adjusted returns. Accordingly, we have implemented balance sheet management strategies that combine efforts to originate Portfolio Loans with disciplined funding strategies. Acquisitions are also an integral component of our capital management strategies.

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CAPITALIZATION

	December 31,
	2006			2005
	(In thousands)
Unsecured debt	$	5,000		$	7,000
Subordinated debentures		64,197			64,197
Amount not qualifying as regulatory capital		(1,847	)		(1,847	)
Amount qualifying as regulatory capital		62,350			62,350
Shareholders’ equity
Common stock		22,865			21,991
Capital surplus		200,241			179,913
Retained earnings		31,420			41,486
Accumulated other comprehensive income		3,641			4,869
Total shareholders’ equity		258,167			248,259
Total capitalization	$	325,517		$	317,609

In March 2003, a special purpose entity, IBC Capital Finance II (the “trust”) issued $1.6 million of common securities to Independent Bank Corporation and $50.6 million of trust preferred securities to the public. Independent Bank Corporation issued $52.2 million of subordinated debentures to the trust in exchange for the proceeds from the public offering. These subordinated debentures represent the sole asset of the trust. Both the common securities and subordinated debentures are included in our Consolidated Statements of Financial Condition at December 31, 2006 and 2005.

In connection with our acquisition of Midwest, we assumed all of the duties, warranties and obligations of Midwest as the sponsor and sole holder of the common securities of Midwest Guaranty Trust I (“MGT”). In 2002, MGT, a special purpose entity, issued $0.2 million of common securities to Midwest and $7.5 million of trust preferred securities as part of a pooled offering. Midwest issued $7.7 million of subordinated debentures to the trust in exchange for the proceeds of the offering, which debentures represent the sole asset of MGT. Both the common securities and subordinated debentures are included in our Consolidated Statements of Financial Condition at December 31, 2006 and 2005.

In connection with our acquisition of North, we assumed all of the duties, warranties and obligations of North as the sole general partner of Gaylord Partners, Limited Partnership (“GPLP”), a special purpose entity. In 2002, North contributed an aggregate of $0.1 million to the capital of GPLP and GPLP issued $5.0 million of floating rate cumulative preferred securities as part of a private placement offering. North issued $5.1 million of subordinated debentures to GPLP in exchange for the proceeds of the offering, which debentures represent the sole asset of GPLP. Independent Bank purchased $0.8 million of the GPLP floating rate cumulative preferred securities during the private placement offering. This investment security at Independent Bank and a corresponding amount of subordinated debentures are eliminated in consolidation. The remaining subordinated debentures as well as our capital investment in GPLP are included in our Consolidated Statements of Financial Condition at December 31, 2006 and 2005.

In March 2005, the Federal Reserve Board issued a final rule that retains trust preferred securities in the Tier 1 capital of bank holding companies. After a transition period ending March 31, 2009, the aggregate amount of trust preferred securities and certain other capital elements will be limited to 25 percent of Tier 1 capital elements, net of goodwill (less any associated deferred tax liability). The amount of trust preferred securities and certain other elements in excess of the limit could be included in the Tier 2 capital, subject to restrictions. Based upon our existing levels of Tier 1 capital, trust preferred securities and goodwill, this final Federal Reserve Board rule would not have impacted our Tier 1 capital to average assets ratio at December 31, 2006.

We have supplemented our balance-sheet management activities with purchases of our common stock. We repurchased 0.5 million shares of our common stock at an average price of $25.36 per share in 2006. The level of

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share repurchases in a given year generally reflects changes in our need for capital associated with our balance sheet growth. In January 2007 our board of directors authorized the repurchase of up to 750,000 shares. This authorization expires on December 31, 2007.

Shareholders’ equity totaled $258.2 million at December 31, 2006. The increase from $248.3 million at December 31, 2005 primarily reflects the retention of earnings (net of cash dividends paid), the issuance of common stock pursuant to various equity-based incentive compensation plans and the $2.1 million adjustment described below, partially offset by share repurchases and a decrease in accumulated other comprehensive income. Shareholders’ equity was equal to 7.53% of total assets at December 31, 2006, compared to 7.40% a year earlier.

In the fourth quarter of 2006 we implemented the provisions of Staff Accounting Bulletin No. 108 (“SAB 108”). This bulletin requires companies to assess the materiality of identified errors in financial statements using both an income statement (“rollover”) and a balance sheet (“iron curtain”) approach. Over the course of many years, accrual differences that we considered immaterial to any particular year’s operations or financial condition accumulated to a total approximate net credit of $2.1 million. Under the balance sheet approach to assessing materiality, we concluded that these accrual differences should be corrected. As allowed by SAB 108, we elected to not restate prior years, but instead reduced the beginning of the year balance of accrued expenses and other liabilities and increased the opening balance of retained earnings by $2.1 million.

CAPITAL RATIOS

	December 31,
	2006			2005
Equity capital		7.53	%		7.40	%
Average shareholders’ equity to average assets		7.60			7.61
Tier 1 capital to average assets		7.62			7.40
Tier 1 risk-based capital		9.62			9.31
Total risk-based capital		10.75			10.27

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 the balance sheet in a manner that is consistent with our mission to maintain profitable financial leverage within established risk parameters. We evaluate various opportunities and alternative balance-sheet 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 balance-sheet 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 quarterly to our respective banks’ boards of directors.

We employ simulation analyses to monitor each Bank’s interest-rate risk profiles and evaluate potential changes in our Banks’ 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 inherent in our balance sheets. 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.

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The following table illustrates the results of the simulation analyses at December 31, 2006:

CHANGES IN MARKET VALUE OF PORTFOLIO EQUITY AND TAX EQUIVALENT NET INTEREST INCOME

	December 31, 2006
	Market Value of		Percent			Tax Equivalent		Percent
Change in Interest Rates	Portfolio Equity(1)		Change			Net Interest Income(2)		Change
	(Dollars in thousands)
200 basis point rise	$	233,400		(13.68	)%	$	123,100		(2.92	)%
100 basis point rise		250,700		(7.29	)		125,300		(1.18	)
Base-rate scenario		270,400					126,800
100 basis point decline		275,700		1.96			128,800		1.58
200 basis point decline		271,000		0.22			130,000		2.52

(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 balance sheet, which includes debt and related financial derivative instruments, and do not consider loan fees.

The percent change from the base rate scenarios in the table above are largely unchanged from the simulation analyses employed at December 31, 2005.

LITIGATION MATTERS

On March 16, 2006, we entered into a settlement agreement with the former shareholders of Mepco, (the “Former Shareholders”) and Edward, Paul, and Howard Walder (collectively referred to as the “Walders”) for purposes of resolving and dismissing all pending litigation between the parties. Under the terms of the settlement, on April 3, 2006, the Former Shareholders paid us a sum of $2.8 million, half of which was paid in the form of cash and half of which was paid in shares of our common stock. In return, we released 90,766 shares of Independent Bank Corporation common stock held pursuant to an escrow agreement among the parties that was previously entered into for the purpose of funding certain contingent liabilities that were, in part, the subject of the pending litigation. As a result of settlement of the litigation, we recorded other income of $2.8 million and an additional claims expense of approximately $1.7 million (related to the release of the shares held in escrow) in the first quarter of 2006.

The settlement covers both the claim filed by the Walders against Independent Bank Corporation and Mepco in the Circuit Court of Cook County, Illinois, as well as the litigation filed by Independent Bank Corporation and Mepco against the Walders in the Ionia County Circuit Court of Michigan.

As permitted under the terms of the merger agreement under which we acquired Mepco, on April 3, 2006, we paid the accelerated earn-out payments for the last three years of the performance period ending April 30, 2008. Those payments totaled approximately $8.9 million. Also, under the terms of the merger agreement, the second year of the earn out for the year ended April 30, 2005, in the amount of $2.7 million was paid on March 21, 2006. As a result of the settlement and these payments, no future payments are due under the terms of the merger agreement under which we acquired Mepco.

We are also involved in various other litigation matters in the ordinary course of business and at the present time, we do not believe that any of these matters will have a significant impact on our financial condition or results of operation.

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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 other than temporary impairment of investment securities, the allowance for loan losses, originated real estate mortgage loan servicing rights, derivative financial instruments, income taxes and goodwill 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 financial position or results of operations.

We are required to assess our investment securities for “other than temporary impairment” on a periodic basis. The determination of other than temporary impairment for an investment security requires judgment as to the cause of the impairment, the likelihood of recovery and the projected timing of the recovery. Our assessment process during 2006 resulted in recording no impairment charges for other than temporary impairment on various investment securities within our portfolio (compared to $0.4 million in 2005 and $1.6 million in 2004). We believe that our assumptions and judgments in assessing other than temporary impairment for our investment securities are reasonable and conform to general industry practices.

Our methodology for determining the allowance and related provision for loan losses is described above in “Portfolio Loans and asset quality.” In particular, this area of accounting requires a significant amount of judgment because a multitude of factors can influence the ultimate collection of a loan or other type of credit. It is extremely difficult to precisely measure the amount of losses that are probable in our loan portfolio. We use a rigorous process to attempt to accurately quantify the necessary allowance and related provision for loan losses, but there can be no assurance that our modeling process will successfully identify all of the losses that are probable in our loan portfolio. As a result, we could record future provisions for loan losses that may be significantly different than the levels that we have recorded in the past three-year period.

At December 31, 2006 we had approximately $14.8 million of real estate mortgage loan servicing rights capitalized on our balance sheet. There are several critical assumptions involved in establishing the value of this asset including estimated future prepayment speeds on the underlying real estate mortgage loans, the interest rate used to discount the net cash flows from the real estate mortgage loan servicing, the estimated amount of ancillary income that will be received in the future (such as late fees) and the estimated cost to service the real estate mortgage loans. We utilize an outside third party (with expertise in the valuation of real estate mortgage loan servicing rights) to assist us in our valuation process. We believe the assumptions that we utilize in our valuation are reasonable based upon accepted industry practices for valuing mortgage servicing rights and represent neither the most conservative or aggressive assumptions.

We use a variety of derivative instruments to manage our interest rate risk. These derivative instruments may include interest rate swaps, collars, floors and caps and mandatory forward commitments to sell real estate mortgage loans. Under SFAS #133 the accounting for increases or decreases in the value of derivatives depends upon the use of the derivatives and whether the derivatives qualify for hedge accounting. At December 31, 2006 we had approximately $834.9 million in notional amount of derivative financial instruments that qualified for hedge accounting under SFAS #133. As a result, generally, changes in the fair market value of those derivative financial instruments qualifying as cash flow hedges are recorded in other comprehensive income. The changes in the fair value of those derivative financial instruments qualifying as fair value hedges are recorded in earnings and, generally, are offset by the change in the fair value of the hedged item which is also recorded in earnings. The fair value of derivative financial instruments qualifying for hedge accounting was a negative $1.4 million at December 31, 2006.

Our accounting for income taxes involves the valuation of deferred tax assets and liabilities primarily associated with differences in the timing of the recognition of revenues and expenses for financial reporting and tax purposes. At December 31, 2006 we had recorded a net deferred tax asset of $10.6 million, which included a net operating loss carryforward of $4.5 million. We have recorded no valuation allowance on our net deferred tax asset because we believe that the tax benefits associated with this asset will more likely than not, be realized. However, changes in tax laws, changes in tax rates and our future level of earnings can adversely impact the ultimate realization of our net deferred tax asset.

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At December 31, 2006 we had recorded $48.7 million of goodwill. Under SFAS #142, amortization of goodwill ceased, and instead this asset must be periodically tested for impairment. Our goodwill primarily arose from the 2004 acquisitions of Midwest and North, the 2003 acquisition of Mepco and the past acquisitions of other banks and a mobile home loan origination company. We test our goodwill for impairment utilizing the methodology and guidelines established in SFAS #142. This methodology involves assumptions regarding the valuation of the business segments that contain the acquired entities. We believe that the assumptions we utilize are reasonable. During 2006 we recorded goodwill impairment charges of $3.6 million as described above under “Non-interest expense.” (no such charges were recorded in 2005 or 2004). We also allocated $4.1 million of goodwill to discontinued operations related to Mepco’s insurance premium finance business that was sold in January 2007. We may incur additional impairment charges related to our goodwill in the future due to changes in business prospects or other matters that could affect our valuation assumptions.

RECENT ACCOUNTING PRONOUNCEMENTS

In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156, “Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140,” (“SFAS #156”). This statement amends SFAS #140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”, to permit entities to choose to either subsequently measure servicing rights at fair value and report changes in fair value in earnings, or amortize servicing rights in proportion to and over the estimated net servicing income or loss and assess the rights for impairment or the need for an increased obligation. In addition, this statement (1) clarifies when a servicer should separately recognize servicing assets and liabilities, (2) requires all separately recognized servicing assets and liabilities to be initially measured at fair value, (3) permits at the date of adoption, a one-time reclassification of available for sale (“AFS”) securities to trading securities without calling into question the treatment of other AFS securities under SFAS #115, “Accounting for Certain Investments in Debt and Equity Securities” and (4) requires additional disclosures for all separately recognized servicing assets and liabilities. This statement is effective as of the beginning of an entities first fiscal year that begins after September 15, 2006. Early adoption is permitted as of the beginning of an entities fiscal year, provided the entity has not yet issued financial statements for any interim period of that fiscal year. We adopted SFAS #156 on January 1, 2007 and it did not have a material impact on our consolidated financial statements. We chose to amortize servicing rights in proportion to and over the estimated net servicing income or loss and assess the rights for impairment or the need for an increased obligation.

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109,” (“FIN #48”), which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS #109, “Accounting for Income Taxes”. FIN #48 prescribes a recognition and measurement threshold for a tax position taken or expected to be taken in a tax return. FIN #48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN #48 is effective for fiscal years beginning after December 15, 2006. We do not expect the adoption of FIN #48 to have a material impact on our consolidated financial statements.

39

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING

The management of Independent Bank Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance to us and the board of directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

We assessed the effectiveness of our internal control over financial reporting as of December 31, 2006. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on our assessment, management has concluded that as of December 31, 2006, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Our independent auditors have issued an audit report on our assessment of the Company’s internal control over financial reporting. Their report immediately follows our report.

Michael M. Magee, Jr.	Robert N. Shuster
President and Chief	Executive Vice President
Executive Officer	and Chief Financial Officer

Independent Bank Corporation

March 1, 2007

40

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Independent Bank Corporation

Ionia, Michigan

We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, that Independent Bank Corporation maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Independent Bank Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Independent Bank Corporation maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion, Independent Bank Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of Independent Bank Corporation and our report dated March 1, 2007 expressed an unqualified opinion on those consolidated financial statements.

Signature

Grand Rapids, Michigan

March 1, 2007

41

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Independent Bank Corporation

Ionia, Michigan

We have audited the accompanying consolidated statements of financial condition of Independent Bank Corporation as of December 31, 2006 and 2005, and the related consolidated statements of operations, shareholders’ equity, comprehensive income and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of Independent Bank Corporation for the year ended December 31, 2004 were audited by other auditors whose report dated March 4, 2005, except for notes 1, 5, 6, 7, 8, 12, 13, 14, 17, 18, 22, 23 and 24 as to which the date is March 1, 2007, expressed an unqualified opinion on those statements.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Independent Bank Corporation as of December 31, 2006 and 2005, and the results of its operations and its cash flows for the years ended December 31, 2006 and 2005, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Independent Bank Corporation’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2007 expressed an unqualified opinion thereon.

As discussed in note 1, the Company adopted Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” and accordingly adjusted assets and liabilities at the beginning of 2006 with an offsetting adjustment to the opening balance of retained earnings.

Signature

Grand Rapids, Michigan

March 1, 2007

42

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	December 31,
	2006			2005
	(In thousands, except share amounts)
ASSETS
Cash and due from banks	$	73,142		$	67,522
Securities available for sale		434,785			483,447
Federal Home Loan Bank stock, at cost		14,325			17,322
Loans held for sale		31,846			28,569
Loans
Commercial		1,083,921			1,030,095
Real estate mortgage		865,522			852,742
Installment		350,273			304,053
Finance receivables		183,679			185,427
Total loans		2,483,395			2,372,317
Allowance for loan losses		(26,879	)		(22,420	)
Net Loans		2,456,516			2,349,897
Property and equipment, net		67,992			63,081
Bank owned life insurance		41,109			39,451
Goodwill		48,709			51,813
Other intangibles		7,854			10,277
Assets of discontinued operations		189,432			188,108
Accrued income and other assets		64,188			56,361
Total Assets	$	3,429,898		$	3,355,848
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest bearing	$	282,632		$	295,151
Savings and NOW		875,541			861,277
Time		1,444,618			1,317,811
Total Deposits		2,602,791			2,474,239
Federal funds purchased		84,081			80,299
Other borrowings		163,681			227,047
Subordinated debentures		64,197			64,197
Financed premiums payable		32,767			24,760
Liabilities of discontinued operations		183,676			178,680
Accrued expenses and other liabilities		40,538			58,367
Total Liabilities		3,171,731			3,107,589
Commitments and contingent liabilities
Shareholders’ Equity
Preferred stock, no par value — 200,000 shares authorized; none issued or outstanding
Common stock, $1.00 par value — 30,000,000 shares authorized; issued and outstanding; 22,864,587 shares at December 31, 2006 and 21,991,001 shares at December 31, 2005		22,865			21,991
Capital surplus		200,241			179,913
Retained earnings		31,420			41,486
Accumulated other comprehensive income		3,641			4,869
Total Shareholders’ Equity		258,167			248,259
Total Liabilities and Shareholders’ Equity	$	3,429,898		$	3,355,848

See accompanying notes to consolidated financial statements

43

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended December 31,
	2006			2005		2004
	(In thousands, except per share amounts)
INTEREST INCOME
Interest and fees on loans	$	193,937		$	167,846	$	131,525
Securities available for sale
Taxable		11,108			13,588		12,497
Tax-exempt		11,048			10,888		9,439
Other investments		802			713		765
Total Interest Income		216,895			193,035		154,226
INTEREST EXPENSE
Deposits		74,290			41,905		26,339
Other borrowings		19,408			21,194		16,651
Total Interest Expense		93,698			63,099		42,990
Net Interest Income		123,197			129,936		111,236
Provision for loan losses		16,344			7,806		4,016
Net Interest Income After Provision for Loan Losses		106,853			122,130		107,220
NON-INTEREST INCOME
Service charges on deposit accounts		19,936			19,342		17,551
Net gains on assets
Real estate mortgage loans		4,593			5,370		5,956
Securities		171			1,484		856
VISA check card interchange income		3,432			2,778		2,054
Mepco litigation settlement		2,800
Title insurance fees		1,724			1,962		2,036
Manufactured home loan origination fees and commissions		884			1,216		1,264
Real estate mortgage loan servicing		2,440			2,627		1,427
Other income		8,870			8,047		7,116
Total Non-interest Income		44,850			42,826		38,260
NON-INTEREST EXPENSE
Compensation and employee benefits		50,801			52,147		47,166
Occupancy, net		9,626			8,590		7,342
Furniture, fixtures and equipment		7,057			6,812		5,956
Goodwill impairment		3,575
Other expenses		35,157			34,236		29,991
Total Non-interest Expense		106,216			101,785		90,455
Income From Continuing Operations Before Income Tax		45,487			63,171		55,025
Income tax expense		11,662			17,466		14,713
Income From Continuing Operations		33,825			45,705		40,312
Discontinued operations, net of tax		(622	)		1,207		(1,754	)
Net Income	$	33,203		$	46,912	$	38,558
Income per share from continuing operations
Basic	$	1.48		$	1.96	$	1.79
Diluted	$	1.45		$	1.92	$	1.75
Net income per share
Basic	$	1.45		$	2.01	$	1.71
Diluted	$	1.43		$	1.97	$	1.67
Cash dividends declared per common share	$	0.78		$	0.71	$	0.60

See accompanying notes to consolidated financial statements

44

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

										Accumulated
										Other			Total
	Common			Capital			Retained			Comprehensive			Shareholders’
	Stock			Surplus			Earnings			Income (Loss)			Equity
	(In thousands)
Balances at January 1, 2004	$	19,521		$	119,401		$	16,953		$	6,341		$	162,216
Net income for 2004								38,558						38,558
Cash dividends declared, $.60 per share								(13,716	)					(13,716	)
Issuance of 1,755,114 shares of common stock		1,755			41,317									43,072
Repurchase and retirement of 81,600 shares of common stock		(81	)		(1,921	)								(2,002	)
Net change in accumulated other comprehensive income, net of $1.2 million of related tax effect											2,164			2,164
Balances at December 31, 2004		21,195			158,797			41,795			8,505			230,292
Net income for 2005								46,912						46,912
Cash dividends declared, $.71 per share								(16,468	)					(16,468	)
5% stock dividend (1,057,706 shares)		1,058			29,671			(30,753	)					(24	)
Issuance of 214,327 shares of common stock		214			4,034									4,248
Repurchase and retirement of 475,683 shares of common stock		(476	)		(12,589	)								(13,065	)
Net change in accumulated other comprehensive income, net of $2.0 million of related tax effect											(3,636	)		(3,636	)
Balances at December 31, 2005		21,991			179,913			41,486			4,869			248,259
Adjustment to beginning retained earnings pursuant to SAB 108 (Note 1)								2,071						2,071
Adjusted balances, January 1, 2006		21,991			179,913			43,557			4,869			250,330
Net income for 2006								33,203						33,203
Cash dividends declared, $.78 per share								(17,884	)					(17,884	)
5% stock dividend (1,087,048 shares)		1,087			26,351			(27,456	)					(18	)
Issuance of 245,627 shares of common stock		246			5,507									5,753
Repurchase and retirement of 459,089 shares of common stock		(459	)		(11,530	)								(11,989	)
Net change in accumulated other comprehensive income, net of $.7 million of related tax effect											(1,228	)		(1,228	)
Balances at December 31, 2006	$	22,865		$	200,241		$	31,420		$	3,641		$	258,167

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	2006			2005			2004
	(In thousands)
Net income	$	33,203		$	46,912		$	38,558
Other comprehensive income
Net change in unrealized gain (loss) on securities available for sale, including reclassification adjustments and net of related tax effect		513			(5,208	)		(1,423	)
Net change in unrealized gain (loss) on derivative instruments, net of related tax effect		(1,409	)		1,572			3,587
Reclassification adjustment for accretion on settled derivative instruments, net of related tax effect		(332	)
Comprehensive Income	$	31,975		$	43,276		$	40,722

See accompanying notes to consolidated financial statements

45

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31,
	2006			2005			2004
	(In thousands)
Net Income	$	33,203		$	46,912		$	38,558
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FROM OPERATING ACTIVITIES
Proceeds from sales of loans held for sale		285,815			382,635			391,401
Disbursements for loans held for sale		(284,499	)		(367,078	)		(391,559	)
Provision for loan losses		17,412			8,071			4,309
Deferred federal income tax expense		(2,328	)		3,019			2,185
Deferred loan fees		309			(383	)		(568	)
Depreciation, amortization of intangible assets and premiums and accretion of discounts on securities and loans		(9,839	)		(12,498	)		(3,001	)
Net gains on sales of real estate mortgage loans		(4,593	)		(5,370	)		(5,956	)
Net gains on securities		(171	)		(1,484	)		(856	)
Goodwill impairment		3,575
Write-off of uncompleted software								977
Increase in accrued income and other assets		(9,595	)		(8,234	)		(11,432	)
Increase (decrease) in accrued expenses and other liabilities		(6,954	)		2,757			18,546
Total Adjustments		(10,868	)		1,435			4,046
Net Cash From Operating Activities		22,335			48,347			42,604
CASH FLOW USED IN INVESTING ACTIVITIES
Proceeds from the sale of securities available for sale		1,283			54,556			57,441
Proceeds from the maturity of securities available for sale		20,007			20,575			24,489
Principal payments received on securities available for sale		35,813			56,000			46,672
Purchases of securities available for sale		(5,267	)		(70,632	)		(132,190	)
Proceeds from sale of non-performing and other loans of concern					7,794
Portfolio loans originated, net of principal payments		(104,454	)		(324,656	)		(292,231	)
Acquisition of businesses, less cash received								12,905
Capital expenditures		(13,316	)		(13,899	)		(11,720	)
Net Cash Used in Investing Activities		(65,934	)		(270,262	)		(294,634	)
CASH FLOW FROM FINANCING ACTIVITIES
Net increase in total deposits		124,352			471,394			150,930
Net increase (decrease) in other borrowings and federal funds purchased		(41,331	)		(66,215	)		88,306
Proceeds from Federal Home Loan Bank advances		223,200			659,750			509,100
Payments of Federal Home Loan Bank advances		(239,453	)		(807,127	)		(503,525	)
Proceeds from issuance of long-term debt								10,000
Repayment of long-term debt		(2,000	)		(2,000	)		(1,000	)
Net increase (decrease) in financed premiums payable		13,044			(12,782	)		21,820
Dividends paid		(17,547	)		(15,320	)		(12,500	)
Repurchase of common stock		(11,989	)		(13,065	)		(2,002	)
Proceeds from issuance of common stock		1,046			2,051			1,975
Net Cash From Financing Activities		49,322			216,686			263,104
Net Increase (Decrease) in Cash and Cash Equivalents		5,723			(5,229	)		11,074
Change in cash and cash equivalents of discontinued operations		(103	)		(64	)
Cash and Cash Equivalents at Beginning of Year		67,522			72,815			61,741
Cash and Cash Equivalents at End of Year	$	73,142		$	67,522		$	72,815
Cash paid during the year for
Interest	$	98,177		$	63,749		$	43,253
Income taxes		13,415			17,752			5,666
Transfer of loans to other real estate		4,381			4,360			2,096
Real estate loans securitized								50,593

See accompanying notes to consolidated financial statements

46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — ACCOUNTING POLICIES

The accounting and reporting policies and practices of Independent Bank Corporation and subsidiaries conform with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. Our critical accounting policies include the assessment for other than temporary impairment on investment securities, the determination of the allowance for loan losses, the valuation of derivative financial instruments, the valuation of originated mortgage loan servicing rights, the valuation of deferred tax assets and the valuation of goodwill. We are required to make material estimates and assumptions that are particularly susceptible to changes in the near term as we prepare the consolidated financial statements and report amounts for each of these items. Actual results may vary from these estimates.

Our Banks transact business in the single industry of commercial banking. Our Banks’ activities cover traditional phases of commercial banking, including checking and savings accounts, commercial lending, direct and indirect consumer financing and mortgage lending. The principal markets are the rural and suburban communities across lower Michigan that are served by our Banks’ branches and loan production offices. The economies of these communities are relatively stable and reasonably diversified. We also provide payment plans to consumers to purchase extended automobile warranties through our wholly owned subsidiary, Mepco Finance Corporation. Subject to established underwriting criteria, our Banks also participate in commercial lending transactions with certain non-affiliated banks and purchase real estate mortgage loans from third-party originators. At December 31, 2006, 77% of our Banks’ loan portfolios were secured by real estate.

On January 15, 2007 we sold substantially all of the assets of Mepco’s insurance premium finance business to Premium Financing Specialists, Inc. See note #24.

PRINCIPLES OF CONSOLIDATION — The consolidated financial statements include the accounts of Independent Bank Corporation and its subsidiaries. The income, expenses, assets and liabilities of the subsidiaries are included in the respective accounts of the consolidated financial statements, after elimination of all material intercompany accounts and transactions.

STATEMENTS OF CASH FLOWS — For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are sold for one-day periods. We report net cash flows for customer loan and deposit transactions, for short-term borrowings and for financed premiums payable.

COMPREHENSIVE INCOME — Statement of Financial Accounting Standards, No. 130, “Reporting Comprehensive Income,” established standards for reporting comprehensive income, which consists of unrealized gains and losses on securities available for sale and derivative instruments classified as cash flow hedges. The net change in unrealized gain on securities available for sale in 2006, 2005 and 2004 reflects net gains reclassified into earnings of $0.2 million, $1.5 million and $0.9 million, respectively. The reclassification of these amounts from comprehensive income resulted in income tax expense of $0.1 million, $0.5 million and $0.3 million in 2006, 2005 and 2004, respectively.

LOANS HELD FOR SALE — Loans held for sale are carried at the lower of aggregate amortized cost or market value. Lower of cost or market value adjustments, as well as realized gains and losses, are recorded in current earnings. We recognize as separate assets the rights to service mortgage loans for others. The fair value of originated mortgage servicing rights has been determined based upon market value indications for similar servicing. These mortgage servicing rights are amortized in proportion to and over the period of estimated net loan servicing income. The Banks assess mortgage servicing rights for impairment based on the fair value of those rights. For purposes of measuring impairment, the primary characteristics used by the Banks include interest rate, term and type. Amortization of and changes in the impairment reserve on servicing rights are included in real estate mortgage loan servicing in the consolidated statements of operations.

TRANSFERS OF FINANCIAL ASSETS — Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from us, the transferee obtains the right (free of conditions that constrain it from taking

47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

advantage of that right) to pledge or exchange the transferred assets, and we do not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

SECURITIES — We classify our securities as trading, held to maturity or available for sale. Trading securities are bought and held principally for the purpose of selling them in the near term and are reported at fair value with realized and unrealized gains and losses included in earnings. We do not have any trading securities. Securities held to maturity represent those securities for which our Banks have the positive intent and ability to hold until maturity and are reported at cost, adjusted for amortization of premiums and accretion of discounts computed on the level-yield method. We did not have any securities held to maturity at December 31, 2006 and 2005. Securities available for sale represent those securities not classified as trading or held to maturity and are reported at fair value with unrealized gains and losses, net of applicable income taxes reported in comprehensive income. We determine whether a decline in fair value below the amortized cost basis is other than temporary. If the decline in value is judged to be other than temporary, the cost basis of the security is written down to fair value as a new cost basis and the amount of the write-down is recognized as a charge to non-interest income. 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. Premiums and discounts are recognized in interest income computed on the level-yield method.

LOAN REVENUE RECOGNITION — Interest on loans is accrued based on the principal amounts outstanding. The accrual of interest income is discontinued when a loan becomes 90 days past due and the borrower’s capacity to repay the loan and collateral values appear insufficient. All interest accrued but not received for loans placed on non-accrual is reversed from interest income. Payments on such loans are generally applied to the principal balance until qualifying to be returned to accrual status. A non-accrual loan may be restored to accrual status when interest and principal payments are current and the loan appears otherwise collectible. Delinquency status is based on contractual terms of the loan agreement.

Certain loan fees and direct loan origination costs are deferred and recognized as an adjustment of yield generally over the contractual life of the related loan. Fees received in connection with loan commitments are deferred until the loan is advanced and are then recognized generally over the contractual life of the loan as an adjustment of yield. Fees on commitments that expire unused are recognized at expiration. Fees received for letters of credit are recognized as revenue over the life of the commitment.

ALLOWANCE FOR LOAN LOSSES — Some loans will not be repaid in full. Therefore, an allowance for loan losses is maintained at a level which represents our best estimate of losses incurred. In determining the allowance 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 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. Increases in the allowance are recorded by a provision for loan losses charged to expense. Although we periodically allocate portions of the allowance to specific loans and loan portfolios, the entire allowance is available for incurred losses. We generally charge-off homogenous residential mortgage, installment and finance receivable loans when they are deemed uncollectible or reach a predetermined number of days past due based on loan product, industry practice and other factors. Collection efforts may continue and recoveries may occur after a loan is charged against the allowance.

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

A loan is impaired when full payment under the loan terms is not expected. Generally, those commercial loans that are rated substandard, classified as non-performing or were classified as non-performing in the preceding quarter are evaluated for impairment. 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. We do not measure impairment on homogenous residential mortgage, installment and finance receivable loans.

48

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The allowance for loan losses on unfunded commitments is determined in a similar manner to the allowance for loan losses and is recorded in accrued expenses and other liabilities.

PROPERTY AND EQUIPMENT — Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using both straight-line and accelerated methods over the estimated useful lives of the related assets. Buildings are generally depreciated over a period not exceeding 39 years and equipment is generally depreciated over periods not exceeding 7 years. Leasehold improvements are depreciated over the shorter of their estimated useful life or lease period.

BANK OWNED LIFE INSURANCE — We have purchased a group flexible premium non-participating variable life insurance contract on approximately 270 salaried employees in order to recover the cost of providing certain employee benefits. Bank owned life insurance is recorded at its cash surrender value or the amount that can be currently realized.

OTHER REAL ESTATE — Other real estate at the time of acquisition is recorded at the lower of cost of acquisition or fair value, less estimated costs to sell, which becomes the property’s new basis. Fair value is typically determined by a third party appraisal of the property. Any write-downs at date of acquisition are charged to the allowance for loan losses. Expense incurred in maintaining assets and subsequent write-downs to reflect declines in value are recorded as other expense.

During 2006 and 2005 we foreclosed on certain loans secured by real estate and transferred approximately $4.4 million to other real estate in each of those years. At the time of acquisition amounts were charged-off against the allowance for loan losses to bring the carrying amount of these properties to their estimated fair market values, less estimated costs to sell. During 2006 and 2005 we sold other real estate with book balances of approximately $3.4 million and $4.5 million, respectively. Gains or losses on the sale of other real estate are recorded in other expense on the income statement.

Other real estate and repossessed assets totaling $3.2 million and $2.1 million at December 31, 2006 and 2005, respectively are included in accrued income and other assets.

GOODWILL AND OTHER INTANGIBLE ASSETS — Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period identified.

Other intangible assets consist of core deposit, customer relationship intangible assets and covenants not to compete. They are initially measured at fair value and then are amortized on both straight-line and accelerated methods over their estimated useful lives, which range from 5 to 15 years.

INCOME TAXES — We employ the asset and liability method of accounting for income taxes. This method establishes deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities at tax rates expected to be in effect when such amounts are realized or settled. Under this method, the effect of a change in tax rates is recognized in the period that includes the enactment date. The deferred tax asset is subject to a valuation allowance for that portion of the asset for which it is more likely than not that it will not be realized.

We file a consolidated federal income tax return. Intercompany tax liabilities are settled as if each subsidiary filed a separate return.

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE — Securities sold under agreements to repurchase are treated as debt and are reflected as a liability in the consolidated statements of financial condition. The book value of securities pledged to secure the repurchase agreements remains in the securities portfolio.

FINANCED PREMIUMS PAYABLE — Financed premiums payable represent amounts owed to insurance companies or other counterparties for warranty payment plans provided by us for our customers.

49

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

DERIVATIVE FINANCIAL INSTRUMENTS — Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (“SFAS #133”) which was subsequently amended by SFAS #138, requires companies to record derivatives on the balance sheet 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.

We record the fair value of cash-flow hedging instruments (“Cash Flow Hedges”) in accrued income and other assets and accrued expenses and other liabilities. On an ongoing basis, our Banks adjust their balance sheets to reflect the then current fair value of the Cash Flow Hedges. The related gains or losses are reported in other comprehensive income and are subsequently reclassified into earnings, as a yield adjustment in the same period in which the related interest on the hedged items (primarily variable-rate debt obligations) affect earnings. To the extent that the Cash Flow Hedges are not effective, the ineffective portion of the Cash Flow Hedges are immediately recognized as interest expense.

We also record fair-value hedging instruments (“Fair Value Hedges”) at fair value in accrued income and other assets and accrued expenses and other liabilities. The hedged items (primarily fixed-rate debt obligations) are also recorded at fair value through the statement of operations, which offsets the adjustment to the Fair Value Hedges. On an ongoing basis, our Banks adjust their balance sheets to reflect the then current fair value of both the Fair Value Hedges and the respective hedged items. To the extent that the change in value of the Fair Value Hedges do not offset the change in the value of the hedged items, the ineffective portion is immediately recognized as interest expense.

Certain derivative financial instruments are not designated as hedges. The fair value of these derivative financial instruments have been recorded on our balance sheet and are adjusted on an ongoing basis to reflect their then current fair value. The changes in the fair value of derivative financial instruments not designated as hedges, are recognized currently in earnings.

When hedge accounting is discontinued because it is determined that a derivative financial instrument no longer qualifies as a fair-value hedge, we continue to carry the derivative financial instrument on the balance sheet at its fair value, and no longer adjust the hedged item for changes in fair value. The adjustment of the carrying amount of the previously hedged item is accounted for in the same manner as other components of similar instruments. When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, we continue to carry the derivative financial instrument on the balance sheet at its fair value, and gains and losses that were included in accumulated other comprehensive income are recognized immediately in earnings. In all other situations in which hedge accounting is discontinued, we continue to carry the derivative financial instrument at its fair value on the balance sheet and recognize any changes in its fair value in earnings.

When a derivative financial instrument that qualified for hedge accounting is settled and the hedged item remains, the gain or loss on the derivative financial instrument is accreted or amortized over the life that remained on the settled derivative financial instrument.

STOCK BASED COMPENSATION — Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R), “Share-based Payment,” (“SFAS #123R”) using the modified prospective transition method. For 2006, adopting this standard had no impact on net income and earnings per share as no share based payments were made during 2006 and share based payments in prior years were fully vested at December 31, 2005. Our stock based compensation plans are described more fully in Note #14.

Prior to January 1, 2006, employee compensation expense under stock options was reported using the intrinsic value method; therefore, no stock-based compensation cost is reflected in net income for the years ending December 31, 2005 and 2004, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant.

Pro forma disclosures for our net income and earnings per share as if we had adopted the fair value accounting method for stock-based compensation in 2005 and 2004 follow. For purposes of these pro forma disclosures, we recognized compensation cost on stock options with pro rata vesting on a straight-line basis.

50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The per share weighted-average fair value of stock options was obtained using the Black Scholes options pricing model. A summary of the weighted-average assumptions used for grants made during 2005 and 2004 and values obtained follows:

	2005			2004
Expected dividend yield		2.63	%		2.37	%
Risk-free interest rate		4.34			4.26
Expected life (in years)		6.63			9.60
Expected volatility		30.65	%		32.53	%
Per share weighted-average fair value	$	8.61		$	9.58

The following table summarizes the impact on our net income had compensation cost included the fair value of options at the grant date:

	2005			2004
Net income — as reported	$	46,912		$	38,558
Stock based compensation expense determined under fair value based method, net of related tax effect		(3,113	)		(2,273	)
Pro-forma net income	$	43,799		$	36,285
Net income per share
Basic
As reported	$	2.01		$	1.71
Pro-forma		1.88			1.61
Diluted
As reported	$	1.97		$	1.67
Pro-forma		1.84			1.57

COMMON STOCK — At December 31, 2006, 0.5 million shares of common stock were reserved for issuance under the dividend reinvestment plan and 2.0 million shares of common stock were reserved for issuance under our long-term incentive plans.

RECLASSIFICATION — Certain amounts in the 2005 and 2004 consolidated financial statements have been reclassified to conform with the 2006 presentation.

ADOPTION OF NEW ACCOUNTING STANDARDS — Effective January 1, 2006, we adopted SFAS #123R. See “Stock Based Compensation” above for further discussion of the effect of adopting this standard.

In September 2006, the Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), which is effective for fiscal years ending on or after November 15, 2006. SAB 108 provides guidance on how the effects of prior-year uncorrected financial statement misstatements should be considered in quantifying a current year misstatement. SAB 108 requires public companies to quantify misstatements using both an income statement (rollover) and balance sheet (iron curtain) approach and evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. If prior year errors that had been previously considered immaterial now are considered material based on either approach, no restatement is required so long as management properly applied its previous approach and all relevant facts and circumstances were considered. Adjustments considered immaterial in prior years under the method previously used, but now considered material under the dual approach required by SAB 108, are to be recorded upon initial adoption of SAB 108. The amount so recorded is shown as a cumulative effect adjustment and is recorded in opening retained earnings as of January 1, 2006.

51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The cumulative effect adjustment primarily reflects an over accrual of non-interest expense relating to years prior to 1999. Over the course of many years, accrual differences that were considered immaterial to any particular year’s statement of operations accumulated to a total of a net credit of $2.1 million. This over accrual has been unchanged since December 31, 1999 and has remained in accrued expenses and other liabilities since that time. Since December 31, 1999, we had continued to evaluate this cumulative accrual difference using the roll over method of quantifying misstatements.

The impact of the over accrual noted above on the 2006 opening consolidated shareholders’ equity and retained earnings was $2.1 million. The impact on selected balance sheet accounts as of January 1, 2006 is as follows:

	January 1, 2006
	Previously					Opening
	Reported		Adjustment			Balance
	(In thousands)
Accrued income and other assets — deferred taxes	$	56,361	$	(188	)	$	56,173
Accrued expenses and other liabilities	$	58,367	$	(2,259	)	$	56,108
Total shareholders’ equity	$	248,259	$	2,071		$	250,330

NOTE 2 — ACQUISITIONS

On July 1, 2004, we completed our acquisition of North Bancorp, Inc. (“North”), with the purpose of expanding our presence in northern Michigan. North was a publicly held bank holding company primarily doing business as a commercial bank. As a result of the closing of this transaction, we issued 345,391 shares of common stock to the North shareholders. 2004 includes the results of North’s operations beginning on July 1, 2004.

A condensed balance sheet of North at the date of acquisition follows:

	(In thousands)
Cash	$	21,505
Securities		26,418
Loans, net		97,573
Property and equipment		2,318
Intangible assets		2,240
Goodwill		2,806
Other assets		9,441
Total assets acquired		162,301
Deposits		124,088
Borrowings		27,090
Other liabilities		2,350
Total liabilities assumed		153,528
Net assets acquired	$	8,773

We recorded purchase accounting adjustments related to the North acquisition including recording goodwill of $2.8 million (non-deductible for federal income tax purposes), and establishing a core deposit intangible of $2.2 million. The core deposit intangible is being amortized on an accelerated basis over eight years. Included in 2006, 2005 and 2004 results of operations were $0.4 million, $0.4 million and $0.2 million, respectively for amortization of the core deposit intangible.

52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The unaudited pro-forma information presented in the following table has been prepared based on our historical results combined with North. The information has been combined to present the results of operations as if the acquisition had occurred at the beginning of the periods presented. The proforma results are not necessarily indicative of the results which would have actually been attained if the acquisition had been consummated in the past or what may be attained in the future:

	Year Ended
	December 31,
	2004
	(In thousands,
	except per
	share amount)
Total revenue	$	205,300
Net income	$	38,100
Earnings per share	$	1.64

On May 31, 2004, we completed our acquisition of Midwest Guaranty Bancorp, Inc. (“Midwest”), with the purpose of expanding our presence in southeastern Michigan. Midwest was a closely held bank holding company primarily doing business as a commercial bank. As a result of the closing of this transaction, we issued 997,700 shares of common stock and paid $16.6 million in cash to the Midwest shareholders. 2004 results include Midwest’s operations subsequent to May 31, 2004.

A condensed balance sheet of Midwest at the date of acquisition follows:

	(In thousands)
Cash	$	8,390
Securities		19,557
Loans, net		201,476
Property and equipment		5,674
Intangible assets		6,219
Goodwill		23,037
Other assets		1,861
Total assets acquired		266,214
Deposits		199,123
Borrowings		20,046
Other liabilities		2,931
Total liabilities assumed		222,100
Net assets acquired	$	44,114

We recorded purchase accounting adjustments related to the Midwest acquisition including recording goodwill of $23.0 million, (non-deductible for federal income tax purposes), establishing a core deposit intangible of $4.9 million, and a covenant not to compete of $1.3 million. The core deposit intangible is being amortized on an accelerated basis over ten years and the covenant not to compete on a straight-line basis over five years. Included in 2006, 2005 and 2004 results of operations were $0.8 million, $0.8 million and $0.5 million, respectively for amortization of the core deposit intangible and the covenant not to compete.

53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The unaudited pro-forma information presented in the following table has been prepared based on our historical results combined with Midwest. The information has been combined to present the results of operations as if the acquisition had occurred at the beginning of the periods presented. The proforma results are not necessarily indicative of the results which would have actually been attained if the acquisition had been consummated in the past or what may be attained in the future:

	Year Ended
	December 31,
	2004
	(In thousands,
	except per
	share amount)
Total revenue	$	206,400
Net income	$	38,900
Earnings per share	$	1.66

NOTE 3 — RESTRICTIONS ON CASH AND DUE FROM BANKS

Our Banks’ are required to maintain reserve balances in the form of vault cash and non-interest earning balances with the Federal Reserve Bank. The average reserve balances to be maintained during 2006 and 2005 were $7.6 million and $14.9 million, respectively. Our Banks do not maintain compensating balances with correspondent banks.

NOTE 4 — SECURITIES

Securities available for sale consist of the following at December 31:

	Amortized		Unrealized
	Cost		Gains		Losses		Fair Value
	(In thousands)
2006
U.S. Treasury	$	4,997			$	83	$	4,914
Mortgage-backed		131,584	$	974		2,363		130,195
Other asset-backed		12,465		294		251		12,508
Obligations of states and political subdivisions		239,945		4,486		147		244,284
Trust preferred		10,283		976				11,259
Preferred stock		28,988		637				29,625
Other		2,000						2,000
Total	$	430,262	$	7,367	$	2,844	$	434,785
2005
U.S. Treasury	$	4,992			$	119	$	4,873
Mortgage-backed		164,644	$	1,084		3,267		162,461
Other asset-backed		15,327		278		266		15,339
Obligations of states and political subdivisions		253,198		5,374		732		257,840
Trust preferred		11,182		1,343		27		12,498
Preferred stock		28,271		146		80		28,337
Other		2,099						2,099
Total	$	479,713	$	8,225	$	4,491	$	483,447

54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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, at December 31, follows:

	Less Than Twelve Months				Twelve Months or More				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(In thousands)
2006
U.S. Treasury					$	4,914	$	83	$	4,914	$	83
Mortgage-backed	$	4,337	$	25		93,406		2,338		97,743		2,363
Other asset-backed						1,845		251		1,845		251
Obligations of states and political subdivisions		14,634		54		15,012		93		29,646		147
Total	$	18,971	$	79	$	115,177	$	2,765	$	134,148	$	2,844
2005
U.S. Treasury					$	4,873	$	119	$	4,873	$	119
Mortgage-backed	$	73,020	$	1,477		51,274		1,790		124,294		3,267
Other asset-backed						2,188		266		2,188		266
Obligations of states and political subdivisions		40,520		359		9,567		373		50,087		732
Trust preferred		828		27						828		27
Preferred stock		16,012		80						16,012		80
Total	$	130,380	$	1,943	$	67,902	$	2,548	$	198,282	$	4,491

We evaluate securities for other-than-temporary impairment at least quarterly and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition of the issuer, including review of recent credit ratings, and our ability and intent to retain the investment for a period of time sufficient to allow for any anticipated recovery of fair value.

U.S. Treasury securities — at December 31, 2006 and 2005, this amount represents one security with an unrealized loss attributed to a rise in interest rates. There are no credit issues with this security and as management has the ability and intent to hold this security for the foreseeable future, no declines are deemed to be other than temporary.

Mortgage-backed and other asset backed securities — at December 31, 2006 and 2005 these securities include both agency and private label mortgage-backed securities. The unrealized losses are largely attributed to a rise in interest rates. The majority of the issues are rated by a major rating agency as AAA or AA. As management has the ability and intent to hold these securities for the foreseeable future, no declines are deemed to be other than temporary.

Obligations of states and political subdivisions — at December 31, 2006 we had approximately 119 municipal securities whose fair market value is less than amortized cost. The unrealized losses are largely attributed to a rise in interest rates. The majority of the securities are rated by a major rating agency as AAA or AA. As management has the ability and intent to hold these securities for the foreseeable future, no declines are deemed to be other than temporary. At December 31, 2005 we had approximately 190 municipal securities whose fair market value is less than amortized cost. The unrealized losses are largely attributed to a rise in interest rates. The majority of the securities are rated by a major rating agency as AAA or AA. As management has the ability and intent to hold these securities for the foreseeable future, no declines are deemed to be other than temporary.

55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Trust preferred securities and preferred stock — at December 31, 2005 there were no credit issues relating to these securities. The securities are either rated by major rating agency as AAA or AA or have been reviewed according to established procedures to determine impairment. Management has concluded that unrealized losses at year-end are temporary. During 2005 and 2004, we recorded other than temporary impairment charges on certain Fannie Mae and Freddie Mac preferred stocks. These preferred stocks are perpetual (i.e. they have no stated maturity date) and as a result are treated like equity securities for purposes of impairment analysis.

The amortized cost and fair value of securities available for sale at December 31, 2006, by contractual maturity, follow. The actual maturity will differ from the contractual maturity because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Fair
	Cost		Value
	(In thousands)
Maturing within one year	$	19,450	$	19,457
Maturing after one year but within five years		57,538		58,708
Maturing after five years but within ten years		63,600		65,646
Maturing after ten years		114,637		116,646
		255,225		260,457
Mortgage-backed		131,584		130,195
Other asset-backed		12,465		12,508
Preferred stock		28,988		29,625
Other		2,000		2,000
Total	$	430,262	$	434,785

A summary of proceeds from the sale of securities and gains and losses follows:

			Realized
	Proceeds		Gains		Losses(1)
	(In thousands)
2006	$	1,283	$	171
2005		54,556		2,102	$	189
2004		57,441		2,540		26

(1) Losses in 2005 and 2004 exclude $0.4 million and $1.6 million, respectively, of other than temporary impairment charges on preferred stock and other asset-backed securities.

Securities with a book value of $177.1 million and $244.1 million at December 31, 2006 and 2005, respectively, were pledged to secure borrowings, public deposits and for other purposes as required by law. There were no investment obligations of state and political subdivisions that were payable from or secured by the same source of revenue or taxing authority that exceeded 10% of consolidated shareholders’ equity at December 31, 2006 or 2005.

56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 5 — LOANS

Our loan portfolios at December 31 follow:

	2006		2005
	(In thousands)
Real estate (1)
Residential first mortgages	$	722,495	$	670,127
Residential home equity and other junior mortgages		239,609		233,057
Construction and land development		254,570		273,811
Other (2)		699,812		635,010
Finance receivables		183,679		185,427
Consumer		178,826		182,902
Commercial		196,541		185,210
Agricultural		7,863		6,773
Total loans	$	2,483,395	$	2,372,317

(1)	Includes both residential and non-residential commercial loans secured by real estate.
(2)	Includes loans secured by multi-family residential and non-farm, non-residential property.

Loans are presented net of deferred loan fees of $2.3 million at December 31, 2006, and $1.9 million at December 31, 2005. Finance receivables totaling $194.8 million and $194.3 million at December 31, 2006 and 2005, respectively, are presented net of unamortized discount of $11.7 million and $9.6 million, at December 31, 2006 and 2005, respectively. These finance receivables had effective interest rates at December 31, 2006 and 2005 of 10.6% and 12.3%, respectively. These receivables have various due dates through 2008.

An analysis of the allowance for loan losses for the years ended December 31 follows:

	2006					2005						2004
	Loan			Unfunded		Loan			Unfunded			Loan			Unfunded
	Losses			Commitments		Losses			Commitments			Losses			Commitments
	(In thousands)
Balance at beginning of year	$	22,420		$	1,820	$	24,162		$	1,846		$	16,455		$	892
Allowance on loans acquired													8,236
Provision charged to operating expense		16,283			61		7,832			(26	)		3,062			954
Recoveries credited to allowance		2,237					1,518						1,241
Loans charged against the allowance		(14,061	)				(11,092	)					(4,832	)
Balance at end of year	$	26,879		$	1,881	$	22,420		$	1,820		$	24,162		$	1,846

Non-performing loans at December 31 follows:

	2006		2005		2004
	(Dollars in thousands)
Non-accrual loans	$	35,683	$	11,546	$	11,119
Loans 90 days or more past due and still accruing interest		3,479		4,862		3,123
Restructured loans		60		84		218
Total non-performing loans	$	39,222	$	16,492	$	14,460

57

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Non performing loans includes both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. If these loans had continued to accrue interest in accordance with their original terms, approximately $1.9 million, $1.5 million, and $1.0 million of interest income would have been recognized in 2006, 2005 and 2004, respectively. Interest income recorded on these loans was approximately $0.4 million, $0.4 million and $0.3 million in 2006, 2005 and 2004, respectively.

Impaired loans totaled approximately $23.2 million, $6.7 million and $14.4 million at December 31, 2006, 2005 and 2004, respectively. Our Banks’ average investment in impaired loans was approximately $13.1 million, $15.0 million and $14.8 million in 2006, 2005 and 2004, respectively. Cash receipts on impaired loans on non-accrual status are generally applied to the principal balance. Interest income recognized on impaired loans was approximately $0.2 million, $0.4 million and $0.6 million in 2006, 2005 and 2004, respectively of which the majority of these amounts were received in cash. Certain impaired loans with a balance of approximately $14.0 million, $3.9 million and $10.8 million had specific allocations of the allowance for loan losses totaling approximately $2.6 million, $1.3 million and $2.9 million at December 31, 2006, 2005 and 2004, respectively.

Residential mortgage loans serviced for others are not reported as assets. The principal balances of these loans at year end are as follows:

	2006		2005		2004
	(In thousands)
Real estate mortgage loans serviced for :
FNMA	$	919,373	$	903,962	$	882,198
FHLMC		651,809		603,866		534,243
Other		620		835		1,190
Total	$	1,571,802	$	1,508,663	$	1,417,631

An analysis of capitalized mortgage servicing rights for the years ended December 31 follows:

	2006			2005			2004
	(In thousands)
Balance at beginning of year	$	13,439		$	11,360		$	8,873
Servicing rights acquired from acquisition of business								1,138
Originated servicing rights capitalized		2,862			3,247			3,341
Amortization		(1,462	)		(1,923	)		(1,948	)
Change in valuation allowance		(57	)		755			(44	)
Balance at end of year	$	14,782		$	13,439		$	11,360
Valuation allowance	$	68		$	11		$	766
Loans sold and serviced that have had servicing rights capitalized	$	1,562,107		$	1,492,100		$	1,392,400

The fair value of capitalized mortgage servicing rights was $19.5 million at December 31, 2006 and 2005. Fair value was determined using an average coupon rate of 5.99%, average servicing fee of 0.259%, average discount rate of 9.54% and an average PSA rate of 218 for December 31, 2006 and average coupon rate of 5.87%, average servicing fee of 0.259%, average discount rate of 9.53% and an average PSA rate of 187 for December 31, 2005. Capitalized mortgage servicing rights are included on the consolidated statement of financial position in accrued income and other assets.

58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 6 — PROPERTY AND EQUIPMENT

A summary of property and equipment at December 31 follows:

	2006			2005
	(In thousands)
Land	$	16,646		$	14,990
Buildings		60,085			52,019
Equipment		55,488			53,668
		132,219			120,677
Accumulated depreciation and amortization		(64,227	)		(57,596	)
Property and equipment, net	$	67,992		$	63,081

Depreciation expense was $8.1 million, $7.1 million and $6.0 million in 2006, 2005 and 2004, respectively.

NOTE 7 — INTANGIBLE ASSETS

Intangible assets, net of amortization, at December 31 follows:

	2006				2005
	Gross				Gross
	Carrying		Accumulated		Carrying		Accumulated
	Amount		Amortization		Amount		Amortization
	(In thousands)
Amortized intangible assets
Core deposit	$	20,545	$	13,679	$	20,545	$	11,709
Customer relationship		1,302		999		1,302		850
Covenants not to compete		1,520		835		1,520		531
Total	$	23,367	$	15,513	$	23,367	$	13,090
Unamortized intangible assets — Goodwill	$	48,709			$	51,813

Intangible amortization expense was $2.4 million, $2.5 million and $2.1 million in 2006, 2005 and 2004, respectively.

A summary of estimated intangible amortization, primarily amortization of core deposit, customer relationship and covenant not to compete intangibles, at December 31, 2006, follows:

	(In thousands)
2007	$	2,282
2008		1,994
2009		921
2010		699
2011		786
2012 and thereafter		1,172
Total	$	7,854

59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Changes in the carrying amount of goodwill by reporting segment for the years ended December 31, 2006 and 2005, follows:

	IB			IBWM		IBSM		IBEM		Mepco(1)			Other(2)			Total
	(In thousands)
Goodwill
Balance at January 1, 2005	$	9,702		$	32			$	23,205	$	15,902		$	380		$	49,221
Acquired during the year		(142	)(3)								2,771	(4)		(37	)(5)		2,592
Balance at December 31, 2005		9,560			32				23,205		18,673			343			51,813
Acquired during the year											471	(4)					471
Impairment		(1,166	)								(2,409	)					(3,575	)
Balance at December 31, 2006	$	8,394		$	32	$	0	$	23,205	$	16,735		$	343		$	48,709

(1)	Approximately $4.1 million of goodwill was allocated to discontinued operations and excluded from this table. See note #24.
(2)	Includes items relating to our parent company and certain insignificant operations.
(3)	Goodwill and intangible assets associated with the acquisition of North. See note #2.
(4)	Goodwill associated with contingent consideration paid or accrued pursuant to an earn-out.
(5)	Goodwill and intangible assets associated with the acquisition of Midwest. See note #2.

During 2006 we recorded a goodwill impairment charge of $1.2 million at First Home Financial (FHF) which was acquired in 1998. FHF is a loan origination company based in Grand Rapids, Michigan that specializes in the financing of manufactured homes located in mobile home parks or communities and is a subsidiary of our IB segment above. Revenues and profits have declined at FHF over the last few years and have continued to decline in 2006. We test goodwill for impairment and based on the fair value of FHF (as determined by a valuation completed by a third party) the goodwill associated with FHF was reduced from $1.5 million to $0.3 million. This amount is included in Goodwill Impairment in the Consolidated Statements of Operations.

Also during 2006 we recorded a goodwill impairment charge of $2.4 million at Mepco which was acquired during 2003. Mepco provides payment plans to consumers to finance the purchase of vehicle service contracts (warranty business). During 2006 we executed a definitive agreement to sell the insurance premium financing line of business at Mepco (see note #24). The fair value of the remaining line of business at Mepco was estimated by a third party valuation. Goodwill was then allocated between the warranty business and the insurance premium finance business based on the respective fair values of each line of business. The fair value of the insurance premium finance business was based on the price at which this business was sold on January 15, 2007. As a result of this analysis, it was determined that the goodwill allocated to the warranty business at Mepco was impaired. This amount is included in Goodwill Impairment in the Consolidated Statements of Operations.

NOTE 8 — DEPOSITS

A summary of interest expense on deposits for the years ended December 31 follows:

	2006		2005		2004
	(In thousands)
Savings and NOW	$	13,604	$	8,345	$	4,543
Time deposits under $100,000		14,020		9,203		7,972
Time deposits of $100,000 or more		46,666		24,357		13,824
Total	$	74,290	$	41,905	$	26,339

60

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Aggregate time deposits in denominations of $100,000 or more amounted to $1.053 billion and $0.975 billion at December 31, 2006 and 2005, respectively. Time deposits acquired through broker relationships included in these amounts totaled $0.890 billion and $0.843 billion at December 31, 2006 and 2005, respectively.

A summary of the maturity of time deposits at December 31, 2006, follows:

	(In thousands)
2007	$	749,723
2008		160,904
2009		229,397
2010		174,749
2011		64,889
2012 and thereafter		64,956
Total	$	1,444,618

NOTE 9 — OTHER BORROWINGS

A summary of other borrowings at December 31 follows:

	2006		2005
	(In thousands)
Repurchase agreements	$	83,431	$	137,903
Advances from Federal Home Loan Bank		60,272		76,525
Notes payable		12,500		9,000
U.S. Treasury demand notes		7,475		3,613
Other		3		6
Total	$	163,681	$	227,047

Advances from the Federal Home Loan Bank (“FHLB”) are secured by our Banks’ unencumbered qualifying mortgage and home equity loans equal to at least 170% and 200%, respectively of outstanding advances. Advances are also secured by FHLB stock owned by the Banks. As of December 31, 2006, our Banks had unused borrowing capacity with the FHLB (subject to the FHLB’s credit requirements and policies) of $269.0 million. Interest expense on advances amounted to $4.2 million, $6.2 million and $5.2 million for the years ended December 31, 2006, 2005 and 2004, respectively. During 2005 and 2004 we prepaid $1.4 million and $11.5 million, respectively, of FHLB advances and incurred losses during 2004 of $0.02 million. These losses were recorded in other expenses. There was no gain or loss incurred during 2005.

As members of the FHLB, our Banks must own FHLB stock equal to the greater of 1.0% of the unpaid principal balance of residential mortgage loans or 5.0% of its outstanding advances. At December 31, 2006, our Banks were in compliance with the FHLB stock ownership requirements.

Certain fixed-rate advances have provisions that allow the FHLB to convert the advance to an adjustable rate prior to stated maturity. If the FHLB exercises its conversion option, we may pay off that advance without penalty. At December 31, 2006, advances totaling $10 million, with a stated maturity of 2008 are convertible in 2007 and beyond.

61

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The maturity and weighted average interest rates of FHLB advances at December 31 follow:

	2006					2005
	Amount		Rate			Amount		Rate
	(Dollars in thousands)
Fixed-rate advances
2006						$	3,011		3.92	%
2007	$	16,997		4.39	%		6,994		3.20
2008		11,485		5.22			11,473		5.22
2009		1,484		5.91			1,478		5.92
2010		6,000		7.46			6,000		7.46
2011		2,250		5.89			2,250		5.89
2012 and thereafter		20,056		6.41			20,319		6.41
Total fixed-rate advances		58,272		5.66			51,525		5.65
Variable-rate advances
2006							25,000		4.18
2007		2,000		5.31
Total variable-rate advances		2,000		5.31			25,000		4.18
Total advances	$	60,272		5.65	%	$	76,525		5.17	%

Repurchase agreements are secured by U.S. Treasury, mortgage-backed, asset-backed and corporate securities with a carrying value of approximately $87.4 million and $152.3 million at December 31, 2006 and 2005, respectively which are being held by the counterparty to the repurchase agreement. The yield on repurchase agreements at December 31, 2006 and 2005 approximated 5.34% and 4.41%, respectively.

Repurchase agreements averaged $91.9 million, $171.2 million and $155.6 million during 2006, 2005 and 2004, respectively. The maximum amounts outstanding at any month end during 2006, 2005 and 2004 were $122.7 million, $204.4 million and $173.3 million, respectively. Interest expense on repurchase agreements totaled $4.6 million, $5.6 million and $2.3 million, for the years ended 2006, 2005 and 2004, respectively. The $83.4 million of repurchase agreements all mature in 2007. During 2006 we prepaid $26.8 million of repurchase agreements and incurred a loss of $0.03 million. These losses were recorded in other expenses.

Interest expense on Federal funds purchased totaled $4.5 million, $3.9 million and $1.3 million for the years ended December 31, 2006, 2005 and 2004, respectively.

We have established an unsecured credit facility comprised of a $5.0 million term loan and a $15.0 million revolving credit agreement. At December 31, 2006, $7.5 million was outstanding on the revolving credit facility. The term loan accrues interest at three month libor plus 90 basis points, which was 6.26% at December 31, 2006. The revolving credit agreement accrues interest at the federal funds rate plus 90 basis points, which was 6.25% at December 31, 2006. We are also charged 28 basis points on the unused balance of the revolving credit facility. Under the credit facility, we are subject to certain restrictive covenants. As of December 31, 2006, we were in compliance with all covenants except for a requirement to maintain our allowance for loan losses equal to or greater than our non-performing loans. We have obtained a waiver of non compliance with this covenant. Under the term loan we are required to make quarterly installments of $0.5 million through June 30, 2009. Interest expense on the term loan totaled $0.4 million, $0.3 million and $0.1 million during 2006, 2005 and 2004 respectively. Interest expense on the revolving credit agreement totaled $0.5 million and $0.01 million during 2006 and 2005, respectively.

Assets, including securities available for sale and loans, pledged to secure other borrowings totaled $758.9 million at December 31, 2006.

62

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 10 — SUBORDINATED DEBENTURES

In March 2003 a special purpose entity, IBC Capital Finance II (the “trust”) issued $1.6 million of common securities to Independent Bank Corporation and $50.6 million of cumulative trust preferred securities (“Preferred Securities’) to the public. Independent Bank Corporation issued $52.2 million of subordinated debentures to the trust in exchange for the proceeds from the public offering. These subordinated debentures represent the sole asset of the trust. The Preferred Securities have a liquidation preference of $25 per security and represent an interest in the subordinated debentures, which have terms that are similar to the Preferred Securities. Distributions on the securities are payable quarterly at the annual rate of 8.25% of the liquidation preference and are included in interest expense in the consolidated financial statements.

The Preferred Securities are subject to mandatory redemption at the liquidation preference, in whole or in part, upon repayment of the subordinated debentures at maturity or their earlier redemption. The subordinated debentures are redeemable prior to the maturity date of March 31, 2033, at our option after March 31, 2008, in whole at any time or in part from time to time. The subordinated debentures are also redeemable at any time, in whole, but not in part, upon the occurrence of specific events defined within the trust indenture. We have the option to defer distributions on the subordinated debentures from time to time for a period not to exceed 20 consecutive quarters.

In accordance with FASB Interpretation No. 46, as revised in December 2003 (“FIN 46R”), the trust is not consolidated with Independent Bank Corporation. Accordingly, we report the common securities of $1.6 million held by Independent Bank Corporation in other assets and the $52.2 million of subordinated debentures issued by Independent Bank Corporation in the liability section of our Consolidated Statements of Financial Condition.

During 2004, we acquired North and its special purpose entity, Gaylord Partners, Limited Partnership (the “Partnership”). The Partnership is a subsidiary of Independent Bank Corporation, but similar to IBC Capital Finance II is not consolidated with Independent Bank Corporation. The Partnership has issued $.1 million of common securities to Independent Bank Corporation and privately placed $5.0 million of cumulative trust preferred securities (“GP Preferred Securities”). Independent Bank Corporation has $5.1 million of subordinated debentures issued to the Partnership. The subordinated debentures are the sole asset of the Partnership. The GP Preferred Securities have a liquidation preference of $25 per security and represent an interest in the subordinated debentures, which have terms that are similar to the GP Preferred Securities. The GP Preferred Securities were sold in two series. Series A totaled $1.2 million and carries a variable interest rate equal to one month LIBOR plus 3.6 percent. Series B totaled $3.9 million and carries a variable interest rate equal to the prime rate, plus 1 percent. For both Series A and Series B, the interest rates reprice quarterly and are not to exceed 12 percent annually. Distributions are payable quarterly and are included in interest expense in the consolidated financial statements.

The GP Preferred Securities are subject to mandatory redemption at the liquidation preference, in whole or in part, upon repayment of the subordinated debentures at maturity or their earlier redemption. The subordinated debentures are redeemable prior to the maturity date of May 31, 2032, at our option after May 31, 2007, in whole at any time or in part from time to time. The subordinated debentures are also redeemable at any time, in whole, but not in part, upon the occurrence of specific events defined within the trust indenture. We have the option to defer distributions on the subordinated debentures from time to time for a period not to exceed 20 consecutive quarters.

During 2004 we acquired Midwest and its special purpose entity, Midwest Guaranty Trust I (the “MG Trust”). The MG Trust is a subsidiary of Independent Bank Corporation, but similar to IBC Capital Finance II, is not consolidated with Independent Bank Corporation. The MG Trust has issued $.2 million of common securities to Independent Bank Corporation and $7.5 of cumulative trust preferred securities (“MG Preferred Securities”) as part of a pooled offering. Independent Bank Corporation has $7.7 million of subordinated debentures issued to the MG Trust. The subordinated debentures are the sole asset of the MG Trust. The MG Preferred Securities have a liquidation preference of $1,000 per security and represent an interest in the subordinated debentures, which have terms that are similar to the MG Preferred Securities. Distributions on the securities are payable quarterly based upon a floating rate equal to three month LIBOR plus 3.45%, not to exceed 12.5% through November 7, 2007 and are included in interest expense in the consolidated financial statements.

63

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The MG Preferred Securities are subject to mandatory redemption at the liquidation preference, in whole or in part, upon repayment of the subordinated debentures at maturity or their earlier redemption. The subordinated debentures are redeemable prior to the maturity date of November 7, 2032, at our option after November 7, 2007, in whole at any time or in part from time to time. The subordinated debentures are also redeemable at any time, in whole, but not in part, upon the occurrence of specific events defined within the trust indenture. We have the option to defer distributions on the subordinated debentures from time to time for a period not to exceed 20 consecutive quarters.

At December 31, 2006 preferred securities totaling $62.4 million, qualified as Tier 1 capital.

Issue costs have been capitalized and are being amortized on a straight-line basis over a period not exceeding 30 years and are included in interest expense in the consolidated financial statements.

NOTE 11 — COMMITMENTS AND CONTINGENT LIABILITIES

In the normal course of business, our Banks enter into financial instruments with off-balance sheet risk to meet the financing needs of customers or to reduce exposure to fluctuations in interest rates. These financial instruments may include commitments to extend credit and standby letters of credit. Financial instruments involve varying degrees of credit and interest-rate risk in excess of amounts reflected in the Consolidated Statements of Financial Condition. Exposure to credit risk in the event of non-performance by the counterparties to the financial instruments for loan commitments to extend credit and letters of credit is represented by the contractual amounts of those instruments. We do not, however, anticipate material losses as a result of these financial instruments.

A summary of financial instruments with off-balance sheet risk at December 31 follows:

	2006		2005
	(In thousands)
Financial instruments whose risk is represented by contract amounts
Commitments to extend credit	$	250,704	$	265,954
Standby letters of credit		19,244		19,897

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and generally require payment of a fee. Since commitments may expire without being drawn upon, the commitment amounts do not represent future cash requirements. Commitments are issued subject to similar underwriting standards, including collateral requirements, as are generally involved in the extension of credit facilities.

Standby letters of credit are written conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in such transactions is essentially the same as that involved in extending loan facilities and, accordingly, standby letters of credit are issued subject to similar underwriting standards, including collateral requirements, as are generally involved in the extension of credit facilities. The majority of the letters of credit are to corporations and mature during 2007.

In May 2004, we received an unsolicited anonymous letter regarding certain business practices at Mepco, which was acquired in April 2003 and is now a wholly-owned subsidiary of Independent Bank. We processed this letter in compliance with our Policy Regarding the Resolution of Reports on the Company’s Accounting, Internal Controls and Other Business Practices. Under the direction of our Audit Committee, special legal counsel was engaged to investigate the matters raised in the anonymous letter. This investigation was completed during the first quarter of 2005 and we have determined that any amounts or issues relating to the period after our April 2003 acquisition of Mepco were not significant. The terms of the agreement under which we acquired Mepco, obligates the former shareholders of Mepco to indemnify us for existing and resulting damages and liabilities from pre-acquisition activities at Mepco.

64

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The potential amount of liability related to periods prior to our April 2003 acquisition date has been determined to not exceed approximately $4.0 million. This potential liability primarily encompasses funds that may be due to former customers of Mepco related to loan overpayments or unclaimed funds that may be subject to escheatment. Prior to our acquisition, Mepco had erroneously recorded these amounts as revenue over a period of several years. The final liability may, however, be less, depending on the facts related to each loan account, the application of the law to those facts and the applicable state escheatment requirements for unclaimed funds. In the second quarter of 2004 we recorded a liability of $2.7 million with a corresponding charge to earnings (included in non-interest expenses) for potential amounts due to third parties (either former loan customers or to states for the escheatment of unclaimed funds). We have been engaged in a process of reviewing individual account records at Mepco to determine the appropriate amount (if any) due to a customer. As of December 31, 2006 we had sent out approximately $2.6 million as a result of this review process and $1.4 million remains accrued at that date.

On September 30, 2004 we entered into an escrow agreement with the primary former shareholders of Mepco. This escrow agreement was entered into for the sole purpose of funding any obligations beyond the $2.7 million amount that we already had accrued. The escrow agreement gave us the right to have all or a portion of the escrow account distributed to us from time to time if the aggregate amount that we (together with any of our affiliates including Mepco) were required to pay to any third parties as a result of the matters being investigated exceeded $2.7 million.

On March 16, 2006, we entered into a settlement agreement with the former shareholders of Mepco, (the “Former Shareholders”) and Edward, Paul, and Howard Walder (collectively referred to as the “Walders”) for purposes of resolving and dismissing all pending litigation between the parties. Under the terms of the settlement, on April 3, 2006, the Former Shareholders paid us a sum of $2.8 million, half of which was paid in the form of cash and half of which was paid in shares of our common stock. In return, we released 90,766 shares of Independent Bank Corporation common stock held pursuant to the escrow agreement described above. As a result of settlement of the litigation, we recorded other income of $2.8 million and an additional claims expense of approximately $1.7 million (related to the release of the shares held in escrow) in the first quarter of 2006.

The settlement covers both the claim filed by the Walders against Independent Bank Corporation and Mepco in the Circuit Court of Cook County, Illinois, as well as the litigation filed by Independent Bank Corporation and Mepco against the Walders in the Ionia County Circuit Court of Michigan.

As permitted under the terms of the merger agreement under which we acquired Mepco, on April 3, 2006, we paid the accelerated earn-out payments for the last three years of the performance period ending April 30, 2008. Those payments totaled approximately $8.9 million. Also, under the terms of the merger agreement, the second year of the earn out for the year ended April 30, 2005, in the amount of $2.7 million was paid on March 21, 2006. As a result of the settlement and these payments, no future payments are due under the terms of the merger agreement under which we acquired Mepco.

We are also involved in various other litigation matters in the ordinary course of business and at the present time, we do not believe that any of these matters will have a significant impact on our financial condition or results of operation.

65

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 12 — EARNINGS PER SHARE

A reconciliation of basic and diluted earnings per share for the years ended December 31 follows:

	2006		2005		2004
	(In thousands, except per share amounts)
Income from continuing operations	$	33,825	$	45,705	$	40,312
Net income	$	33,203	$	46,912	$	38,558
Shares outstanding(1)		22,906		23,339		22,560
Effect of stock options		313		407		433
Stock units for deferred compensation plan for non-employee directors		53		51		50
Shares outstanding for calculation of diluted earnings per share(1)		23,272		23,797		23,043
Income per share from continuing operations
Basic	$	1.48	$	1.96	$	1.79
Diluted	$	1.45	$	1.92	$	1.75
Net income per share
Basic	$	1.45	$	2.01	$	1.71
Diluted	$	1.43	$	1.97	$	1.67

(1) Shares outstanding have been adjusted for 5% stock dividends in 2006 and 2005.

Diluted income/loss per share attributed to discontinued operations was a loss of $0.03 and $0.08 in 2006 and 2004, respectively and income of $0.05 in 2005.

Weighted average stock options outstanding that were not considered in computing diluted earnings per share because they were anti-dilutive totaled 0.6 million, 0.1 million and 0.2 million for 2006, 2005 and 2004, respectively.

NOTE 13 — INCOME TAX

The composition of income tax expense from continuing operations for the years ended December 31 follows:

	2006			2005		2004
	(In thousands)
Current	$	13,736		$	14,436	$	12,333
Deferred		(2,074	)		3,030		2,380
Income tax expense	$	11,662		$	17,466	$	14,713

66

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A reconciliation of income tax expense to the amount computed by applying the statutory federal income tax rate of 35% in each year presented to income from continuing operations before income tax for the years ended December 31 follows:

	2006			2005			2004
	(In thousands)
Statutory rate applied to income from continuing operations before income tax	$	15,920		$	22,110		$	19,259
Tax-exempt income		(4,028	)		(4,243	)		(3,732	)
Mepco lawsuit settlement		(980	)
Bank owned life insurance		(598	)		(544	)		(520	)
Dividends paid to Employee Savings and Stock Ownership Plan		(336	)		(293	)		(262	)
Goodwill impairment		1,251
Non-deductible meals, entertainment and memberships		202			147			101
Other, net		231			289			(133	)
Income tax expense	$	11,662		$	17,466		$	14,713

The deferred income tax benefit of $2.1 million in 2006, and deferred income tax expense of $3.0 million and $2.4 million in 2005 and 2004, respectively can be attributed to tax effects of temporary differences. The tax benefit related to the exercise of stock options recorded in shareholders’ equity was $0.3 million, $0.7 million and $1.5 million during 2006, 2005 and 2004, respectively.

67

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31 follow:

	2006		2005
	(In thousands)
Deferred tax assets
Allowance for loan losses	$	9,891	$	8,161
Net operating loss carryforward		4,508		5,662
Deferred compensation		1,057		967
Loss on receivable from warrant payment plan seller		1,015
Mepco claims expense		608		556
Other than temporary impairment charge on securities available for sale		582		617
Fixed assets		541
Non accrual loan interest income		334
Severance payable		321		673
Deferred insurance premiums		111		173
Loans held for sale		102		93
Other				178
Gross deferred tax assets		19,070		17,080
Deferred tax liabilities
Mortgage servicing rights		5,183		4,704
Unrealized gain on securities available for sale		1,585		1,564
Purchase premiums, net		1,277		1,790
Unrealized gain on derivative financial instruments		358		998
Deferred loan fees		25		246
Fixed assets				269
Other		45
Gross deferred tax liabilities		8,473		9,571
Net deferred tax assets	$	10,597	$	7,509

At December 31, 2005, the Company had a net operating loss (“NOL”) carryforward of approximately $12.9 million which, if not used against taxable income, will expire as follows:

	(In thousands)
2008	$	87
2009		81
2010		6,779
2011		929
2012		411
2013		3,437
2014		189
2019		608
2020		359
Total	$	12,880

68

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The use of the $12.9 million NOL carryforward, which was acquired through the acquisitions of Mutual Savings Bank, f.s.b. and North, is limited to $3.3 million per year as the result of a change in control as defined in the Internal Revenue Code.

We believe that a valuation reserve is not necessary for any of the deferred tax assets since it is more likely than not that these assets will be realized principally through carry back to taxable income in prior years, future reversals of existing taxable temporary differences and to reduce future taxable income.

NOTE 14 — EMPLOYEE BENEFIT PLANS

We maintain a long-term incentive plan for our non-employee directors as well as certain of our officers and those of our banks and other subsidiaries. This plan, which is shareholder-approved, permits the grant of share based payments for up to 0.5 million shares of common stock. We believe that such awards better align the interests of our officers and directors with those of our shareholders. No share based payments were made during 2006. Prior to January 1, 2006 we granted stock options under the plan which were generally granted with vesting periods of up to one year, at a price equal to the fair market value of the common stock on the date of grant, and expire not more than ten years after the date of grant. Common shares issued upon exercise of stock options come from currently authorized but unissued shares.

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

				Average
	Number of			Exercise
	Shares			Price
Outstanding at January 1, 2006		1,596,399		$	19.65
Granted
Exercised		(66,956	)		11.04
Forfeited		(48,167	)		26.13
Outstanding at December 31, 2006		1,481,276		$	19.82

The aggregate intrinsic value and weighted-average remaining contractual term of outstanding and exercisable options at December 31, 2006 were $8.8 million and 6.29 years, respectively.

The following summarizes certain information regarding options exercised during the periods ending December 31, 2006:

	2006		2005		2004
	(In thousands)
Intrinsic value	$	972	$	2,610	$	5,351
Cash proceeds received	$	738	$	1,962	$	1,895
Tax benefit realized	$	308	$	698	$	1,451

We maintain 401(k) and employee stock ownership plans covering substantially all of our full-time employees. We match employee contributions to the 401(k) plan up to a maximum of 3% of participating employees’ eligible wages. Contributions to the employee stock ownership plan are determined annually and require approval of our Board of Directors. The maximum contribution is 6% of employees’ eligible wages. During 2006, 2005 and 2004, $2.1 million, $3.3 million and $1.5 million respectively, was expensed for these retirement plans.

Our officers participate in various performance-based compensation plans. Amounts expensed for all incentive plans totaled $0.3 million, $3.0 million, and $2.1 million, in 2006, 2005 and 2004, respectively.

We also provide certain health care and life insurance programs to substantially all full-time employees. Amounts expensed for these programs totaled $4.4 million, $4.0 million and $4.0 million, in 2006, 2005 and 2004, respectively. These insurance programs are also available to retired employees at their expense.

69

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 15 — DERIVATIVE FINANCIAL INSTRUMENTS

Our derivative financial instruments according to the type of hedge in which they are designated at December 31 follow:

			2006
			Average
	Notional		Maturity		Fair
	Amount		(Years)		Value
	(Dollars in thousands)
Fair Value Hedge — pay variable interest-rate swap agreements	$	489,409		3.1	$	(4,457	)
Cash Flow Hedge
Pay-fixed interest-rate swap agreements	$	95,000		1.6	$	1,318
Interest-rate cap agreements		250,500		2.2		1,714
	$	345,500		2.0	$	3,032
No hedge designation
Pay-variable interest-rate swap agreements		29,000		0.5		(34	)
Interest-rate cap agreements		40,000		1.8		115
Rate-lock real estate mortgage loan commitments		45,104		0.1		(31	)
Mandatory commitments to sell real estate mortgage loans		43,163		0.1		99
Total	$	157,267		0.6	$	149

			2005
			Average
	Notional		Maturity		Fair
	Amount		(Years)		Value
	(Dollars in thousands)
Fair Value Hedge — pay variable interest-rate swap agreements	$	373,659		3.6	$	(7,339	)
Cash Flow Hedge
Pay-fixed interest-rate swap agreements	$	228,000		1.4	$	3,191
Interest-rate cap agreements		130,000		3.0		1,248
	$	358,000		2.0	$	4,439
No hedge designation
Pay-fixed interest-rate swap agreements	$	5,000		0.1	$	8
Pay-variable interest-rate swap agreements		25,000		0.2		(44	)
Interest-rate cap agreements		10,000		2.7		81
Rate-lock real estate mortgage loan commitments		39,876		0.1		33
Mandatory commitments to sell real estate mortgage loans		39,156		0.1		(98	)
Total	$	119,032		0.3	$	(20	)

Our Banks have established management objectives and strategies that include interest-rate risk parameters for maximum fluctuations in net interest income and market value of portfolio equity. We monitor our Banks’ interest rate risk position via simulation modeling reports. The goal of our Banks’ asset/liability management efforts is to maintain profitable financial leverage within established risk parameters.

Our Banks use variable-rate and short-term fixed-rate (less than 12 months) debt obligations to fund a portion of their balance sheets, which expose our Banks to variability in interest rates. To meet their objectives, our Banks may periodically enter into derivative financial instruments to mitigate exposure to fluctuations in cash flows

70

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

resulting from changes in interest rates. Cash Flow Hedges currently include certain pay-fixed interest-rate swaps and interest-rate cap agreements.

Pay-fixed interest-rate swaps convert the variable-rate cash flows on debt obligations to fixed-rates. Under interest-rate cap agreements, our Banks will receive cash if interest rates rise above a predetermined level. As a result, our Banks effectively have variable-rate debt with an established maximum rate. Our Banks pay an upfront premium on interest rate caps which are recognized in earnings in the same period in which the hedged item affects earnings. Unrecognized premiums from interest rate caps aggregated to $2.2 million and $1.5 million at December 31, 2006 and 2005, respectively.

It is anticipated that $0.7 million, net of tax, of unrealized gains on Cash Flow Hedges at December 31, 2006, will be reclassified into earnings over the next twelve months. The maximum term of any Cash Flow Hedge at December 31, 2006 is 5.4 years.

Our Banks also use long-term, fixed-rate brokered CDs to fund a portion of their balance sheets. These instruments expose our Banks to variability in fair value due to changes in interest rates. To meet their objectives, our Banks may enter into derivative financial instruments to mitigate exposure to fluctuations in fair values of such fixed-rate debt instruments. Fair Value Hedges currently include pay-variable interest-rate swaps.

Certain financial derivative instruments have not been designated as hedges. The fair value of these derivative financial instruments have been recorded on our balance sheet and are 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 earnings.

In the ordinary course of business, our Banks enter into rate-lock real estate mortgage loan commitments with customers (“Rate Lock Commitments”). These commitments expose our Banks to interest rate risk. Our Banks also enter into mandatory commitments to sell real estate 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 Banks’ 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 gains on the sale of real estate mortgage loans. We obtain market prices from an outside third party on Mandatory Commitments and Rate Lock Commitments. Net gains on the sale of real estate mortgage loans, as well as net income may be more volatile as a result of these derivative instruments, which are not designated as hedges.

The impact of SFAS #133 on net income and other comprehensive income is as follows:

				Other
				Comprehensive
	Net Income			Income			Total
	(In thousands)
Change in fair value during the year ended December 31, 2006
Interest rate swap agreements not designated as hedges	$	2					$	2
Interest rate cap agreements not designated as hedges		34						34
Rate-lock real estate mortgage loan commitments		(64	)					(64	)
Mandatory commitments to sell real estate mortgage loans		197						197
Ineffectiveness of fair value hedges		4						4
Ineffectiveness of cash flow hedges		2						2
Cash flow hedges				$	(5,955	)		(5,955	)
Reclassification adjustment					3,276			3,276
Total		175			(2,679	)		(2,504	)
Federal income tax		61			(938	)		(877	)
Total, net of federal income tax	$	114		$	(1,741	)	$	(1,627	)

71

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

				Other
				Comprehensive
	Net Income			Income		Total
	(In thousands)
Change in fair value during the year ended December 31, 2005
Interest rate swap agreements not designated as hedges	$	(54	)			$	(54	)
Interest rate cap agreements not designated as hedges		19					19
Rate-lock real estate mortgage loan commitments		(59	)				(59	)
Mandatory commitments to sell real estate mortgage loans		(38	)				(38	)
Ineffectiveness of fair value hedges		(57	)				(57	)
Cash flow hedges				$	1,721		1,721
Reclassification adjustment					697		697
Total		(189	)		2,418		2,229
Federal income tax		(66	)		846		780
Total, net of federal income tax	$	(123	)	$	1,572	$	1,449
Change in fair value during the year ended December 31, 2004
Interest rate swap agreements not designated as hedges	$	101				$	101
Rate-lock real estate mortgage loan commitments		(102	)				(102	)
Mandatory commitments to sell real estate mortgage loans		80					80
Ineffectiveness of fair value hedges		16					16
Cash flow hedges				$	704		704
Reclassification adjustment					4,815		4,815
Total		95			5,519		5,614
Federal income tax		33			1,932		1,965
Total, net of federal income tax	$	62		$	3,587	$	3,649

Accumulated other comprehensive income included derivative gains, net of tax, of $0.5 million, $2.4 million and $0.9 million at December 31, 2006, 2005 and 2004.

NOTE 16 — RELATED PARTY TRANSACTIONS

Certain of our directors and executive officers, including companies in which they are officers or have significant ownership, were loan and deposit customers of the Banks during 2006 and 2005.

A summary of loans to directors and executive officers whose borrowing relationship exceeds $60,000, and to entities in which they own a 10% or more voting interest for the years ended December 31 follows:

	2006			2005
	(In thousands)
Balance at beginning of year	$	19,127		$	11,757
New loans and advances		5,381			16,823
Repayments		(10,625	)		(9,453	)
Balance at end of year	$	13,883		$	19,127

72

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Deposits held by us for directors and executive officers totaled $4.0 million and $4.5 million at December 31, 2006 and 2005, respectively.

NOTE 17 — OTHER NON-INTEREST EXPENSES

Other non-interest expenses for the years ended December 31 follow:

	2006		2005		2004
	(In thousands)
Data processing	$	5,619	$	4,905	$	4,324
Advertising		3,997		4,311		3,662
Credit card and bank service fees		3,839		2,952		2,089
Loan and collection		3,610		4,102		3,500
Communications		3,556		3,724		3,333
Amortization of intangible assets		2,423		2,529		2,123
Loss on receivable from warranty payment plan seller		2,400
Supplies		2,113		2,247		2,091
Legal and professional		1,853		2,509		2,597
Other		5,747		6,957		6,272
Total other non-interest expense	$	35,157	$	34,236	$	29,991

NOTE 18 — LEASES

We have non-cancelable operating leases for certain office facilities, some of which include renewal options.

A summary of future minimum lease payments under non-cancelable operating leases at December 31, 2006, follows:

	(In thousands)
2007	$	1,274
2008		701
2009		573
2010		510
2011		455
2012 and thereafter		4,551
Total	$	8,064

Rental expense on operating leases totaled $1.2 million, $1.2 million and $1.0 million in 2006, 2005 and 2004, respectively.

NOTE 19 — CONCENTRATIONS OF CREDIT RISK

Credit risk is the risk to earnings and capital arising from an obligor’s failure to meet the terms of any contract with our organization, or otherwise fail to perform as agreed. Credit risk can occur outside of our traditional lending activities and can exist in any activity where success depends on counter-party, issuer or borrower performance. Concentrations of credit risk (whether on- or off-balance sheet) arising from financial instruments can exist in relation to individual borrowers or groups of borrowers, certain types of collateral, certain types of industries or certain geographic regions. Credit risk associated with these concentrations could arise when a significant amount of loans or other financial instruments, related by similar characteristics, are simultaneously impacted by changes in economic or other conditions that cause their probability of repayment or other type of settlement to be adversely affected. Our major concentrations of credit risk arise by collateral type in relation to loans and commitments. The

73

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

significant concentrations by collateral type at December 31, 2006 include loans secured by residential real estate which totaled $962.1 million, construction and development loans which totaled $254.6 million and finance receivables secured by vehicle service contracts which totaled $183.7 million.

Additionally, within our commercial real estate and commercial loan portfolio we had significant standard industry classification concentrations in the following categories as of December 31, 2006: Operators of Nonresidential Buildings; Land Subdividers and Developers; Operators of Apartment Buildings and Construction and General Contractors. A geographic concentration arises because the Company primarily conducts its lending activities in the State of Michigan.

Mepco has established and monitors counterparty concentration limits in order to manage our collateral exposure on finance receivables. The counterparty concentration limits are primarily based on the AM Best rating and statutory surplus level for an insurance company and on other factors including financial evaluation and distribution of concentrations for warranty administrators and warranty sellers/dealers. The sudden failure of one of Mepco’s major counterparties (an insurance company or warranty administrator) could expose us to significant losses.

The following represents Mepco’s five largest concentrations for warranty finance as of December 31, 2006:

Company Name	AM Best Rating	Net Counterparty Exposure(1)
		(In thousands)
Lyndon Property Insurance Company(2)	A—	$	43,469
Warrantech Corporation(3)	Not applicable		32,746
Capital Assurance RRG, Inc.	Not applicable		9,340
Warranty America, LLC	Not applicable		7,951
First Warranty Group	Not applicable		7,074

(1)	Receivables are net of unfunded payment plans (financed premiums payable) and any funds held by Mepco in a security and control (collateral) account.
(2)	Lyndon Property Insurance Company is a subsidiary of Protective Life Corporation.
(3)	Warrantech Corporation is a subsidiary of H.I.G. Capital LLC

NOTE 20 — REGULATORY MATTERS

Capital guidelines adopted by Federal and State regulatory agencies and restrictions imposed by law limit the amount of cash dividends our Banks can pay to us. At December 31, 2006, using the most restrictive of these conditions for each Bank, the aggregate cash dividends that our Banks can pay us without prior regulatory approval was $73.9 million. It is not our intent to have dividends paid in amounts which would reduce the capital of our Banks to levels below those which we consider prudent and in accordance with guidelines of regulatory authorities.

We are also subject to various regulatory capital requirements. The prompt corrective action regulations establish quantitative measures to ensure capital adequacy require minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and Tier 1 capital to average assets. Failure to meet minimum capital requirements can initiate 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 notifications from the FDIC as of December 31, 2006 and 2005, categorized each of our Banks as well capitalized. Management is not aware of any conditions or events that would have changed the most recent FDIC categorization.

74

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Our actual capital amounts and ratios at December 31, follow:

						Minimum Ratio for			Minimum Ratio for
	Actual					Adequately Capitalized			Well-Capitalized
	Amount		Ratio			Institutions			Institutions
	(Dollars in thousands)
2006
Total capital to risk-weighted assets
Consolidated	$	286,599		10.75	%		8.00	%		NA
Independent Bank		112,103		10.48			8.00			10.00	%
Independent Bank West Michigan		68,072		10.59			8.00			10.00
Independent Bank South Michigan		40,005		10.83			8.00			10.00
Independent Bank East Michigan		59,643		10.45			8.00			10.00
Tier 1 capital to risk-weighted assets
Consolidated	$	256,287		9.62	%		4.00	%		NA
Independent Bank		102,255		9.56			4.00			6.00	%
Independent Bank West Michigan		59,969		9.33			4.00			6.00
Independent Bank South Michigan		35,804		9.70			4.00			6.00
Independent Bank East Michigan		52,459		9.19			4.00			6.00
Tier 1 capital to average assets
Consolidated	$	256,287		7.62	%		4.00	%		NA
Independent Bank		102,255		7.30			4.00			5.00	%
Independent Bank West Michigan		59,969		7.92			4.00			5.00
Independent Bank South Michigan		35,804		7.15			4.00			5.00
Independent Bank East Michigan		52,459		7.59			4.00			5.00
2005
Total capital to risk-weighted assets
Consolidated	$	264,816		10.27	%		8.00	%		NA
Independent Bank		109,959		10.44			8.00			10.00	%
Independent Bank West Michigan		65,213		10.76			8.00			10.00
Independent Bank South Michigan		37,790		10.78			8.00			10.00
Independent Bank East Michigan		59,237		10.61			8.00			10.00
Tier 1 capital to risk-weighted assets
Consolidated	$	239,931		9.31	%		4.00	%		NA
Independent Bank		101,228		9.61			4.00			6.00	%
Independent Bank West Michigan		57,979		9.57			4.00			6.00
Independent Bank South Michigan		34,460		9.83			4.00			6.00
Independent Bank East Michigan		53,634		9.61			4.00			6.00
Tier 1 capital to average assets
Consolidated	$	239,931		7.40	%		4.00	%		NA
Independent Bank		101,228		7.46			4.00			5.00	%
Independent Bank West Michigan		57,979		8.06			4.00			5.00
Independent Bank South Michigan		34,460		7.23			4.00			5.00
Independent Bank East Michigan		53,634		7.91			4.00			5.00

NA — Not applicable.

75

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 21 — 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 cannot be determined with precision. 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.

Financial instrument assets actively traded in a secondary market, such as securities, have been valued using quoted market prices while recorded book balances have been used for cash and due from banks and accrued interest.

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.

We have purchased a “stable value wrap” for our bank owned life insurance that permits a surrender of this investment at the greater of its fair market or book value.

Financial instrument liabilities with a stated maturity, such as certificates of deposit, 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.

Derivative financial instruments have principally been valued based on discounted value of contractual cash flows using a discount rate approximating current market rates.

Financial instrument liabilities without a stated maturity, such as demand deposits, savings, NOW and money market accounts, have a fair value equal to the amount payable on demand.

The estimated fair values and recorded book balances at December 31 follow:

	2006				2005
			Recorded				Recorded
	Estimated		Book		Estimated		Book
	Fair Value		Balance		Fair Value		Balance
	(In thousands)
Assets
Cash and due from banks	$	73,100	$	73,100	$	67,500	$	67,500
Securities available for sale		434,800		434,800		483,400		483,400
Net loans and loans held for sale		2,462,100		2,488,400		2,346,000		2,378,500
Bank owned life insurance		41,100		41,100		39,500		39,500
Accrued interest receivable		18,100		18,100		16,100		16,100
Liabilities
Deposits with no stated maturity	$	1,158,200	$	1,158,200	$	1,156,400	$	1,156,400
Deposits with stated maturity		1,442,400		1,444,600		1,311,800		1,317,800
Other borrowings		315,200		312,000		377,300		371,500
Accrued interest payable		14,600		14,600		10,000		10,000
Derivative financial instruments		1,300		1,300		2,900		2,900

The fair values for commitments to extend credit and standby letters of credit are estimated to approximate their aggregate book balance, which is nominal.

76

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 substantial 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.

NOTE 22 — OPERATING SEGMENTS

Our reportable segments are based upon legal entities. We have five reportable segments: Independent Bank (“IB”), Independent Bank West Michigan (“IBWM”), Independent Bank South Michigan (“IBSM”), Independent Bank East Michigan (“IBEM”) and Mepco Finance Corporation (“Mepco”). The accounting policies of the segments are the same as those described in Note 1 to the Consolidated Financial Statements. We evaluate performance based principally on net income of the respective reportable segments. Certain operational and administrative functions have been consolidated at the parent company and the costs of these functions are allocated to each segment.

77

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

	IB(1)		IBWM(1)		IBSM(1)		IBEM		Mepco			Other(2)			Elimination			Total
	(In thousands)
2006
Total assets	$	1,025,949	$	779,388	$	503,614	$	712,404	$	401,267		$	347,105		$	(339,829	)	$	3,429,898
Interest income		66,132		52,010		31,781		47,496		20,115			20			(659	)		216,895
Net interest income		38,899		33,182		17,752		28,809		11,023			(6,301	)		(167	)		123,197
Provision for loan losses		3,419		4,710		1,817		6,124		274									16,344
Income (loss) from continuing operations before income tax		17,070		16,814		9,344		7,248		(361	)		(4,749	)		121			45,487
Discontinued operations, net of tax										(622	)								(622	)
Net income (loss)		12,844		11,889		7,271		5,708		(1,972	)		(2,480	)		(57	)		33,203
2005
Total assets	$	1,014,008	$	737,563	$	489,457	$	716,525	$	398,891		$	346,315		$	(346,911	)	$	3,355,848
Interest income		63,081		41,024		26,421		40,556		22,163			22			(232	)		193,035
Net interest income		43,160		30,020		16,952		29,112		16,465			(5,710	)		(63	)		129,936
Provision for loan losses		1,731		2,462		2,291		1,300		22									7,806
Income (loss) from continuing operations before income tax		27,083		16,953		8,699		11,117		11,054			(6,661	)		(5,074	)		63,171
Discontinued operations, net of tax										1,207									1,207
Net income (loss)		19,828		11,927		6,775		8,326		8,056			(4,466	)		(3,534	)		46,912
2004
Total assets	$	1,183,924	$	507,574	$	433,573	$	674,799	$	282,680		$	321,436		$	(309,959	)	$	3,094,027
Interest income		63,317		28,539		20,780		29,063		12,535			61			(69	)		154,226
Net interest income		45,223		22,568		14,500		22,685		11,199			(4,939	)					111,236
Provision for loan losses		2,095		681		466		644		130									4,016
Income (loss) from continuing operations before income tax		24,085		14,751		8,858		9,515		5,716			(7,279	)		(621	)		55,025
Discontinued operations, net of tax										(1,754	)								(1,754	)
Net income (loss)		17,816		10,480		6,567		7,232		1,999			(4,915	)		(621	)		38,558

(1)	During 2005 certain loans, other assets and deposits were sold by IB to IBWM and IBSM as part of a branch realignment.
(2)	Includes amounts relating to our parent company and certain insignificant operations.

78

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 23 — INDEPENDENT BANK CORPORATION (PARENT COMPANY ONLY) FINANCIAL INFORMATION

Presented below are condensed financial statements for our parent company.

CONDENSED STATEMENTS OF FINANCIAL CONDITION

	December 31,
	2006		2005
	(In thousands)
ASSETS
Cash and due from banks	$	14,131	$	10,882
Investment in subsidiaries		318,113		321,702
Other assets		12,289		11,526
Total Assets	$	344,533	$	344,110
LIABILITIES AND SHAREHOLDERS’ EQUITY
Notes payable	$	12,500	$	9,000
Subordinated debentures		64,947		64,947
Other liabilities		8,919		21,904
Shareholders’ equity		258,167		248,259
Total Liabilities and Shareholders’ Equity	$	344,533	$	344,110

79

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED STATEMENTS OF OPERATIONS

	Year Ended December 31,
	2006			2005		2004
	(In thousands)
OPERATING INCOME
Dividends from subsidiaries	$	42,650		$	42,500	$	26,350
Management fees from subsidiaries and other income		23,570			23,166		20,246
Total Operating Income		66,220			65,666		46,596
OPERATING EXPENSES
Interest expense		6,321			5,732		5,000
Administrative and other expenses		22,611			24,921		23,467
Total Operating Expenses		28,932			30,653		28,467
Income Before Income Tax and (Excess dividends from) Undistributed Net Income of Subsidiaries		37,288			35,013		18,129
Income tax benefit		2,479			2,477		2,685
Income Before (Excess dividends from) Equity in Undistributed Net Income of Subsidiaries Continuing Operations		39,767			37,490		20,814
(Excess dividends from) equity in undistributed net income of subsidiaries continuing operations		(5,942	)		8,215		19,498
Income From Continuing operations		33,825			45,705		40,312
Discontinued operations		(622	)		1,207		(1,754	)
Net Income	$	33,203		$	46,912	$	38,558

80

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

CONDENSED STATEMENTS OF CASH FLOWS

	Year Ended December 31,
	2006			2005			2004
	(In thousands)
Net Income	$	33,203		$	46,912		$	38,558
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FROM OPERATING ACTIVITIES
Depreciation, amortization of intangible assets and premiums, and accretion of discounts on securities and loans		1,897			1,575			1,238
Gain on sale of securities					(1,425	)
Increase in other assets		(1,059	)		(521	)		(457	)
Increase (decrease) in other liabilities		(9,094	)		4,848			2,930
Excess dividends (Equity in undistributed net income) of subsidiaries continuing operations		5,942			(8,215	)		(19,498	)
Excess dividends (Equity in undistributed net income) of subsidiaries discontinued operations		622			(1,207	)		1,754
Total Adjustments		(1,692	)		(4,945	)		(14,033	)
Net Cash from Operating Activities		31,511			41,967			24,525
CASH FLOW USED IN INVESTING ACTIVITIES
Proceeds from the sale of securities available for sale					1,963
Investment in subsidiaries		(1,500	)		(17,750	)		(16,889	)
Capital expenditures		(1,772	)		(1,652	)		(2,315	)
Net Cash Used in Investing Activities		(3,272	)		(17,439	)		(19,204	)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings		13,500			2,000
Proceeds from long-term debt								10,000
Repayment of long-term debt		(2,000	)		(2,000	)		(1,000	)
Repayment of other borrowings		(8,000	)
Dividends paid		(17,547	)		(15,320	)		(12,500	)
Repurchase of common stock		(11,989	)		(13,065	)		(2,002	)
Proceeds from issuance of common stock		1,046			2,051			1,975
Net Cash Used in Financing Activities		(24,990	)		(26,334	)		(3,527	)
Net Increase (Decrease) in Cash and Cash Equivalents		3,249			(1,806	)		1,794
Cash and Cash Equivalents at Beginning of Year		10,882			12,688			10,894
Cash and Cash Equivalents at End of Year	$	14,131		$	10,882		$	12,688

NOTE 24 — DISCONTINUED OPERATIONS

On January 15, 2007 we sold substantially all of the assets of Mepco’s insurance premium finance business to Premium Financing Specialists, Inc. (“PFS”). We received $176.0 million of cash that was utilized to payoff Brokered CD’s and short-term borrowings at Mepco’s parent company, Independent Bank. Under the terms of the sale, PFS also assumed approximately $11.7 million in liabilities. In the fourth quarter of 2006, we recorded a loss of $0.2 million and accrued for approximately $1.1 million of expenses related to the disposal of this business. We also allocated $4.1 million of goodwill and $0.3 million of other intangible assets to this business. Revenues and

81

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

expenses associated with Mepco’s insurance premium finance business have been presented as discontinued operations in the Consolidated Statements of Operations. Likewise, in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the assets and liabilities associated with this business have been reclassified to discontinued operations in the Consolidated Statements of Financial Condition. We have elected to not make any reclassifications in the Consolidated Statements of Cash Flows. Prior to the December 2006 announced sale, our insurance premium finance business was included in the Mepco segment.

Funding for Mepco’s insurance premium and warranty businesses is accomplished by loans from its parent company, Independent Bank. Those loans are primarily funded with brokered certificates of deposit. Liabilities of discontinued operations include amounts allocable to Mepco’s insurance premium financing business that will not be assumed by the purchaser. Mepco is charged interest by its parent company based upon the amount borrowed at an interest rate that approximates the parent company’s borrowing rate. Interest expense recorded by Mepco was allocated to discontinued operations based primarily upon the ratio of insurance premium finance receivables to Mepco’s total finance receivables.

The major classes of assets and liabilities of discontinued operations were as follows:

	December 31,
	2006			2005
	(In thousands)
ASSETS OF DISCONTINUED OPERATIONS
Cash and due from banks	$	167		$	64
Loans:
Gross insurance premium finance receivables		189,392			186,843
Deferred finance income		(4,715	)		(4,400	)
Deferred loan origination costs		1,161			1,001
Total loans		185,838			183,444
Allowance for Loan Losses		(1,265	)		(615	)
Net loans		184,573			182,829
Property and equipment, net		68			92
Goodwill		4,133			4,133
Other intangibles		303			452
Accrued income and other assets		188			538
Total Assets of Discontinued Operations	$	189,432		$	188,108
LIABILITIES OF DISCONTINUED OPERATIONS
Deposits — Time	$	165,496		$	166,818
Financed premiums payable		15,655			10,618
Accrued expenses and other liabilities		2,525			1,244
Total Liabilities of Discontinued Operations	$	183,676		$	178,680

82

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The results of discontinued operations are as follows:

	Year Ended December 31,
	2006			2005		2004
	(In thousands)
Interest income — interest and fees on loans	$	16,317		$	11,889	$	8,321
Interest expense		9,231			5,456		2,024
Net Interest Income		7,086			6,433		6,297
Provision for loan losses		1,068			265		293
Net Interest Income After Provision for Loan Losses		6,018			6,168		6,004
NON-INTEREST EXPENSE
Compensation and employee benefits		1,459			1,548		2,915
Occupancy, net		356			273		197
Furniture, fixtures and equipment		188			173		166
Other expenses		5,127			2,226		5,397
Total Non-interest Expense		7,130			4,220		8,675
Income (Loss) Before Income Taxes		(1,112	)		1,948		(2,671	)
Income tax expense (benefit)		(490	)		741		(917	)
Income (loss) from discontinued operations	$	(622	)	$	1,207	$	(1,754	)

83

QUARTERLY FINANCIAL DATA (UNAUDITED)

A summary of selected quarterly results of operations for the years ended December 31 follows:

	Three Months Ended
	March 31,			June 30,		September 30,		December 31,
	(In thousands, except per share amounts)
2006
Interest income	$	51,986		$	54,284	$	54,838	$	55,787
Net interest income		31,735			31,606		30,004		29,852
Provision for loan losses		1,386			2,511		4,484		7,963
Income from continuing operations before income tax expense		16,649			14,400		12,891		1,547
Discontinued operations		(713	)		180		567		(656	)
Net income		12,343			10,602		9,951		307
Income per share from continuing operations
Basic	$	0.57		$	0.45	$	0.41	$	0.04
Diluted		0.56			0.45		0.40		0.04
Net income per share
Basic	$	0.54		$	0.46	$	0.43	$	0.01
Diluted		0.53			0.45		0.43		0.01
2005
Interest income	$	45,056		$	47,498	$	49,290	$	51,191
Net interest income		31,909			32,739		32,670		32,618
Provision for loan losses		1,563			2,415		1,431		2,397
Income from continuing operations before income tax expense		15,025			16,415		16,318		15,413
Discontinued operations		351			399		197		260
Net income		11,301			12,126		12,048		11,437
Income per share from continuing operations
Basic	$	0.47		$	0.50	$	0.51	$	0.48
Diluted		0.46			0.49		0.50		0.47
Net income per share
Basic	$	0.48		$	0.52	$	0.52	$	0.49
Diluted		0.47			0.51		0.51		0.48

During the fourth quarter of 2006 we recognized $3.0 million of goodwill impairment at Mepco and FHF and a $2.4 million expense related to a reserve on a receivable from a warranty payment plan seller at Mepco. These costs are included in goodwill impairment and other expenses, respectively, on the consolidated statements of operations.

QUARTERLY SUMMARY

	Reported Sale Prices of Common Shares												Cash Dividends
	2006						2005						Declared
	High		Low		Close		High		Low		Close		2006		2005
First quarter	$	27.14	$	24.68	$	27.10	$	28.67	$	25.73	$	26.10	$	0.19	$	0.17
Second quarter		27.62		24.38		25.05		27.21		24.39		25.80		0.19		0.17
Third quarter		25.59		23.85		24.28		28.56		25.84		27.66		0.20		0.18
Fourth quarter		25.76		23.00		25.29		28.38		24.88		25.93		0.20		0.18

We have approximately 2,500 holders of record of our common stock. Our common stock trades on the Nasdaq National Market System under the symbol “IBCP.” The prices shown above are supplied by Nasdaq and reflect the inter-dealer prices and may not include retail markups, markdowns or commissions. There may have been transactions or quotations at higher or lower prices of which the Company is not aware.

In addition to the provisions of the Michigan Business Corporation Act, our ability to pay dividends is limited by our ability to obtain funds from our Banks and by regulatory capital guidelines applicable to us.

84

OFFICERS AND DIRECTORS
INDEPENDENT BANK CORPORATION

OFFICERS

Michael M. Magee Jr. • Robert N. Shuster •  Richard E. Butler • Peter R. Graves • Charles F. Schadler • James J. Twarozynski • Julie T. Anderson • Corina R. Cline • Sandra A. Dine • Robert L. Dood •  Dennis D. Gale • Steven L. Germond • Lori K. Gogulski •  Deborah E. Herman •  Rita R. Leudesdorff •  Cheryl L. McKellar • Patrick A. Miller • Dean M. Morse • Laurinda M. Neve • Scott E. Petersen • Shelby L. Reno • Thomas A. Rinness • James L. Smith • David W. Troyer • Alisa D. Anderson • Amy L. Anderson •  Cynthia L. Blackmer • Toni A. Buys • Deborah A. Campbell • David L. Edwards • Janice E. Gustafson • Philip J. Hamlin • Lynne M. Hunt • Shirley A. Johns • Beth A. Kaphing •  Nancy F. Lohrer • Jeri L. May  • Victor L. Munn • Elizabeth S. Peabody • Earl W. Petrimoulx • Mary K. Prater • Amy G. Robinson • Brent J. Smith • Troy A. Smith • Michael J. Steele •  Amie L. Stout • Mary Jo Troost • Linda K. Winters

BOARD OF DIRECTORS

Charles C. Van Loan, Chairman • Donna J. Banks • Jeffrey A. Bratsburg • Stephen L. Gulis Jr. • Terry L. Haske • Robert L. Hetzler • Michael M. Magee Jr. • James E. McCarty • Charles A. Palmer

INDEPENDENT BANK AND SUBSIDIARIES

OFFICERS

William B. Kessel • Gary C. Dawley • Beth J. Jungel • R. Darren Rhoads • Michael J. Stodolak • Robert J. Thomas •  Jerry E. White • Larry L. Arendt • Sharon J. Brown • Steven E. Canole • James L. Hill • Caryl J. Irrer • Daniel P. McEvoy • Thomas A. McKinley • Rona L. Mehl • Denise M. Parkinson • Patrick M. Rokosz •  Jerome P. Schmidt • Dennis J. Werner • Christine M. Aldrich • Kay A. Burks • Alycia L. Bye • Teresa L. Conroy • Mary A. Cosbitt • Daniel J. Couveau  • Mark F. Delestowicz • Mary S. Doak • Gary E. Ebel • Theresa I. Erickson • Norma K. Flewelling • Kimberly A. Foldie • Lisa M. Foy • Renee L. Gradowski • Denise A. Harkness • Mary M. Holzheuer • Charles T. Manning •  Terri K. Marx-Schnetzler •  Richard S. Michaels • Joseph J. Neering •  Ralph W. Putnam • Linda L. Rasdorf • Cheryl L. Ratynski • James A. Simcox •  Katherine L. Taskey

BOARD OF DIRECTORS

W. Lynn Weimer, Chairman • Robert L. Hetzler • William B. Kessel • Michael M. Magee Jr. • James E. McCarty • Brenda S. Rowley • Richard A. Spencer • Charles C. Van Loan

DIRECTORS EMERITI

Loren C. Adgate • A. Ross Huffman • Thomas F. Kohn • Robert J. Leppink • Rex P. O’Connor • Carleton T. Wilson • Arch V. Wright Jr.

INDEPENDENT BANK EAST MICHIGAN AND SUBSIDIARIES

OFFICERS

Ronald L. Long • David A. Dornbrook • Michael J. Furst • Raymond P. Stecko • Martin W. Bahr • Steven G. Broda • Thomas F. Gammon • Romy F. Gingras, CFP^® CLU • Bonnie M. Hanna • Robert B. Mahloy • Patricia A. Sparrow • David A. Verkeyn • Neil R. Warriner • Richard J. Wolff • Kathryn M. Block • Daniel P. Dueweke • Amy L. Farnum • Jane M. Fluegel • Patricia A. Gilley • Barbara J. Haranda • Randall L. Howard • Russell J. Kacin • Susan K. Ross • Claudia J. Tesch • Steven F. Valice • Christina A. Vroman • Paul T. Whalen

85

OFFICERS AND DIRECTORS — Continued

BOARD OF DIRECTORS

Mike H. Coulter, Chairman • Frank A. Borschke • Kurt K. Ewald • Mark H. Gettel • Terry L. Haske • Catharine B. LaMont • Ronald L. Long • Clarke B. Maxson • Thomas J. Strobl • Jean T. Talaski • Gary L. Vollmar • William C. Young

DIRECTORS EMERITI

Daniel E. Herman • Alan K. Shaw

INDEPENDENT BANK SOUTH MICHIGAN AND SUBSIDIARIES

OFFICERS

Edward B. Swanson • Denise E. Wheaton • Cheryl A. Bartholic • Ronald J. Eible • David S. Flower • David E. Gillison • Mark K. MacLellan • Deborah S. Stehlik • Rosemary K. Atwood • Joseph M. Campbell • Pamela J. Cole • Josh J. Goss • Janet M. Green • Joanne L. Herendeen • Kathleen M. Hendershot • Daniel W. Klauka • Susan M. Lathrop • Colleen R. Michels • Raymond E. Pape • Thomas R. Ruis • Renee L. Underwood • Brian W. Vicary • Kelly A. Wolgamott

BOARD OF DIRECTORS

Fred L. Poston, Chairman • Donna J. Banks • E. James Barrett • Charles A. Palmer • Stanley A. Smith • Edward B. Swanson

DIRECTORS EMERITI

Max W. DeCamp • Jonathan E. Maire • Norman M. Mitchell • Paul D. Piepkow • Larry L. Richardson • Ralph C. Vahs

INDEPENDENT BANK WEST MICHIGAN AND SUBSIDIARIES

OFFICERS

David C. Reglin • Larry R. Daniel Jr. • José A. Infante • Scott D. Raymond • Hank B. Risley • Tami E. Coates • Daniel B. DeLong • Michael D. Finstrom • Rick J. Goerner • Stephen R. Hale • Stephen M. Hallead • Mark D. Hofmeyer • Thomas R. Jessmore • Thomas Edison Lane • Kevin A. Langseth • Jane M. Meyer • Guerin T. Pierre • Steven R. Pike • Doreen A. Rademacher • Brian R. Talbot • Trevor N. Tooker • Armando Hernandez • James B. Badgero • Forrest W. Bowman • Lisa L. Brown • Coni R. Burns • Sheryl A. Conklin • Mark L. Davis II • Kelly J. DeWindt • Janine A. Erridge • Pamela S. Fortin • Christopher T. Hebel • Jenny M. Houghton • Cheryl A. Koster • Jennifer M. May  •  Laura J. McDowell • Jennifer L. Meyers • Cathy K. Norkus • David K. Robach • Kimberly J. VanderArk • Sandra K. Wagner • Sueann L. Walz • Katherine C. Weaver

BOARD OF DIRECTORS

John J. Wheeler, Chairman • Daniel A. Balice • Neil C. Blakeslee • Jeffrey A. Bratsburg • Elizabeth A. Cherin • Stephen L. Gulis Jr. • Kevin B. Jeffers • David C. Reglin

DIRECTORS EMERITI

Ralph G. Bergman • William F. Ehinger • Emiel Kempf • A.G. Meyer • Kenneth R. Shaw

86

OFFICERS AND DIRECTORS — Continued

INDEPENDENT TITLE SERVICES, INC.

OFFICERS

Michael J. Cole

MEPCO FINANCE CORPORATION

OFFICERS

Theresa F. Kendziorski • Scott A. McMillan • Douglas A. Greenwood • Lee G. Tocher

FIRST HOME FINANCIAL, INC.

OFFICERS

Tony P. Mlejnek

87

EX-21

EXHIBIT 21

INDEPENDENT BANK CORPORATION
Subsidiaries of the Registrant

	State of Incorporation
IBC Capital Finance II Ionia, Michigan	Delaware
Midwest Guarantee Trust I Ionia, Michigan	Delaware
Gaylord Partners, Limited Partnership Ionia, Michigan	Michigan
Independent Bank Bay City, Michigan	Michigan
Independent Bank West Michigan Grand Rapids, Michigan	Michigan
Independent Bank South Michigan East Lansing, Michigan	Michigan
Independent Bank East Michigan Troy, Michigan	Michigan
IBC Financial Services, Inc., Bay City, Michigan (a subsidiary of Independent Bank)	Michigan
IBC Financial Services West Michigan, Inc., Grand Rapids, Michigan (a subsidiary of Independent Bank West Michigan)	Michigan
IBC Financial Services South Michigan, Inc., Okemos, Michigan (a subsidiary of Independent Bank South Michigan)	Michigan
IBC Financial Services East Michigan, Inc. Troy, Michigan (a subsidiary of Independent Bank East Michigan)	Michigan
Independent Title Services, Inc., Grand Rapids, Michigan (a subsidiary of Independent Bank, Independent Bank West Michigan, Independent Bank South Michigan and Independent Bank East Michigan)	Michigan
First Home Financial, Inc., Grand Rapids, Michigan (a subsidiary of Independent Bank)	Michigan
Mepco Finance Corporation (“Mepco”), Chicago, Illinois (a subsidiary of Independent Bank)	Michigan
Mepco Acceptance Corporation, Chicago, Illinois (a subsidiary of Mepco)	California
Mepco Services, Inc., Chicago, Illinois (a subsidiary of Mepco)	Illinois
Independent Mortgage Company Central Michigan Bay City, Michigan (a subsidiary of Independent Bank)	Michigan
Independent Mortgage Company West Michigan Grand Rapids, Michigan (a subsidiary of Independent Bank West Michigan)	Michigan
Independent Mortgage Company South Michigan Okemos, Michigan (a subsidiary of Independent Bank South Michigan)	Michigan
Independent Mortgage Company East Michigan Troy, Michigan (a subsidiary of Independent Bank East Michigan)	Michigan

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     We consent to the incorporation by reference in the Registration Statements (Nos. 333-47352, 333-32269, 333-89072 and 333-125484) on Forms S-8 of Independent Bank Corporation of our reports dated March 1, 2007 with respect to the consolidated financial statements of Independent Bank Corporation, and management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which reports appear in this Annual Report on Form 10-K of Independent Bank Corporation for the year ended December 31, 2006.

/s/ Crowe Chizek and Company LLC

Grand Rapids, Michigan
March 9, 2007

EX-23.2

EXHIBIT 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
Independent Bank Corporation:

We consent to the incorporation by reference in the Registration Statements (Nos. 333-47352, 333-32269, 333-89072, and 333-125484) on Form S-8 of Independent Bank Corporation of our report dated March 4, 2005, except as to notes 1, 5, 6, 7, 8, 12, 13, 14, 17, 18, 22, 23, and 24, which are as of March 1, 2007, relating to the consolidated statements of operations, shareholders’ equity, cash flows, and comprehensive income for the year ended December 31, 2004, which report appears in the December 31, 2006, annual report on Form 10-K of Independent Bank Corporation.

Our report dated March 4, 2005, except as to note 24, which is as of March 1, 2007, refers to a retrospective application of a change in accounting reflecting discontinued operations.

/s/ KPMG LLP

Detroit, Michigan
March 1, 2007

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Michael M. Magee, Jr., certify that:

1.	I have reviewed this annual report on Form 10-K of Independent Bank Corporation;
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15.15(f)) for the registrant and we have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

	INDEPENDENT BANK CORPORATION
Date:March 9, 2007	/s/ Michael M. Magee, Jr.
	Michael M. Magee, Jr.
	Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Robert N. Shuster, certify that:

1.	I have reviewed this annual report on Form 10-K of Independent Bank Corporation;
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15.15(f)) for the registrant and we have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

	INDEPENDENT BANK CORPORATION
Date: March 9, 2007	/s/ Robert N. Shuster
	Robert N. Shuster
	Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATE OF THE
CHIEF EXECUTIVE OFFICER OF
INDEPENDENT BANK CORPORATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002:

I, Michael M. Magee, Jr., Chief Executive Officer of Independent Bank Corporation, certify, to the best of my knowledge and belief, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:

(1) The annual report on Form 10-K for the annual period ended December 31, 2006, which this statement accompanies, fully complies with requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and;

(2) The information contained in this annual report on Form 10-K for the annual period ended December 31, 2006, fairly presents, in all material respects, the financial condition and results of operations of Independent Bank Corporation.

	INDEPENDENT BANK CORPORATION
Date: March 9, 2007	/s/ Michael M. Magee, Jr.
	Michael M. Magee, Jr.
	Chief Executive Officer

The signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Independent Bank Corporation and will be retained by Independent Bank Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

EXHIBIT 32.2

CERTIFICATE OF THE
CHIEF FINANCIAL OFFICER OF
INDEPENDENT BANK CORPORATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002:

I, Robert N. Shuster, Chief Financial Officer of Independent Bank Corporation, certify, to the best of my knowledge and belief, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:

(1) The annual report on Form 10-K for the annual period ended December 31, 2006, which this statement accompanies, fully complies with requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and;

(2) The information contained in this annual report on Form 10-K for the annual period ended December 31, 2006, fairly presents, in all material respects, the financial condition and results of operations of Independent Bank Corporation.

	INDEPENDENT BANK CORPORATION
Date: March 9, 2007	/s/ Robert N. Shuster
	Robert N. Shuster
	Chief Financial Officer

The signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Independent Bank Corporation and will be retained by Independent Bank Corporation and furnished to the Securities and Exchange Commission or its staff upon request.