exv13

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.

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

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

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.

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%.

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

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.

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.

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.

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

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.”)

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

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.

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.

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.

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.

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.”)

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).

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.

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

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.

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.

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.

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.

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

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

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

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

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

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

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

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

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.

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.

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.

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.

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.

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.

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

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.

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.

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

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.

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

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

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.

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.

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.

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.

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.

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

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.

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

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.

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

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	)

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

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

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.

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.

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.

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.

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.

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

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

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

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.

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

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


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


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