10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2012

Commission file number   0-7818

INDEPENDENT BANK CORPORATION

(Exact name of registrant as specified in its charter)

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

230 West Main Street, P.O. Box 491, Ionia, Michigan 48846

(Address of principal executive offices)

(616) 527-5820

(Registrant's telephone number, including area code)

NONE                                                                          

Former name, address and fiscal year, if changed since last report.

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

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

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

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company  x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES  o    NO  x

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

Common stock, no par value	8,773,629
Class	Outstanding at August 9, 2012

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

INDEX

Number(s)

PART I -	Financial Information
Item 1.	Condensed Consolidated Statements of Financial Condition June 30, 2012 and December 31, 2011	3
	Condensed Consolidated Statements of OperationsThree- and Six-month periods ended June 30, 2012 and 2011	4
	Condensed Consolidated Statements of Comprehensive Income (Loss)  Three- and Six-month periods ended June 30, 2012 and 2011	5
	Condensed Consolidated Statements of Cash Flows Six-month periods ended June 30, 2012 and 2011	6
	Condensed Consolidated Statements of Shareholders' Equity Six-month periods ended June 30, 2012 and 2011	7
	Notes to Interim Condensed Consolidated Financial Statements	8-61
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	62-94
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	95
Item 4.	Controls and Procedures	95
PART II -	Other Information
Item 1A	Risk Factors	96
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	96
Item 3b.	Defaults Upon Senior Securities	96
Item 6.	Exhibits	96

Discussions and statements in this report that are not statements of historical fact, including, without limitation, statements that include terms such as “will,” “may,” “should,” “believe,” “expect,” “forecast,” “anticipate,” “estimate,” “project,” “intend,” “likely,” “optimistic” and “plan,” and statements about future or projected financial and operating results, plans, projections, objectives, expectations, and intentions and other statements that are not historical facts, are forward-looking statements. Forward-looking statements include, but are not limited to, descriptions of plans and objectives for future operations, products or services; projections of our future revenue, earnings or other measures of economic performance; forecasts of credit losses and other asset quality trends; predictions as to our Bank’s ability to maintain certain regulatory capital standards; our expectation that we will have sufficient cash on hand to meet expected obligations during 2012; and descriptions of steps we may take to improve our capital position. These forward-looking statements express our current expectations, forecasts of future events, or long-term goals and, by their nature, are subject to assumptions, risks, and uncertainties.  Although we believe that the expectations, forecasts, and goals reflected in these forward-looking statements are reasonable, actual results could differ materially for a variety of reasons, including, among others:

· our ability to successfully raise new equity capital, effect a conversion of our outstanding convertible preferred stock held by the U.S. Treasury into our common stock, and otherwise implement our capital restoration plan;

· the failure of assumptions underlying the establishment of and provisions made to our allowance for loan losses;

· the timing and pace of an economic recovery in Michigan and the United States in general, including regional and local real estate markets;

· the ability of our Bank to remain well-capitalized;

· the failure of assumptions underlying our estimate of probable incurred losses from vehicle service contract payment plan counterparty contingencies, including our assumptions regarding future cancellations of vehicle service contracts, the value to us of collateral that may be available to recover funds due from our counterparties, and our ability to enforce the contractual obligations of our counterparties to pay amounts owing to us;

1

· further adverse developments in the vehicle service contract industry;

· potential limitations on our ability to access and rely on wholesale funding sources;

· the risk that sales of our common stock could trigger a reduction in the amount of net operating loss carryforwards that we may be able to utilize for income tax purposes;

· the continued services of our management team, particularly as we work through our asset quality issues and the implementation of our capital restoration plan;

· implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act or other new legislation, which may have significant effects on us and the financial services industry, the exact nature and extent of which cannot be determined at this time; and

· the risk that our common stock may be delisted from the Nasdaq Global Select Market.

This list provides examples of factors that could affect the results described by forward-looking statements contained in this report, but the list is not intended to be all inclusive.  The risk factors disclosed in Part I – Item A of our Annual Report on Form 10-K for the year ended December 31, 2011, as updated by any new or modified risk factors disclosed in Part II – Item 1A of any subsequently filed Quarterly Report on Form 10-Q, include all known risks that our management believes could materially affect the results described by forward-looking statements in this report.  However, those risks may not be the only risks we face.  Our results of operations, cash flows, financial position, and prospects could also be materially and adversely affected by additional factors that are not presently known to us, that we currently consider to be immaterial, or that develop after the date of this report.  We cannot assure you that our future results will meet expectations. While we believe the forward-looking statements in this report are reasonable, you should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. We do not undertake, and expressly disclaim, any obligation to update or alter any statements, whether as a result of new information, future events, or otherwise, except as required by applicable law.

2

Part I - Item 1. 

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Financial Condition

	June 30,			December 31,
	2012			2011
	(unaudited)
Assets	(In thousands, except share amounts)
Cash and due from banks	$	60,838		$	62,777
Interest bearing deposits		358,920			278,331
Cash and Cash Equivalents		419,758			341,108
Trading securities		86			77
Securities available for sale		247,047			157,444
Federal Home Loan Bank and Federal Reserve Bank stock, at cost		20,494			20,828
Loans held for sale, carried at fair value		43,386			44,801
Loans held for sale relating to branch sale, carried at lower of cost or fair value		53,180			-
Loans
Commercial		612,044			651,155
Mortgage		547,210			590,876
Installment		199,190			219,559
Payment plan receivables		98,946			115,018
Total Loans		1,457,390			1,576,608
Allowance for loan losses		(51,346	)		(58,884	)
Net Loans		1,406,044			1,517,724
Other real estate and repossessed assets		29,504			34,042
Property and equipment, net		50,802			62,548
Bank-owned life insurance		50,094			49,271
Other intangibles		7,065			7,609
Capitalized mortgage loan servicing rights		10,651			11,229
Prepaid FDIC deposit insurance assessment		11,008			12,609
Vehicle service contract counterparty receivables, net		28,879			29,298
Fixed assets held for sale relating to branch sale		8,491			-
Accrued income and other assets		16,976			18,818
Total Assets	$	2,403,465		$	2,307,406
Liabilities and Shareholders' Equity
Deposits
Non-interest bearing	$	471,718		$	497,718
Savings and interest-bearing checking		852,214			1,019,603
Retail time		392,544			526,525
Brokered time		48,860			42,279
Total Deposits		1,765,336			2,086,125
Deposits held for sale relating to branch sale		417,521			-
Other borrowings		17,929			33,387
Subordinated debentures		50,175			50,175
Vehicle service contract counterparty payables		7,118			6,633
Accrued expenses and other liabilities		32,214			28,459
Total Liabilities		2,290,293			2,204,779
Shareholders' Equity
Convertible preferred stock, no par value, 200,000 shares authorized; 74,426 shares issued and outstanding at June 30, 2012 and December 31, 2011; liquidation preference: $83,061 at  June 30, 2012 and $81,023 at December 31, 2011		82,004			79,857
Common stock, no par value, 500,000,000 shares authorized; issued and outstanding: 8,749,220 shares at June 30, 2012 and 8,491,526 shares at December 31, 2011		249,751			248,950
Accumulated deficit		(208,569	)		(214,259	)
Accumulated other comprehensive loss		(10,014	)		(11,921	)
Total Shareholders' Equity		113,172			102,627
Total Liabilities and Shareholders' Equity	$	2,403,465		$	2,307,406

See notes to interim condensed consolidated financial statements (unaudited)

3

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
	(unaudited)
	(In thousands)
Interest Income
Interest and fees on loans	$	23,696		$	28,102		$	48,042		$	57,586
Interest on securities
Taxable		933			344			1,591			811
Tax-exempt		244			298			540			630
Other investments		382			383			778			818
Total Interest Income		25,255			29,127			50,951			59,845
Interest Expense
Deposits		2,305			4,511			4,729			9,456
Other borrowings		1,120			1,232			2,292			2,555
Total Interest Expense		3,425			5,743			7,021			12,011
Net Interest Income		21,830			23,384			43,930			47,834
Provision for loan losses		1,056			4,156			6,187			14,858
Net Interest Income After Provision for Loan Losses		20,774			19,228			37,743			32,976
Non-interest Income
Service charges on deposit accounts		4,552			4,784			8,753			9,066
Interchange income		2,407			2,308			4,729			4,476
Net gains (losses) on assets
Mortgage loans		3,579			1,793			7,439			3,728
Securities		169			115			853			328
Other than temporary impairment loss on securities
Total impairment loss		(85	)		327			(262	)		(142	)
Loss recognized in other comprehensive loss		-			(327	)		-			-
Net impairment loss recognized in earnings		(85	)		-			(262	)		(142	)
Mortgage loan servicing		(1,088	)		(126	)		(352	)		770
Title insurance fees		489			318			997			791
(Increase) decrease in fair value of U.S. Treasury warrant		(25	)		642			(179	)		996
Other		3,044			2,622			5,648			5,154
Total Non-interest Income		13,042			12,456			27,626			25,167
Non-interest Expense
Compensation and employee benefits		13,506			13,029			25,988			25,378
Loan and collection		2,407			3,580			5,297			7,447
Occupancy, net		2,490			2,663			5,206			5,764
Data processing		2,450			2,415			4,789			4,725
Furniture, fixtures and equipment		1,307			1,502			2,601			2,920
Legal and professional		1,268			801			2,165			1,579
Communications		826			889			1,701			1,837
FDIC deposit insurance		816			652			1,673			1,887
Net losses on other real estate and repossessed assets		633			777			1,620			2,183
Credit card and bank service fees		624			1,013			1,275			2,060
Advertising		639			670			1,195			1,224
Vehicle service contract counterparty contingencies		326			1,311			797			3,657
Provision for loss reimbursement on sold loans		126			363			558			769
Costs (recoveries) related to unfunded lending commitments		(12	)		89			(59	)		184
Other		2,077			2,151			2,726			4,159
Total Non-interest Expense		29,483			31,905			57,532			65,773
Income (Loss) Before Income Tax		4,333			(221	)		7,837			(7,630	)
Income tax benefit		-			(258	)		-			(266	)
Net Income (Loss)	$	4,333		$	37		$	7,837		$	(7,364	)
Convertible preferred stock dividends and discount accretion		1,092			1,051			2,148			2,059
Net Income (Loss) Applicable to Common Stock	$	3,241		$	(1,014	)		5,689		$	(9,423	)
Net Income (Loss) Per Common Share
Basic	$	.38		$	(.12	)	$	.66		$	(1.16	)
Diluted		.11			(.12	)		.19			(1.16	)
Dividends Per Common Share
Declared	$	.00		$	.00		$	.00		$	.00
Paid		.00			.00			.00			.00

See notes to interim condensed consolidated financial statements (unaudited)

4

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
	(unaudited)						(unaudited)
	(In thousands)						(In thousands)
Net income (loss)	$	4,333		$	37		$	7,837		$	(7,364	)
Other comprehensive income (loss), before tax
Unrealized losses on available for sale securities
Unrealized gain (loss) arising during period		2,756			394			1,896			715
Change in unrealized losses for which a portion of other than temporary impairment has been recognized in earnings		204			738			333			411
Reclassification adjustments for (gains) losses included in earnings		(151	)		(64	)		(843	)		(204	)
Unrealized losses on available for sale securities, net		2,809			1,068			1,386			922
Unrealized losses on derivative instruments
Unrealized loss arising during period		(24	)		(240	)		(75	)		(263	)
Reclassification adjustment for expense recognized in earnings		120			201			305			403
Reclassfication adjustment for accretion on settled derivatives		146			147			291			369
Unrealized gains on derivative instruments		242			108			521			509
Other comprehensive income (loss), before tax		3,051			1,176			1,907			1,431
Income tax expense related to components of other comprehesive   income (loss)		-			501			-			501
Other comprehensive income		3,051			675			1,907			930
Comprehensive income (loss)	$	7,384		$	712		$	9,744		$	(6,434	)

See notes to interim condensed consolidated financial statements (unaudited)

5

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

	Six months ended June 30,
	2012			2011
	(unaudited - In thousands)
Net Income (Loss)	$	7,837		$	(7,364	)
Adjustments to Reconcile Net Income (Loss) to Net Cash from Operating Activities
Proceeds from sales of loans held for sale		246,587			187,558
Disbursements for loans held for sale		(237,733	)		(160,040	)
Provision for loan losses		6,187			14,858
Deferred loan fees		(404	)		(214	)
Depreciation, amortization of intangible assets and premiums and accretion of discounts on securities and loans		(2,351	)		(6,442	)
Net gains on sales of mortgage loans		(7,439	)		(3,728	)
Net gains on securities		(853	)		(328	)
Securities impairment recognized in earnings		262			142
Net losses on other real estate and repossessed assets		1,620			2,183
Vehicle service contract counterparty contingencies		797			3,657
Share based compensation		304			455
Decrease in accrued income and other assets		3,288			4,346
Increase in accrued expenses and other liabilities		4,262			2,632
Total Adjustments		14,527			45,079
Net Cash from Operating Activities		22,364			37,715
Cash Flow from (used in) Investing Activities
Proceeds from the sale of securities available for sale		18,999			70,322
Proceeds from the maturity or call of securities available for sale		60,728			295
Principal payments received on securities available for sale		11,220			3,872
Purchases of securities available for sale		(179,262	)		(83,906	)
Redemption of Federal Home Loan Bank stock		-			2,397
Redemption of Federal Reserve Bank stock		334			228
Net decrease in portfolio loans (loans originated, net of principal payments)		53,220			108,369
Proceeds from the collection of vehicle service contract counterparty receivables		396			671
Proceeds from the sale of other real estate and repossessed assets		8,912			10,084
Capital expenditures		(3,257	)		(1,554	)
Net Cash from (used in) Investing Activities		(28,710	)		110,778
Cash Flow from (used in) Financing Activities
Net increase (decrease) in total deposits		99,472			(187,153	)
Net increase (decrease) in other borrowings		9			(8	)
Proceeds from Federal Home Loan Bank advances		12,000			7,000
Payments of Federal Home Loan Bank advances		(27,467	)		(37,115	)
Net increase in vehicle service contract counterparty payables		485			2,858
Proceeds from issuance of common stock		497			1,335
Net Cash from (used in) Financing Activities		84,996			(213,083	)
Net Increase (Decrease) in Cash and Cash Equivalents		78,650			(64,590	)
Cash and Cash Equivalents at Beginning of Period		341,108			385,374
Cash and Cash Equivalents at End of Period	$	419,758		$	320,784
Cash paid during the period for
Interest	$	5,914		$	11,361
Income taxes		186			26
Transfers to other real estate and repossessed assets		5,994			10,462
Transfer of payment plan receivables to vehicle service contract counterparty receivables		849			8,010
Transfers to loans held for sale		54,127			-
Transfers to fixed assets held for sale		11,065			-
Transfers to deposits held for sale		420,261			-

See notes to interim condensed consolidated financial statements (unaudited)

6

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders' Equity

	Six months ended
	June 30,
	2012		2011
	(unaudited)
	(In thousands)
Balance at beginning of period	$	102,627	$	119,085
Net income (loss)		7,837		(7,364	)
Issuance of common stock		497		1,335
Share based compensation		304		455
Net change in accumulated other comprehensive loss, net of related tax effect		1,907		930
Balance at end of period	$	113,172	$	114,441

See notes to interim condensed consolidated financial statements (unaudited)

7

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.   Preparation of Financial Statements

The interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading.  The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 2011 included in our Annual Report on Form 10-K.

In our opinion, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary to present fairly our consolidated financial condition as of June 30, 2012 and December 31, 2011, and the results of operations for the three and six-month periods ended June 30, 2012 and 2011.  The results of operations for the three and six-month periods ended June 30, 2012, are not necessarily indicative of the results to be expected for the full year.  Certain reclassifications have been made in the prior period financial statements to conform to the current period presentation.  Our critical accounting policies include the assessment for other than temporary impairment (“OTTI”) on investment securities,  the determination of the allowance for loan losses, the determination of vehicle service contract counterparty contingencies, the valuation of originated mortgage loan servicing rights and the valuation of deferred tax assets.  Refer to our 2011 Annual Report on Form 10-K for a disclosure of our accounting policies.

2.  New Accounting Standards

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, “Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. This ASU amended guidance that will result in common fair value measurement and disclosure requirements between U.S. GAAP and International Financial Reporting Standards (“IFRS”). Under the amended guidance, entities are required to expand disclosure for fair value instruments categorized within Level 3 of the fair value hierarchy to include (1) the valuation processes used; and (2) a narrative description of the sensitivity of the fair value measurement to changes in unobservable inputs for recurring fair value measurements and the interrelationships between those unobservable inputs, if any. They are also required to disclose the categorization by level of the fair value hierarchy for items that are not measured at fair value in the Consolidated Statement of Financial Condition but for which the fair value is required to be disclosed (e.g. portfolio loans). This amended guidance became effective for us at January 1, 2012.  The effect of adopting this standard did not have a material impact on our consolidated operating results or financial condition, but the additional disclosures are included in notes #12 and #13.

8

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220)”. This ASU amended guidance on the presentation requirements for comprehensive income. The amended guidance requires an entity to present total comprehensive income, the components of net income and the components of other comprehensive income on the face of the financial statements, either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amended guidance did not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This amended guidance became effective for us at January 1, 2012 and was applied retrospectively.  The effect of adopting this standard did not have a material impact on our consolidated operating results or financial condition, but we have included separate Condensed Consolidated Statements of Comprehensive Income (Loss) immediately following our Condensed Consolidated Statements of Operations in our Condensed Consolidated Financial Statements.

3.  Securities

Securities available for sale consist of the following:

	Amortized		Unrealized
	Cost		Gains		Losses		Fair Value
	(In thousands)
June 30, 2012
U.S. agency	$	38,039	$	124	$	20	$	38,143
U.S. agency residential mortgage-backed		156,231		994		61		157,164
Private label residential mortgage-backed		9,887		-		2,208		7,679
Obligations of states and political subdivisions		40,383		643		62		40,964
Trust preferred		4,700		-		1,603		3,097
Total	$	249,240	$	1,761	$	3,954	$	247,047
December 31, 2011
U.S. agency	$	24,980	$	58	$	21	$	25,017
U.S. agency residential mortgage-backed		93,415		1,007		216		94,206
Private label residential mortgage-backed		11,066		-		2,798		8,268
Obligations of states and political subdivisions		26,865		510		58		27,317
Trust preferred		4,697		-		2,061		2,636
Total	$	161,023	$	1,575	$	5,154	$	157,444

9

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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

	Less Than Twelve Months				Twelve Months or More				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(In thousands)
June 30, 2012
U.S. agency	$	7,507	$	20	$	-	$	-	$	7,507	$	20
U.S. agency residential mortgage-backed		30,497		44		10,097		17		40,594		61
Private label residential mortgage-backed		-		-		7,677		2,208		7,677		2,208
Obligations of states and political subdivisions		8,202		62		-		-		8,202		62
Trust preferred		-		-		3,097		1,603		3,097		1,603
Total	$	46,206	$	126	$	20,871	$	3,828	$	67,077	$	3,954
December 31, 2011
U.S. agency	$	9,974	$	21	$	-	$	-	$	9,974	$	21
U.S. agency residential mortgage-backed		42,500		216		-		-		42,500		216
Private label residential mortgage-backed		163		90		8,102		2,708		8,265		2,798
Obligations of states and political subdivisions		-		-		1,729		58		1,729		58
Trust preferred		591		1,218		2,045		843		2,636		2,061
Total	$	53,228	$	1,545	$	11,876	$	3,609	$	65,104	$	5,154

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

U.S. Agency and U.S. Agency residential mortgage-backed securities — at June 30, 2012 we had two U.S. Agency and eight U.S. Agency residential mortgage-backed securities whose fair market value is less than amortized cost. The unrealized losses on U.S. Agency residential mortgage-backed securities are largely attributed to widening discount margins. As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Private label residential mortgage backed securities — at June 30, 2012 we had eight securities whose fair value is less than amortized cost.  Two of the issues are rated by a major rating agency as investment grade while four are below investment grade and two are split rated.  Six of these bonds have impairment in excess of 10% and all of these holdings have been impaired for more than 12 months.

10

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The unrealized losses are largely attributable to credit spread widening on these securities since their acquisition. The underlying loans within these securities include Jumbo (75%) and Alt A (25%) at June 30, 2012.

	June 30, 2012					December 31, 2011
			Net					Net
	Fair		Unrealized			Fair		Unrealized
	Value		Gain (Loss)			Value		Gain (Loss)
	(In thousands)
Private label residential mortgage-backed
Jumbo	$	5,738	$	(1,602	)	$	6,454	$	(1,937	)
Alt-A		1,941		(606	)		1,814		(861	)

Seven of the private label residential mortgage-backed transactions have geographic concentrations in California, ranging from 22% to 58% of the collateral pool. Typical exposure levels to California (median exposure is 47%) are consistent with overall market collateral characteristics. Three transactions have modest exposure to Florida, ranging from 5% to 7% and one transaction has modest exposure to Nevada (5%). The underlying collateral pools do not have meaningful exposure to Arizona, Michigan or Ohio. None of the issues involve subprime mortgage collateral. Thus the impact of this market segment is only indirect, in that it has impacted liquidity and pricing in general for private label residential mortgage-backed securities. The majority of transactions are backed by fully amortizing loans. However, six transactions have concentrations in loans that pay interest only for a specified period of time and will fully amortize thereafter ranging from 31% to 94% (at origination date). The structure of the residential mortgage securities portfolio provides protection to credit losses. The portfolio primarily consists of senior securities as demonstrated by the following: super senior (22%), senior (43%), senior support (25%) and mezzanine (10%). The mezzanine class is from a seasoned transaction (94 months) with a significant level of subordination (8.60%). Except for the additional discussion below relating to other than temporary impairment, each private label residential mortgage-backed security has sufficient credit enhancement via subordination to reasonably assure full realization of book value. This assertion is based on a transaction level review of the portfolio.

Individual security reviews include: external credit ratings, forecasted weighted average life, recent prepayment speeds, underwriting characteristics of the underlying collateral, the structure of the securitization and the credit performance of the underlying collateral. The review of underwriting characteristics considers: average loan size, type of loan (fixed or ARM), vintage, rate, FICO, loan-to-value, scheduled amortization, occupancy, purpose, geographic mix and loan documentation. The review of the securitization structure focuses on the priority of cash flows to the bond, the priority of the bond relative to the realization of credit losses and the level of subordination available to absorb credit losses. The review of credit performance includes: current period as well as cumulative realized losses; the level of severe payment problems, which includes other real estate (ORE), foreclosures, bankruptcy and 90 day delinquencies; and the level of less severe payment problems, which consists of 30 and 60 day delinquencies.

All of these securities are receiving some principal and interest payments. Most of these transactions are passthrough structures, receiving pro rata principal and interest payments from a dedicated collateral pool for loans that are performing. The nonreceipt of interest cash flows is not expected and thus not presently considered in our discounted cash flow methodology discussed below.

11

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

In addition to the review discussed above, all private label residential mortgage-backed securities are reviewed for OTTI utilizing a cash flow projection. The cash flow analysis forecasts cash flow from the underlying loans in each transaction and then applies these cash flows to the bonds in the securitization. The cash flows from the underlying loans considers contractual payment terms (scheduled amortization), prepayments, defaults and severity of loss given default. The analysis uses dynamic assumptions for prepayments, defaults and loss severity. Near term prepayment assumptions are based on recently observed prepayment rates. More weight is given to longer term historic performance (12 months). In some cases, recently observed prepayment rates are lower than historic norms due to the absence of new jumbo loan issuances. This loan market is heavily dependent upon securitization for funding, and new securitization transactions have been minimal. Our model projections anticipate that prepayment rates gradually revert to historical levels. For seasoned ARM transactions, normalized prepayment rates range from 10% to 18% CPR which is at the lower end of historically observed speeds for seasoned ARM collateral. For fixed rate collateral (one transaction), the prepayment speeds are projected to rise modestly.

Default assumptions are largely based on the volume of existing real-estate owned, pending foreclosures and severe delinquencies. Other considerations include the quality of loan underwriting, recent default experience, realized loss performance and the volume of less severe delinquencies. Default levels generally are projected to remain elevated or increase for a period of time sufficient to address the level of distressed loans in the transaction. Our projections expect defaults to then decline, generally beginning in year three. Current loss severity assumptions are based on recent observations when meaningful data is available. Loss severity is expected to remain elevated for the next three years as recent housing data remains weak. Severity is expected to decline beginning in year four as the back log of foreclosure and distressed sales clear the market. Except for three securities discussed in further detail below (all three are currently below investment grade), our cash flow analysis forecasts complete recovery of our cost basis for each reviewed security.

At June 30, 2012 three below investment grade private label residential mortgage-backed securities with fair values of $3.3 million, $1.7 million and $0.1 million, respectively and unrealized losses of $1.0 million, $0.3 million and $0.03 million, respectively (amortized cost of $4.3 million, $2.0 million and $0.1 million, respectively) had losses that were considered other than temporary.

The underlying loans in the first transaction are 30 year fixed rate jumbos with an average FICO of 744 and an average loan-to-value ratio of 72%. The loans backing this transaction were originated in 2007 and this is our only security backed by 2007 vintage loans. We believe that this vintage is a key differentiating factor between this security and the others in our portfolio that do not have unrealized losses that are considered OTTI. The bond is a senior security that is receiving principal and interest payments similar to principal reductions in the underlying collateral. The cash flow analysis described above calculated $0.645 million of cumulative credit related OTTI as of June 30, 2012 on this security.   $0.085 million and zero of this credit related OTTI was recognized in our Condensed Consolidated Statements of Operations during the three months ended June 30, 2012 and 2011, respectively and $0.170 million and $0.052 million of this credit related OTTI was recognized during the six months ended June 30, 2012 and 2011, respectively, with the balance being recognized in previous periods.  The remaining non-credit related unrealized loss was attributed to other factors and is reflected in other comprehensive income (loss) during those same periods.

12

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The underlying loans in the second transaction are 30 year hybrid ARM Alt-A with an average FICO of 717 and an average loan-to-value ratio of 78%. The loans backing this transaction were originated in 2005.  The bond is a super senior security that is receiving principal and interest payments similar to principal reductions in the underlying collateral.  The cash flow analysis described above calculated $0.457 million of cumulative credit related OTTI as of June 30, 2012 on this security.   There was no credit related OTTI recognized in our Condensed Consolidated Statements of Operations during the three months ended June 30, 2012 and 2011 while $0.032 million and zero of this credit related OTTI was recognized during the six months ended June 30, 2012 and 2011, respectively, with the balance being recognized in previous periods.  The remaining non-credit related unrealized loss was attributed to other factors and is reflected in other comprehensive income (loss) during those same periods.

The underlying loans in the third transaction are 30 year hybrid ARM jumbos with an average FICO of 738 and an average loan-to-value ratio of 57%. The loans backing this transaction were originated in 2005. The bond is a senior support security that is receiving principal and interest payments similar to principal reductions in the underlying collateral.  The cash flow analysis described above calculated $0.380 million of cumulative credit related OTTI as of June 30, 2012 on this security.   There was no credit related OTTI recognized in our Condensed Consolidated Statements of Operations during the three months ended June 30, 2012 and 2011, while $0.060 million and $0.090 million of this credit related OTTI was recognized during the six months ended June 30, 2012 and 2011, respectively, with the balance being recognized in previous periods.  The remaining non-credit related unrealized loss was attributed to other factors and is reflected in other comprehensive income (loss) during those same periods.

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

Obligations of states and political subdivisions — at June 30, 2012 we had nine municipal securities whose fair value is less than amortized cost. The unrealized losses are largely attributed to widening of market spreads.  Seven of the impaired securities are rated by a major rating agency as investment grade.  The non rated securities have a periodic internal credit review according to established procedures. As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Trust preferred securities — at June 30, 2012 we had four securities whose fair value is less than amortized cost. All of our trust preferred securities are single issue securities issued by a trust subsidiary of a bank holding company. The pricing of trust preferred securities over the past several years has suffered from significant credit spread widening fueled by uncertainty regarding potential losses of financial companies, the absence of a liquid functioning secondary market and potential supply concerns from financial companies issuing new debt to recapitalize themselves.

13

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

One of the four securities is rated by two major rating agencies as investment grade, while one is rated one grade below investment grade by two major rating agencies and the other two are non-rated. The non-rated issues are relatively small banks and were never rated. The issuers of these non-rated trust preferred securities, which had a total amortized cost of $2.8 million and total fair value of $1.5 million as of June 30, 2012, continue to have satisfactory credit metrics and one continues to make interest payments.  One non-rated issue began deferring dividend payments in the third quarter of 2011 apparently due to an increase in non-performing assets.  Nevertheless, this issuer continues to have satisfactory capital measures and interim profitability.

The following table breaks out our trust preferred securities in further detail as of June 30, 2012 and December 31, 2011:

	June 30, 2012					December 31, 2011
			Net					Net
	Fair		Unrealized			Fair		Unrealized
	Value		Gain (Loss)			Value		Gain (Loss)
	(In thousands)
Trust preferred securities
Rated issues	$	1,564	$	(329	)	$	1,405	$	(484	)
Unrated issues - no OTTI		1,533		(1,274	)		1,231		(1,577	)

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

We recorded credit related OTTI charges in earnings on securities available for sale of $0.085 million and zero during the three month periods ended June 30, 2012 and 2011, respectively and $0.262 million and $0.142 million during the six month periods ended June 30, 2012 and 2011, respectively (see discussion above).

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

	Three months ended				Six months ended
	June 30,				June 30,
	2012		2011		2012		2011
	(In thousands)
Balance at beginning of period	$	1,647	$	852	$	1,470	$	710
Additions to credit losses on securities for which no previous OTTI was recognized		-		-		-		-
Increases to credit losses on securities for which OTTI was previously recognized		85		-		262		142
Balance at end of period	$	1,732	$	852	$	1,732	$	852

14

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The amortized cost and fair value of securities available for sale at June 30, 2012, by contractual maturity, follow. The actual maturity may differ from the contractual maturity because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Fair
	Cost		Value
	(In thousands)
Maturing within one year	$	1,323	$	1,341
Maturing after one year but within five years		6,491		6,711
Maturing after five years but within ten years		15,318		15,531
Maturing after ten years		59,990		58,621
		83,122		82,204
U.S. agency residential mortgage-backed		156,231		157,164
Private label residential mortgage-backed		9,887		7,679
Total	$	249,240	$	247,047

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

			Realized
	Proceeds		Gains		Losses(1)
	(In thousands)
2012	$	18,999	$	843	$	-
2011		70,322		279		75

(1) Losses in 2012 and 2011 exclude $0.262 million and $0.142 million, respectively of credit related OTTI recognized in earnings.

During 2012 and 2011 our trading securities consisted of various preferred stocks.  During the first six months of 2012 and 2011 we recognized gains on trading securities of $0.010 million and $0.124 million, respectively, that are included in net gains (losses) on securities in the Condensed Consolidated Statements of Operations.  Both of these amounts, relate to gains  recognized on trading securities still held at each respective period end.

15

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

4.  Loans

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

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

										Payment
										Plan
	Commercial			Mortgage			Installment			Receivables			Unallocated			Total
	(In thousands)
2012
Balance at beginning of period	$	16,441		$	23,271		$	5,534		$	206		$	10,554		$	56,006
Additions (deductions)
Provision for loan losses		1,194			570			229			(7	)		(930	)		1,056
Recoveries credited to allowance		390			572			389			-			-			1,351
Loans charged against the allowance		(2,379	)		(2,950	)		(953	)		(4	)		-			(6,286	)
Reclassification to loans held for sale		(170	)		(192	)		(218	)		-			(201	)		(781	)
Balance at end of period	$	15,476		$	21,271		$	4,981		$	195		$	9,423		$	51,346
2011
Balance at beginning of period	$	21,279		$	23,771		$	6,719		$	333		$	13,659		$	65,761
Additions (deductions)
Provision for loan losses		1,333			2,964			446			37			(624	)		4,156
Recoveries credited to allowance		512			385			348			2			-			1,247
Loans charged against the allowance		(5,427	)		(3,968	)		(1,224	)		(26	)		-			(10,645	)
Balance at end of period	$	17,697		$	23,152		$	6,289		$	346		$	13,035		$	60,519

16

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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

										Payment
										Plan
	Commercial			Mortgage			Installment			Receivables			Unallocated			Total
	(In thousands)
2012
Balance at beginning of period	$	18,183		$	22,885		$	6,146		$	197		$	11,473		$	58,884
Additions (deductions)
Provision for loan losses		2,690			4,805			518			23			(1,849	)		6,187
Recoveries credited to allowance		1,396			1,120			715			-			-			3,231
Loans charged against the allowance		(6,623	)		(7,347	)		(2,180	)		(25	)		-			(16,175	)
Reclassification to loans held for sale		(170	)		(192	)		(218	)		-			(201	)		(781	)
Balance at end of period	$	15,476		$	21,271		$	4,981		$	195		$	9,423		$	51,346
2011
Balance at beginning of period	$	23,836		$	22,642		$	6,769		$	389		$	14,279		$	67,915
Additions (deductions)
Provision for loan losses		6,043			8,333			1,681			45			(1,244	)		14,858
Recoveries credited to allowance		731			740			707			4			-			2,182
Loans charged against the allowance		(12,913	)		(8,563	)		(2,868	)		(92	)		-			(24,436	)
Balance at end of period	$	17,697		$	23,152		$	6,289		$	346		$	13,035		$	60,519

17

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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

							Payment
							Plan
	Commercial		Mortgage		Installment		Receivables		Unallocated		Total
	(In thousands)
June 30, 2012
Allowance for loan losses:
Individually evaluated for impairment	$	9,855	$	10,201	$	1,674	$	-	$	-	$	21,730
Collectively evaluated for impairment		5,621		11,070		3,307		195		9,423		29,616
Total ending allowance balance	$	15,476	$	21,271	$	4,981	$	195	$	9,423	$	51,346
Loans
Individually evaluated for impairment	$	66,703	$	91,494	$	7,717	$	-			$	165,914
Collectively evaluated for impairment		547,014		458,274		192,249		98,946				1,296,483
Total loans recorded investment		613,717		549,768		199,966		98,946				1,462,397
Accrued interest included in recorded investment		1,673		2,558		776		-				5,007
Total loans	$	612,044	$	547,210	$	199,190	$	98,946			$	1,457,390
December 31, 2011
Allowance for loan losses:
Individually evaluated for impairment	$	10,252	$	10,285	$	1,762	$	-	$	-	$	22,299
Collectively evaluated for impairment		7,931		12,600		4,384		197		11,473		36,585
Total ending allowance balance	$	18,183	$	22,885	$	6,146	$	197	$	11,473	$	58,884
Loans
Individually evaluated for impairment	$	58,674	$	93,702	$	7,554	$	-			$	159,930
Collectively evaluated for impairment		594,665		499,919		212,907		115,018				1,422,509
Total loans recorded investment		653,339		593,621		220,461		115,018				1,582,439
Accrued interest included in recorded investment		2,184		2,745		902		-				5,831
Total loans	$	651,155	$	590,876	$	219,559	$	115,018			$	1,576,608

18

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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

	90+ and				Total Non-
	Still		Non-		Performing
	Accruing		Accrual		Loans
	(In thousands)
June 30, 2012
Commercial
Income producing - real estate	$	280	$	8,277	$	8,557
Land, land development and construction - real estate		125		4,804		4,929
Commercial and industrial		338		8,932		9,270
Mortgage
1-4 family		-		11,593		11,593
Resort lending		-		6,475		6,475
Home equity line of credit - 1st lien		-		592		592
Home equity line of credit - 2nd lien		-		690		690
Installment
Home equity installment - 1st lien		-		1,079		1,079
Home equity installment - 2nd lien		-		710		710
Loans not secured by real estate		-		883		883
Other		-		1		1
Payment plan receivables
Full refund		-		126		126
Partial refund		-		137		137
Other		-		15		15
Total recorded investment	$	743	$	44,314	$	45,057
Accrued interest included in recorded investment	$	4	$	-	$	4
December 31, 2011
Commercial
Income producing - real estate	$	490	$	13,788	$	14,278
Land, land development and construction - real estate		43		6,990		7,033
Commercial and industrial		-		7,984		7,984
Mortgage
1-4 family		54		15,929		15,983
Resort lending		-		8,819		8,819
Home equity line of credit - 1st lien		-		523		523
Home equity line of credit - 2nd lien		-		889		889
Installment
Home equity installment - 1st lien		-		1,542		1,542
Home equity installment - 2nd lien		-		1,023		1,023
Loans not secured by real estate		-		880		880
Other		-		4		4
Payment plan receivables
Full refund		-		491		491
Partial refund		-		424		424
Other		-		23		23
Total recorded investment	$	587	$	59,309	$	59,896
Accrued interest included in recorded investment	$	13	$	-	$	13

19

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

An aging analysis of loans by class follows:

	Loans Past Due								Loans not		Total
	30-59 days		60-89 days		90+ days		Total		Past Due		Loans
	(In thousands)
June 30, 2012
Commercial
Income producing - real estate	$	2,280	$	1,887	$	3,823	$	7,990	$	210,777	$	218,767
Land, land development and construction - real estate		191		-		1,555		1,746		42,605		44,351
Commercial and industrial		2,820		999		4,498		8,317		342,282		350,599
Mortgage
1-4 family		2,501		1,003		11,593		15,097		285,035		300,132
Resort lending		169		383		6,475		7,027		174,069		181,096
Home equity line of credit - 1st lien		334		101		592		1,027		19,395		20,422
Home equity line of credit - 2nd lien		372		55		690		1,117		47,001		48,118
Installment
Home equity installment - 1st lien		498		162		1,079		1,739		33,405		35,144
Home equity installment - 2nd lien		542		145		710		1,397		42,147		43,544
Loans not secured by real estate		872		297		883		2,052		116,454		118,506
Other		13		3		1		17		2,755		2,772
Payment plan receivables
Full refund		2,075		659		126		2,860		87,987		90,847
Partial refund		208		94		137		439		7,220		7,659
Other		10		8		15		33		407		440
Total recorded investment	$	12,885	$	5,796	$	32,177	$	50,858	$	1,411,539	$	1,462,397
Accrued interest included in recorded investment	$	111	$	78	$	4	$	193	$	4,814	$	5,007
December 31, 2011
Commercial
Income producing - real estate	$	1,701	$	937	$	6,408	$	9,046	$	264,620	$	273,666
Land, land development and construction - real estate		487		66		2,720		3,273		51,453		54,726
Commercial and industrial		1,861		1,132		3,516		6,509		318,438		324,947
Mortgage
1-4 family		3,507		1,418		15,983		20,908		294,771		315,679
Resort lending		2,129		932		8,819		11,880		184,943		196,823
Home equity line of credit - 1st lien		96		196		523		815		24,705		25,520
Home equity line of credit - 2nd lien		506		159		889		1,554		54,045		55,599
Installment
Home equity installment - 1st lien		757		264		1,542		2,563		41,239		43,802
Home equity installment - 2nd lien		676		365		1,023		2,064		51,224		53,288
Loans not secured by real estate		1,173		463		880		2,516		117,661		120,177
Other		36		10		4		50		3,144		3,194
Payment plan receivables
Full refund		2,943		951		491		4,385		99,284		103,669
Partial refund		380		200		424		1,004		9,918		10,922
Other		23		24		23		70		357		427
Total recorded investment	$	16,275	$	7,117	$	43,245	$	66,637	$	1,515,802	$	1,582,439
Accrued interest included in recorded investment	$	160	$	105	$	13	$	278	$	5,553	$	5,831

20

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Impaired loans are as follows :

	June 30,		December 31,
	2012		2011
Impaired loans with no allocated allowance
TDR	$	26,170	$	26,945
Non - TDR		235		423
Impaired loans with an allocated allowance
TDR - allowance based on collateral		17,137		20,142
TDR - allowance based on present value cash flow		111,396		98,130
Non - TDR - allowance based on collateral		10,479		13,773
Non - TDR - allowance based on present value cash flow		-		-
Total impaired loans	$	165,417	$	159,413
Amount of allowance for loan losses allocated
TDR - allowance based on collateral	$	4,860	$	6,004
TDR - allowance based on present value cash flow		13,384		12,048
Non - TDR - allowance based on collateral		3,486		4,247
Non - TDR - allowance based on present value cash flow		-		-
Total amount of allowance for loan losses allocated	$	21,730	$	22,299

21

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Impaired loans by class  are as follows (1):

	June 30, 2012						December 31, 2011
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:	(In thousands)
Commercial
Income producing - real estate	$	1,848	$	2,692	$	-	$	4,626	$	6,386	$	-
Land, land development & construction-real estate		2,794		2,787		-		219		243		-
Commercial and industrial		3,332		3,657		-		3,593		3,677		-
Mortgage
1-4 family		7,651		10,350		-		6,975		9,242		-
Resort lending		5,913		6,375		-		7,156		7,680		-
Home equity line of credit - 1st lien		22		40		-		-		-		-
Home equity line of credit - 2nd lien		45		118		-		134		211		-
Installment
Home equity installment - 1st lien		2,100		2,204		-		2,100		2,196		-
Home equity installment - 2nd lien		2,239		2,238		-		1,987		1,987		-
Loans not secured by real estate		529		600		-		637		688		-
Other		22		22		-		24		24		-
		26,495		31,083		-		27,451		32,334		-
With an allowance recorded:
Commercial
Income producing - real estate		26,935		30,985		3,094		22,781		29,400		3,642
Land, land development & construction-real estate		10,203		12,703		2,945		12,362		14,055		3,633
Commercial and industrial		21,591		25,376		3,816		15,093		18,357		2,977
Mortgage
1-4 family		59,255		60,826		6,980		61,214		63,464		7,716
Resort lending		18,561		18,926		3,190		18,159		19,351		2,534
Home equity line of credit - 1st lien		47		47		31		64		73		35
Home equity line of credit - 2nd lien		-		-		-		-		-		-
Installment
Home equity installment - 1st lien		1,397		1,430		673		1,232		1,293		660
Home equity installment - 2nd lien		1,151		1,220		921		1,421		1,458		1,062
Loans not secured by real estate		279		287		80		153		156		40
Other		-		-		-		-		-		-
		139,419		151,800		21,730		132,479		147,607		22,299
Total
Commercial
Income producing - real estate		28,783		33,677		3,094		27,407		35,786		3,642
Land, land development & construction-real estate		12,997		15,490		2,945		12,581		14,298		3,633
Commercial and industrial		24,923		29,033		3,816		18,686		22,034		2,977
Mortgage
1-4 family		66,906		71,176		6,980		68,189		72,706		7,716
Resort lending		24,474		25,301		3,190		25,315		27,031		2,534
Home equity line of credit - 1st lien		69		87		31		64		73		35
Home equity line of credit - 2nd lien		45		118		-		134		211		-
Installment
Home equity installment - 1st lien		3,497		3,634		673		3,332		3,489		660
Home equity installment - 2nd lien		3,390		3,458		921		3,408		3,445		1,062
Loans not secured by real estate		808		887		80		790		844		40
Other		22		22		-		24		24		-
Total	$	165,914	$	182,883	$	21,730	$	159,930	$	179,941	$	22,299
Accrued interest included in recorded investment	$	497					$	517

(1) There were no impaired payment plan receivables at June 30, 2012 or December 31, 2011.

22

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Average recorded investment in and interest income earned on impaired loans by class for the three month periods ending June 30, follows:

	2012				2011
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:	(In thousands)
Commercial
Income producing - real estate	$	2,211	$	13	$	1,922	$	12
Land, land development & construction-real estate		2,877		36		514		14
Commercial and industrial		3,896		44		1,800		17
Mortgage
1-4 family		7,615		75		9,258		102
Resort lending		6,134		60		8,543		125
Home equity line of credit - 1st lien		11		-		-		-
Home equity line of credit - 2nd lien		46		1		116		1
Installment
Home equity installment - 1st lien		1,827		32		1,919		28
Home equity installment - 2nd lien		1,987		30		1,999		28
Loans not secured by real estate		473		7		705		10
Other		23		-		14		1
		27,100		298		26,790		338
With an allowance recorded:
Commercial
Income producing - real estate		24,300		120		16,824		33
Land, land development & construction-real estate		10,495		52		8,133		37
Commercial and industrial		18,954		156		9,253		92
Mortgage
1-4 family		59,285		650		63,492		668
Resort lending		18,499		192		22,469		152
Home equity line of credit - 1st lien		59		-		24		1
Home equity line of credit - 2nd lien		47		-		10		-
Installment
Home equity installment - 1st lien		1,709		9		1,521		14
Home equity installment - 2nd lien		1,469		6		1,561		14
Loans not secured by real estate		241		3		150		-
Other		-		-		-		-
		135,058		1,188		123,437		1,011
Total
Commercial
Income producing - real estate		26,511		133		18,746		45
Land, land development & construction-real estate		13,372		88		8,647		51
Commercial and industrial		22,850		200		11,053		109
Mortgage
1-4 family		66,900		725		72,750		770
Resort lending		24,633		252		31,012		277
Home equity line of credit - 1st lien		70		-		24		1
Home equity line of credit - 2nd lien		93		1		126		1
Installment
Home equity installment - 1st lien		3,536		41		3,440		42
Home equity installment - 2nd lien		3,456		36		3,560		42
Loans not secured by real estate		714		10		855		10
Other		23		-		14		1
Total	$	162,158	$	1,486	$	150,227	$	1,349

(1)  There were no impaired payment plan receivables during the three month periods ending June 30, 2012 and 2011.

23

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Average recorded investment in and interest income earned on impaired loans by class for the six month periods ending June 30, follows:

	2012				2011
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:	(In thousands)
Commercial
Income producing - real estate	$	3,016	$	30	$	2,796	$	30
Land, land development & construction-real estate		1,991		36		876		27
Commercial and industrial		3,795		46		3,143		17
Mortgage
1-4 family		7,401		149		9,095		214
Resort lending		6,474		126		7,584		223
Home equity line of credit - 1st lien		7		-		-		-
Home equity line of credit - 2nd lien		75		2		108		2
Installment
Home equity installment - 1st lien		1,918		52		1,870		48
Home equity installment - 2nd lien		1,987		51		1,963		49
Loans not secured by real estate		528		13		540		16
Other		23		1		9		1
		27,215		506		27,984		627
With an allowance recorded:
Commercial
Income producing - real estate		23,793		267		16,618		122
Land, land development & construction-real estate		11,117		105		9,667		69
Commercial and industrial		17,667		270		10,335		141
Mortgage
1-4 family		59,928		1,300		63,714		1,351
Resort lending		18,386		370		24,417		396
Home equity line of credit - 1st lien		60		1		16		1
Home equity line of credit - 2nd lien		31		-		15		-
Installment
Home equity installment - 1st lien		1,550		30		1,467		28
Home equity installment - 2nd lien		1,453		25		1,511		30
Loans not secured by real estate		211		5		185		1
Other		-		-		-		-
		134,196		2,373		127,945		2,139
Total
Commercial
Income producing - real estate		26,809		297		19,414		152
Land, land development & construction-real estate		13,108		141		10,543		96
Commercial and industrial		21,462		316		13,478		158
Mortgage
1-4 family		67,329		1,449		72,809		1,565
Resort lending		24,860		496		32,001		619
Home equity line of credit - 1st lien		67		1		16		1
Home equity line of credit - 2nd lien		106		2		123		2
Installment
Home equity installment - 1st lien		3,468		82		3,337		76
Home equity installment - 2nd lien		3,440		76		3,474		79
Loans not secured by real estate		739		18		725		17
Other		23		1		9		1
Total	$	161,411	$	2,879	$	155,929	$	2,766

(1) There were no impaired payment plan receivables during the six month periods ending June 30, 2012 and 2011.

24

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Our average investment in impaired loans was approximately $162.2 million and $150.2 million for the three-month periods ended June 30, 2012 and 2011, respectively and $161.4 million and $155.9 million for the six-month periods ended June 30, 2012 and 2011, respectively.  Cash receipts on impaired loans on non-accrual status are generally applied to the principal balance.  Interest income recognized on impaired loans during the three months ending June 30, 2012 and 2011 was approximately $1.5 million and $1.3 million, respectively and was approximately $2.9 million and $2.8 million during the six months ending June 30, 2012 and 2011, respectively .

Troubled debt restructurings follow:

	June 30, 2012
	Commercial		Retail			Total
	(In thousands)
Performing TDR's	$	44,573	$	87,294		$	131,867
Non-performing TDR's(1)		11,298		11,538	(2)		22,836
Total	$	55,871	$	98,832		$	154,703
	December 31, 2011
	Commercial		Retail			Total
	(In thousands)
Performing TDR's	$	29,799	$	86,770		$	116,569
Non-performing TDR's(1)		14,567		14,081	(2)		28,648
Total	$	44,366	$	100,851		$	145,217

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

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

The Company has allocated $18.2 million and $18.1 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2012 and December 31, 2011, respectively.

During the three and six months ending June 30, 2012, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans generally included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

Modifications involving a reduction of the stated interest rate of the loan have generally been for periods ranging from 9 months to 60 months but have extended to as much as 480 months in certain circumstances. Modifications involving an extension of the maturity date have generally been for periods ranging from 1 month to 60 months but have extended to as much as 472 months in certain circumstances.

25

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Loans that have been classified as troubled debt restructurings during the three-month period endedJune 30, 2012 follows:

			Pre-modification		Post-modification
	Number of		Recorded		Recorded
	Contracts		Balance		Balance
	(Dollars in thousands)
Commercial
Income producing - real estate		12	$	8,045	$	7,974
Land, land development & construction-real estate		1		49		77
Commercial and industrial		19		4,286		4,001
Mortgage
1-4 family		28		3,504		3,372
Resort lending		11		3,031		2,917
Home equity line of credit - 1st lien		-		-		-
Home equity line of credit - 2nd lien		-		-		-
Installment
Home equity installment - 1st lien		6		118		115
Home equity installment - 2nd lien		6		317		313
Loans not secured by real estate		9		252		233
Other		-		-		-
Total		92	$	19,602	$	19,002

Loans that have been classified as troubled debt restructurings during the six-month period endedJune 30, 2012 follows:

			Pre-modification		Post-modification
	Number of		Recorded		Recorded
	Contracts		Balance		Balance
	(Dollars in thousands)
Commercial
Income producing - real estate		14	$	8,268	$	8,191
Land, land development & construction-real estate		3		2,887		2,913
Commercial and industrial		33		8,196		7,895
Mortgage
1-4 family		43		4,802		4,639
Resort lending		18		5,206		5,072
Home equity line of credit - 1st lien		1		15		6
Home equity line of credit - 2nd lien		-		-		-
Installment
Home equity installment - 1st lien		10		426		426
Home equity installment - 2nd lien		13		511		507
Loans not secured by real estate		10		277		258
Other		-		-		-
Total		145	$	30,588	$	29,907

The troubled debt restructurings described above increased the allowance for loan losses by $0.4 million and resulted in $0.3 million charge offs during the three months ending June 30, 2012 and increased the allowance by $0.6 million and resulted in $0.3 million charge offs during the six months ending June 30, 2012.

26

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Loans that have been classified as troubled debt restructurings during the past twelve months and thathave subsequently defaulted during the three-month period ended June 30, 2012 follows:

	Number of		Recorded
	Contracts		Balance
	(Dollars in thousands)
Commercial
Income producing - real estate		-	$	-
Land, land development & construction-real estate		-		-
Commercial and industrial		1		41
Mortgage
1-4 family		2		148
Resort lending		-		-
Home equity line of credit - 1st lien		-		-
Home equity line of credit - 2nd lien		-		-
Installment
Home equity installment - 1st lien		-		-
Home equity installment - 2nd lien		1		20
Loans not secured by real estate		-		-
Other		-		-
		4	$	209

Loans that have been classified as troubled debt restructurings during the past twelve months and thathave subsequently defaulted during the six-month period ended June 30, 2012 follows:

	Number of		Recorded
	Contracts		Balance
	(Dollars in thousands)
Commercial
Income producing - real estate		2	$	434
Land, land development & construction-real estate		1		136
Commercial and industrial		8		914
Mortgage
1-4 family		2		148
Resort lending		1		117
Home equity line of credit - 1st lien		-		-
Home equity line of credit - 2nd lien		-		-
Installment
Home equity installment - 1st lien		1		26
Home equity installment - 2nd lien		1		20
Loans not secured by real estate		-		-
Other		-		-
		16	$	1,795

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

The troubled debt restructurings that subsequently defaulted described above decreased the allowance for loan losses by $0.1 million as a result of charge offs of $0.2 million during the three months ending June 30, 2012 and decreased the allowance for loan losses by $0.3 million as a result of charge offs of $0.6 million during the six months ending June 30, 2012.

27

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The terms of certain other loans were modified during the three months ending June 30, 2012 that did not meet the definition of a troubled debt restructuring.  The modification of these loans could have included modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.

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

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

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

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

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

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

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

Rating 12: These loans are generally referred to as our “loss” commercial credits. This rating includes loans to borrowers that are deemed incapable of repayment and are charged-off.

28

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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

	Commercial
					Substandard		Non-
	Non-watch		Watch		Accrual		Accrual
	1-6		7-8		9		10-11		Total
					(In thousands)
June 30, 2012
Income producing - real estate	$	173,267	$	34,030	$	3,193	$	8,277	$	218,767
Land, land development and construction - real estate		28,353		8,409		2,785		4,804		44,351
Commercial and industrial		294,234		31,843		15,590		8,932		350,599
Total	$	495,854	$	74,282	$	21,568	$	22,013	$	613,717
Accrued interest included in total	$	1,386	$	212	$	75	$	-	$	1,673
December 31, 2011
Income producing - real estate	$	201,655	$	52,438	$	5,785	$	13,788	$	273,666
Land, land development and construction - real estate		33,515		9,421		4,800		6,990		54,726
Commercial and industrial		275,245		27,783		13,935		7,984		324,947
Total	$	510,415	$	89,642	$	24,520	$	28,762	$	653,339
Accrued interest included in total	$	1,677	$	381	$	126	$	-	$	2,184

29

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

For each of our mortgage and consumer segment classes we generally monitor credit quality based on the credit scores of the borrowers. These credit scores are generally updated at least annually.

The following table summarizes credit scores by loan class for our mortgage and installment loan segments:

	Mortgage (1)
					Home		Home
			Resort		Equity		Equity
	1-4 Family		Lending		1st Lien		2nd Lien		Total
	(In thousands)
June 30, 2012
800 and above	$	24,454	$	16,742	$	2,800	$	5,408	$	49,404
750-799		59,134		71,244		5,707		14,147		150,232
700-749		52,303		49,423		3,577		10,143		115,446
650-699		51,716		20,267		2,387		6,861		81,231
600-649		38,761		10,220		2,363		4,834		56,178
550-599		27,954		9,041		1,550		3,270		41,815
500-549		26,443		3,024		1,459		2,579		33,505
Under 500		10,678		557		508		740		12,483
Unknown		8,689		578		71		136		9,474
Total	$	300,132	$	181,096	$	20,422	$	48,118	$	549,768
Accrued interest included in total	$	1,368	$	832	$	105	$	253	$	2,558
December 31, 2011
800 and above	$	26,509	$	17,345	$	4,062	$	6,317	$	54,233
750-799		63,746		76,381		8,058		16,892		165,077
700-749		55,047		53,210		4,280		12,131		124,668
650-699		54,579		21,579		2,854		7,909		86,921
600-649		40,977		12,750		2,485		5,066		61,278
550-599		29,732		10,698		1,547		3,466		45,443
500-549		28,573		3,716		1,615		2,758		36,662
Under 500		12,434		565		539		886		14,424
Unknown		4,082		579		80		174		4,915
Total	$	315,679	$	196,823	$	25,520	$	55,599	$	593,621
Accrued interest included in total	$	1,404	$	928	$	123	$	290	$	2,745

30

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

	Installment(1)
	Home		Home		Loans not
	Equity		Equity		Secured by
	1st Lien		2nd Lien		Real Estate		Other		Total
	(In thousands)
June 30, 2012
800 and above	$	4,188	$	3,811	$	17,761	$	53	$	25,813
750-799		8,736		12,808		43,719		512		65,775
700-749		5,342		8,690		23,724		746		38,502
650-699		5,413		6,869		13,903		589		26,774
600-649		4,673		4,877		6,681		394		16,625
550-599		3,121		2,984		3,859		225		10,189
500-549		2,634		2,791		2,444		155		8,024
Under 500		975		687		1,001		39		2,702
Unknown		62		27		5,414		59		5,562
Total	$	35,144	$	43,544	$	118,506	$	2,772	$	199,966
Accrued interest included in total	$	142	$	168	$	444	$	22	$	776
December 31, 2011
800 and above	$	5,466	$	5,047	$	18,245	$	70	$	28,828
750-799		11,651		16,475		41,501		572		70,199
700-749		6,899		10,693		23,174		883		41,649
650-699		7,144		8,407		15,646		673		31,870
600-649		4,943		5,412		7,599		434		18,388
550-599		3,435		3,221		4,573		270		11,499
500-549		3,021		3,145		3,011		183		9,360
Under 500		1,160		854		1,391		50		3,455
Unknown		83		34		5,037		59		5,213
Total	$	43,802	$	53,288	$	120,177	$	3,194	$	220,461
Accrued interest included in total	$	176	$	208	$	489	$	29	$	902

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

Mepco Finance Corporation (“Mepco”) is a wholly-owned subsidiary of our Bank that operates a vehicle service contract payment plan business throughout the United States. See note #14 for more information about Mepco’s business. As of June 30, 2012, approximately 91.8% of Mepco’s outstanding payment plan receivables relate to programs in which a third party insurer or risk retention group is obligated to pay Mepco the full refund owing upon cancellation of the related service contract (including with respect to both the portion funded to the service contract seller and the portion funded to the administrator). These receivables are shown as “Full Refund” in the table below. Another approximately 7.7% of Mepco’s outstanding payment plan receivables as of June 30, 2012, relate to programs in which a third party insurer or risk retention group is obligated to pay Mepco the refund owing upon cancellation only with respect to the unearned portion previously funded by Mepco to the administrator (but not to the service contract seller). These receivables are shown as “Partial Refund” in the table below. The balance of Mepco’s outstanding payment plan receivables relate to programs in which there is no insurer or risk retention group that has any contractual liability to Mepco for any portion of the refund amount. These receivables are shown as “Other” in the table below. For each class of our payment plan receivables we monitor credit ratings of the counterparties as we evaluate the credit quality of this portfolio.

31

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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

	Payment Plan Receivables
	Full		Partial
	Refund		Refund		Other		Total
	(In thousands)
June 30, 2012
AM Best rating
A +	$	-	$	-	$	201	$	201
A		30,724		5,603		-		36,327
A -		20,094		2,056		-		22,150
B +		421		-		-		421
B		-		-		-		-
Not rated		39,608		-		239		39,847
Total	$	90,847	$	7,659	$	440	$	98,946
December 31, 2011
AM Best rating
A +	$	-	$	118	$	7	$	125
A		32,461		165		269		32,895
A -		27,056		10,639		-		37,695
B  +		1,390		-		-		1,390
B		-		-		-		-
Not rated		42,762		-		151		42,913
Total	$	103,669	$	10,922	$	427	$	115,018

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

5.  Segments

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

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

32

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

A summary of selected financial information for our reportable segments as of or for the three-month and six-month periods ended June 30 follows:

As of or for the three months ended June 30,

	IB		Mepco			Other(1)			Elimination(2)			Total
2012	(In thousands)
Total assets	$	2,246,538	$	154,248		$	169,019		$	(166,340	)	$	2,403,465
Interest income		21,550		3,705			-			-			25,255
Net interest income		19,766		2,799			(735	)		-			21,830
Provision for loan losses		1,063		(7	)		-			-			1,056
Income (loss) before income tax		4,944		337			(925	)		(23	)		4,333
Net income (loss)		5,059		222			(925	)		(23	)		4,333
2011
Total assets	$	2,094,597	$	223,799		$	171,396		$	(172,184	)	$	2,317,608
Interest income		23,733		5,394			-			-			29,127
Net interest income		20,073		3,987			(676	)		-			23,384
Provision for loan losses		4,122		34			-			-			4,156
Income (loss) before income tax		367		(322	)		(243	)		(23	)		(221	)
Net income (loss)		510		(207	)		(243	)		(23	)		37

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

(2)Includes parent company’s investment in subsidiaries and cash balances maintained at subsidiary.

As of or for the six months ended June 30,

	IB			Mepco			Other(1)			Elimination(2)			Total
2012	(In thousands)
Total assets	$	2,246,538		$	154,248		$	169,019		$	(166,340	)	$	2,403,465
Interest income		43,395			7,556			-			-			50,951
Net interest income		39,705			5,681			(1,456	)		-			43,930
Provision for loan losses		6,166			21			-			-			6,187
Income (loss) before income tax		7,957			1,893			(1,966	)		(47	)		7,837
Net income (loss)		8,601			1,249			(1,966	)		(47	)		7,837
2011
Total assets	$	2,094,597		$	223,799		$	171,396		$	(172,184	)	$	2,317,608
Interest income		48,313			11,532			-			-			59,845
Net interest income		40,604			8,574			(1,344	)		-			47,834
Provision for loan losses		14,821			37			-			-			14,858
Income (loss) before income tax		(5,869	)		(912	)		(802	)		(47	)		(7,630	)
Net income (loss)		(5,933	)		(582	)		(802	)		(47	)		(7,364	)

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

(2)Includes parent company’s investment in subsidiaries and cash balances maintained at subsidiary.

33

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

6.    Earnings Per Common Share

		Three months ended					Six months ended
		June 30,					June 30,
		2012		2011			2012		2011
		(in thousands, except per share amounts)
Net income (loss) applicable to common stock	$	3,241	$	(1,014	)	$	5,689	$	(9,423	)
Convertible preferred stock dividends		1,092		-			2,148		-
Net income (loss) applicable to common stock for calculation of diluted earnings per share(1) (2)	$	4,333	$	(1,014	)	$	7,837	$	(9,423	)
Weighted average shares outstanding		8,607		8,287			8,570		8,111
Effect of convertible preferred stock		31,987		41,207			31,987		41,207
Restricted stock units		140		139			140		104
Stock units for deferred compensation plan for non-employee directors		58		7			41		7
Effect of stock options		7		-			-		-
Weighted average shares outstanding for  calculation of diluted income (loss) per share(1)		40,799		49,640			40,738		49,429
Net income (loss) per common share
Basic	$	.38	$	(.12	)	$	.66	$	(1.16	)
Diluted(2)		.11		(.12	)		.19		(1.16	)

 (1) For any period in which a loss is recorded, dividends on convertible preferred stock are not added back in the diluted per share calculation.  For any period in which a loss is recorded, the assumed conversion of convertible preferred stock, assumed exercise of common stock warrants, assumed exercise of stock options, restricted stock units and stock units for a deferred compensation plan for non-employee directors would have an anti-dilutive impact on the loss per share and thus are ignored in the diluted per share calculation.

(2) Basic income (loss) per share includes weighted average common shares outstanding during the period and participating share awards.

Weighted average stock options outstanding that were not considered in computing diluted loss per share because they were anti-dilutive totaled 0.04 million and 0.05 million for the three-month periods ended June 30, 2012 and 2011, respectively and totaled 0.2 million and 0.05 million for the six-month periods ended June 30, 2012 and 2011, respectively.The warrant to purchase 346,154 shares of our common stock (see note #15) was not considered in computing the diluted loss per share in all periods in 2012 and 2011 as it was anti-dilutive.

7.      Derivative Financial Instruments

We are required to record derivatives on our Condensed Consolidated Statements of Financial Condition as assets and liabilities measured at their fair value.  The accounting for increases and decreases in the value of derivatives depends upon the use of derivatives and whether the derivatives qualify for hedge accounting.

34

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Our derivative financial instruments according to the type of hedge in which they are designated follows:

	June 30, 2012
			Average
	Notional		Maturity		Fair
	Amount		(years)		Value
	(Dollars in thousands)
Cash Flow Hedges - Pay fixed interest-rate swap agreements	$	10,000		2.5	$	(872	)
No hedge designation
Mandatory commitments to sell mortgage loans	$	63,013		0.1	$	1,983
Rate-lock mortgage loan commitments		103,722		0.1		(696	)
Amended Warrant		2,504		6.4		(353	)
Total	$	169,239		0.2	$	934

We 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 interest rate risk position via simulation modeling reports. The goal of our asset/liability management efforts is to maintain profitable financial leverage within established risk parameters.

We use variable-rate and short-term fixed-rate (less than 12 months) debt obligations to fund a portion of our balance sheet, which exposes us to variability in interest rates. To meet our objectives, we may periodically enter into derivative financial instruments to mitigate exposure to fluctuations in cash flows resulting from changes in interest rates (“Cash Flow Hedges”).  Cash Flow Hedges currently include certain pay-fixed interest-rate swaps.  Pay-fixed interest-rate swaps convert the variable-rate cash flows on debt obligations to fixed-rates.

We record the fair value of Cash Flow Hedges in accrued income and other assets and accrued expenses and other liabilities.  On an ongoing basis, we adjust our Condensed Consolidated Statements of Financial Condition to reflect the then current fair value of Cash Flow Hedges.  The related gains or losses are reported in other comprehensive income or loss and are subsequently reclassified into earnings, as a yield adjustment in the same period in which the related interest on the hedged items (primarily variable-rate debt obligations) affect earnings.  It is anticipated that approximately $0.3 million, of unrealized losses on Cash Flow Hedges at June 30, 2012 will be reclassified to earnings over the next twelve months.  To the extent that the Cash Flow Hedges are not effective, the ineffective portion of the Cash Flow Hedges is immediately recognized as interest expense.  The maximum term of any Cash Flow Hedge at June 30, 2012 is 2.5 years.

Certain financial derivative instruments have not been designated as hedges. The fair value of these derivative financial instruments has been recorded on our Condensed Consolidated Statements of Financial Condition and 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.

35

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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

During 2010, we entered into an amended and restated warrant with the U.S. Department of the Treasury (“UST”) that would allow them to purchase our common stock at a fixed price (see note #15). Because of certain anti-dilution features included in the Amended Warrant (as defined in note #15), it is not considered to be indexed to our common stock and is therefore accounted for as a derivative instrument and recorded as a liability. Any change in value of the Amended Warrant is recorded in other income in our Condensed Consolidated Statements of Operations.

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

Fair Values of Derivative Instruments

	Asset Derivatives						Liability Derivatives
	June 30,			December 31,			June 30,			December 31,
	2012			2011			2012			2011
	Balance			Balance			Balance			Balance
	Sheet	Fair		Sheet	Fair		Sheet	Fair		Sheet	Fair
	Location	Value		Location	Value		Location	Value		Location	Value
	(In thousands)
Derivatives designated as hedging instruments
Pay-fixed interest rate swap agreements							Other liabilities	$	872	Other liabilities	$	1,103
Total									872			1,103
Derivatives not designated as hedging instruments
Rate-lock mortgage loan commitments	Other assets	$	1,983	Other assets	$	857
Mandatory commitments to sell mortgage loans	Other assets		-			-			696	Other liabilities		606
Amended Warrant			-			-	Other liabilities		353	Other liabilities		174
Total			1,983			857			1,049			780
Total derivatives		$	1,983		$	857		$	1,921		$	1,883

36

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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

Three Month Periods Ended June 30,
							Location of
							Gain (Loss)
							Reclassified
							from
	Gain (Loss)						Accumulated	Gain (Loss)
	Recognized in						Other	Reclassified from
	Other						Comprehensive	Accumulated Other
	Comprehensive						Income into	Comprehensive						Location of	Gain (Loss)
	Income (Loss)						Income	Loss into Income						Gain (Loss)	Recognized
	(Effective Portion)						(Effective	(Effective Portion)						Recognized	in Income
	2012			2011			Portion)	2012			2011			in Income (1)	2012			2011
	(In thousands)
Cash Flow Hedges
Pay-fixed interest rate swap agreements	$	(24	)	$	(270	)	Interest expense	$	(266	)	$	(341	)		$	-		$	(3	)
Interest-rate cap agreements		-			30		Interest expense		-			(7	)			-			-
Total	$	(24	)	$	(240	)		$	(266	)	$	(348	)		$	-		$	(3	)
No hedge designation
Rate-lock mortgage loan commitments														Net mortgage loan gains	$	283		$	68
Mandatory commitments to sell mortgage loans														Net mortgage loan gains		(704	)		196
Amended warrant														(Increase)decrease in fair value of U.S. Treasury warrant		(25	)		642
Total															$	(446	)	$	906

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

37

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Six Month Periods Ended June 30,
							Location of
							Gain (Loss)
							Reclassified
							from
	Gain (Loss)						Accumulated	Gain (Loss)
	Recognized in						Other	Reclassified from
	Other						Comprehensive	Accumulated Other
	Comprehensive						Income into	Comprehensive						Location of	Gain (Loss)
	Income (Loss)						Income	Loss into Income						Gain (Loss)	Recognized
	(Effective Portion)						(Effective	(Effective Portion)						Recognized	in Income
	2012			2011			Portion)	2012			2011			in Income (1)	2012			2011
	(In thousands)
Cash Flow Hedges
Pay-fixed interest rate swap agreements	$	(75	)	$	(293	)	Interest expense	$	(596	)	$	(757	)		$	-		$	(3	)
Interest-rate cap agreements		-			30		Interest expense		-			(15	)			-			-
Total	$	(75	)	$	(263	)		$	(596	)	$	(772	)		$	-		$	(3	)
No hedge designation
Rate-lock mortgage loan commitments														Net mortgage loan gains	$	1,126		$	99
Mandatory commitments to sell mortgage loans														Net mortgage loan gains		(90	)		(1,296	)
Amended warrant														(Increase) decrease in fair value of U.S. Treasury warrant		(179	)		996
Total															$	857		$	(201	)

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

8.  Intangible Assets

Other intangible assets, net of amortization, were comprised of the following at June 30, 2012 and December 31, 2011:

		June 30, 2012				December 31, 2011
		Gross				Gross
		Carrying		Accumulated		Carrying		Accumulated
		Amount		Amortization		Amount		Amortization
		(In thousands)
Amortized other intangible assets - core deposits	$	31,326	$	24,261	$	31,326	$	23,717

38

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Amortization of other intangibles has been estimated through 2017 and thereafter in the following table.

	(In thousands)
Six months ended December 31, 2012	$	544
Year ending December 31:
2013		1,078
2014		801
2015		613
2016		613
2017 and thereafter		3,416
Total	$	7,065

9.  Share Based Compensation

We maintain share based payment plans that include a non-employee director stock purchase plan and a long-term incentive plan that permits the issuance of share based compensation, including stock options and non-vested share awards. The long-term incentive plan, which is shareholder approved, permits the grant of additional share based awards for up to 0.5 million shares of common stock as of June 30, 2012.  The non-employee director stock purchase plan permits the grant of additional share based payments for up to 0.4 million shares of common stock as of June 30, 2012.  Share based awards and payments are measured at fair value at the date of grant and are expensed over the requisite service period.  Common shares issued upon exercise of stock options come from currently authorized but unissued shares.

During the first quarter of 2012 our president’s annual salary was increased by $0.03 million, effective January 1, 2012.  One half of this increase is currently being paid in the form of common stock (also referred to as “salary stock”).  During the first quarter of 2011, pursuant to a management transition plan, our chief executive officer’s annual salary was increased by $0.2 million effective January 1, 2011.  This increase is currently being paid entirely in the form of salary stock.  These shares are issued each pay period and vest immediately.

During the first quarter of 2011, we issued 0.14 million restricted stock units to five of our executive officers.  These restricted stock units do not vest for a minimum of two years and until we repay in full our obligations related to the Troubled Asset Relief Program (“TARP”).

Beginning in the second quarter of 2011 our directors elected to receive their quarterly cash retainer fees in the form of common stock currently (or on a deferred basis pursuant to a deferred compensation and stock purchase plan).  Shares equal in value to each director’s quarterly cash retainer are issued each quarter and vest immediately.  We have issued 0.13 million shares and 0.03 million shares to directors during the first six months of 2012 and 2011, respectively and expensed their value during those same periods.

39

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Total compensation expense recognized for stock option grants, restricted stock grants, restricted stock unit grants and salary stock was $0.2 million and $0.1 million during the three and six month periods ended June 30, 2012, and was $0.2 million and $0.4 million during the same periods in 2011.  The corresponding tax benefit relating to this expense was zero for the three and six month periods ended June 30, 2012 and 2011, respectively.  Total expense recognized for non-employee director share based payments was $0.1 million in both three month periods ended June 30, 2012 and 2011 and $0.2 million and $0.1 million in the six month periods ended June 30, 2012 and 2011, respectively.

At June 30, 2012, the total expected compensation cost related to non-vested stock options, restricted stock and restricted stock unit awards not yet recognized was $0.7 million.  The weighted-average period over which this amount will be recognized is 2.6 years.

A summary of outstanding stock option grants and transactions follows:

	Six-months ended June 30, 2012
						Weighted- Average Remaining Contractual		Aggregated Intrinsic
	Number of Shares			Average Exercise Price		Term (years)		Value (in thousands)
Outstanding at January 1, 2012		180,862		$	7.98
Granted		-			-
Exercised		-			-
Exchanged		-			-
Forfeited		(11,200	)		1.92
Expired		(5,495	)		90.66
Outstanding at June 30, 2012		164,167		$	5.62		8.26	$	70
Vested and expected to vest at June 30, 2012		154,970		$	5.84		8.22	$	65
Exercisable at June 30, 2012		79,282		$	9.59		7.47	$	23

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

	2012
	Number of Shares			Weighted Average Grant Date Fair Value
Outstanding at January 1, 2012		165,045		$	17.90
Granted		-			-
Vested		(4,496	)		166.90
Forfeited		(522	)		93.14
Outstanding at June 30, 2012		160,027		$	13.47

There were no stock option exercises during the six month periods ending June 30, 2012 and 2011, respectively.

40

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

10.  Income Tax

At both June 30, 2012 and December 31, 2011, we had approximately $2.1 million of gross unrecognized tax benefits.  We do not expect the total amount of unrecognized tax benefits to significantly increase or decrease during the balance of 2012.

As a result of being in a net operating loss carryforward position, we have established a deferred tax asset valuation allowance of $72.1 million and $75.2 million as of June 30, 2012 and December 31, 2011, respectively against all of our net deferred tax assets.  Accordingly, we are not recognizing much income tax expense (benefit) related to any income or loss before income tax.  The income tax expense (benefit) was zero for the three and six month periods ending June 30, 2012.  Income tax (benefit) was $(0.26) million and $(0.27) million for the three and six month periods ending June 30, 2011, respectively.  The benefit recognized during these periods was primarily the result of current period adjustments to other comprehensive income (“OCI”), net of state income tax expense and adjustments to the deferred tax asset valuation allowance.

Generally, the amount of income tax expense or benefit allocated to operations is determined without regard to the tax effects of other categories of income or loss, such as other comprehensive income (loss). However, an exception to the general rule is provided when, in the presence of a valuation allowance against deferred tax assets, there is a pretax loss from operations and pretax income from other categories in the current period.  In such instances, income from other categories must offset the current loss from operations, the tax benefit of such offset being reflected in operations. For the three and six month periods ending June 30, 2011 this resulted in an income tax (benefit) of $(0.26) million in both periods.

11.  Regulatory Matters

Capital guidelines adopted by Federal and State regulatory agencies and restrictions imposed by law limit the amount of cash dividends our Bank can pay to us. Under these guidelines, the amount of dividends that may be paid in any calendar year is limited to the Bank’s current year’s net profits, combined with the retained net profits of the preceding two years. It is not our intent to have dividends paid in amounts which would reduce the capital of our Bank to levels below those which we consider prudent and in accordance with guidelines of regulatory authorities.

In December 2009, the Board of Directors of Independent Bank Corporation adopted resolutions (as subsequently amended) that impose the following restrictions:

● We will not pay dividends on our outstanding common stock or the outstanding preferred stock held by the UST and we will not pay distributions on our outstanding trust preferred securities without, in each case, the prior written approval of the Federal Reserve Board (“FRB”) and the Michigan Office of Financial and Insurance Regulation (“OFIR”);

● We will not incur or guarantee any additional indebtedness without the prior approval of the FRB;

● We will not repurchase or redeem any of our common stock without the prior approval of the FRB; and

● We will not rescind or materially modify any of these limitations without notice to the FRB and the OFIR.

41

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

In December 2009, the Board of Directors of Independent Bank adopted resolutions (as subsequently amended) designed to enhance certain aspects of the Bank’s performance and, most importantly, to improve the Bank’s capital position. These resolutions require the following:

● The adoption by the Bank of a capital restoration plan designed to help the Bank achieve the minimum capital ratios established by the Bank’s Board of Directors as described below;

● The enhancement of the Bank’s documentation of the rationale for discounts applied to collateral valuations on impaired loans and improved support for the identification, tracking, and reporting of loans classified as TDR’s;

● The adoption of certain changes and enhancements to our liquidity monitoring and contingency planning and our interest rate risk management practices;

● Additional reporting to the Bank’s Board of Directors regarding initiatives and plans pursued by management to improve the Bank’s risk management practices;

● Prior approval of the FRB and the OFIR for any dividends or distributions to be paid by the Bank to Independent Bank Corporation; and

● Notice to the FRB and the OFIR of any rescission of or material modification to any of these resolutions.

The substance of all of the resolutions described above was developed in conjunction with discussions held with the FRB and the OFIR. Based on those discussions, we acted proactively to adopt the resolutions described above to address those areas of the Bank’s financial condition and operations that we believe most require our focus at this time.

On October 25, 2011, the respective Boards of Directors of the Company and the Bank entered into a Memorandum of Understanding (“MOU”) with the FRB and OFIR. The MOU largely duplicates certain of the provisions in the Board resolutions described above, but also has the following specific requirements:

● Submission of a joint revised capital plan (the “Capital Plan”) by November 30, 2011 to maintain sufficient capital at the Company on a consolidated basis and at the Bank on a stand-alone basis;

● Submission of quarterly progress reports regarding disposition plans for any assets in excess of $1.0 million that are in ORE, are 90 days or more past due, are on our “watch list”, or were adversely classified in our most recent examination;

● Enhanced reporting and monitoring at Mepco regarding risk management and the internal classification of assets; and

● Enhanced interest rate risk modeling practices.

We submitted our Capital Plan on a timely basis and believe that we are generally in compliance with the provisions of the MOU, however, we must still execute on certain strategies outlined in our Capital Plan.

42

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

We are also subject to various regulatory capital requirements. The prompt corrective action regulations establish quantitative measures to ensure capital adequacy and require minimum amounts and ratios of total 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 regulatory filings as of June 30, 2012 and December 31, 2011 categorized our Bank as well capitalized. Management is not aware of any conditions or events that would have changed the most recent Federal Deposit Insurance Corporation (“FDIC”)  categorization.

Our actual capital amounts and ratios follow:

						Minimum for					Minimum for
						Adequately Capitalized					Well-Capitalized
	Actual					Institutions					Institutions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
June 30, 2012
Total capital to risk-weighted assets
Consolidated	$	183,061		12.29	%	$	119,150		8.00	%	NA		NA
Independent Bank		185,594		12.48			118,933		8.00		$	148,667		10.00	%
Tier 1 capital to risk-weighted assets
Consolidated	$	156,419		10.50	%	$	59,575		4.00	%	NA		NA
Independent Bank		166,591		11.21			59,467		4.00		$	89,200		6.00	%
Tier 1 capital to average assets
Consolidated	$	156,419		6.55	%	$	95,522		4.00	%	NA		NA
Independent Bank		166,591		6.98			95,416		4.00		$	119,270		5.00	%
December 31, 2011
Total capital to risk-weighted assets
Consolidated	$	174,547		11.31	%	$	123,470		8.00	%	NA		NA
Independent Bank		175,868		11.41			123,254		8.00		$	154,068		10.00	%
Tier 1 capital to risk-weighted assets
Consolidated	$	144,265		9.35	%	$	61,735		4.00	%	NA		NA
Independent Bank		156,104		10.13			61,627		4.00		$	92,441		6.00	%
Tier 1 capital to average assets
Consolidated	$	144,265		6.25	%	$	92,338		4.00	%	NA		NA
Independent Bank		156,104		6.77			92,268		4.00		$	115,335		5.00	%

NA - Not applicable

43

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The components of our regulatory capital are as follows:

	Consolidated						Independent Bank
	June 30,			December 31,			June 30,			December 31,
	2012			2011			2012			2011
	(In thousands)
Total shareholders' equity	$	113,172		$	102,627		$	164,453		$	152,987
Add (deduct)
Qualifying trust preferred securities		41,062			38,183			-			-
Accumulated other comprehensive loss		10,014			11,921			9,967			11,583
Intangible assets		(7,065	)		(7,609	)		(7,065	)		(7,609	)
Disallowed capitalized mortgage loan servicing rights		(764	)		(857	)		(764	)		(857	)
Tier 1 capital		156,419			144,265			166,591			156,104
Qualifying trust preferred securities		7,606			10,485			-			-
Allowance for loan losses and allowance for unfunded lending commitments limited to 1.25% of total risk-weighted assets		19,036			19,797			19,003			19,764
Total risk-based capital	$	183,061		$	174,547		$	185,594		$	175,868

In November, 2011, our Board adopted the Capital Plan and submitted such Capital Plan to the FRB and the OFIR. The Capital Plan was updated in February, 2012.  The FRB and OFIR have accepted such Capital Plan, assuming the execution of certain strategies and the attainment of the required Tier 1 Capital to Average Total Assets Ratio of 8%.

The primary objective of our Capital Plan is to achieve and thereafter maintain the minimum capital ratios required by the Board resolutions adopted in December 2009 (as subsequently amended). The minimum capital ratios established by our Board are higher than the ratios required in order to be considered “well-capitalized” under federal standards. The Board imposed these higher ratios in order to ensure that we have sufficient capital to withstand potential continuing losses based on our prevailing elevated level of non-performing assets and given certain other risks and uncertainties we face. As of June 30, 2012, our Bank continued to meet the requirements to be considered “well-capitalized” under federal regulatory standards and met one of the minimum capital ratio goals established by our Board.

44

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Set forth below are the actual capital ratios of our Bank as of June 30, 2012, the minimum capital ratios imposed by the Board resolutions, and the minimum ratios necessary to be considered “well-capitalized” under federal regulatory standards:

	Independent						Minimum
	Bank			Minimum			Ratio
	Actual as of			Ratios			Required to
	June 30,			Established			be Well-
	2012			by our Board			Capitalized
Total Capital to Risk-Weighted Assets		12.48	%		11.00	%		10.00	%
Tier 1 Capital to Average Total Assets		6.98			8.00			5.00

If we are unable to achieve both minimum capital ratios set forth in our Capital Plan it may adversely affect our business and financial condition. An inability to improve our capital position could make it difficult for us to withstand continued losses. In addition, we believe that if our financial condition and performance fail to improve, we may not be able to remain well-capitalized under federal regulatory standards. In that case, our primary bank regulators may impose additional regulatory restrictions and requirements on us. If we fail to remain well-capitalized under federal regulatory standards, we will be prohibited from accepting or renewing brokered certificates of deposit without the prior consent of the FDIC, which would likely have an adverse impact on our business and financial condition. If our regulators take more formal enforcement action against us, it would likely increase our expenses and could limit our business operations. There could be other expenses associated with a continued deterioration of our capital, such as increased deposit insurance premiums payable to the FDIC. At the present time, based on our current forecasts and expectations, we believe that our Bank can remain above “well-capitalized” for regulatory purposes for the foreseeable future, even without additional capital, due to our projected further decline in total assets (principally loans), our improved performance in 2012 and the impact of a pending branch sale (see note #16).

12.  Fair Value Disclosures

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

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

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

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

45

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Level 3:  Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

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

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

Loans held for sale:  The fair value of mortgage loans held for sale is based on mortgage backed security pricing for comparable assets (recurring Level 2).  The fair value of loans held for sale relating to branch sale is based on a discount provided for in the branch sale agreement (non-recurring Level 2).

Impaired loans with specific loss allocations based on collateral value:  From time to time, certain loans are considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. We measure our investment in an impaired loan based on one of three methods: the loan’s observable market price, the fair value of the collateral or the present value of expected future cash flows discounted at the loan’s effective interest rate. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2012 and December 31, 2011, all of our total impaired loans were evaluated based on either the fair value of the collateral or the present value of expected future cash flows discounted at the loan’s effective interest rate. When the fair value of the collateral is based on an appraised value or when an appraised value is not available we record the impaired loan as nonrecurring Level 3.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments can be significant and thus will typically result in a Level 3 classification of the inputs for determining fair value.

46

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by us.  Once received, an independent third party (for commercial properties over $0.25 million) or a member of  our special assets group (for commercial properties under $0.25 million and retail properties) reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.  On an annual basis, we compare the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment, if any, should be made to the appraisal value to arrive at fair value.  For commercial properties we typically do not discount an appraisal while for retail properties we generally discount the value by 5%.  In addition, we will adjust the appraised values for expected liquidation costs including sales commissions and transfer taxes.

Capitalized mortgage loan servicing rights:  The fair value of capitalized mortgage loan servicing rights is based on a valuation model used by an independent third party that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. Since the secondary servicing market has not been active since the later part of 2009, model assumptions are generally unobservable and are based upon the best information available including data relating to our own servicing portfolio, reviews of mortgage servicing assumption and valuation surveys and input from various mortgage servicers and, therefore, are recorded as nonrecurring Level 3.  At June 30, 2012 these assumptions included a weighted average (“WA”) discount rate of 10.5%, WA cost to service of $79, WA ancillary income of $44 and WA float rate of 0.96%.  Management evaluates the third party valuation for reasonableness each quarter as part of our financial reporting control processes.

47

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Derivatives:  The fair value of interest rate swap agreements, in general, is determined using a discounted cash flow model whose significant fair value inputs can generally be verified and do not typically involve judgment by management (recurring Level 2).  The fair value of the Amended Warrant at June 30, 2012 was estimated based on an internal update of an independent third party analysis that was performed at March 31, 2012 (the December 31, 2011 fair value was also based on an independent valuation performed at that date).  Nearly all key variables remained consistent between March 31, 2012 (the last date a third party valuation was performed) and June 30, 2012.  The internal update primarily focused on the change in our stock price during the second quarter of 2012, which was not significant.  The third party valuation uses a simulation analysis which considers potential outcomes for a large number of independent scenarios regarding the future prices of our common stock.  The simulation analysis relies on a binomial lattice model, a standard technique usually applied to the valuation of stock options. The binomial lattice maps out possible price paths of our common stock, the underlying asset of the Amended Warrant. The simulation is based on a 500-step lattice covering the term of the Amended Warrant. The binomial lattice requires specification of 14 variables, of which several are unobservable in the market including probability of a non-permitted capital raise (1.0% at June 30, 2012 and December 31, 2011), expected discount to stock price in an equity raise (10%), dollar amount of expected capital raise ($100 million) and expected time of equity raise (April, 2013 at June 30, 2012 and December 31, 2011).  As a result of these unobservable inputs, the resulting fair value of the Amended Warrant is classified as Level 3 pricing.  Changes in these variables would have an impact on the fair value of the Amended Warrant.  If the probability of a non-permitted capital raise increased to 2.5%, 5.0% or 10.0%, the value of the Amended Warrant is estimated to increase to $0.40 million, $0.45 million and $0.58 million, respectively.

Fixed assets held for sale relating to branch sale:  The fair value of fixed assets held for sale was determined based upon a value agreed upon in the branch sale agreement (non-recurring Level 2).

48

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Assets and liabilities measured at fair value, including financial assets for which we have elected the fair value option, were as follows:

			Fair Value Measurements Using
			Quoted
			Prices
			in Active
			Markets		Significant		Significant
			for		Other		Un-
	Fair Value		Identical		Observable		observable
	Measure-		Assets		Inputs		Inputs
	ments		(Level 1)		(Level 2)		(Level 3)
	(In thousands)
June 30, 2012:
Measured at Fair Value on a Recurring Basis:
Assets
Trading securities	$	86	$	86	$	-	$	-
Securities available for sale
U.S. agency		38,143		-		38,143		-
U.S. agency residential mortgage-backed		157,164		-		157,164		-
Private label residential mortgage-backed		7,679		-		7,679		-
Obligations of states and political subdivisions		40,964		-		40,964		-
Trust preferred		3,097		-		3,097		-
Loans held for sale		43,386		-		43,386		-
Derivatives (1)		1,983		-		1,983		-
Liabilities
Derivatives (2)		1,921		-		1,568		353
Measured at Fair Value on a Non-recurring basis:
Assets
Capitalized mortgage loan servicing rights (3)		9,354		-		-		9,354
Impaired loans (4)
Commercial
Income producing - real estate		5,867		-		-		5,867
Land, land development & construction-real estate		3,062		-		-		3,062
Commercial and industrial		7,779		-		-		7,779
Mortgage
1-4 Family		2,256		-		-		2,256
Resort Lending		306		-		-		306
Other real estate (5)
Commercial
Income producing - real estate		860		-		-		860
Land, land development & construction-real estate		6,376		-		-		6,376
Commercial and industrial		248		-		-		248
Mortgage
1-4 Family		1,086		-		-		1,086
Resort Lending		4,824		-		-		4,824
Installment
Home equity installment - 1st lien		100		-		-		100
Loans held for sale relating to branch sale		53,180		-		53,180		-
Fixed assets held for sale relating to branch sale		8,491		-		8,491		-

(1) Included in accrued income and other assets

(2) Included in accrued expenses and other liabilities

(3) Only includes servicing rights that are carried at fair value due to recognition of a valuation allowance.

(4) Only includes impaired loans with specific loss allocations based on collateral value.

(5) Only includes other real estate with subsequent write downs to fair value.

49

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

			Fair Value Measurements Using
			Quoted
			Prices
			in Active
			Markets		Significant		Significant
			for		Other		Un-
	Fair Value		Identical		Observable		observable
	Measure-		Assets		Inputs		Inputs
	ments		(Level 1)		(Level 2)		(Level 3)
	(In thousands)
December 31, 2011:
Measured at Fair Value on a Recurring Basis:
Assets
Trading securities	$	77	$	77	$	-	$	-
Securities available for sale
U.S. agency		25,017		-		25,017		-
U.S. agency residential mortgage-backed		94,206		-		94,206		-
Private label residential mortgage-backed		8,268		-		8,268		-
Obligations of states and political subdivisions		27,317		-		27,317		-
Trust preferred		2,636		-		2,636		-
Loans held for sale		44,801		-		44,801		-
Derivatives (1)		857		-		857		-
Liabilities
Derivatives (2)		1,883		-		1,709		174
Measured at Fair Value on a Non-recurring basis:
Assets
Capitalized mortgage loan servicing rights (3)		11,004		-		-		11,004
Impaired loans (4)
Commercial
Income producing - real estate		8,022		-		-		8,022
Land, land development & construction-real estate		5,702		-		-		5,702
Commercial and industrial		5,613		-		-		5,613
Mortgage
1-4 Family		3,263		-		-		3,263
Resort Lending		1,064		-		-		1,064
Other real estate (5)
Commercial
Income producing - real estate		1,388		-		-		1,388
Land, land development & construction-real estate		7,512		-		-		7,512
Commercial and industrial		497		-		-		497
Mortgage
1-4 Family		2,079		-		-		2,079
Resort Lending		5,297		-		-		5,297
Home equity line of credit - 1st lien		53		-		-		53
Installment
Home equity installment - 1st lien		100		-		-		100

(1) Included in accrued income and other assets

(2) Included in accrued expenses and other liabilities

(3) Only includes servicing rights that are carried at fair value due to recognition of a valuation allowance.

(4) Only includes impaired loans with specific loss allocations based on collateral value.

(5) Only includes other real estate with subsequent write downs to fair value.

50

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

There were no transfers between Level 1 and Level 2 during the six months ended June 30, 2012 and 2011.

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

		Changes in Fair Values for the Six-Month
		Periods Ended June 30 for Items Measured at
		Fair Value Pursuant to Election of the Fair Value Option
		2012						2011
						Total						Total
						Change						Change
						in Fair						in Fair
						Values						Values
						Included						Included
		Net Gains (Losses)				in Current		Net Gains (Losses)				in Current
		on Assets				Period		on Assets				Period
		Securities		Loans		Earnings		Securities		Loans		Earnings
		(In thousands)
Trading securities	$	9	$	-	$	9	$	124	$	-	$	124
Loans held for sale		-		241		241		-		717		717

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

The following represent impairment charges recognized during the three and six month periods ended June 30, 2012 and 2011 relating to assets measured at fair value on a non-recurring basis:

· Capitalized mortgage loan servicing rights, whose individual strata are measured at fair value, had a carrying amount of $9.4 million which is net of a valuation allowance of $6.8 million at June 30, 2012 and had a carrying amount of $11.0 million which is net of a valuation allowance of $6.5 million at December 31, 2011.  A recovery (charge) of $(0.9) million and $(0.2) million was included in our results of operations for the three and six month periods ending June 30, 2012, respectively and $(0.6) million and $(0.1) million during the same periods in 2011.

· Loans which are measured for impairment using the fair value of collateral for collateral dependent loans, had a carrying amount of $27.6 million, with a valuation allowance of $8.3 million at June 30, 2012 and had a carrying amount of $33.9 million, with a valuation allowance of $10.3 million at December 31, 2011.  An additional provision for loan losses relating to impaired loans of $0.6 million and $2.2 million was included in our results of operations for the three and six month periods ending June 30, 2012, respectively and $2.9 million and $5.7 million during the same periods in 2011.

· Other real estate, which is measured using the fair value of the property, had a carrying amount of $13.5 million which is net of a valuation allowance of $10.7 million at June 30, 2012 and a carrying amount of $16.9 million which is net of a valuation allowance of $14.7 million at December 31, 2011.  An additional charge relating to ORE measured at fair value of $0.5 million and $1.2 million was included in our results of operations during the three and six month periods ended June 30, 2012, respectively and $0.8 million and $2.1 million during the same periods in 2011.

51

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

A reconciliation for all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30 follows:

	(Liability)
	Amended Warrant
	Three months ended						Six months ended
	June 30,						June 30,
	2012			2011			2012			2011
Beginning balance	$	(328	)	$	(957	)	$	(174	)	$	(1,311	)
Total gains (losses) realized and unrealized:
Included in results of operations		(25	)		642			(179	)		996
Included in other comprehensive income		-			-			-			-
Purchases, issuances, settlements, maturities and calls		-			-			-			-
Transfers in and/or out of Level 3		-			-			-			-
Ending balance	$	(353	)	$	(315	)	$	(353	)	$	(315	)
Amount of total gains (losses) for the period  included in earnings attributable to the change in unrealized gains (losses) relating to assets  and liabilities still held at June 30	$	(25	)	$	642		$	(179	)	$	996

During 2010, we entered into an amended and restated warrant with the UST that would allow them to purchase our common stock at a fixed price (see note #15). Because of certain anti-dilution features included in the Amended Warrant, it is not considered to be indexed to our common stock and is therefore accounted for as a derivative instrument (see note #7). Any change in value of this warrant is recorded in other income in our Condensed Consolidated Statements of Operations.

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

	Aggregate Fair Value		Difference		Contractual Principal
	(In thousands)
Loans held for sale
June 30, 2012	$	43,386	$	1,644	$	41,742
December 31, 2011		44,801		1,403		43,398

52

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

13.  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.

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

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

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

Net loans and loans held for sale:  The fair value of loans is calculated by discounting estimated future cash flows using estimated market discount rates that reflect credit and interest-rate risk inherent in the loans resulting in a Level 3 classification.  Impaired loans are valued at the lower of cost or fair value as described in note #12.  Loans held for sale are classified as Level 2 as described in note #12.

Accrued interest receivable and payable:  The recorded book balance of accrued interest receivable and payable approximate fair value and are classified at the same Level as the asset and liability they are associated with.

Derivative financial instruments:  Interest rate swaps have principally been valued based on the discounted value of contractual cash flows using a discount rate approximating current market rates and are classified as Level 2 as described in note #12  and the Amended Warrant has been valued based on a simulation analysis which considers potential outcomes for a large number of independent scenarios and is classified as Level 3 as described in note #12.

Deposits:  Deposits without a stated maturity, including demand deposits, savings, NOW and money market accounts, have a fair value equal to the amount payable on demand.  Each of these instruments is classified as Level 1.  Deposits with a stated maturity, such as certificates of 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 resulting in a Level 2 classification.  Deposits include those held for sale relating to branch sale.

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

53

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Subordinated debentures:  Subordinated debentures have generally been valued based on a quoted market price of the specific or similar instruments resulting in a Level 1 or Level 2 classification.

The estimated recorded book balances and fair values follows:

	June 30, 2012
					Fair Value Measurements Using
					Quoted
					Prices
					in Active
					Markets		Significant		Significant
					for		Other		Un-
	Recorded		Fair Value		Identical		Observable		observable
	Book		Measure-		Assets		Inputs		Inputs
	Balance		ments		(Level 1)		(Level 2)		(Level 3)
	(In thousands)
Assets
Cash and due from banks	$	60,800	$	60,800	$	60,800	$	-	$	-
Interest bearing deposits		358,900		358,900		358,900		-		-
Trading securities		100		100		100		-		-
Securities available for sale		247,000		247,000		-		247,000		-
Federal Home Loan Bank and Federal Reserve Bank Stock		20,500	NA		NA		NA		NA
Net loans and loans held for sale		1,502,600		1,441,800		-		96,600		1,345,200
Accrued interest receivable		6,100		6,100		50		900		5,150
Derivative financial instruments		2,000		2,000		-		2,000		-
Liabilities
Deposits with no stated maturity	$	1,617,700	$	1,617,700	$	1,617,700	$	-	$	-
Deposits with stated maturity		565,100		567,600		-		567,600		-
Other borrowings		17,900		22,000		-		22,000		-
Subordinated debentures		50,200		34,600		6,500		28,100		-
Accrued interest payable		6,200		6,200		2,500		3,700		-
Derivative financial instruments		1,900		1,900		-		1,500		400

	December 31, 2011
	Recorded
	Book		Estimated
	Balance		Fair Value
	(In thousands)
Assets
Cash and due from banks	$	62,800	$	62,800
Interest bearing deposits		278,300		278,300
Trading securities		80		80
Securities available for sale		157,400		157,400
Federal Home Loan Bank and Federal Reserve Bank Stock		20,800	NA
Net loans and loans held for sale		1,562,500		1,475,700
Accrued interest receivable		6,200		6,200
Derivative financial instruments		900		900
Liabilities
Deposits with no stated maturity	$	1,517,300	$	1,517,300
Deposits with stated maturity		568,800		571,600
Other borrowings		33,400		37,900
Subordinated debentures		50,200		16,100
Accrued interest payable		5,100		5,100
Derivative financial instruments		1,900		1,900

54

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The fair values for commitments to extend credit and standby letters of credit are estimated to approximate their aggregate book balance, which is nominal and therefore are not disclosed.

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

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

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

14. Contingent Liabilities

Our Mepco segment conducts its payment plan business activities across the United States. Mepco acquires the payment plans from companies (which we refer to as Mepco’s “counterparties”) at a discount from the face amount of the payment plan. Each payment plan (which are classified as payment plan receivables in our Condensed Consolidated Statements of Financial Condition) permits a consumer to purchase a vehicle service contract by making installment payments, generally for a term of 12 to 24 months, to the sellers of those contracts (one of the “counterparties”). Mepco thereafter collects the payments from consumers. In acquiring the payment plan, Mepco generally funds a portion of the cost to the seller of the service contract and a portion of the cost to the administrator of the service contract. The administrator, in turn, pays the necessary contractual liability insurance policy (“CLIP”) premium to the insurer or risk retention group.

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

55

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Upon the cancellation of a service contract and the completion of the billing process to the counterparties for amounts due to Mepco, there is a decrease in the amount of “payment plan receivables” and an increase in the amount of “vehicle service contract counterparty receivables” until such time as the amount due from the counterparty is collected. These amounts represent funds actually due to Mepco from its counterparties for cancelled service contracts. At June 30, 2012, the aggregate amount of such obligations owing to Mepco by counterparties, net of write-downs and reserves made through the recognition of vehicle service contract counterparty contingencies expense, totaled $28.9 million. This compares to a balance of $29.3 million at December 31, 2011. Mepco is currently in the process of working to recover these receivables, including through liquidation of collateral, claims against the bankruptcy estate of a counterparty that previously represented a significant portion of Mepco’s business, and litigation against counterparties.

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

When counterparties do not honor their contractual obligations to Mepco to repay advanced funds, we recognize estimated losses. Mepco pursues collection (including commencing legal action if necessary) of funds due to it under its various contracts with counterparties.  Charges related to estimated losses for vehicle service contract counterparty contingencies included in non-interest expenses were $0.3 million and $1.3 million for the three months ended June 30, 2012 and 2011, respectively and $0.8 million and $3.7 million for the six months ended June 30, 2012 and 2011, respectively.  These charges are being classified in non-interest expense because they are associated with a default or potential default of a contractual obligation under our counterparty contracts as opposed to loss on the administration of the payment plan itself.

The determination of losses related to vehicle service contract counterparty contingencies requires a significant amount of judgment because a number of factors can influence the amount of loss that we may ultimately incur. These factors include our estimate of future cancellations of vehicle service contracts, our evaluation of collateral that may be available to recover funds due from our counterparties, and the amount collected from counterparties in connection with their contractual obligations. Mepco is currently involved in litigation with certain of its counterparties in an attempt to collect amounts owing from those counterparties for cancelled service contracts.

56

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

We apply a rigorous process, based upon observable contract activity and past experience, to estimate probable incurred losses and quantify the necessary reserves for our vehicle service contract counterparty contingencies, but there can be no assurance that our modeling process will successfully identify all such losses. As a result, we could record future losses associated with vehicle service contract counterparty contingencies that may be significantly different than the levels that we recorded during the first six months of 2012 and 2011.

We believe our assumptions regarding the collection of vehicle service contract counterparty receivables are reasonable, and we based them on our good faith judgments using data currently available. We also believe the current amount of reserves we have established and the vehicle service contract counterparty contingencies expense that we have recorded are appropriate given our estimate of probable incurred losses at the applicable Condensed Consolidated Statement of Financial Condition date. However, because of the uncertainty surrounding the numerous and complex assumptions made, actual losses could exceed the charges we have taken to date.

We are also involved in various litigation matters in the ordinary course of business. At the present time, we do not believe any of these matters will have a significant impact on our Condensed Consolidated Financial Statements.  The aggregate amount we have accrued for losses we consider probable as a result of these litigation matters is immaterial. However, because of the inherent uncertainty of outcomes from any litigation matter, we believe it is reasonably possible we may incur losses in addition to the amounts we have accrued. However, at this time, we are unable to estimate the range of additional losses that are reasonably possible because of a number of factors, including the fact that certain of these litigation matters are still in their early stages and involve claims for which, at this point, we believe have little to no merit.

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

15.  Shareholders’ Equity

On April 2, 2010, we entered into an exchange agreement with the UST pursuant to which the UST agreed to exchange all 72,000 shares of our Series A Fixed Rate Cumulative Perpetual Preferred Stock, with an original liquidation preference of $1,000 per share (“Series A Preferred Stock”), beneficially owned and held by the UST, plus accrued and unpaid dividends on such Series A Preferred Stock, for shares of our Series B Fixed Rate Cumulative Mandatorily Convertible Preferred Stock, with an original liquidation preference of $1,000 per share (“Series B Preferred Stock”). As part of the terms of the exchange agreement, we also agreed to amend and restate the terms of the warrant, dated December 12, 2008, issued to the UST to purchase 346,154 shares of our common stock.

57

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

On April 16, 2010, we closed the transactions described in the exchange agreement and we issued to the UST (1) 74,426 shares of our Series B Preferred Stock and (2) an Amended and Restated Warrant to purchase 346,154 shares of our common stock at an exercise price of $7.234 per share and expiring on December 12, 2018 (the “Amended Warrant”) for all of the 72,000 shares of Series A Preferred Stock and the original warrant that had been issued to the UST in December 2008 pursuant to the TARP Capital Purchase Program, plus approximately $2.4 million in accrued dividends on such Series A Preferred Stock.

With the exception of being convertible into shares of our common stock, the terms of the Series B Preferred Stock are substantially similar to the terms of the Series A Preferred Stock that was exchanged. The Series B Preferred Stock qualifies as Tier 1 regulatory capital and pays cumulative dividends quarterly at a rate of 5% per annum through February 14, 2014, and at a rate of 9% per annum thereafter. The Series B Preferred Stock is non-voting, other than class voting rights on certain matters that could adversely affect the Series B Preferred Stock. If dividends on the Series B Preferred Stock have not been paid for an aggregate of six quarterly dividend periods or more, whether consecutive or not, the holders of the Series B Preferred Stock, voting together with holders of any then outstanding voting parity stock, have the right to elect two additional directors at our next annual meeting of shareholders or at a special meeting of shareholders called for that purpose. These directors would be elected annually and serve until all accrued and unpaid dividends on the Series B Preferred Stock have been paid. Beginning in December of 2009, we suspended payment of quarterly dividends. The cash dividends payable to the UST amount to approximately $4.2 million per year until December of 2013, at which time they would increase to approximately $7.5 million per year.  Because we have deferred dividends on the Series B Preferred Stock for at least six quarterly dividend periods, the UST currently has the right to elect two directors to our board. At this time, in lieu of electing such directors, the UST requested us to allow (and we have allowed) an observer to attend our Board of Directors meetings beginning in the third quarter of 2011. The UST continues to retain the right to elect two directors as described above.

Under the terms of the Series B Preferred Stock, UST (and any subsequent holder of the Series B Preferred Stock) has the right to convert the Series B Preferred Stock into our common stock at any time. In addition, we have the right to compel a conversion of the Series B Preferred Stock into common stock, subject to the following conditions:

(i) we shall have received all appropriate approvals from the Board of Governors of the Federal Reserve System;

(ii) we shall have issued our common stock in exchange for at least $40 million aggregate original liquidation amount of the trust preferred securities issued by the Company’s trust subsidiaries, IBC Capital Finance II, IBC Capital Finance III, IBC Capital Finance IV, and Midwest Guaranty Trust I;

(iii) we shall have closed one or more transactions (on terms reasonably acceptable to the UST, other than the price per share of common stock) in which investors, other than the UST, have collectively provided a minimum aggregate amount of $100 million in cash proceeds to us in exchange for our common stock; and

(iv) we shall have made the anti-dilution adjustments to the Series B Preferred Stock, if any, required by the terms of the Series B Preferred Stock.

58

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

If converted by the holder or by us pursuant to either of the above-described conversion rights, each share of Series B Preferred Stock (liquidation amount of $1,000 per share) will convert into a number of shares of our common stock equal to a fraction, the numerator of which is $750 and the denominator of which is $7.234, which was the market price of our common stock at the time the exchange agreement was signed (as such market price was determined pursuant to the terms of the Series B Preferred Stock), referred to as the “conversion rate.” This conversion rate is subject to certain anti-dilution adjustments that may result in a greater number of shares being issued to the holder of the Series B Preferred Stock. If converted by the holder or by us pursuant to either of the above-described conversion rights, as of June 30, 2012, the Series B Preferred Stock and accrued and unpaid dividends would have been convertible into approximately 11.0 million shares of our common stock.

Unless earlier converted by the holder or by us as described above, the Series B Preferred Stock will convert into shares of our common stock on a mandatory basis on the seventh anniversary (April 16, 2017) of the issuance of the Series B Preferred Stock. In any such mandatory conversion, each share of Series B Preferred Stock (liquidation amount of $1,000 per share) will convert into a number of shares of our common stock equal to a fraction, the numerator of which is $1,000 and the denominator of which is the market price of our common stock at the time of such mandatory conversion (as such market price is determined pursuant to the terms of the Series B Preferred Stock).

At the time any Series B Preferred Stock are converted into our common stock, we will be required to pay all accrued and unpaid dividends on the Series B Preferred Stock being converted in cash or, at our option, in shares of our common stock, in which case the number of shares to be issued will be equal to the amount of accrued and unpaid dividends to be paid in common stock divided by the market value of our common stock at the time of conversion (as such market price is determined pursuant to the terms of the Series B Preferred Stock). Accrued and unpaid dividends on the Series B Preferred Stock totaled $8.6 million (approximately $116 per share of Series B Preferred Stock) and $6.6 million (approximately $89 per share of Series B Preferred Stock) at June 30, 2012 and December 31, 2011, respectively.  These amounts are recorded in Convertible Preferred Stock on the Condensed Consolidated Statements of Financial Condition.

The maximum number of shares of our common stock that may be issued upon conversion of all shares of the Series B Preferred Stock and any accrued dividends on Series B Preferred Stock is 14.4 million, unless we receive shareholder approval to issue a greater number of shares.

59

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The Series B Preferred Stock may be redeemed by us, subject to the approval of the Board of Governors of the Federal Reserve System, at any time, in an amount up to the cash proceeds (minimum of approximately $18.6 million) from qualifying equity offerings of common stock (plus any net increase to our retained earnings after the original issue date). If the Series B Preferred Stock is redeemed prior to the first dividend payment date falling on or after the second anniversary of the original issue date, the redemption price will be equal to the $1,000 liquidation amount per share plus any accrued and unpaid dividends. If the Series B Preferred Stock is redeemed on or after such date, the redemption price will be the greater of (a) the $1,000 liquidation amount per share plus any accrued and unpaid dividends and (b) the product of the applicable Conversion Rate (as described above) and the average of the market prices per share of our common stock (as such market price is determined pursuant to the terms of the Series B Preferred Stock) over a 20 trading day period beginning on the trading day immediately after we give notice of redemption to the holder (plus any accrued and unpaid dividends). In any redemption, we must redeem at least 25% of the number of Series B Preferred Stock shares originally issued to the UST, unless fewer of such shares are then outstanding (in which case all of the Series B Preferred Stock must be redeemed).  In addition to the terms of the Series B Preferred Stock discussed above, the UST updated its Frequently Asked Questions regarding the Capital Purchase Program (“CPP”) as of March 1, 2012 to permit any CPP participant to repay its investment, in part, subject to a minimum repayment of the greater of (i) 5% of the aggregate liquidation amount of the preferred stock issued to the UST or (ii) $100,000.  Under this updated guidance, we could repay a minimum of approximately $3.7 million, subject to the approval of the Board of Governors of the Federal Reserve System, in a partial redemption of the Series B Preferred Stock.

On July 7, 2010 we executed an Investment Agreement and Registration Rights Agreement with Dutchess Opportunity Fund, II, LP (“Dutchess”) for the sale of up to 1.50 million shares of our common stock. These agreements serve to establish an equity line facility as a contingent source of liquidity at the parent company level. Pursuant to the Investment Agreement, Dutchess committed to purchase up to $15.0 million of our common stock over a 36-month period ending November 1, 2013. We have the right, but no obligation, to draw on this equity line facility from time to time during such 36-month period by selling shares of our common stock to Dutchess. The sales price would be at a 5% discount to the market price of our common stock at the time of the draw; as such market price is determined pursuant to the terms of the Investment Agreement. Through June 30, 2012, 0.95 million shares of our common stock were sold to Dutchess pursuant to the Investment Agreement (0.17 million shares during the second quarter of 2012, 0.43 million shares during 2011 and 0.35 million shares during the fourth quarter of 2010) for an aggregate purchase price of $2.3 million. In order to comply with Nasdaq rules, we needed shareholder approval to sell more than approximately 0.7 million more shares to Dutchess pursuant to the Investment Agreement. In April 2011, our shareholders approved a resolution at our Annual Meeting to authorize us to sell up to 2.5 million additional shares under this equity line, so we now have additional flexibility to take advantage of this contingent source of liquidity. Remaining shares approved to sell pursuant to the Investment Agreement totaled 3.1 million shares at June 30, 2012. Based on our closing stock price on June 30, 2012, additional funds available under the Investment Agreement totaled approximately $7.6 million at June 30, 2012.

16.  Branch Sale

On May 23, 2012 we executed a definitive agreement to sell 21 branches to Chemical Bank, headquartered in Midland, Michigan (the “Branch Sale”).  The branches to be sold include 6 branch locations in the Battle Creek, Michigan market area and 15 branch locations in Northeast Michigan.

60

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

We expect that the Branch Sale will result in the transfer of approximately $417.5 million of deposits to Chemical Bank in exchange for the payment of a deposit premium of approximately $12.4 million.  This represents a deposit premium of approximately 3.1% on identified core deposits. Certain non-core deposits will be transferred at no premium. Chemical Bank will also have the right to purchase certain loans associated with the branches being sold, at a discount of 1.75%.  Currently, we estimate that approximately $53.2 million of loans will be sold to Chemical Bank.  These loans are classified as held for sale in the June 30, 2012 Condensed Consolidated Statement of Financial Condition and are carried at the lower of cost or fair value.  Certain fixed assets with a fair value at June 30, 2012 of approximately $8.5 million (cost, net of accumulated depreciation of approximately $11.1 million) are expected to be sold and are also classified as held for sale in the June 30, 2012 Condensed Consolidated Statement of Financial Condition.  In addition, approximately $2.7 million of remaining unamortized intangible assets at June 30, 2012 relate to customers and deposits associated with the pending Branch Sale. The Branch Sale is expected to be completed by the end of the third quarter of 2012, subject to customary regulatory approvals and the satisfaction of other terms and conditions of sale.

The following summarizes estimated loans and deposits related to the Branch Sale:

	June 30,
	2012
Loans:
Commercial	$	31,729
Mortgage		8,699
Installment		13,699
Total loans		54,127
Allowance for Loan Losses		(781	)
Adjustment to lower of cost or fair value		(166	)
Net loans	$	53,180
Deposits
Non-interest bearing	$	65,059
Savings and interest bearing-checking		231,470
Retail time		123,732
Total deposits		420,261
Net adjustments		(2,740	)
Net depostis	$	417,521

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ITEM 2.

Management’s Discussion and Analysis

of Financial Condition and Results of Operations

The following section presents additional information that may be necessary to assess our financial condition and results of operations.  This section should be read in conjunction with our condensed consolidated financial statements contained elsewhere in this report as well as our 2011 Annual Report on Form 10-K.  The Form 10-K includes a list of risk factors that you should consider in connection with any decision to buy or sell our securities.

Introduction. Our success depends to a great extent upon the economic conditions in Michigan’s Lower Peninsula. We have in general experienced a difficult economy in Michigan since 2001, although economic conditions in the state began to show signs of improvement during 2010 and generally these improvements have continued into 2012, albeit at a slower pace, as evidenced, in part, by an overall decline in the unemployment rate.

We provide banking services to customers located primarily in Michigan’s Lower Peninsula. Our loan portfolio, the ability of the borrowers to repay these loans and the value of the collateral securing these loans has been and will be impacted by local economic conditions. The weaker economic conditions faced in Michigan have had and may continue to have adverse consequences as described below in “Portfolio Loans and asset quality.” However, since early- to mid-2009, we have generally seen a decline in non-performing loans and a declining level of provision for loan losses.

In response to these difficult market conditions and the significant losses that we incurred from 2008 through 2011 that reduced our capital, we have taken steps or initiated actions designed to increase our capital ratios, improve our operations and augment our liquidity as described in more detail below.

On May 23, 2012 we executed a definitive agreement to sell 21 branches to Chemical Bank, headquartered in Midland, Michigan (the “Branch Sale”).  The branches to be sold include 6 branch locations in the Battle Creek, Michigan market area and 15 branch locations in Northeast Michigan.

We expect that the Branch Sale will result in the transfer of approximately $417.5 million of deposits to Chemical Bank in exchange for the payment of a deposit premium of approximately $12.4 million.  This represents a deposit premium of approximately 3.1% on identified core deposits. Certain non-core deposits will be transferred at no premium. Chemical Bank will also have the right to purchase certain loans originated at the branches being sold, at a discount of 1.75%.  Currently, we estimate that approximately $53.2 million of loans will be sold to Chemical Bank.  These loans are classified as held for sale in the June 30, 2012 Condensed Consolidated Statement of Financial Condition and are carried at the lower of cost or fair value.  The Branch Sale is expected to be completed by the end of the third quarter of 2012, subject to customary regulatory approvals and the satisfaction of other terms and conditions of sale.

62

At the present time, based on our current forecasts and expectations and considering the above referenced Branch Sale, we believe that our Bank can remain above “well-capitalized” for regulatory purposes for the foreseeable future, even without additional capital, primarily because of our reduction in total assets and our return to profitability during 2012. Our forecast of a return to profitability during 2012 and beyond reflects an expectation for reduced credit costs (in particular the provision for loan losses, net losses on other real estate [“ORE”] and repossessed assets and loan and collection costs) that is anticipated to be partially offset by a decline in net interest income (due primarily to a change in asset mix as higher yielding loans are expected to continue to decline and lower yielding investment securities are expected to increase as well as due to the Branch Sale). This forecast is susceptible to significant variations, particularly if the Michigan economy were to deteriorate and credit costs were to be higher than anticipated or if we incur any significant future losses at Mepco Finance Corporation (“Mepco”) related to the collection of vehicle service contract counterparty receivables (see “Non-interest expense”). Because of such uncertainties, it is possible that our Bank may not be able to remain well-capitalized as we work through asset quality issues and seek to return to consistent profitability. As described in more detail under “Liquidity and capital resources” below, we believe failing to remain well-capitalized would have a material adverse effect on our business and financial condition as it would, among other consequences, likely lead to further regulatory enforcement actions (see “Regulatory development”), a potential loss of our mortgage servicing rights with Fannie Mae and/or Freddie Mac, and limits on our access to certain wholesale funding sources. In addition, any significant deterioration in our ability to improve our capital position would make it very difficult for us to withstand future losses that we may incur and that may be increased or made more likely as a result of economic difficulties and other factors.

In July 2010, Congress passed and the President signed into law the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Dodd-Frank Act”). The Dodd-Frank Act includes the creation of the new Consumer Financial Protection Bureau with power to promulgate and enforce consumer protection laws; the creation of the Financial Stability Oversight Council chaired by the Secretary of the Treasury with authority to identify institutions and practices that might pose a systemic risk; provisions affecting corporate governance and executive compensation of all companies whose securities are registered with the SEC; a provision that broadened the base for Federal Deposit Insurance Corporation (“FDIC”) insurance assessments; a provision under which interchange fees for debit cards are set by the Federal Reserve under a restrictive “reasonable and proportional cost” per transaction standard; a provision that requires bank regulators to set minimum capital levels for bank holding companies that are as strong as those required for their insured depository subsidiaries, subject to a grandfather clause for financial institutions with less than $15 billion in assets as of December 31, 2009; and new restrictions on how mortgage brokers and loan originators may be compensated. Certain provisions of the Dodd-Frank Act only apply to institutions with more than $10 billion in assets. The Dodd-Frank Act has had (and we expect it will continue to have) a significant impact on the banking industry, including our organization.

On June 4, 2012, the Board of Governors of the Federal Reserve System issued Notices of Proposed Rulemaking (“NPR”) – Enhancements to the Regulatory Capital Requirements (the “Proposed New Capital Requirements”).  These Proposed New Capital Requirements, if adopted as outlined in the NPR, would have a material impact on the banking industry, including our organization.  In general the Proposed New Capital Requirements would significantly increase the need for Tier 1 common equity capital and substantially impact the calculation of risk-weighted assets.  See “Liquidity and Capital Resources.”

It is against this backdrop that we discuss our results of operations for the second quarter and first six months of 2012 as compared to 2011 and our financial condition as of June 30, 2012.

63

Results of Operations

Summary.  We recorded net income of $4.3 million and net income applicable to common stock of $3.2 million during the three months ended June 30, 2012 compared to net income of $0.04 million and a net loss applicable to common stock of $1.0 million during the comparable period in 2011.  The improvement in 2012 results as compared to 2011 primarily reflects decreases in the provision for loan losses and non-interest expenses that were partially offset by a decrease in net interest income.

We recorded net income of $7.8 million and net income applicable to common stock of $5.7 million during the six months ended June 30, 2012 compared to a net loss of $7.4 million and a net loss applicable to common stock of $9.4 million during the comparable period in 2011.  The reasons for the changes in the year-to-date comparative periods are generally commensurate with the quarterly comparative periods.

Key performance ratios

	Three months ended						Six months ended
	June 30,						June 30,
	2012			2011			2012			2011
Net income (loss) (annualized) to(1)
Average assets		0.54	%		(0.17	)%		0.48	%		(0.78	)%
Average common shareholders’ equity		47.96			(11.94	)		45.34			(50.84	)
Net income (loss) per common share(1)
Basic	$	0.38		$	(0.12	)	$	0.66		$	(1.16	)
Diluted		0.11			(0.12	)		0.19			(1.16	)

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

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

Our net interest income totaled $21.8 million during the second quarter of 2012, a decrease of $1.6 million, or 6.6% from the year-ago period.  Our net interest income as a percent of average interest-earning assets (the “net interest margin”) was 4.02% during the second quarter of 2012, compared to 4.36% in the year-ago period. The net interest margin decreased due primarily to a change in asset mix, as higher yielding loans declined and lower yielding short-term investments increased.  The year-over-year decrease in net interest income was partially offset by an increase in average interest-earning assets, which rose to $2.18 billion in the second quarter of 2012 compared to $2.15 billion in the year-ago quarter.  The increase in average interest-earning assets primarily reflects a rise in securities available for sale that was partially offset by a decline in loans.

64

For the first six months of 2012, net interest income totaled $43.9 million, a decrease of $3.9 million, or 8.2% from 2011.  The Company’s net interest margin for the first six months of 2012 decreased to 4.08% compared to 4.35% in 2011.  The reasons for the decline in net interest income for the first six months of 2012 are generally consistent with those described above for the comparative quarterly periods.

Beginning in the last half of 2009 and continuing into the first half of 2012, we increased our level of lower-yielding interest bearing cash balances and investment securities to augment our liquidity in response to our stressed financial condition (see “Liquidity and capital resources”). In addition, due to the challenges facing Mepco (see “Noninterest expense”), we have been reducing the balance of payment plan receivables beginning in late 2009 and continuing into the first half of 2012. These payment plan receivables are the highest yielding segment of our loan portfolio, with an average yield of approximately 13% to 14%. The combination of these two items (an increase in the level of lower-yielding interest bearing cash balances and investment securities and a decrease in the level of higher-yielding loans, including payment plan receivables) has had an adverse impact on our 2012 net interest income and net interest margin.

Our net interest income is also adversely impacted by our level of non-accrual loans.  In the second quarter and first six months of 2012 non-accrual loans averaged $47.6 million and $51.9 million, respectively compared to $56.5 million and $60.1 million, respectively for the same periods in 2011.  In addition, in the second quarter and first six months of 2012 we had net recoveries of $0.085 million and $0.054 million, respectively, of accrued and unpaid interest on loans placed on or taken off non-accrual during each period compared to a net recovery of $0.025 million and a net reversal of $0.1 million, respectively during the same periods in 2011.

65

Average Balances and Rates

		Three Months Ended
		June 30,
		2012						2011
		Average						Average
		Balance		Interest	Rate(3)			Balance		Interest	Rate(3)
Assets (1)		(Dollars in thousands)
Taxable loans	$	1,556,478	$	23,623	6.09	%	$	1,718,171	$	28,017	6.54	%
Tax-exempt loans (2)		7,085		73	4.14			8,080		85	4.22
Taxable securities		261,554		933	1.43			61,407		344	2.25
Tax-exempt securities (2)		26,431		244	3.71			30,064		298	3.98
Cash – interest bearing		306,329		196	0.26			306,864		194	0.25
Other investments		20,564		186	3.64			22,852		189	3.32
Interest Earning Assets		2,178,441		25,255	4.65			2,147,438		29,127	5.43
Cash and due from banks		51,470						50,250
Other assets, net		163,096						189,472
Total Assets	$	2,393,007					$	2,387,160
Liabilities
Savings and NOW	$	1,080,130		486	0.18		$	1,013,095		608	0.24
Time deposits		571,088		1,819	1.28			680,267		3,903	2.30
Other borrowings		69,826		1,120	6.45			94,609		1,232	5.22
Interest Bearing Liabilities		1,721,044		3,425	0.80			1,787,971		5,743	1.29
Demand deposits		523,647						443,163
Other liabilities		39,630						44,674
Shareholders’ equity		108,686						111,352
Total liabilities and shareholders’ equity	$	2,393,007					$	2,387,160
Net Interest Income			$	21,830					$	23,384
Net Interest Income as a Percent of Earning Assets					4.02	%					4.36	%

(1) All domestic, except for none and $0.01 million for the three months ended June 30, 2012 and 2011, respectively, of average payment plan receivables included in taxable loans for customers domiciled in Canada.

(2) Interest on tax-exempt loans and securities is not presented on a fully tax equivalent basis due to the current net operating loss carryforward position and the deferred tax asset valuation allowance.

(3) Annualized.

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Average Balances and Rates

		Six Months Ended
		June 30,
		2012						2011
		Average						Average
		Balance		Interest	Rate(3)			Balance		Interest	Rate(3)
Assets (1)		(Dollars in thousands)
Taxable loans	$	1,569,460	$	47,893	6.13	%	$	1,757,979	$	57,414	6.57	%
Tax-exempt loans (2)		7,162		149	4.18			8,235		172	4.21
Taxable securities		223,176		1,591	1.43			51,568		811	3.17
Tax-exempt securities (2)		26,788		540	4.05			30,508		630	4.16
Cash – interest bearing		312,452		395	0.25			338,154		426	0.25
Other investments		20,696		383	3.72			23,239		392	3.40
Interest Earning Assets		2,159,734		50,951	4.73			2,209,683		59,845	5.45
Cash and due from banks		53,776						50,568
Other assets, net		163,608						190,672
Total Assets	$	2,377,118					$	2,450,923
Liabilities
Savings and NOW	$	1,067,013		958	0.18		$	1,003,864		1,197	0.24
Time deposits		574,028		3,771	1.32			742,609		8,259	2.24
Other borrowings		76,605		2,292	6.02			99,730		2,555	5.17
Interest Bearing Liabilities		1,717,646		7,021	0.82			1,846,203		12,011	1.31
Demand deposits		513,833						446,056
Other liabilities		39,442						44,515
Shareholders’ equity		106,197						114,149
Total liabilities and shareholders’ equity	$	2,377,118					$	2,450,923
Net Interest Income			$	43,930					$	47,834
Net Interest Income as a Percent of Earning Assets					4.08	%					4.35	%

(1) All domestic, except for none and $0.02 million for the six months ended June 30, 2012 and 2011, respectively, of average payment plan receivables included in taxable loans for customers domiciled in Canada.

(2) Interest on tax-exempt loans and securities is not presented on a fully tax equivalent basis due to the current net operating loss carryforward position and the deferred tax asset valuation allowance.

(3) Annualized.

Provision for loan losses.  The provision for loan losses was $1.1 million and $4.2 million during the three months ended June 30, 2012 and 2011, respectively. During the six-month periods ended June 30, 2012 and 2011, the provision was $6.2 million and $14.9 million, respectively. The provision reflects our assessment of the allowance for loan losses taking into consideration factors such as loan mix, levels of non-performing and classified loans and loan net charge-offs.  While we use relevant information to recognize losses on loans, additional provisions for related losses may be necessary based on changes in economic conditions, customer circumstances and other credit risk factors.  The decrease in the provision for loan losses in the second quarter and first half of 2012 primarily reflects reduced levels of non-performing loans, lower total loan balances and a decline in loan net charge-offs.  See “Portfolio Loans and asset quality” for a discussion of the various components of the allowance for loan losses and their impact on the provision for loan losses in the second quarter and first half of 2012.

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

Non-interest income totaled $13.0 million during the three months ended June 30, 2012, a $0.6 million increase from the comparable period in 2011.  For the first six months of 2012 non-interest income totaled $27.6 million, a $2.5 million increase from the comparable period in 2011.  The year-to-date changes are generally commensurate with the quarterly changes.

Non-Interest Income

	Three months ended						Six months ended
	June 30,						June 30,
	2012			2011			2012			2011
	(In thousands)
Service charges on deposit accounts	$	4,552		$	4,784		$	8,753		$	9,066
Interchange income		2,407			2,308			4,729			4,476
Net gains (losses) on assets:
Mortgage loans		3,579			1,793			7,439			3,728
Securities		169			115			853			328
Other than temporary loss on securities available for sale:
Total impairment loss		(85	)		327			(262	)		(142	)
Recognized in other comprehensive loss		-			(327	)		-			-
Net impairment loss in earnings		(85	)		-			(262	)		(142	)
Mortgage loan servicing		(1,088	)		(126	)		(352	)		770
Investment and insurance commissions		648			524			1,095			1,079
Bank owned life insurance		399			464			823			889
Title insurance fees		489			318			997			791
Change in U.S. Treasury Warrant fair value		(25	)		642			(179	)		996
Other		1,997			1,634			3,730			3,186
Total non-interest income	$	13,042		$	12,456		$	27,626		$	25,167

Service charges on deposit accounts declined during the three- and six-month periods ended June 30, 2012, respectively, from the comparable periods in 2011.  The decrease in such service charges in 2012 principally relates to a decline in non-sufficient funds (”NSF”) occurrences and related NSF fees. We believe the decline in NSF occurrences is principally due to our customers managing their finances more closely in order to reduce NSF activity and avoid the associated fees.

Interchange income increased on both a comparative quarterly and year-to-date basis in 2012 compared to 2011.  The growth in interchange income primarily reflects an increase in debit card transaction volumes and PIN-based interchange fees. As described earlier, the Dodd-Frank Act includes a provision under which interchange fees for debit cards are set by the Federal Reserve under a restrictive “reasonable and proportional cost” per transaction standard. On June 29, 2011 the Federal Reserve issued final rules (that were effective October 1, 2011) on interchange fees for debit cards. Overall, these final rules established price caps for debit card interchange fees that were approximately 50% lower than previous averages. However, debit card issuers with less than $10 billion in assets (like us) are exempt from this rule. On a long-term basis, it is not clear how competitive market factors may impact debit card issuers who are exempt from the rule. As a result, at the present time, we cannot predict if our interchange income will be lower in the future because of such price caps.

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Net gains on the sale of mortgage loans increased on both a quarterly and a year to date basis. Mortgage loan activity is summarized as follows:

Mortgage Loan Activity

	Three months ended						Six months ended
	June 30,						June 30,
	2012			2011			2012			2011
	(Dollars in thousands)
Mortgage loans originated	$	136,835		$	74,612		$	249,633		$	170,185
Mortgage loans sold		127,013			63,369			239,154			184,857
Mortgage loans sold with servicing rights released		22,555			18,428			37,895			35,000
Net gains on the sale of mortgage loans		3,579			1,793			7,439			3,728
Net gains as a percent of mortgage loans sold (“Loan Sales Margin”)		2.82	%		2.83	%		3.11	%		2.02	%
Fair value adjustments included in the Loan Sales Margin		0.19			0.63			0.53			(0.26	)

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

Net gains as a percentage of mortgage loans sold (our “Loan Sales Margin”) are impacted by several factors including competition and the manner in which the loan is sold (with servicing rights retained or released). Our decision to sell or retain mortgage loan servicing rights is primarily influenced by an evaluation of the price being paid for mortgage loan servicing by outside third parties compared to our calculation of the economic value of retaining such servicing. The sale of mortgage loan servicing rights may result in declines in mortgage loan servicing income in future periods. Net gains on mortgage loans are also impacted by recording fair value accounting adjustments. Excluding the aforementioned accounting adjustments, the Loan Sales Margin would have been 2.63% and 2.20% in the second quarters of 2012 and 2011, respectively and 2.58% and 2.28% for the comparative 2012 and 2011 year-to-date periods, respectively. The increase in the Loan Sales Margin (excluding fair value adjustments) in 2012 was generally due to somewhat more favorable competitive conditions including wider primary-to-secondary market pricing spreads.  The changes in the fair value accounting adjustments are primarily due to changes in the amount of commitments to originate mortgage loans for sale.

Net securities gains totaled $0.2 million and $0.9 million during the three and six months ended June 30, 2012, respectively, and $0.1 million and $0.3 million for the respective comparable periods in 2011.  The 2012 net securities gains were due primarily to the sale of U.S. agency residential mortgage-backed investment securities.  The 2011 securities gains were due primarily to the sale of U.S. agency residential mortgage-backed investment securities and a U.S. Treasury security.

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We recorded net other than temporary impairment charges on securities available for sale of $0.1 million and $0.3 million during the three and six months ended June 30, 2012, respectively, and none and $0.1 million for the respective comparable periods in 2011.  These impairment charges related to private label residential mortgage-backed investment securities.  (See “Securities.”)

Mortgage loan servicing generated a loss of $1.1 million and $0.4 million in the second quarter and first six months of 2012, respectively, compared to a loss of $0.1 million and income of $0.8 million in the corresponding periods of 2011, respectively. These variances are primarily due to changes in the valuation allowance on and the amortization of capitalized mortgage loan servicing rights. The period end valuation allowance is based on the valuation of the mortgage loan servicing portfolio.  The impairment charges incurred in the second quarters of both 2012 and 2011 primarily reflect lower mortgage loan interest rates during those quarters resulting in higher estimated future prepayment rates being used in the quarter end valuation.  Activity related to capitalized mortgage loan servicing rights is as follows:

Capitalized Mortgage Loan Servicing Rights

	Three months ended June 30							Six months ended June 30
	2012			2011				2012			2011
	(In thousands)
Balance at beginning of period	$	11,795			$	15,531		$	11,229		$	14,661
Originated servicing rights capitalized		1,028				431			1,952			1,495
Amortization		(1,237	)			(574	)		(2,299	)		(1,323	)
(Increase)/decrease in impairment reserve		(935	)			(647	)		(231	)		(92	)
Balance at end of period	$	10,651			$	14,741		$	10,651		$	14,741
Impairment reserve at end of period	$	6,775			$	3,302		$	6,775		$	3,302

At June 30, 2012 we were servicing approximately $1.76 billion in mortgage loans for others on which servicing rights have been capitalized. This servicing portfolio had a weighted average coupon rate of 5.02% and a weighted average service fee of approximately 25.4 basis points. Remaining capitalized mortgage loan servicing rights at June 30, 2012 totaled $10.7 million, representing approximately 61 basis points on the related amount of mortgage loans serviced for others. The capitalized mortgage loan servicing had an estimated fair market value of $11.0 million at June 30, 2012.

Nearly all of our mortgage loans serviced for others at June 30, 2012 are for either Fannie Mae or Freddie Mac. If our Bank were to fall below “well capitalized” (as defined by banking regulations) it is possible that Fannie Mae and Freddie Mac could require us to very quickly sell or transfer such servicing rights to a third party or unilaterally strip us of such servicing rights if we cannot complete an approved transfer. Depending on the terms of any such transaction, this forced sale or transfer of such mortgage loan servicing rights could have a material adverse impact on our financial condition and results of operations.

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Investment and insurance commissions increased on a comparative quarterly basis and were relatively flat on a year-to-date basis in 2012 compared to 2011. The quarterly increase primarily reflects a higher volume of sales of these products.  These higher sales reflect our efforts to expand this business.

Income from bank owned life insurance decreased on both a comparative quarterly and year-to-date basis in 2012 compared to 2011 primarily reflecting a lower average crediting rate on our cash surrender value due to reduced total returns on the underlying separate account assets.Our separate account is primarily invested in U.S. agency residential mortgage-backed securities and managed by PIMCO. The crediting rate (on which the earnings are based) reflects the performance of the separate account. The total cash surrender value of our bank owned life insurance was $50.1 million and $49.3 million at June 30, 2012 and December 31, 2011, respectively.

Title insurance fees were higher on both a comparative quarterly and year-to-date basis in 2012 compared to 2011 primarily as a result of an increase in mortgage lending origination volume.

Changes in the fair value of the amended warrant issued to the U.S. Department of the Treasury (“UST”) in April 2010 are recorded as a component of non-interest income. The fair value of this amended warrant is included in accrued expenses and other liabilities in our Condensed Consolidated Statements of Financial Condition.  (See “Liquidity and capital resources.”) Two significant inputs in our valuation model for the amended warrant are our common stock price and the probability percentage of triggering anti-dilution provisions in this instrument related to certain equity transactions. The second quarter and first six months of 2012, included $0.03 million and $0.2 million of expense, respectively, related to an increase in the fair value of the warrant due primarily to a rise in our common stock price. The second quarter and first six months of 2011, included $0.6 million and $1.0 million of income, respectively, related to a decline in the fair value of the warrant due primarily to the use of a lower probability of triggering the anti-dilution provisions.  (See “Liquidity and capital resources.”)

Other non-interest income increased on both a comparative quarterly and year-to-date basis in 2012 compared to 2011.  The increases in 2012 are due in part to improvement (earnings in 2012 compared to losses in 2011) in the performance of our private mortgage reinsurance captive of $0.3 million and $0.2 million in the second quarter and first six months of 2012, respectively. The improved 2012 performance reflects a decline in mortgage loan defaults and lower private mortgage insurance claims.  In addition, rental income (which is generated primarily on ORE properties) increased by $0.1 million and $0.2 million for the second quarter and first six months of 2012, respectively, compared to 2011.

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

Non-interest expense decreased by $2.4 million to $29.5 million and by $8.2 million to $57.5 million during the three- and six-month periods ended June 30, 2012, respectively, compared to the like periods in 2011.  The comparative quarterly and year-to-date decreases are primarily due to declines in loan and collection costs, vehicle service contract counterparty contingencies, net losses on ORE and repossessed assets, and credit card and bank service fees.

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Non-Interest Expense

		Three months ended					Six months ended
		June 30,					June 30,
		2012			2011		2012			2011
		(in thousands)
Compensation	$	9,551		$	10,020	$	19,496		$	19,832
Performance-based compensation		1,735			334		1,820			491
Payroll taxes and employee benefits		2,220			2,675		4,672			5,055
Compensation and employee benefits		13,506			13,029		25,988			25,378
Loan and collection		2,407			3,580		5,297			7,447
Occupancy, net		2,490			2,663		5,206			5,764
Data processing		2,450			2,415		4,789			4,725
Furniture, fixtures and equipment		1,307			1,502		2,601			2,920
Legal and professional		1,268			801		2,165			1,579
Communications		826			889		1,701			1,837
FDIC deposit insurance		816			652		1,673			1,887
Net losses on ORE and repossessed assets		633			777		1,620			2,183
Credit card and bank service fees		624			1,013		1,275			2,060
Advertising		639			670		1,195			1,224
Vehicle service contract counterparty contingencies		326			1,311		797			3,657
Supplies		340			392		734			794
Provision for loss reimbursement on sold loans		126			363		558			769
Amortization of intangible assets		272			343		544			686
Costs (recoveries) related to unfunded lending commitments		(12	)		89		(59	)		184
Other		1,465			1,416		1,448			2,679
Total non-interest expense	$	29,483		$	31,905	$	57,532		$	65,773

Compensation and employee benefits expenses increased by $0.5 million to $13.5 million and by $0.6 million to $26.0 million during the three- and six-month periods ended June 30, 2012, respectively, compared to 2011.  Compensation expense declined due primarily to a reduction in our average number of full time equivalent employees in 2012 compared to year ago levels.  Also payroll taxes and employee benefits declined due primarily to a decrease in medical insurance costs due to both a reduction in the number of insured employees as well as somewhat reduced claims.  However, more than offsetting the aforementioned decreases was an increase in performance based compensation due primarily to accruals recorded in the second quarter of 2012 of $1.0 million for anticipated incentive based compensation and $0.4 million for an anticipated employee stock ownership plan contribution.  These accruals were recorded because of our improved overall performance in the second quarter of 2012, which is now expected to lead to the payout of incentive based compensation.

Loan and collection expenses decreased by $1.2 million to $2.4 million and by $2.2 million to $5.3 million during the three- and six-month periods ended June 30, 2012, respectively, compared to 2011.  Loan and collection expenses primarily reflect costs related to the management and collection of non-performing loans and other problem credits. These expenses (although still at an elevated level compared to historic norms) have declined significantly in 2012, which primarily reflects the overall decrease in the volume of problem credits (non-performing loans and “watch” credits). (See “Portfolio Loans and asset quality.”)

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Occupancy, net decreased on both a comparative quarterly and year-to-date basis due primarily to lower snow removal and utilities costs in 2012 which reflect an unseasonably warm winter in Michigan in 2012 as well as a reduction in the number of branch offices due to the consolidation or closing of certain locations in late 2011 and early 2012.

The current year levels of data processing, furniture, fixtures and equipment, communications, advertising and supplies were generally comparable to or lower than the prior year.  Collectively, these expense categories declined by $0.3 million, or 5.2%, and by $0.5 million, or 4.2%, during the second quarter and first six months of 2012, respectively, compared to the year ago periods due primarily to our cost reduction efforts.

Legal and professional fees increased on both a comparative quarterly and year-to-date basis.  This increase is primarily due to expenses associated with certain consulting services, various regulatory matters, the Branch Sale, and legal costs at Mepco associated with litigation being pursued against certain business counterparties.

FDIC deposit insurance expense increased on a comparative quarterly basis but declined on a year-to-date basis principally reflecting a new rate structure implemented by the FDIC, which became effective at the beginning of the second quarter of 2011. The new rate structure has a lower assessment rate but is based on total assets as compared to the prior structure that was based primarily on total deposits but had a higher assessment rate.

Net losses on ORE and repossessed assets primarily represent the loss on the sale or additional write downs on these assets subsequent to the transfer of the asset from our loan portfolio. This transfer occurs at the time we acquire the collateral that secured the loan. At the time of acquisition, the other real estate or repossessed asset is valued at fair value, less estimated costs to sell, which becomes the new basis for the asset. Any write-downs at the time of acquisition are charged to the allowance for loan losses.  The reduced net losses in 2012, as compared to 2011, primarily reflects some stability in real estate prices during the last twelve months, with some markets even experiencing modest price increases. However, foreclosed properties generally continue to have distressed valuations.

Credit card and bank service fees decreased on both a comparative quarterly and year-to-date basis primarily due to a decline in the number of payment plans being serviced by Mepco in 2012 compared to 2011.

We record estimated incurred losses associated with Mepco’s vehicle service contract payment plan receivables in our provision for loan losses and establish a related allowance for loan losses. (See “Portfolio Loans and asset quality.”) We record estimated incurred losses associated with defaults by Mepco’s counterparties as “vehicle service contract counterparty contingencies expense,” which is included in non-interest expenses in our Condensed Consolidated Statements of Operations.

We recorded an expense of $0.3 million and $0.8 million for vehicle service contract payment plan counterparty contingencies in the second quarter and first six months of 2012, respectively, compared to $1.3 million and $3.7 million, respectively, for the comparable periods in 2011.  The lower expense in 2012 is attributed to a decline in the actual and expected level of cancellations giving rise to potential amounts due from counterparties.

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Our estimate of probable incurred losses from vehicle service contract counterparty contingencies requires a significant amount of judgment because a number of factors can influence the amount of loss that we may ultimately incur. These factors include our estimate of future cancellations of vehicle service contracts, our evaluation of collateral that may be available to recover funds due from our counterparties, and our assessment of the amount that may ultimately be collected from counterparties in connection with their contractual obligations. We apply a rigorous process, based upon historical payment plan activity and past experience, to estimate probable incurred losses and quantify the necessary reserves for our vehicle service contract counterparty contingencies, but there can be no assurance that our modeling process will successfully identify all such losses.

In particular, as noted in our Risk Factors included in Part I - Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011, Mepco has had to initiate litigation against certain counterparties, including one of the respective third party insurers, to collect amounts owed to Mepcoas a result of those parties' dispute of their contractual obligations to Mepco.  In addition, see Note #14 to the Interim Condensed Consolidated Financial Statements included within this report for more information about Mepco's business, certain risks and difficulties we currently face with respect to that business, and reserves we have established (through vehicle service contract counterparty contingencies expense) for losses related to the business.

The provision for loss reimbursement on sold loans represents our estimate of incurred losses related to mortgage loans that we have sold to investors (primarily Fannie Mae and Freddie Mac). Since we sell mortgage loans without recourse, loss reimbursements only occur in those instances where we have breached a representation or warranty or other contractual requirement related to the loan sale. Historically, loss reimbursements on mortgage loans sold without recourse were very rare. In 2009, we had only one actual loss reimbursement (for $0.06 million). Prior to 2009, we had years in which we incurred no such loss reimbursements. However, our loss reimbursements have increased and totaled $0.2 million in 2010, $0.5 million in 2011 and $0.2 million and $0.65 million in the second quarter and first six months of 2012, respectively.  Over the past two years Fannie Mae and Freddie Mac, in particular, have been doing more reviews of mortgage loans where they have incurred or expect to incur a loss and have been more aggressive in pursuing loss reimbursements from the sellers of such mortgage loans. Although we are successful in the vast majority of cases where file reviews are conducted on mortgage loans that we have sold to investors and actual loss reimbursements have been relatively modest, the levels of such file reviews and loss reimbursement requests have increased, particularly over the past twelve months. As a result, we have established a reserve (which totaled $1.4 million and $1.5 million at June 30, 2012 and December 31, 2011, respectively) for loss reimbursements on sold mortgage loans. This reserve is included in accrued expenses and other liabilities in our Condensed Consolidated Statements of Financial Condition. This reserve is based on an analysis of mortgage loans that we have sold which are further categorized by delinquency status, loan to value, and year of origination. The calculation includes factors such as probability of default, probability of loss reimbursement (breach of representation or warranty) and estimated loss severity. While we believe that the amounts we have accrued for incurred losses on sold loans are appropriate given these analyses, future losses could exceed our current estimate.

The amortization of intangible assets primarily relates to branch acquisitions and the amortization of the deposit customer relationship value, including core deposit value, which was acquired in connection with those acquisitions. We had remaining unamortized intangible assets of $7.1 million and $7.6 million at June 30, 2012 and December 31, 2011, respectively. See Note #8 to the Interim Condensed Consolidated Financial Statements for a schedule of future amortization of intangible assets.  At June 30, 2012, approximately $2.7 million of the remaining unamortized intangible assets relate to customers and deposits associated with the pending Branch Sale.

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

Other non-interest expenses were relatively unchanged between the second quarters of 2012 and 2011, but declined by $1.2 million in the first six months of 2012 compared to the like period in 2011. This decline principally reflects the first quarter 2012 reversal of a previously established accrual at Mepco that was determined to no longer be necessary.

Income tax expense (benefit).  As a result of being in a net operating loss carryforward position, we have established a deferred tax asset valuation allowance against all of our net deferred tax assets.  Accordingly, the income tax expense (benefit) related to any income (loss) before income tax is largely being offset by changes in the deferred tax valuation allowance.  See Note #10 to the Interim Condensed Consolidated Financial Statements.

The capital initiatives detailed below under “Liquidity and capital resources” may trigger an ownership change that would negatively affect our ability to utilize our net operating loss carryforwards and other deferred tax assets in the future. If such an ownership change were to occur, we may suffer higher-than-anticipated tax expense, and consequently lower net income and cash flow, in those future years. As of June 30, 2012, we had federal loss carryforwards of approximately $80.3 million (which includes $0.5 million of federal capital loss carryforwards). Companies are subject to a change of ownership test under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), that, if met, would limit the annual utilization of tax losses and credits carrying forward from pre-change of ownership periods, as well as the ability to use certain unrealized built-in losses. Generally, under Section 382, the yearly limitation on our ability to utilize such deductions will be equal to the product of the applicable long-term tax exempt rate (presently 3.06%) and the sum of the values of our common shares and of our outstanding convertible preferred stock, immediately before the ownership change. In addition to limits on the use of net operating loss carryforwards, our ability to utilize deductions related to bad debts and other losses for up to a five-year period following such an ownership change would also be limited under Section 382, to the extent that such deductions reflect a net loss that was “built-in” to our assets immediately prior to the ownership change. We are presently seeking to limit the size of any future equity offering in order to avoid triggering any Section 382 limitations.

Since we currently have a valuation allowance intended to fully offset these net operating loss carryforwards and most other deferred tax assets, we do not expect these tax rules to cause a material impact to our net income or loss in the near term.

Our actual federal income tax expense (benefit) is different than the amount computed by applying our statutory federal income tax rate to our pre-tax income (loss) primarily due to tax-exempt interest income and tax-exempt income from the increase in the cash surrender value on life insurance, as well as the impact of the change in the deferred tax asset valuation allowance.

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

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

Business Segments

	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
	(in thousands)
Independent Bank	$	5,059		$	510		$	8,601		$	(5,933	)
Mepco		222			(207	)		1,249			(582	)
Other(1)		(925	)		(243	)		(1,966	)		(802	)
Elimination		(23	)		(23	)		(47	)		(47	)
Net income (loss)	$	4,333		$	37		$	7,837		$	(7,364	)

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

The improvement in the results of operations of Independent Bank in 2012 compared to 2011 is primarily due to a lower provision for loan losses, an increase in non-interest income and a decrease in non-interest expenses that were partially offset by a decline in net interest income.  (See “Provision for loan losses,” “Portfolio Loans and asset quality,” “Net interest income,” “Non-interest income,” and “Non-interest expense.”)

The change in Mepco’s results is due to a decline in non-interest expenses that was partially offset by a decrease in net interest income that is due principally to a decline in payment plan receivables (see “Net interest income” and “Non-interest expense”).  All of Mepco’s funding is provided by Independent Bank through an intercompany loan (that is eliminated in consolidation).  The rate on this intercompany loan is based on the Prime Rate (currently 3.25%). Mepco might not be able to obtain such favorable funding costs on its own in the open market.

The change in other in the table above (increased loss of $0.7 million and $1.2 million in the second quarter and first six months of 2012, respectively, as compared to 2011) is due primarily to the change in the fair value of the amended warrant issued to the UST in each respective period (see “Non-interest income”).

Financial Condition

Summary.  Our total assets increased by $96.1 million during the first six months of 2012 due primarily to increases in cash and cash equivalents and securities available for sale that were partially offset by a decline in loans.  Loans, excluding loans held for sale ("Portfolio Loans"), totaled $1.46 billion at June 30, 2012, down 7.6% from $1.58 billion at December 31, 2011.  (See "Portfolio Loans and asset quality").  At June 30, 2012 we classified $53.2 million of loans and $8.5 million of fixed assets as held for sale (and valued these at the lower of cost or fair value) related to the pending Branch Sale.

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Deposits totaled $1.77 billion at June 30, 2012, compared to $2.09 billion at December 31, 2011.  The $320.8 million decrease in total deposits during the period is entirely due to the classification of $417.5 million of deposits (related to the pending Branch Sale) as held for sale at June 30, 2012.  Including these deposits held for sale, total deposits increased by $96.7 million during the first six months of 2012, primarily due to growth in checking and savings account balances.  Other borrowings totaled $17.9 million at June 30, 2012, a decrease of $15.5 million from December 31, 2011.  This decrease primarily reflects reduced borrowings from the Federal Home Loan Bank of Indianapolis.

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

Securities
			Unrealized
	Amortized						Fair
	Cost		Gains		Losses		Value
	(In thousands)
Securities available for sale
June 30, 2012	$	249,240	$	1,761	$	3,954	$	247,047
December 31, 2011		161,023		1,575		5,154		157,444

Securities available for sale increased during the first six months of 2012 due primarily to the purchase of U.S. government-sponsored agency residential mortgage-backed securities, U.S. government-sponsored agency structured notes and obligations of states and political subdivisions. The securities were purchased to utilize some of the funds generated from the continued decline in Portfolio Loans as well as from the increase in total deposits. (See “Deposits” and “Liquidity and capital resources.”)   However, in preparation for funding needed for the pending Branch Sale we generally ceased purchasing securities available for sale in May 2012.

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

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We recorded net other than temporary impairment charges on securities of $0.1 million and none in the second quarters of 2012 and 2011, respectively.  We recorded net other than temporary impairment charges on securities of $0.3 million and $0.1 million in the first six months of 2012 and 2011, respectively. In these instances we believe that the decline in value is directly due to matters other than changes in interest rates, are not expected to be recovered within a reasonable timeframe based upon available information and are therefore other than temporary in nature.  These net other than temporary impairment charges are all related to private label residential mortgage-backed securities.  (See “Non-interest income” and “Asset/liability management.”)

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

	Six months ended
	June 30,
	2012			2011
	(In thousands)
Proceeds	$	18,999		$	70,322
Gross gains	$	843		$	279
Gross losses		-			(75	)
Net impairment charges		(262	)		(142	)
Fair value adjustments		10			124
Net gains	$	591		$	186

Portfolio Loans and asset quality.  In addition to the communities served by our Bank branch network, our principal lending markets also include nearby communities and metropolitan areas. Subject to established underwriting criteria, we also historically participated in commercial lending transactions with certain non-affiliated banks and also purchased mortgage loans from third-party originators. Currently, we are not engaging in any new commercial loan participations with non-affiliated banks or purchasing any mortgage loans from third party originators.

The senior management and board of directors of our Bank retain authority and responsibility for credit decisions and we have adopted uniform underwriting standards. Our loan committee structure and the loan review process attempt to provide requisite controls and promote compliance with such established underwriting standards. There can be no assurance that the aforementioned 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, we recorded a significant provision for loan losses over the past four years as compared to prior historical levels.

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 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.”)

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Future growth of overall Portfolio Loans is dependent upon a number of competitive and economic factors. Although economic conditions have generally improved in Michigan over the past two years, overall loan demand has remained somewhat subdued, reflecting still somewhat weak economic conditions in the State. Further, it is our desire to reduce certain loan categories in order to preserve our regulatory capital ratios or for risk management reasons. For example, construction and land development loans have been declining because we are seeking to shrink this portion of our Portfolio Loans due to a generally poor economic climate for real estate development, particularly residential real estate. In addition, payment plan receivables have declined as we seek to reduce Mepco’s vehicle service contract payment plan business. Further declines in Portfolio Loans may continue to adversely impact our future net interest income.

Non-performing assets(1)
	June 30,		December 31,
	2012		2011
	(Dollars in thousands)
Non-accrual loans	$	44,314	$	59,309
Loans 90 days or more past due and still accruing interest		739		574
Total non-performing loans		45,053		59,883
Other real estate and repossessed assets		29,504		34,042
Total non-performing assets	$	74,557	$	93,925

As a percent of Portfolio Loans
Non-performing loans	3.09	%	3.80	%
Allowance for loan losses	3.52		3.73
Non-performing assets to total assets	3.10		4.07
Allowance for loan losses as a percent of non-performing loans	113.97		98.33

(1) Excludes loans classified as “troubled debt restructured” that are not past due and vehicle service contract counterparty receivables, net.

Troubled debt restructurings (“TDR”)
	June 30, 2012
	Commercial		Retail			Total
	(In thousands)
Performing TDR’s	$	44,573	$	87,294		$	131,867
Non-performing TDR’s (1)		11,298		11,538	(2)		22,836
Total	$	55,871	$	98,832		$	154,703

	December 31, 2011
	Commercial		Retail			Total
	(In thousands)
Performing TDR’s	$	29,799	$	86,770		$	116,569
Non-performing TDR’s (1)		14,567		14,081	(2)		28,648
Total	$	44,366	$	100,851		$	145,217

(1)  Included in non-performing loans in the “Non-performing assets” table above.

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

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Non-performing loans declined by $14.8 million, or 24.8%, during the first six months of 2012 due principally to declines in non-performing commercial loans and residential mortgage loans. These declines primarily reflect loan net charge-offs, pay-offs, negotiated transactions, and the migration of loans into ORE. Non-performing commercial loans relate largely to delinquencies caused by cash-flow difficulties encountered by owners of income-producing properties (due to higher vacancy rates and/or lower rental rates). Non-performing residential mortgage loans are primarily due to delinquencies reflecting both somewhat still weak economic conditions and soft real estate values in many parts of Michigan and in certain markets where we have mortgage loans secured by resort properties (see Note #4 to the Interim Condensed Consolidated Financial Statements). Non-performing loans exclude performing loans that are classified as troubled debt restructurings (“TDRs”). Performing TDRs totaled $131.9 million, or 9.0% of total Portfolio Loans, and $116.6 million, or 7.4% of total Portfolio Loans, at June 30, 2012 and December 31, 2011, respectively. The increase in the amount of performing TDRs in the first six months of 2012 primarily reflects an increase in commercial loan TDR’s.

ORE and repossessed assets totaled $29.5 million at June 30, 2012, compared to $34.0 million at December 31, 2011. This decrease is primarily the result of sales and write-downs of ORE being in excess of the migration of non-performing loans secured by real estate into ORE as the foreclosure process is completed and any redemption period expires. High foreclosure rates are evident nationwide, but Michigan has consistently had one of the higher foreclosure rates in the U.S. during the past few years. We believe that this high foreclosure rate is due to both somewhat weak economic conditions and declines in residential real estate values (which has eroded or eliminated the equity that many mortgagors had in their home).

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

The ratio of loan net charge-offs to average loans was 1.69% on an annualized basis in the first six months of 2012 compared to 2.58% in the first six months of 2011.  The $9.3 million decline in loan net charge-offs primarily reflects a decrease of $7.0 million for commercial loans and $1.6 million for mortgage loans. The loan net charge-offs primarily reflect our levels of non-performing loans and collateral liquidation values, particularly on residential real estate or income-producing commercial properties.

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Allowance for loan losses
	Six months ended
	June 30,
	2012						2011
				Unfunded						Unfunded
	Loans			Commitments			Loans			Commitments
	(Dollars in thousands)
Balance at beginning of period	$	58,884		$	1,286		$	67,915		$	1,322
Additions (deduction)
Provision for loan losses		6,187			-			14,858			-
Recoveries credited to allowance		3,231			-			2,182			-
Loans charged against the allowance		(16,175	)		-			(24,436	)		-
Reclassification to loans held for sale		(781	)		-			-			-
Addition included in non-interest expense		-			(59	)		-			184
Balance at end of period	$	51,346		$	1,227		$	60,519		$	1,506
Net loans charged against the allowance to average Portfolio Loans (annualized)		1.69	%					2.58	%

Allocation of the Allowance for Loan Losses
		June 30,		December 31,
		2012		2011
		(In thousands)
Specific allocations	$	21,730	$	22,299
Other adversely rated loans		2,785		4,430
Historical loss allocations		17,408		20,682
Additional allocations based on subjective factors		9,423		11,473
Total	$	51,346	$	58,884

Some loans will not be repaid in full. Therefore, an allowance for loan losses (“AFLL”) is maintained at a level which represents our best estimate of losses incurred. In determining the 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.

The first AFLL element (specific allocations) reflects our estimate of probable incurred losses based upon our systematic review of specific loans. These estimates are based upon a number of objective factors, such as payment history, financial condition of the borrower, discounted collateral exposure and discounted cash flow analysis. Impaired commercial and mortgage loans are allocated allowance amounts using this first element. The second AFLL element (other adversely rated loans) 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 both the probability of default and the expected loss rate (“loss given default”). The lower the rating assigned to a loan or category, the greater the allocation percentage that is applied. For higher rated loans (“non-watch credit”) we again determine a probability of default and loss given default in order to apply an allocation percentage. Commercial loans not falling under the first AFLL element are allocated allowance amounts using this second AFLL element. The third AFLL element (historical loss allocations) is determined by assigning allocations to homogeneous loan groups based principally upon the five-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 an analysis of delinquent loans. Loss analyses are conducted at least annually. Mortgage loans not falling under the first AFLL element as well as installment and payment plan receivables are allocated allowance amounts using this third AFLL element. The fourth AFLL element (additional allocations based on subjective factors) is based on factors that cannot be associated with a specific credit or loan category and reflects our attempt to ensure that the overall allowance for loan losses appropriately reflects a margin for the imprecision necessarily inherent in the estimates of expected credit losses. We consider a number of subjective factors when determining this fourth element, including local and general economic business factors and trends, portfolio concentrations and changes in the size, mix and the general terms of the overall loan portfolio.

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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 commercial, homogenous residential mortgage, and installment loans and payment plan receivables when they are deemed uncollectible or reach a predetermined number of days past due based on product, industry practice and other factors. Collection efforts may continue and recoveries may occur after a loan is charged against the allowance.

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

Mepco’s allowance for losses is determined in a similar manner as discussed above, and primarily takes into account historical loss experience and other subjective factors deemed relevant to Mepco’s payment plan business. Estimated incurred losses associated with Mepco’s outstanding vehicle service contract payment plans are included in the provision for loan losses. Mepco recorded a provision of $0.02 million and $0.04 million in the first six months of 2012 and 2011, respectively, for its provision for loan losses.  These lower provision levels are due primarily to declines ($16.1 million and $45.9 million in the first six months of 2012 and 2011, respectively) in the balance of payment plan receivables. Mepco’s allowance for loan losses totaled $0.2 million at both June 30, 2012 and December 31, 2011, respectively. Mepco has established procedures for vehicle service contract payment plan servicing, administration and collections, including the timely cancellation of the vehicle service contract, in order to protect our position in the event of payment default or voluntary cancellation by the customer. Mepco has also established procedures to attempt to prevent and detect fraud since the payment plan origination activities and initial customer contacts are done entirely through unrelated third parties (vehicle service contract administrators and sellers or automobile dealerships). However, there can be no assurance that the aforementioned risk management policies and procedures will prevent us from the possibility of incurring significant credit or fraud related losses in this business segment. The estimated incurred losses described in this paragraph should be distinguished from the possible losses we may incur from counterparties failing to pay their obligations to Mepco.  See Note #14 to the Interim Condensed Consolidated Financial Statements included within this report.

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The allowance for loan losses decreased $7.5 million to $51.3 million at June 30, 2012 from $58.9 million at December 31, 2011 and was equal to 3.52% of total Portfolio Loans at June 30, 2012 compared to 3.73% at December 31, 2011. All of the four components of the allowance for loan losses outlined above declined during the first six months of 2012. The specific allocations for loan losses decreased due principally to a decline in specific reserves on commercial loans.  Such reserves declined due primarily to charge-offs.  The allowance for loan losses related to other adversely rated loans decreased from December 31, 2011 to June 30, 2012 due primarily to lower levels of such loans.  The allowance for loan losses related to historical losses decreased due primarily to lower adjustments for delinquent loans as well as a decline in loan balances.  Finally, the allowance for loan losses related to subjective factors decreased due to the improvement in certain economic indicators used in computing this portion of the allowance as well as an overall decline in Portfolio Loans.  In addition to the aforementioned changes, at June 30, 2012, approximately $0.8 million in AFLL (of which $0.6 million related to historical losses and $0.2 million related to subjective factors) was reclassified to loans held for sale associated with the pending Branch Sale.

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

To attract new core deposits, we have implemented a direct mail account acquisition program as well as branch staff sales training. Our new account acquisition initiatives have historically generated increases in customer relationships. Over the past three to four years we have also expanded our treasury management products and services for commercial businesses and municipalities or other governmental units and have also increased our sales calling efforts in order to attract additional deposit relationships from these sectors. We view long-term core deposit growth as an important objective. Core deposits generally provide a more stable and lower cost source of funds than alternative sources such as short-term borrowings.  During the first six months of 2012 total deposits (including those deposits classified as held for sale and related to the pending Branch Sale) increased by $96.7 million, or 4.6%.  This increase was primarily due to growth in checking and savings account balances. (See “Liquidity and capital resources.”)

During the fourth quarter of 2009 we prepaid our estimated quarterly deposit insurance premium assessments to the FDIC for periods through the fourth quarter of 2012. These estimated quarterly deposit insurance premium assessments were based on projected deposit balances over the assessment periods. The prepaid deposit insurance premium assessments totaled $11.0 million and $12.6 million at June 30, 2012 and December 31, 2011, respectively. The actual expense over the assessment periods may be different from this prepaid amount due to various factors including variances in the estimated compared to the actual assessment base and rates used during each assessment period.

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

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Alternative Sources of Funds

	June 30,						December 31,
	2012						2011
			Average						Average
	Amount		Maturity	Rate			Amount		Maturity	Rate
	(Dollars in thousands)
Brokered CDs(1)	$	48,860	0.8 years		1.21	%	$	42,279	1.0 years		1.59	%
Fixed rate FHLB advances		17,917	5.1 years		6.38			30,384	3.3 years		3.99
Variable rate FHLB advances(1)		-						3,000	2.3 years		0.51
Total	$	66,777	2.0 years		2.60	%	$	75,663	2.0 years		2.51	%

(1) Certain of these items have had their average maturity and rate altered through the use of derivative instruments, including pay-fixed interest rate swaps.

Other borrowings, comprised of advances from the Federal Home Loan Bank (the “FHLB”), totaled $17.9 million at June 30, 2012, compared to $33.4 million at December 31, 2011. The decrease in other borrowed funds reflects reduced borrowings from the FHLB.

As described above, we utilize wholesale funding, including FHLB borrowings and Brokered CDs to augment our core deposits and fund a portion of our assets. At June 30, 2012, our use of such wholesale funding sources amounted to approximately $66.8 million, or 3.0% of total funding (deposits, including deposits held for sale, and total borrowings, excluding subordinated debentures). Because wholesale funding sources are affected by general market conditions, the availability of such funding may be dependent on the confidence these sources have in our financial condition and operations. The continued availability to us of these funding sources is uncertain, and Brokered CDs may be difficult for us to retain or replace at attractive rates as they mature. Our liquidity may be constrained if we are unable to renew our wholesale funding sources or if adequate financing is not available in the future at acceptable rates of interest or at all. Additionally, we may not have sufficient liquidity to continue to fund new loans, and we may need to liquidate loans or other assets unexpectedly, in order to repay obligations as they mature.

If we fail to remain “well-capitalized” (under federal regulatory standards) we will be prohibited from accepting or renewing Brokered CDs, without the prior consent of the FDIC. At June 30, 2012, we had Brokered CDs of approximately $48.9 million, or 2.2% of total deposits, including deposits held for sale. Of this amount $34.7 million mature during the next twelve months. We currently have ample liquidity in the form of interest-bearing deposits at the FRB or other short-term investments to retire maturing Brokered CDs. As a result, any potential future restrictions on our ability to access Brokered CDs are not expected to adversely impact our business or financial condition.

We cannot be sure that we will be able to maintain our current level of core deposits. In particular, those deposits that are currently uninsured or those deposits that are in non-interest bearing transaction accounts and have unlimited deposit insurance only through December 31, 2012 (in accordance with provisions in the Dodd-Frank Act), may be particularly susceptible to outflow. At June 30, 2012 we had an estimated $127.4 million of uninsured deposits and an additional $182.7 million of deposits that were in non-interest bearing transaction accounts and fully insured only through December 31, 2012 under the Dodd-Frank Act. A reduction in core deposits would increase our need to rely on wholesale funding sources, at a time when our ability to do so may be more restricted, as described above.

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We historically employed derivative financial instruments to manage our exposure to changes in interest rates. We discontinued the active use of derivative financial instruments during 2008, in part, because we could no longer get unsecured credit from our derivatives counterparties. At June 30, 2012, we had remaining one interest-rate swap with an aggregate notional amount of $10.0 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 Condensed Consolidated Statements of Cash Flows categorize these sources and uses into operating, investing and financing activities. We primarily focus our liquidity management on maintaining adequate levels of liquid assets (primarily funds on deposit with the FRB and certain investment securities) as well as developing access to a variety of borrowing sources to supplement our deposit gathering activities and provide funds for purchasing investment securities or originating Portfolio Loans as well as to be able to respond to unforeseen liquidity needs.

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

At June 30, 2012 we had $404.2 million of time deposits (including deposits held for sale) that mature in the next twelve months. Historically, a majority of these maturing time deposits are renewed by our customers. Additionally $1.324 billion of our deposits (excluding deposits held for sale) at June 30, 2012 were in account types from which the customer could withdraw the funds on demand. Changes in the balances of deposits that can be withdrawn upon demand are usually predictable and the total balances of these accounts have generally grown or have been stable over time as a result of our marketing and promotional activities. However, there can be no assurance that historical patterns of renewing time deposits or overall growth or stability in deposits will continue in the future.

In particular, media reports about bank failures have created concerns among depositors at banks throughout the country, including certain of our customers, particularly those with deposit balances in excess of deposit insurance limits. In response, the deposit insurance limit was permanently increased from $100,000 to $250,000 and unlimited deposit insurance is currently provided (only through December 31, 2012) for balances in non-interest bearing demand deposit accounts under provisions in the Dodd-Frank Act. We have proactively sought to provide appropriate information to our deposit customers about our organization in order to retain our business and deposit relationships. Despite the increases in deposit insurance limits and our proactive communications efforts, the potential outflow of deposits remains as a significant liquidity risk, particularly since our recent losses and our elevated level of non-performing assets have reduced some of the financial ratings of our Bank that are followed by our larger deposit customers, such as municipalities. The potential outflow of significant amounts of deposits could have an adverse impact on our liquidity and results of operations.

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

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As a result of the liquidity risks described above and in “Deposits and borrowings” and now the pending Branch Sale, we have generally maintained elevated levels of overnight cash balances in interest-bearing deposits, which totaled $358.9 million and $278.3 million at June 30, 2012 and December 31, 2011, respectively.  We expect the pending Branch Sale will require the use of approximately $330 to $340 million of interest bearing deposits or short-term securities available for sale.  We believe that we will have adequate liquidity after the Branch Sale closes despite the reduction in our cash and cash equivalents because of our remaining securities available for sale, our access to secured advances from the FHLB, our ability to issue Brokered CDs and our improved financial metrics.

As described in greater detail below, we are deferring interest on our subordinated debentures and are not currently paying any dividends on our preferred or common stock. Interest on the subordinated debentures can continue to be deferred until the fourth quarter of 2014. Thus, the only use of cash at the parent company at the present time is for operating expenses. Because of the past losses that our Bank has experienced and the Bank’s regulatory capital requirements, we do not anticipate that the Bank will be able to pay any dividends up to the parent company for at least through the end of 2012. As a result, the only substantial near term source of cash to our parent company is under an equity line facility that is described below. We believe that the available cash and cash equivalents on hand as well as access to the equity line facility provide sufficient liquidity at the parent company to meet its operating expenses until the fourth quarter of 2014 (at which point the parent company can no longer defer interest on its subordinated debentures).

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 cumulative trust preferred securities and cumulative convertible preferred stock.

Capitalization
	June 30,			December 31,
	2012			2011
	(In thousands)
Subordinated debentures	$	50,175		$	50,175
Amount not qualifying as regulatory capital		(1,507	)		(1,507	)
Amount qualifying as regulatory capital		48,668			48,668
Shareholders’ Equity
Convertible preferred stock		82,004			79,857
Common stock		249,751			248,950
Accumulated deficit		(208,569	)		(214,259	)
Accumulated other comprehensive loss		(10,014	)		(11,921	)
Total shareholders’ equity		113,172			102,627
Total capitalization	$	161,840		$	151,295

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We have four special purpose entities that originally issued $90.1 million of cumulative trust preferred securities. On June 23, 2010, we issued 5.1 million shares of our common stock (having a fair value of approximately $23.5 million on the date of the exchange) in exchange for $41.4 million in liquidation amount of trust preferred securities and $2.3 million of accrued and unpaid interest on such securities. As a result, at June 30, 2012 and December 31, 2011, $48.7 million of cumulative trust preferred securities remained outstanding. These special purpose entities issued common securities and provided cash to our parent company that in turn, issued subordinated debentures to these special purpose entities equal to the trust preferred securities and common securities. The subordinated debentures represent the sole asset of the special purpose entities. The common securities and subordinated debentures are included in our Condensed Consolidated Statements of Financial Condition.

The Federal Reserve Board has issued rules regarding trust preferred securities as a component of the Tier 1 capital of bank holding companies. The aggregate amount of trust preferred securities (and certain other capital elements) are limited to 25 percent of Tier 1 capital elements, net of goodwill (net of any associated deferred tax liability). The amount of trust preferred securities and certain other elements in excess of the limit can be included in Tier 2 capital, subject to restrictions. At the parent company, $41.1 million of these securities qualified as Tier 1 capital at June 30, 2012. Although the Dodd-Frank Act further limited Tier 1 treatment for trust preferred securities, those new limits will not apply to our outstanding trust preferred securities.

The Proposed New Capital Requirements described above, if adopted, would have a significant impact on our capital requirements, and include provisions that would eventually eliminate trust preferred securities as Tier 1 capital.

In December 2008, we issued 72,000 shares of Series A, Fixed Rate Cumulative Perpetual Preferred Stock, with an original liquidation preference of $1,000 per share (“Series A Preferred Stock”), and a warrant to purchase 346,154 shares (at $31.20 per share) of our common stock (“Original Warrant”) to the UST in return for $72.0 million under the Troubled Asset Relief Program’s Capital Purchase Program. Of the total proceeds, $68.4 million was originally allocated to the Series A Preferred Stock and $3.6 million was allocated to the Original Warrant (included in capital surplus) based on the relative fair value of each. The $3.6 million discount on the Series A Preferred Stock was being accreted using an effective yield method over five years. The accretion had been recorded as part of the Series A Preferred Stock dividend.

On April 16, 2010, we exchanged the Series A Preferred Stock (including accumulated but unpaid dividends) for 74,426 shares of our Series B Fixed Rate Cumulative Mandatorily Convertible Preferred Stock, with an original liquidation preference of $1,000 per share (“Series B Preferred Stock”). As part of the terms of the exchange agreement, we also agreed to amend and restate the terms of the Original Warrant and issued an Amended and Restated Warrant to purchase 346,154 shares of our common stock at an exercise price of $7.234 per share and expiring on December 12, 2018. The Series B Preferred Stock and the Amended Warrant were issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. We did not receive any cash proceeds from the issuance of the Series B Preferred Stock or the Amended Warrant. In general, the terms of the Series B Preferred Stock are substantially similar to the terms of the Series A Preferred Stock that was held by the UST, except that the Series B Preferred Stock is convertible into our common stock. See Note #15 to the Interim Condensed Consolidated Financial Statements included within this report for information about the terms of the Series B Preferred Stock and the Amended and Restated Warrant.

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Shareholders’ equity applicable to common stock increased to $31.2 million at June 30, 2012 from $22.8 million at December 31, 2011 due primarily to our net income during the first six months of 2012. Our tangible common equity (“TCE”) totaled $24.1 million and $15.2 million, respectively, at those same dates. Our ratio of TCE to tangible assets was 1.01% at June 30, 2012 compared to 0.66% at December 31, 2011. Although our Bank’s regulatory capital ratios remain at levels above “well capitalized” standards, because of the past losses that we have incurred, our elevated levels of non-performing loans and other real estate, and the ongoing economic stress in Michigan, we have taken the following actions to maintain and improve our regulatory capital ratios and preserve liquidity at our parent company level:

· Eliminated the cash dividend on our common stock:  Beginning in November 2009, we eliminated the $0.10 per share quarterly cash dividend on our common stock.

· Deferred dividends on our preferred stock:  Beginning in December 2009, we suspended payment of quarterly dividends on the preferred stock held by the UST. The cash dividends payable to the UST on the Series B Preferred Stock amount to approximately $4.2 million per year until December of 2013, at which time they would increase to approximately $7.5 million per year.  Accrued and unpaid dividends were $8.6 million at June 30, 2012.

· Deferred dividends on our subordinated debentures:  Beginning in December 2009, we exercised our right to defer all quarterly interest payments on the subordinated debentures we issued to our trust subsidiaries. As a result, all quarterly dividends on the related trust preferred securities were also deferred. Based on current dividend rates, the cash dividends on all outstanding trust preferred securities as of June 30, 2012, amount to approximately $2.3 million per year. Accrued and unpaid dividends on trust preferred securities at June 30, 2012 and December 31, 2011 were $5.5 million and $4.4 million, respectively.

· Exchanged the Series A Preferred Stock held by the UST for Series B Preferred Stock:  In April 2010, we completed the exchange of Series A Preferred Stock held by the UST (plus accrued and unpaid dividends on such stock) for new shares of convertible Series B Preferred Stock, as described above.

· Exchanged certain trust preferred securities for our common stock:  In June 2010, we completed the exchange of 5.1 million shares of our common stock for $41.4 million in liquidation amount of trust preferred securities and $2.3 million of accrued and unpaid interest on such securities.

· Executed a definitive agreement to sell 21 branch offices.

Many of these actions have preserved cash at our parent company as we do not expect our Bank to be able to pay any cash dividends in the near term. Dividends from the Bank are restricted by federal and state law and are further restricted by the board resolutions adopted in December 2009 (as subsequently amended) and by the Memorandum of Understanding (“MOU”) described in Note #11 to the Interim Condensed Consolidated Financial Statements included within this report. In particular, those resolutions and the MOU prohibit the Bank from paying any dividends to the parent company without the prior written approval of the FRB and the Michigan Office of Financial and Insurance Regulation (“OFIR”). Also see “Regulatory development.”

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Our parent company is also currently prohibited from paying any dividends on our common stock or the convertible preferred stock held by the UST or any distributions on our trust preferred securities. Although there are no specific regulations restricting dividend payments by bank holding companies (other than state corporate laws) the FRB, our primary federal regulator, has issued a policy statement on cash dividend payments. The FRB’s view is that: “an organization experiencing earnings weaknesses or other financial pressures should not maintain a level of cash dividends that exceeds its net income, that is inconsistent with the organization’s capital position, or that can only be funded in ways that may weaken the organization’s financial health.” Moreover, the resolutions adopted by our Board in 2009 and the MOU referenced above specifically prohibit the parent company from paying any dividends on our common stock or the preferred stock held by the UST or any distributions on our trust preferred securities without, in each case, the prior written approval of the FRB and the OFIR.

Payment of dividends and distributions on the outstanding common stock, convertible preferred stock, and trust preferred securities is also restricted and governed by the terms of those instruments, as follows:

The terms of the subordinated debentures and trust indentures (the “Indentures”) related to our trust preferred securities allow us to defer payment of interest at any time or from time to time for up to 20 consecutive quarters provided no event of default (as defined in the Indentures) has occurred and is continuing. We are not in default with respect to the Indentures, and the deferral of interest does not constitute an event of default under the Indentures. While we defer the payment of interest, we will continue to accrue the interest expense owed at the applicable interest rate. Upon the expiration of the deferral, all accrued and unpaid interest is due and payable. During the deferral period on the Indentures, we may not declare or pay any dividends or distributions on, or redeem, purchase, acquire or make a liquidation payment with respect to, any of our capital stock.

So long as any shares of the Series B Preferred Stock remain outstanding, unless all accrued and unpaid dividends for all prior dividend periods have been paid or are contemporaneously declared and paid in full, (a) no dividend may be paid or declared on our common stock or other junior stock, other than a dividend payable solely in common stock and other than certain dividends or distributions of rights in connection with a shareholders’ rights plan; and (b) with limited exceptions, neither we nor any of our subsidiaries may purchase, redeem or otherwise acquire for consideration any shares of our common stock or other junior stock unless we have paid in full all accrued dividends on the Series B Preferred Stock for all prior dividend periods.

We do not have any current plans to resume interest payments on our outstanding trust preferred securities or dividend payments on the outstanding shares of any convertible preferred stock or common stock. We do not know if or when any such payments will resume. However, as described in Note #11 to the Interim Condensed Consolidated Financial Statements included within this report, our Board adopted a Joint Revised Capital Plan (the “Capital Plan”) in November 2011 (as subsequently amended in February 2012). The primary objective of our Capital Plan is to achieve and thereafter maintain the minimum capital ratios required by the December 2009 board resolutions referenced above (as subsequently amended).

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As of June 30, 2012, our Bank continued to meet the requirements to be considered “well-capitalized” under federal regulatory standards. However, the minimum capital ratios established by our Board are higher than the ratios required in order to be considered “well-capitalized” under federal standards. The Board imposed these higher ratios in order to ensure that we have sufficient capital to withstand potential continuing losses based on our elevated level of non-performing assets and given certain other risks and uncertainties we face. Set forth below are the actual capital ratios of our Bank as of June 30, 2012, the minimum capital ratios imposed by the board resolutions, and the minimum ratios necessary to be considered “well-capitalized” under federal regulatory standards. As of June 30, 2012, our Bank’s Total Capital to Risk-Weighted Assets ratio exceeded the target of 11%.

Regulatory Capital Ratios	Independent Bank Actual at June 30, 2012			Minimum Ratios Established by our Board			Required to be Well-Capitalized
Tier 1 capital to average total assets		6.98	%		8.00	%		5.00	%
Total capital to risk-weighted assets		12.48			11.00			10.00

The Capital Plan includes projections that reflect forecasted financial data through 2014. At the present time, based on these forecasts and our expectations, we believe that our Bank can remain above “well-capitalized” for regulatory purposes, even without additional capital, primarily because of the pending Branch Sale as well as some further projected decline in total assets (principally loans). Further, credit costs have abated sufficiently so that we have returned to profitability in the first half of 2012. These forecasts are susceptible to significant variations, particularly if the Michigan economy were to further deteriorate and credit costs were to be higher than anticipated or if we incur any significant future losses at Mepco related to the collection of vehicle service contract counterparty receivables (see “Non-interest expense”). Because of such uncertainties, it is possible that our Bank may not be able to remain well-capitalized as we work through asset quality issues and seek to return to consistent profitability. Any significant deterioration in or inability to improve our capital position would make it very difficult for us to withstand continued losses that we may incur and that may be increased or made more likely as a result of continued economic difficulties and other factors. Please see page 1 of this report for cautionary information about these forward-looking statements and factors that may cause actual results to differ from our current expectations.

Our Capital Plan also outlines various contingency plans in case we do not succeed in meeting the required minimum capital ratios. These contingency plans include a possible further reduction in our assets (such as through another sale of branches, loans, and/or operating divisions or subsidiaries), more significant expense reductions than those that have already been implemented, and a sale of the Bank. These contingency plans were considered and included within the Capital Plan in recognition of the possibility that market conditions for these transactions may improve and that such transactions may be necessary or required by our regulators if we are unable to attain the required minimum capital ratios described above through other means. At the present time, as a result of the pending Branch Sale, during the second half of 2012 we expect to meet all of the required minimum capital ratios described above.

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In addition to the measures outlined in the Capital Plan, on July 7, 2010 we executed an Investment Agreement and Registration Rights Agreement with Dutchess Opportunity Fund, II, LP (“Dutchess”) for the sale of shares of our common stock. These agreements serve to establish an equity line facility as a contingent source of liquidity at the parent company level. Pursuant to the Investment Agreement, Dutchess committed to purchase up to $15.0 million of our common stock over a 36-month period ending November 1, 2013. We have the right, but no obligation, to draw on this equity line facility from time to time during such 36-month period by selling shares of our common stock to Dutchess. The sales price is at a 5% discount to the market price of our common stock at the time of the draw (as such market price is determined pursuant to the terms of the Investment Agreement). To date, we have sold a total of 945,209 shares (167,235 shares in the second quarter of 2012, 345,177 shares in the fourth quarter of 2010, 253,759 shares in the first quarter of 2011 and 179,038 shares in the second quarter of 2011) of our common stock to Dutchess under this equity line for total net proceeds of approximately $2.3 million. At the present time, we have shareholder approval to sell approximately 3.1 million additional shares under this equity line.

Our bank holding company and our Bank both remain “well capitalized” (as defined by banking regulations) at June 30, 2012.

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

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

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

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Changes in Market Value of Portfolio Equity and Net Interest Income

	Market Value
Change in Interest	Of Portfolio		Percent			Net Interest		Percent
Rates	Equity(1)		Change			Income(2)		Change
	(Dollars in thousands)
June 30, 2012
200 basis point rise	$	265,300		29.92	%	$	89,900		8.05	%
100 basis point rise		237,300		16.21			86,000		3.37
Base-rate scenario		204,200		-			83,200		-
100 basis point decline		170,000		(16.75	)		82,500		(0.84	)
December 31, 2011
200 basis point rise	$	277,500		26.08	%	$	91,200		6.17	%
100 basis point rise		252,200		14.58			88,200		2.68
Base-rate scenario		220,100		-			85,900		-
100 basis point decline		181,700		(17.45	)		85,000		(1.05	)

(1) Simulation analyses calculate the change in the net present value of our assets and liabilities, including debt and related financial derivative instruments, under parallel shifts in interest rates by discounting the estimated future cash flows using a market-based discount rate. Cash flow estimates incorporate anticipated changes in prepayment speeds and other embedded options.

(2) Simulation analyses calculate the change in net interest income under immediate parallel shifts in interest rates over the next twelve months, based upon a static statement of financial condition, which includes debt and related financial derivative instruments, and do not consider loan fees.

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

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

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

Regulatory developments. On October 25, 2011, the respective Boards of Directors of the Company and the Bank entered into an MOU with the FRB and OFIR. The MOU largely duplicates certain of the provisions in the Board resolutions described above, but also has the following specific requirements:

● Submission of a joint revised capital plan by November 30, 2011 to maintain sufficient capital at the Company on a consolidated basis and at the Bank on a stand-alone basis;

● Submission of quarterly progress reports regarding disposition plans for any assets in excess of $1.0 million that are in ORE, are 90 days or more past due, are on our “watch list,” or were adversely classified in our most recent examination;

● Enhanced reporting and monitoring at Mepco regarding risk management and the internal classification of assets; and

● Enhanced interest rate risk modeling practices.

We believe that we are generally in compliance with the provisions of the MOU, however, we must still execute on certain strategies outlined in our Capital Plan.

Management plans and expectations. Elevated credit costs, including our provision for loan losses, loan and collection costs, net losses on ORE, and losses related to vehicle service contract counterparty contingencies, resulted in substantial losses over the period from 2008 through 2011 and reduced our capital. Management continues to focus on reducing non-performing assets and returning the organization to consistent profitability as soon as possible. Management believes meaningful progress was made on these objectives in 2011 and 2010. Further, as discussed above, we have adopted a Capital Plan, which includes a series of actions designed to increase our regulatory capital ratios, decrease our expenses and enable us to withstand and better respond to current market conditions and the potential for worsening market conditions. At the present time, based on our current forecasts and expectations, we believe that our Bank can remain above “well-capitalized” for regulatory purposes for the foreseeable future, even without additional capital, primarily because of the pending Branch Sale, some projected further decline in total assets (principally loans) and a return to profitability in 2012 and beyond. As a result of these expectations with respect to the Bank’s regulatory capital ratios, and in light of our improvements in asset quality and other positive indicators, we continue to evaluate our alternatives in connection with the timing and size of any common stock offering. This evaluation will take into account our ongoing operating results, as well as input from our financial advisors and the UST.

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Litigation Matters

We are involved in various litigation matters in the ordinary course of business. At the present time, we do not believe any of these matters will have a significant impact on our consolidated financial position or results of operations. The aggregate amount we have accrued for losses we consider probable as a result of these litigation matters is immaterial. However, because of the inherent uncertainty of outcomes from any litigation matter, we believe it is reasonably possible we may incur losses in addition to the amounts we have accrued. However, at this time, we are unable to estimate the range of additional losses that are reasonably possible because of a number of factors, including the fact that certain of these litigation matters are still in their early stages and involve claims for which, at this point, we believe have little to no merit.

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

Critical Accounting Policies

Our accounting and reporting policies are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. Accounting and reporting policies for other than temporary impairment of investment securities, the allowance for loan losses, originated mortgage loan servicing rights, vehicle service contract payment plan counterparty contingencies, and income taxes are deemed critical since they involve the use of estimates and require significant management judgments. Application of assumptions different than those that we have used could result in material changes in our consolidated financial position or results of operations.  There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.

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Item 3.

Quantitative and Qualitative Disclosures about Market Risk

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

Item 4.

Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

With the participation of management, our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a – 15(e) and 15d – 15(e)) for the period ended June 30, 2012, have concluded that, as of such date, our disclosure controls and procedures were effective.

(b) Changes in Internal Controls.

During the quarter ended June 30, 2012, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II

Item 1A.  Risk Factors

There have been no material changes to the risk factors disclosed in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2011.

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

The following table shows certain information relating to purchases of common stock for the three-months ended June 30, 2012, pursuant to any share repurchase plans:

						Total Number of		Remaining
						Shares Purchased		Number of
						as Part of a		Shares Authorized
	Total Number of			Average Price		Publicly		for Purchase
Period	Shares Purchased			Paid Per Share		Announced Plan		Under the Plan
April 2012		3,024	(1)	$	2.26		-	NA
May 2012		1,977	(1)		3.44		-	NA
June 2012		3,487	(1)		2.93		-	NA
Total		8,488		$	2.81		-	NA

(1) A portion of the salary payable to our Chief Executive Officer, Michael M. Magee, and to our President, William B. Kessel, is payable in salary stock, which is issued on a bi-weekly basis in connection with our regular pay periods.  The shares disclosed in this table are shares withheld from the shares that would otherwise be issued to Mr. Magee and Mr. Kessel in order to satisfy tax withholding obligations.

Item 3b.  Defaults Upon Senior Securities

As of June 30, 2012, the Company was in arrears in the aggregate amount of $8.1 million with respect to the Series B Preferred Stock it issued to the U.S. Department of the Treasury as a result of the Company’s decision to defer these dividends in the fourth quarter of 2009.  

Item 6.  Exhibits

(a)	The following exhibits (listed by number corresponding to the Exhibit Table as Item 601 in Regulation S-K) are filed with this report:
11.	Computation of Earnings Per Share.
31.1	Certificate of the Chief Executive Officer of Independent Bank Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
31.2	Certificate of the Chief Financial Officer of Independent Bank Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
32.1	Certificate of the Chief Executive Officer of Independent Bank Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
32.2	Certificate of the Chief Financial Officer of Independent Bank Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
	101.INS Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURES

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

Date	August 9, 2012	By	/s/ Robert N. Shuster
			Robert N. Shuster, Principal Financial Officer
Date	August 9, 2012	By	/s/ James J. Twarozynski
			James J. Twarozynski, Principal Accounting Officer

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EX-11

 Exhibit 11

Computation of Earnings Per Share

See Note #6 to the Interim Condensed Consolidated Financial Statements (unaudited) for a reconciliation of basic and diluted earnings per share for the three- and six- month periods ending June 30, 2012 and 2011.

EX-31.1

EXHIBIT 31.1

CERTIFICATION

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

1. I have reviewed this quarterly report on Form 10-Q of Independent Bank Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

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

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.

	INDEPENDENT BANK CORPORATION
Date:  August 9, 2012	/s/ Michael M. Magee, Jr.
	Michael M. Magee, Jr.
	Chief Executive Officer

EX-31.2

 EXHIBIT 31.2

CERTIFICATION

I, Robert N. Shuster, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Independent Bank Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

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

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.

	INDEPENDENT BANK CORPORATION
Date:  August 9, 2012	/s/ Robert N. Shuster
	Robert N. Shuster
	Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATE OF THE

CHIEF EXECUTIVE OFFICER OF

INDEPENDENT BANK CORPORATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350):

I, Michael M. Magee, Jr., Chief Executive Officer of Independent Bank Corporation, certify, to the best of my knowledge and belief, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) that:

(1)           The quarterly report on Form 10-Q for the quarterly period ended June 30, 2012, which this statement accompanies, fully complies with requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and;

(2)          The information contained in this quarterly report on Form 10-Q for the quarterly period ended June 30, 2012, fairly presents, in all material respects, the financial condition and results of operations of Independent Bank Corporation..

	INDEPENDENT BANK CORPORATION
Date:  August 9, 2012	/s/ Michael M. Magee, Jr.
	Michael M. Magee, Jr.
	Chief Executive Officer

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

EX-32.2

 EXHIBIT 32.2

CERTIFICATE OF THE

CHIEF FINANCIAL OFFICER OF

INDEPENDENT BANK CORPORATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350):

I, Robert N. Shuster, Chief Financial Officer of Independent Bank Corporation, certify, to the best of my knowledge and belief, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) that:

(1)           The quarterly report on Form 10-Q for the quarterly period ended June 30, 2012, which this statement accompanies, fully complies with requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and;

(2)           The information contained in this quarterly report on Form 10-Q for the quarterly period ended June 30, 2012, fairly presents, in all material respects, the financial condition and results of operations of Independent Bank Corporation.

	INDEPENDENT BANK CORPORATION
Date:  August 9, 2012	/s/ Robert N. Shuster
	Robert N. Shuster
	Chief Financial Officer

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

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Loans, Troubled Debt Restructurings (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012		Jun. 30, 2012		Dec. 31, 2011
Financing Receivable, Modifications [Line Items]
Troubled debt restructuring	$ 154,703,000		$ 154,703,000		$ 145,217,000
Troubled debt restructuring, specific reserve	18,200,000		18,200,000		18,100,000
Loans classified as troubled debt restructurings [Abstract]
Number of contracts	92		145
Pre-modification recorded balance	19,602,000		30,588,000
Post-modification recorded balance	19,002,000		29,907,000
Increase in allowance for loan losses	400,000		600,000
Charge offs due to troubled debt restructurings	300,000		300,000
TDR that subsequently defaulted [Abstract]
Number of contracts	4		16
Financing receivable modification subsequent default recorded investment	209,000		1,795,000
Past due period for modified loans			90 days
Decrease in allowance for loan loss due to TDRs that subsequently defaulted	100,000		300,000
Charge-offs on TDRs that subsequently defaulted	200,000		600,000
Maximum [Member]
Financing Receivable, Modifications [Line Items]
Modification of stated interest rate of loans, range of period (in months)			60
Modifications involving extension of maturity date, period range (in months)			60
Minimum [Member]
Financing Receivable, Modifications [Line Items]
Modification of stated interest rate of loans, range of period (in months)			9
Modifications involving extension of maturity date, period range (in months)			1
Maximum in Certain Circunstances [Member]
Financing Receivable, Modifications [Line Items]
Modification of stated interest rate of loans, range of period (in months)			480
Modifications involving extension of maturity date, period range (in months)			472
Commercial [Member] | Income Producing - Real Estate [Member]
Loans classified as troubled debt restructurings [Abstract]
Number of contracts	12		14
Pre-modification recorded balance	8,045,000		8,268,000
Post-modification recorded balance	7,974,000		8,191,000
TDR that subsequently defaulted [Abstract]
Number of contracts	0		2
Financing receivable modification subsequent default recorded investment	0		434,000
Commercial [Member] | Land, Land Development and Construction Real Estate [Member]
Loans classified as troubled debt restructurings [Abstract]
Number of contracts	1		3
Pre-modification recorded balance	49,000		2,887,000
Post-modification recorded balance	77,000		2,913,000
TDR that subsequently defaulted [Abstract]
Number of contracts	0		1
Financing receivable modification subsequent default recorded investment	0		136,000
Commercial [Member] | Commercial and Industrial [Member]
Loans classified as troubled debt restructurings [Abstract]
Number of contracts	19		33
Pre-modification recorded balance	4,286,000		8,196,000
Post-modification recorded balance	4,001,000		7,895,000
TDR that subsequently defaulted [Abstract]
Number of contracts	1		8
Financing receivable modification subsequent default recorded investment	41,000		914,000
Mortgage [Member] | Family 1 4 [Member]
Loans classified as troubled debt restructurings [Abstract]
Number of contracts	28		43
Pre-modification recorded balance	3,504,000		4,802,000
Post-modification recorded balance	3,372,000		4,639,000
TDR that subsequently defaulted [Abstract]
Number of contracts	2		2
Financing receivable modification subsequent default recorded investment	148,000		148,000
Mortgage [Member] | Resort Lending [Member]
Loans classified as troubled debt restructurings [Abstract]
Number of contracts	11		18
Pre-modification recorded balance	3,031,000		5,206,000
Post-modification recorded balance	2,917,000		5,072,000
TDR that subsequently defaulted [Abstract]
Number of contracts	0		1
Financing receivable modification subsequent default recorded investment	0		117,000
Mortgage [Member] | Home Equity Line of Credit - 1st Lien [Member]
Loans classified as troubled debt restructurings [Abstract]
Number of contracts	0		1
Pre-modification recorded balance	0		15,000
Post-modification recorded balance	0		6,000
TDR that subsequently defaulted [Abstract]
Number of contracts	0		0
Financing receivable modification subsequent default recorded investment	0		0
Mortgage [Member] | Home Equity Line of Credit - 2nd Lien [Member]
Loans classified as troubled debt restructurings [Abstract]
Number of contracts	0		0
Pre-modification recorded balance	0		0
Post-modification recorded balance	0		0
TDR that subsequently defaulted [Abstract]
Number of contracts	0		0
Financing receivable modification subsequent default recorded investment	0		0
Installment [Member]
TDR that subsequently defaulted [Abstract]
Number of contracts			0
Financing receivable modification subsequent default recorded investment			0
Installment [Member] | Home Equity Installment - 1st Lien [Member]
Loans classified as troubled debt restructurings [Abstract]
Number of contracts	6		10
Pre-modification recorded balance	118,000		426,000
Post-modification recorded balance	115,000		426,000
TDR that subsequently defaulted [Abstract]
Number of contracts	0		1
Financing receivable modification subsequent default recorded investment	0		26,000
Installment [Member] | Home Equity Installment - 2nd Lien [Member]
Loans classified as troubled debt restructurings [Abstract]
Number of contracts	6		13
Pre-modification recorded balance	317,000		511,000
Post-modification recorded balance	313,000		507,000
TDR that subsequently defaulted [Abstract]
Number of contracts	1		1
Financing receivable modification subsequent default recorded investment	20,000		20,000
Installment [Member] | Loans Not Secured By Real Estate [Member]
Loans classified as troubled debt restructurings [Abstract]
Number of contracts	9		10
Pre-modification recorded balance	252,000		277,000
Post-modification recorded balance	233,000		258,000
TDR that subsequently defaulted [Abstract]
Number of contracts	0		0
Financing receivable modification subsequent default recorded investment	0		0
Installment [Member] | Others 2 [Member]
Loans classified as troubled debt restructurings [Abstract]
Number of contracts	0		0
Pre-modification recorded balance	0		0
Post-modification recorded balance	0		0
TDR that subsequently defaulted [Abstract]
Number of contracts	0
Financing receivable modification subsequent default recorded investment	0
Performing TDR's [Member]
Financing Receivable, Modifications [Line Items]
Troubled debt restructuring	131,867,000		131,867,000		116,569,000
Non-performing TDR's [Member]
Financing Receivable, Modifications [Line Items]
Troubled debt restructuring	22,836,000	[1]	22,836,000	[1]	28,648,000	[1]
Commercial [Member]
Financing Receivable, Modifications [Line Items]
Troubled debt restructuring	55,871,000		55,871,000		44,366,000
Commercial [Member] | Performing TDR's [Member]
Financing Receivable, Modifications [Line Items]
Troubled debt restructuring	44,573,000		44,573,000		29,799,000
Commercial [Member] | Non-performing TDR's [Member]
Financing Receivable, Modifications [Line Items]
Troubled debt restructuring	11,298,000	[1]	11,298,000	[1]	14,567,000	[1]
Retail Segment [Member]
Financing Receivable, Modifications [Line Items]
Troubled debt restructuring	98,832,000		98,832,000		100,851,000
Retail Segment [Member] | Performing TDR's [Member]
Financing Receivable, Modifications [Line Items]
Troubled debt restructuring	87,294,000		87,294,000		86,770,000
Retail Segment [Member] | Non-performing TDR's [Member]
Financing Receivable, Modifications [Line Items]
Troubled debt restructuring	$ 11,538,000	[1],[2]	$ 11,538,000	[1],[2]	$ 14,081,000	[1],[2]

[1] Included in non-performing loans table above.

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

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Regulatory Matters (Details) (USD $)					6 Months Ended	12 Months Ended	6 Months Ended	12 Months Ended
	Jun. 30, 2012	Dec. 31, 2011	Jun. 30, 2011	Dec. 31, 2010	Jun. 30, 2012 Independent Bank [Member]	Dec. 31, 2011 Independent Bank [Member]	Jun. 30, 2012 Consolidated [Member]	Dec. 31, 2011 Consolidated [Member]	Jun. 30, 2012 Board Established Ratios [Member]	Jun. 30, 2012 Minimum Ratio To Be Well Capitalized [Member]
Regulatory Matters [Abstract]
Past due assets disposition plan amount to be reported	$ 1,000,000
Total capital to risk-weighted assets [Abstract]
Actual Amount					185,594,000	175,868,000	183,061,000	174,547,000
Minimum for Adequately Capitalized Institutions, Amount					118,933,000	123,254,000	119,150,000	123,470,000
Minimum for Well Capitalized Institutions, Amount					148,667,000	154,068,000	0	0
Actual Ratio (in hundredths)					12.48%	11.41%	12.29%	11.31%	11.00%	10.00%
Minimum for Adequately Capitalized Institutions Ratio (in hundredths)					8.00%	8.00%	8.00%	8.00%
Minimum for Well-Capitalized Institutions (in hundredths)					10.00%	10.00%	0.00%	0.00%
Tier 1 capital to risk-weighted assets [Abstract]
Actual Amount					166,591,000	156,104,000	156,419,000	144,265,000
Minimum for Adequately Capitalized Institutions, Amount					59,467,000	61,627,000	59,575,000	61,735,000
Minimum for Well-Capitalized Institutions, Amount					89,200,000	92,441,000	0	0
Actual Ratio (in hundredths)					11.21%	10.13%	10.50%	9.35%
Minimum for Adequately Capitalized Institutions, Ratio (in hundredths)					4.00%	4.00%	4.00%	4.00%
Minimum for Well Capitalized Institutions, Ratio (in hundredths)					6.00%	6.00%	0.00%	0.00%
Tier 1 capital to average assets [Abstract]
Actual Amount					166,591,000	156,104,000	156,419,000	144,265,000
Minimum for Adequately Capitalized Institutions, Amount					95,416,000	92,268,000	95,522,000	92,338,000
Minimum for Well-Capitalized Institutions, Amount					119,270,000	115,335,000	0	0
Actual Ratio (in hundredths)					6.98%	6.77%	6.55%	6.25%	8.00%	5.00%
Minimum for Adequately Capitalized Institutions, Ratio (in hundredths)					4.00%	4.00%	4.00%	4.00%
Minimum for Well-Capitalized Institutions, Ratio (in hundredths)					5.00%	5.00%	0.00%	0.00%
Components of regulatory capital [Abstract]
Total shareholders' equity	113,172,000	102,627,000	114,441,000	119,085,000	164,453,000	152,987,000	113,172,000	102,627,000
Add (deduct) [Abstract]
Qualifying trust preferred securities					0	0	41,062,000	38,183,000
Accumulated other comprehensive loss	(10,014,000)	(11,921,000)			9,967,000	11,583,000	10,014,000	11,921,000
Intangible assets	(7,065,000)	(7,609,000)			(7,065,000)	(7,609,000)	(7,065,000)	(7,609,000)
Disallowed capitalized mortgage loan servicing rights					(764,000)	(857,000)	(764,000)	(857,000)
Tier 1 capital					166,591,000	156,104,000	156,419,000	144,265,000
Qualifying trust preferred securities II					0	0	7,606,000	10,485,000
Allowance for loan losses and allowance for unfunded lending commitments					19,003,000	19,764,000	19,036,000	19,797,000
Total risk-based capital					$ 185,594,000	$ 175,868,000	$ 183,061,000	$ 174,547,000
Maximum percentage of allowance for loan losses and allowance for unfunded lending commitments (in hundredths)	1.25%
Actual, minimum board imposed and ratios necessary to be well capitalized [Abstract]
Total Capital to Risk-Weighted Assets (in hundredths)					12.48%	11.41%	12.29%	11.31%	11.00%	10.00%
Tier 1 Capital to Average Total Assets (in hundredths)					6.98%	6.77%	6.55%	6.25%	8.00%	5.00%

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Share Based Compensation (Details) (USD $)	3 Months Ended		6 Months Ended				3 Months Ended				6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012 Stock Options [Member]	Jun. 30, 2012 Restricted Stock [Member]	Mar. 31, 2012 President [Member]	Mar. 31, 2011 Chief Executive Officer [Member]	Mar. 31, 2011 Executive Officers [Member]	Jun. 30, 2011 Executive Officers [Member]	Jun. 30, 2012 Non-Employee Directors [Member]
Salary Stock Arrangement with Individual, Share-based Payments [Line Items]
Number of additional shares approved for grant (in shares)			500,000								400,000
Annual salary increase							$ 30,000	$ 200,000
Restricted stock units issued to executives (in shares)									140,000
Number of executive issued restricted stock										5
Award vesting period, minimum									2 years
Shares issued to directors as retainer fees (in shares)			130,000	30,000
Total compensation expense (recovery) recognized	200,000	200,000	100,000	400,000
Non-employee directors share-based compensation expenses	100,000	100,000	200,000	100,000
Total compensation cost not yet recognized	700,000		700,000
Total compensation cost not yet recognized, period for recognition			2 years 7 months 6 days
Outstanding stock option grants and transaction [Roll Forward]
Outstanding, beginning balance (in shares)					180,862
Granted (in shares)					0
Exercised (in shares)					0
Exchanged (in shares)					0
Forfeited (in shares)					(11,200)
Expired (in shares)					(5,495)
Outstanding, ending balance (in shares)					164,167
Vested and expected to vest, period end (in shares)					154,970
Exercisable, period end (in shares)					79,282
Weighted Average Exercise Price [Roll Forward]
Outstanding, beginning balance (in dollars per share)					$ 7.98
Granted (in dollars per share)					$ 0
Exercised (in dollars per share)					$ 0
Exchanged (in dollars per share)			$ 0
Forfeited (in dollars per share)					$ 1.92
Expired (in dollars per share)					$ 90.66
Outstanding, ending balance (in dollars per share)					$ 5.62
Vested and expected to vest, period end (in dollars per share)					$ 5.84
Exercisable, period end (in dollars per share)					$ 9.59
Weighted-Average Remaining Contractual Term [Abstract]
Outstanding, Weighted Average Remaining Contractual Term					8 years 3 months 4 days
Vested and Expected to Vest, Weighted-Average Remaining Contractual Term					8 years 2 months 19 days
Exercisable, Weighted Average Remaining Contractual Term					7 years 5 months 19 days
Aggregate intrinsic value [Abstract]
Outstanding, Intrinsic Value					70,000
Vested and Expected to Vest, Outstanding, Aggregate Intrinsic Value					65,000
Exercisable, Aggregate Intrinsic Value					$ 23,000
Non-vested restricted stock and stock units and transactions [Roll Forward]
Outstanding, beginning balance (in shares)						165,045
Granted (in shares)						0
Vested (in shares)						(4,496)
Forfeited (in shares)						(522)
Outstanding, ending balance (in shares)						160,027
Weighted Average Grant Date Fair Value [Roll Forward]
Outstanding, beginning balance (in dollars per share)						$ 17.90
Granted (in dollars per share)						$ 0
Vested (in dollars per share)						$ 166.90
Forfeited (in dollars per share)						$ 93.14
Outstanding, ending balance (in dollars per share)						$ 13.47

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Fair Values of Financial Instruments (Tables)

6 Months Ended

Jun. 30, 2012

Fair Values of Financial Instruments [Abstract]

Estimated recorded book balance and fair values

The estimated recorded book balances and fair values follows:

	June 30, 2012
					Fair Value Measurements Using
					Quoted
					Prices
					in Active
					Markets		Significant		Significant
					for		Other		Un-
	Recorded		Fair Value		Identical		Observable		observable
	Book		Measure-		Assets		Inputs		Inputs
	Balance		ments		(Level 1)		(Level 2)		(Level 3)
	(In thousands)
Assets
Cash and due from banks	$	60,800	$	60,800	$	60,800	$	-	$	-
Interest bearing deposits		358,900		358,900		358,900		-		-
Trading securities		100		100		100		-		-
Securities available for sale		247,000		247,000		-		247,000		-
Federal Home Loan Bank and Federal Reserve Bank Stock		20,500		NA		NA		NA		NA
Net loans and loans held for sale		1,502,600		1,441,800		-		96,600		1,345,200
Accrued interest receivable		6,100		6,100		50		900		5,150
Derivative financial instruments		2,000		2,000		-		2,000		-
Liabilities
Deposits with no stated maturity	$	1,617,700	$	1,617,700	$	1,617,700	$	-	$	-
Deposits with stated maturity		565,100		567,600		-		567,600		-
Other borrowings		17,900		22,000		-		22,000		-
Subordinated debentures		50,200		34,600		6,500		28,100		-
Accrued interest payable		6,200		6,200		2,500		3,700		-
Derivative financial instruments		1,900		1,900		-		1,500		400

	December 31, 2011
	Recorded
	Book		Estimated
	Balance		Fair Value
	(In thousands)
Assets
Cash and due from banks	$	62,800	$	62,800
Interest bearing deposits		278,300		278,300
Trading securities		80		80
Securities available for sale		157,400		157,400
Federal Home Loan Bank and Federal   Reserve Bank Stock		20,800	NA
Net loans and loans held for sale		1,562,500		1,475,700
Accrued interest receivable		6,200		6,200
Derivative financial instruments		900		900
Liabilities
Deposits with no stated maturity	$	1,517,300	$	1,517,300
Deposits with stated maturity		568,800		571,600
Other borrowings		33,400		37,900
Subordinated debentures		50,200		16,100
Accrued interest payable		5,100		5,100
Derivative financial instruments		1,900		1,900

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Loans (Tables)

6 Months Ended

Jun. 30, 2012

Loans [Abstract]

Analysis of allowance for loan losses by portfolio segment

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

										Payment
										Plan
	Commercial			Mortgage			Installment			Receivables			Unallocated			Total
	(In thousands)
2012
Balance at beginning of period	$	16,441		$	23,271		$	5,534		$	206		$	10,554		$	56,006
Additions (deductions)
Provision for loan losses		1,194			570			229			(7	)		(930	)		1,056
Recoveries credited to allowance		390			572			389			-			-			1,351
Loans charged against the allowance		(2,379	)		(2,950	)		(953	)		(4	)		-			(6,286	)
Reclassification to loans held for sale		(170	)		(192	)		(218	)		-			(201	)		(781	)
Balance at end of period	$	15,476		$	21,271		$	4,981		$	195		$	9,423		$	51,346
2011
Balance at beginning of period	$	21,279		$	23,771		$	6,719		$	333		$	13,659		$	65,761
Additions (deductions)
Provision for loan losses		1,333			2,964			446			37			(624	)		4,156
Recoveries credited to allowance		512			385			348			2			-			1,247
Loans charged against the allowance		(5,427	)		(3,968	)		(1,224	)		(26	)		-			(10,645	)
Balance at end of period	$	17,697		$	23,152		$	6,289		$	346		$	13,035		$	60,519

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

										Payment
										Plan
	Commercial			Mortgage			Installment			Receivables			Unallocated			Total
	(In thousands)
2012
Balance at beginning of period	$	18,183		$	22,885		$	6,146		$	197		$	11,473		$	58,884
Additions (deductions)
Provision for loan losses		2,690			4,805			518			23			(1,849	)		6,187
Recoveries credited to allowance		1,396			1,120			715			-			-			3,231
Loans charged against the allowance		(6,623	)		(7,347	)		(2,180	)		(25	)		-			(16,175	)
Reclassification to loans held for sale		(170	)		(192	)		(218	)		-			(201	)		(781	)
Balance at end of period	$	15,476		$	21,271		$	4,981		$	195		$	9,423		$	51,346
2011
Balance at beginning of period	$	23,836		$	22,642		$	6,769		$	389		$	14,279		$	67,915
Additions (deductions)
Provision for loan losses		6,043			8,333			1,681			45			(1,244	)		14,858
Recoveries credited to allowance		731			740			707			4			-			2,182
Loans charged against the allowance		(12,913	)		(8,563	)		(2,868	)		(92	)		-			(24,436	)
Balance at end of period	$	17,697		$	23,152		$	6,289		$	346		$	13,035		$	60,519

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

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

							Payment
							Plan
	Commercial		Mortgage		Installment		Receivables		Unallocated		Total
	(In thousands)
June 30, 2012
Allowance for loan losses:
Individually evaluated for impairment	$	9,855	$	10,201	$	1,674	$	-	$	-	$	21,730
Collectively evaluated for impairment		5,621		11,070		3,307		195		9,423		29,616
Total ending allowance balance	$	15,476	$	21,271	$	4,981	$	195	$	9,423	$	51,346
Loans
Individually evaluated for impairment	$	66,703	$	91,494	$	7,717	$	-			$	165,914
Collectively evaluated for impairment		547,014		458,274		192,249		98,946				1,296,483
Total loans recorded     investment		613,717		549,768		199,966		98,946				1,462,397
Accrued interest included in recorded investment		1,673		2,558		776		-				5,007
Total loans	$	612,044	$	547,210	$	199,190	$	98,946			$	1,457,390
December 31, 2011
Allowance for loan losses:
Individually evaluated for impairment	$	10,252	$	10,285	$	1,762	$	-	$	-	$	22,299
Collectively evaluated for impairment		7,931		12,600		4,384		197		11,473		36,585
Total ending allowance balance	$	18,183	$	22,885	$	6,146	$	197	$	11,473	$	58,884
Loans
Individually evaluated for impairment	$	58,674	$	93,702	$	7,554	$	-			$	159,930
Collectively evaluated     for impairment		594,665		499,919		212,907		115,018				1,422,509
Total loans recorded     investment		653,339		593,621		220,461		115,018				1,582,439
Accrued interest included     in recorded investment		2,184		2,745		902		-				5,831
Total loans	$	651,155	$	590,876	$	219,559	$	115,018			$	1,576,608

Loans on non-accrual status and past due more than 90 days

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

	90+ and				Total Non-
	Still		Non-		Performing
	Accruing		Accrual		Loans
	(In thousands)
June 30, 2012
Commercial
Income producing - real estate	$	280	$	8,277	$	8,557
Land, land development and    construction - real estate		125		4,804		4,929
Commercial and industrial		338		8,932		9,270
Mortgage
1-4 family		-		11,593		11,593
Resort lending		-		6,475		6,475
Home equity line of credit - 1st lien		-		592		592
Home equity line of credit - 2nd lien		-		690		690
Installment
Home equity installment - 1st lien		-		1,079		1,079
Home equity installment - 2nd lien		-		710		710
Loans not secured by real estate		-		883		883
Other		-		1		1
Payment plan receivables
Full refund		-		126		126
Partial refund		-		137		137
Other		-		15		15
Total recorded investment	$	743	$	44,314	$	45,057
Accrued interest included in recorded investment	$	4	$	-	$	4
December 31, 2011
Commercial
Income producing - real estate	$	490	$	13,788	$	14,278
Land, land development and    construction - real estate		43		6,990		7,033
Commercial and industrial		-		7,984		7,984
Mortgage
1-4 family		54		15,929		15,983
Resort lending		-		8,819		8,819
Home equity line of credit - 1st lien		-		523		523
Home equity line of credit - 2nd lien		-		889		889
Installment
Home equity installment - 1st lien		-		1,542		1,542
Home equity installment - 2nd lien		-		1,023		1,023
Loans not secured by real estate		-		880		880
Other		-		4		4
Payment plan receivables
Full refund		-		491		491
Partial refund		-		424		424
Other		-		23		23
Total recorded investment	$	587	$	59,309	$	59,896
Accrued interest included in   recorded investment	$	13	$	-	$	13

Aging analysis of loans by class

An aging analysis of loans by class follows:

	Loans Past Due								Loans not		Total
	30-59 days		60-89 days		90+ days		Total		Past Due		Loans
	(In thousands)
June 30, 2012
Commercial
Income producing - real estate	$	2,280	$	1,887	$	3,823	$	7,990	$	210,777	$	218,767
Land, land development and construction - real estate		191		-		1,555		1,746		42,605		44,351
Commercial and industrial		2,820		999		4,498		8,317		342,282		350,599
Mortgage
1-4 family		2,501		1,003		11,593		15,097		285,035		300,132
Resort lending		169		383		6,475		7,027		174,069		181,096
Home equity line of credit - 1st lien		334		101		592		1,027		19,395		20,422
Home equity line of credit - 2nd lien		372		55		690		1,117		47,001		48,118
Installment
Home equity installment - 1st lien		498		162		1,079		1,739		33,405		35,144
Home equity installment - 2nd lien		542		145		710		1,397		42,147		43,544
Loans not secured by real estate		872		297		883		2,052		116,454		118,506
Other		13		3		1		17		2,755		2,772
Payment plan receivables
Full refund		2,075		659		126		2,860		87,987		90,847
Partial refund		208		94		137		439		7,220		7,659
Other		10		8		15		33		407		440
Total recorded investment	$	12,885	$	5,796	$	32,177	$	50,858	$	1,411,539	$	1,462,397
Accrued interest included in recorded investment	$	111	$	78	$	4	$	193	$	4,814	$	5,007
December 31, 2011
Commercial
Income producing - real estate	$	1,701	$	937	$	6,408	$	9,046	$	264,620	$	273,666
Land, land development and    construction - real estate		487		66		2,720		3,273		51,453		54,726
Commercial and industrial		1,861		1,132		3,516		6,509		318,438		324,947
Mortgage
1-4 family		3,507		1,418		15,983		20,908		294,771		315,679
Resort lending		2,129		932		8,819		11,880		184,943		196,823
Home equity line of credit - 1st lien		96		196		523		815		24,705		25,520
Home equity line of credit - 2nd lien		506		159		889		1,554		54,045		55,599
Installment
Home equity installment - 1st lien		757		264		1,542		2,563		41,239		43,802
Home equity installment - 2nd lien		676		365		1,023		2,064		51,224		53,288
Loans not secured by real estate		1,173		463		880		2,516		117,661		120,177
Other		36		10		4		50		3,144		3,194
Payment plan receivables
Full refund		2,943		951		491		4,385		99,284		103,669
Partial refund		380		200		424		1,004		9,918		10,922
Other		23		24		23		70		357		427
Total recorded investment	$	16,275	$	7,117	$	43,245	$	66,637	$	1,515,802	$	1,582,439
Accrued interest included in recorded investment	$	160	$	105	$	13	$	278	$	5,553	$	5,831

Impaired loans

Impaired loans are as follows :

	June 30,		December 31,
	2012		2011
Impaired loans with no allocated allowance
TDR	$	26,170	$	26,945
Non - TDR		235		423
Impaired loans with an allocated allowance
TDR - allowance based on collateral		17,137		20,142
TDR - allowance based on present value cash flow		111,396		98,130
Non - TDR - allowance based on collateral		10,479		13,773
Non - TDR - allowance based on present value cash flow		-		-
Total impaired loans	$	165,417	$	159,413
Amount of allowance for loan losses allocated
TDR - allowance based on collateral	$	4,860	$	6,004
TDR - allowance based on present value cash flow		13,384		12,048
Non - TDR - allowance based on collateral		3,486		4,247
Non - TDR - allowance based on present value cash flow		-		-
Total amount of allowance for loan losses allocated	$	21,730	$	22,299

Impaired loans by class  are as follows (1):

	June 30, 2012						December 31, 2011
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:	(In thousands)
Commercial
Income producing - real estate	$	1,848	$	2,692	$	-	$	4,626	$	6,386	$	-
Land, land development & construction-real estate		2,794		2,787		-		219		243		-
Commercial and industrial		3,332		3,657		-		3,593		3,677		-
Mortgage
1-4 family		7,651		10,350		-		6,975		9,242		-
Resort lending		5,913		6,375		-		7,156		7,680		-
Home equity line of credit - 1st lien		22		40		-		-		-		-
Home equity line of credit - 2nd lien		45		118		-		134		211		-
Installment
Home equity installment - 1st lien		2,100		2,204		-		2,100		2,196		-
Home equity installment - 2nd lien		2,239		2,238		-		1,987		1,987		-
Loans not secured by real estate		529		600		-		637		688		-
Other		22		22		-		24		24		-
		26,495		31,083		-		27,451		32,334		-
With an allowance recorded:
Commercial
Income producing - real estate		26,935		30,985		3,094		22,781		29,400		3,642
Land, land development & construction-real estate		10,203		12,703		2,945		12,362		14,055		3,633
Commercial and industrial		21,591		25,376		3,816		15,093		18,357		2,977
Mortgage
1-4 family		59,255		60,826		6,980		61,214		63,464		7,716
Resort lending		18,561		18,926		3,190		18,159		19,351		2,534
Home equity line of credit - 1st lien		47		47		31		64		73		35
Home equity line of credit - 2nd lien		-		-		-		-		-		-
Installment
Home equity installment - 1st lien		1,397		1,430		673		1,232		1,293		660
Home equity installment - 2nd lien		1,151		1,220		921		1,421		1,458		1,062
Loans not secured by real estate		279		287		80		153		156		40
Other		-		-		-		-		-		-
		139,419		151,800		21,730		132,479		147,607		22,299
Total
Commercial
Income producing - real estate		28,783		33,677		3,094		27,407		35,786		3,642
Land, land development & construction-real estate		12,997		15,490		2,945		12,581		14,298		3,633
Commercial and industrial		24,923		29,033		3,816		18,686		22,034		2,977
Mortgage
1-4 family		66,906		71,176		6,980		68,189		72,706		7,716
Resort lending		24,474		25,301		3,190		25,315		27,031		2,534
Home equity line of credit - 1st lien		69		87		31		64		73		35
Home equity line of credit - 2nd lien		45		118		-		134		211		-
Installment
Home equity installment - 1st lien		3,497		3,634		673		3,332		3,489		660
Home equity installment - 2nd lien		3,390		3,458		921		3,408		3,445		1,062
Loans not secured by real estate		808		887		80		790		844		40
Other		22		22		-		24		24		-
Total	$	165,914	$	182,883	$	21,730	$	159,930	$	179,941	$	22,299
Accrued interest included in recorded investment	$	497					$	517

(1) There were no impaired payment plan receivables at June 30, 2012 or December 31, 2011.

Average recorded investment in and interest income earned on impaired loans by class

Average recorded investment in and interest income earned on impaired loans by class for the three month periods ending June 30, follows:

	2012				2011
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:	(In thousands)
Commercial
Income producing - real estate	$	2,211	$	13	$	1,922	$	12
Land, land development & construction-real estate		2,877		36		514		14
Commercial and industrial		3,896		44		1,800		17
Mortgage
1-4 family		7,615		75		9,258		102
Resort lending		6,134		60		8,543		125
Home equity line of credit - 1st lien		11		-		-		-
Home equity line of credit - 2nd lien		46		1		116		1
Installment
Home equity installment - 1st lien		1,827		32		1,919		28
Home equity installment - 2nd lien		1,987		30		1,999		28
Loans not secured by real estate		473		7		705		10
Other		23		-		14		1
		27,100		298		26,790		338
With an allowance recorded:
Commercial
Income producing - real estate		24,300		120		16,824		33
Land, land development & construction-real estate		10,495		52		8,133		37
Commercial and industrial		18,954		156		9,253		92
Mortgage
1-4 family		59,285		650		63,492		668
Resort lending		18,499		192		22,469		152
Home equity line of credit - 1st lien		59		-		24		1
Home equity line of credit - 2nd lien		47		-		10		-
Installment
Home equity installment - 1st lien		1,709		9		1,521		14
Home equity installment - 2nd lien		1,469		6		1,561		14
Loans not secured by real estate		241		3		150		-
Other		-		-		-		-
		135,058		1,188		123,437		1,011
Total
Commercial
Income producing - real estate		26,511		133		18,746		45
Land, land development & construction-real estate		13,372		88		8,647		51
Commercial and industrial		22,850		200		11,053		109
Mortgage
1-4 family		66,900		725		72,750		770
Resort lending		24,633		252		31,012		277
Home equity line of credit - 1st lien		70		-		24		1
Home equity line of credit - 2nd lien		93		1		126		1
Installment
Home equity installment - 1st lien		3,536		41		3,440		42
Home equity installment - 2nd lien		3,456		36		3,560		42
Loans not secured by real estate		714		10		855		10
Other		23		-		14		1
Total	$	162,158	$	1,486	$	150,227	$	1,349

(1) There were no impaired payment plan receivables during the three month periods ending June 30, 2012 and 2011.

Average recorded investment in and interest income earned on impaired loans by class for the six month periods ending June 30, follows:

	2012				2011
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:	(In thousands)
Commercial
Income producing - real estate	$	3,016	$	30	$	2,796	$	30
Land, land development & construction-real estate		1,991		36		876		27
Commercial and industrial		3,795		46		3,143		17
Mortgage
1-4 family		7,401		149		9,095		214
Resort lending		6,474		126		7,584		223
Home equity line of credit - 1st lien		7		-		-		-
Home equity line of credit - 2nd lien		75		2		108		2
Installment
Home equity installment - 1st lien		1,918		52		1,870		48
Home equity installment - 2nd lien		1,987		51		1,963		49
Loans not secured by real estate		528		13		540		16
Other		23		1		9		1
		27,215		506		27,984		627
With an allowance recorded:
Commercial
Income producing - real estate		23,793		267		16,618		122
Land, land development & construction-real estate		11,117		105		9,667		69
Commercial and industrial		17,667		270		10,335		141
Mortgage
1-4 family		59,928		1,300		63,714		1,351
Resort lending		18,386		370		24,417		396
Home equity line of credit - 1st lien		60		1		16		1
Home equity line of credit - 2nd lien		31		-		15		-
Installment
Home equity installment - 1st lien		1,550		30		1,467		28
Home equity installment - 2nd lien		1,453		25		1,511		30
Loans not secured by real estate		211		5		185		1
Other		-		-		-		-
		134,196		2,373		127,945		2,139
Total
Commercial
Income producing - real estate		26,809		297		19,414		152
Land, land development & construction-real estate		13,108		141		10,543		96
Commercial and industrial		21,462		316		13,478		158
Mortgage
1-4 family		67,329		1,449		72,809		1,565
Resort lending		24,860		496		32,001		619
Home equity line of credit - 1st lien		67		1		16		1
Home equity line of credit - 2nd lien		106		2		123		2
Installment
Home equity installment - 1st lien		3,468		82		3,337		76
Home equity installment - 2nd lien		3,440		76		3,474		79
Loans not secured by real estate		739		18		725		17
Other		23		1		9		1
Total	$	161,411	$	2,879	$	155,929	$	2,766

(1) There were no impaired payment plan receivables during the six month periods ending June 30, 2012 and 2011.

Troubled debt restructurings

Troubled debt restructurings follow:

	June 30, 2012
	Commercial		Retail			Total
	(In thousands)
Performing TDR's	$	44,573	$	87,294		$	131,867
Non-performing TDR's(1)		11,298		11,538	(2)		22,836
Total	$	55,871	$	98,832		$	154,703
	December 31, 2011
	Commercial		Retail			Total
	(In thousands)
Performing TDR's	$	29,799	$	86,770		$	116,569
Non-performing TDR's(1)		14,567		14,081	(2)		28,648
Total	$	44,366	$	100,851		$	145,217

Troubled debt restructuring during the period

Loans that have been classified as troubled debt restructurings during the three-month period endedJune 30, 2012 follows:

			Pre-modification		Post-modification
	Number of		Recorded		Recorded
	Contracts		Balance		Balance
	(Dollars in thousands)
Commercial
Income producing - real estate		12	$	8,045	$	7,974
Land, land development & construction-real estate		1		49		77
Commercial and industrial		19		4,286		4,001
Mortgage
1-4 family		28		3,504		3,372
Resort lending		11		3,031		2,917
Home equity line of credit - 1st lien		-		-		-
Home equity line of credit - 2nd lien		-		-		-
Installment
Home equity installment - 1st lien		6		118		115
Home equity installment - 2nd lien		6		317		313
Loans not secured by real estate		9		252		233
Other		-		-		-
Total		92	$	19,602	$	19,002

Loans that have been classified as troubled debt restructurings during the six-month period endedJune 30, 2012 follows:

			Pre-modification		Post-modification
	Number of		Recorded		Recorded
	Contracts		Balance		Balance
	(Dollars in thousands)
Commercial
Income producing - real estate		14	$	8,268	$	8,191
Land, land development & construction-real estate		3		2,887		2,913
Commercial and industrial		33		8,196		7,895
Mortgage
1-4 family		43		4,802		4,639
Resort lending		18		5,206		5,072
Home equity line of credit - 1st lien		1		15		6
Home equity line of credit - 2nd lien		-		-		-
Installment
Home equity installment - 1st lien		10		426		426
Home equity installment - 2nd lien		13		511		507
Loans not secured by real estate		10		277		258
Other		-		-		-
Total		145	$	30,588	$	29,907

Troubled debt restructuring during the past twelve months that subsequently defaulted

Loans that have been classified as troubled debt restructurings during the past twelve months and thathave subsequently defaulted during the three-month period ended June 30, 2012 follows:

	Number of		Recorded
	Contracts		Balance
	(Dollars in thousands)
Commercial
Income producing - real estate		-	$	-
Land, land development & construction-real estate		-		-
Commercial and industrial		1		41
Mortgage
1-4 family		2		148
Resort lending		-		-
Home equity line of credit - 1st lien		-		-
Home equity line of credit - 2nd lien		-		-
Installment
Home equity installment - 1st lien		-		-
Home equity installment - 2nd lien		1		20
Loans not secured by real estate		-		-
Other		-		-
		4	$	209

Loans that have been classified as troubled debt restructurings during the past twelve months and thathave subsequently defaulted during the six-month period ended June 30, 2012 follows:

	Number of		Recorded
	Contracts		Balance
	(Dollars in thousands)
Commercial
Income producing - real estate		2	$	434
Land, land development & construction-real estate		1		136
Commercial and industrial		8		914
Mortgage
1-4 family		2		148
Resort lending		1		117
Home equity line of credit - 1st lien		-		-
Home equity line of credit - 2nd lien		-		-
Installment
Home equity installment - 1st lien		1		26
Home equity installment - 2nd lien		1		20
Loans not secured by real estate		-		-
Other		-		-
		16	$	1,795

Loan ratings by loan class for commercial loan segment

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

	Commercial
					Substandard		Non-
	Non-watch		Watch		Accrual		Accrual
	1-6		7-8		9		10-11		Total
					(In thousands)
June 30, 2012
Income producing - real estate	$	173,267	$	34,030	$	3,193	$	8,277	$	218,767
Land, land development and  construction - real estate		28,353		8,409		2,785		4,804		44,351
Commercial and industrial		294,234		31,843		15,590		8,932		350,599
Total	$	495,854	$	74,282	$	21,568	$	22,013	$	613,717
Accrued interest included in total	$	1,386	$	212	$	75	$	-	$	1,673
December 31, 2011
Income producing - real estate	$	201,655	$	52,438	$	5,785	$	13,788	$	273,666
Land, land development and  construction - real estate		33,515		9,421		4,800		6,990		54,726
Commercial and industrial		275,245		27,783		13,935		7,984		324,947
Total	$	510,415	$	89,642	$	24,520	$	28,762	$	653,339
Accrued interest included in total	$	1,677	$	381	$	126	$	-	$	2,184

Credit scores by loan class for mortgage and installment loan segments

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

	Commercial
					Substandard		Non-
	Non-watch		Watch		Accrual		Accrual
	1-6		7-8		9		10-11		Total
					(In thousands)
June 30, 2012
Income producing - real estate	$	173,267	$	34,030	$	3,193	$	8,277	$	218,767
Land, land development and  construction - real estate		28,353		8,409		2,785		4,804		44,351
Commercial and industrial		294,234		31,843		15,590		8,932		350,599
Total	$	495,854	$	74,282	$	21,568	$	22,013	$	613,717
Accrued interest included in total	$	1,386	$	212	$	75	$	-	$	1,673
December 31, 2011
Income producing - real estate	$	201,655	$	52,438	$	5,785	$	13,788	$	273,666
Land, land development and  construction - real estate		33,515		9,421		4,800		6,990		54,726
Commercial and industrial		275,245		27,783		13,935		7,984		324,947
Total	$	510,415	$	89,642	$	24,520	$	28,762	$	653,339
Accrued interest included in total	$	1,677	$	381	$	126	$	-	$	2,184

Credit ratings of insurer or risk retention group counterparties by class of payment plan receivable

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

	Commercial
					Substandard		Non-
	Non-watch		Watch		Accrual		Accrual
	1-6		7-8		9		10-11		Total
					(In thousands)
June 30, 2012
Income producing - real estate	$	173,267	$	34,030	$	3,193	$	8,277	$	218,767
Land, land development and  construction - real estate		28,353		8,409		2,785		4,804		44,351
Commercial and industrial		294,234		31,843		15,590		8,932		350,599
Total	$	495,854	$	74,282	$	21,568	$	22,013	$	613,717
Accrued interest included in total	$	1,386	$	212	$	75	$	-	$	1,673
December 31, 2011
Income producing - real estate	$	201,655	$	52,438	$	5,785	$	13,788	$	273,666
Land, land development and  construction - real estate		33,515		9,421		4,800		6,990		54,726
Commercial and industrial		275,245		27,783		13,935		7,984		324,947
Total	$	510,415	$	89,642	$	24,520	$	28,762	$	653,339
Accrued interest included in total	$	1,677	$	381	$	126	$	-	$	2,184

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Fair Values of Financial Instruments (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Assets [Abstract]
Cash and due from banks	$ 60,838	$ 62,777
Securities available for sale	247,047	157,444
Liabilities [Abstract]
Subordinated debentures	50,175	50,175
Quoted Prices in Active Markets for Identical Assets, Level 1 [Member]
Assets [Abstract]
Cash and due from banks	60,800
Interest bearing deposits	358,900
Trading securities	100
Securities available for sale	0
Net loans and loans held for sale	0
Accrued interest receivable	50
Derivative financial instruments	0
Liabilities [Abstract]
Domestic Deposit Savings No Stated Maturity	1,617,700
Deposits with stated maturity	0
Other borrowings	0
Subordinated debentures	6,500
Accrued interest payable	2,500
Derivative financial instruments	0
Significant Other Observable Inputs, Level 2 [Member]
Assets [Abstract]
Cash and due from banks	0
Interest bearing deposits	0
Trading securities	0
Securities available for sale	247,000
Net loans and loans held for sale	96,600
Accrued interest receivable	900
Derivative financial instruments	2,000
Liabilities [Abstract]
Domestic Deposit Savings No Stated Maturity	0
Deposits with stated maturity	567,600
Other borrowings	22,000
Subordinated debentures	28,100
Accrued interest payable	3,700
Derivative financial instruments	1,500
Significant Unobservable Inputs, Level 3 [Member]
Assets [Abstract]
Cash and due from banks	0
Interest bearing deposits	0
Trading securities	0
Securities available for sale	0
Net loans and loans held for sale	1,345,200
Accrued interest receivable	5,150
Derivative financial instruments	0
Liabilities [Abstract]
Domestic Deposit Savings No Stated Maturity	0
Deposits with stated maturity	0
Other borrowings	0
Subordinated debentures	0
Accrued interest payable	0
Derivative financial instruments	400
Recorded Book Balance [Member]
Assets [Abstract]
Cash and due from banks	60,800	62,800
Interest bearing deposits	358,900	278,300
Trading securities	100	80
Securities available for sale	247,000	157,400
Federal Home Loan Bank and Federal Reserve Bank Stock	20,500	20,800
Net loans and loans held for sale	1,502,600	1,562,500
Accrued interest receivable	6,100	6,200
Derivative financial instruments	2,000	900
Liabilities [Abstract]
Domestic Deposit Savings No Stated Maturity	1,617,700	1,517,300
Deposits with stated maturity	565,100	568,800
Other borrowings	17,900	33,400
Subordinated debentures	50,200	50,200
Accrued interest payable	6,200	5,100
Derivative financial instruments	1,900	1,900
Fair Value Measurement [Member]
Assets [Abstract]
Cash and due from banks	60,800	62,800
Interest bearing deposits	358,900	278,300
Trading securities	100	80
Securities available for sale	247,000	157,400
Net loans and loans held for sale	1,441,800	1,475,700
Accrued interest receivable	6,100	6,200
Derivative financial instruments	2,000	900
Liabilities [Abstract]
Domestic Deposit Savings No Stated Maturity	1,617,700	1,517,300
Deposits with stated maturity	567,600	571,600
Other borrowings	22,000	37,900
Subordinated debentures	34,600	16,100
Accrued interest payable	6,200	5,100
Derivative financial instruments	$ 1,900	$ 1,900

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Earnings Per Common Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended				6 Months Ended
	Jun. 30, 2012		Jun. 30, 2011		Jun. 30, 2012		Jun. 30, 2011
Earnings Per Share Reconciliation [Abstract]
Net income (loss) applicable to common stock	$ 3,241		$ (1,014)		$ 5,689		$ (9,423)
Convertible preferred stock dividends	1,092		0		2,148		0
Net income (loss)	$ 4,333	[1],[2]	$ (1,014)	[1],[2]	$ 7,837	[1],[2]	$ (9,423)	[1],[2]
Weighted average shares outstanding (in shares)	8,607,000		8,287,000		8,570,000		8,111,000
Effect of convertible preferred stock (in shares)	31,987,000		41,207,000		31,987,000		41,207,000
Restricted stock units (in shares)	140,000		139,000		140,000		104,000
Stock units for deferred compensation plan for non-employee directors (in shares)	58,000		7,000		41,000		7,000
Effect of stock options (in shares)	7,000		0		0		0
Weighted average shares outstanding for calculation of diluted income (loss) per share (in shares)	40,799,000	[1]	49,640,000	[1]	40,738,000	[1]	49,429,000	[1]
Net income (loss) per common share [Abstract]
Basic (in dollars per share)	$ 0.38		$ (0.12)		$ 0.66		$ (1.16)
Diluted (in dollars per share)	$ 0.11	[2]	$ (0.12)	[2]	$ 0.19	[2]	$ (1.16)	[2]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive shares excluded from computation of diluted loss per share (in shares)	40,000		50,000		200,000		50,000
Antidilutive securities excluded from computation of earnings per share (in shares)	346,154		346,154		346,154		346,154

[1] For any period in which a loss is recorded, dividends on convertible preferred stock are not added back in the diluted per share calculation. For any period in which a loss is recorded, the assumed conversion of convertible preferred stock, assumed exercise of common stock warrants, assumed exercise of stock options, restricted stock units and stock units for a deferred compensation plan for non-employee directors would have an anti-dilutive impact on the loss per share and thus are ignored in the diluted per share calculation.

[2] Basic income (loss) per share includes weighted average common shares outstanding during the period and participating share awards.

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Loans, Receivables Past Due (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Aging analysis of loans by class [Abstract]
Total loans	$ 1,457,390	$ 1,576,608
Total Recorded Investment [Member]
Loans on non-accrual status and past due more than 90 days (Non-performing loans) [Abstract]
90+ and Still Accruing	743	587
Non-Accrual	44,314	59,309
Total Non-performing Loans	45,057	59,896
Aging analysis of loans by class [Abstract]
Loans Past Due 30-59 days	12,885	16,275
Loans Past Due 60 to 89 days	5,796	7,117
Loans Past Due 90+ days	32,177	43,245
Total	50,858	66,637
Loans not Past Due	1,411,539	1,515,802
Total loans	1,462,397	1,582,439
Accrued Interest Included in Recorded Investment [Member]
Loans on non-accrual status and past due more than 90 days (Non-performing loans) [Abstract]
90+ and Still Accruing	4	13
Non-Accrual	0	0
Total Non-performing Loans	4	13
Aging analysis of loans by class [Abstract]
Loans Past Due 30-59 days	111	160
Loans Past Due 60 to 89 days	78	105
Loans Past Due 90+ days	4	13
Total	193	278
Loans not Past Due	4,814	5,553
Total loans	5,007	5,831
Commercial [Member] | Income Producing - Real Estate [Member]
Loans on non-accrual status and past due more than 90 days (Non-performing loans) [Abstract]
90+ and Still Accruing	280	490
Non-Accrual	8,277	13,788
Total Non-performing Loans	8,557	14,278
Aging analysis of loans by class [Abstract]
Loans Past Due 30-59 days	2,280	1,701
Loans Past Due 60 to 89 days	1,887	937
Loans Past Due 90+ days	3,823	6,408
Total	7,990	9,046
Loans not Past Due	210,777	264,620
Total loans	218,767	273,666
Commercial [Member] | Land, Land Development and Construction Real Estate [Member]
Loans on non-accrual status and past due more than 90 days (Non-performing loans) [Abstract]
90+ and Still Accruing	125	43
Non-Accrual	4,804	6,990
Total Non-performing Loans	4,929	7,033
Aging analysis of loans by class [Abstract]
Loans Past Due 30-59 days	191	487
Loans Past Due 60 to 89 days	0	66
Loans Past Due 90+ days	1,555	2,720
Total	1,746	3,273
Loans not Past Due	42,605	51,453
Total loans	44,351	54,726
Commercial [Member] | Commercial and Industrial [Member]
Loans on non-accrual status and past due more than 90 days (Non-performing loans) [Abstract]
90+ and Still Accruing	338	0
Non-Accrual	8,932	7,984
Total Non-performing Loans	9,270	7,984
Aging analysis of loans by class [Abstract]
Loans Past Due 30-59 days	2,820	1,861
Loans Past Due 60 to 89 days	999	1,132
Loans Past Due 90+ days	4,498	3,516
Total	8,317	6,509
Loans not Past Due	342,282	318,438
Total loans	350,599	324,947
Mortgage [Member] | 1-4 Family [Member]
Loans on non-accrual status and past due more than 90 days (Non-performing loans) [Abstract]
90+ and Still Accruing	0	54
Non-Accrual	11,593	15,929
Total Non-performing Loans	11,593	15,983
Aging analysis of loans by class [Abstract]
Loans Past Due 30-59 days	2,501	3,507
Loans Past Due 60 to 89 days	1,003	1,418
Loans Past Due 90+ days	11,593	15,983
Total	15,097	20,908
Loans not Past Due	285,035	294,771
Total loans	300,132	315,679
Mortgage [Member] | Resort Lending [Member]
Loans on non-accrual status and past due more than 90 days (Non-performing loans) [Abstract]
90+ and Still Accruing	0	0
Non-Accrual	6,475	8,819
Total Non-performing Loans	6,475	8,819
Aging analysis of loans by class [Abstract]
Loans Past Due 30-59 days	169	2,129
Loans Past Due 60 to 89 days	383	932
Loans Past Due 90+ days	6,475	8,819
Total	7,027	11,880
Loans not Past Due	174,069	184,943
Total loans	181,096	196,823
Mortgage [Member] | Home Equity Line of Credit - 1st Lien [Member]
Loans on non-accrual status and past due more than 90 days (Non-performing loans) [Abstract]
90+ and Still Accruing	0	0
Non-Accrual	592	523
Total Non-performing Loans	592	523
Aging analysis of loans by class [Abstract]
Loans Past Due 30-59 days	334	96
Loans Past Due 60 to 89 days	101	196
Loans Past Due 90+ days	592	523
Total	1,027	815
Loans not Past Due	19,395	24,705
Total loans	20,422	25,520
Mortgage [Member] | Home Equity Line of Credit - 2nd Lien [Member]
Loans on non-accrual status and past due more than 90 days (Non-performing loans) [Abstract]
90+ and Still Accruing	0	0
Non-Accrual	690	889
Total Non-performing Loans	690	889
Aging analysis of loans by class [Abstract]
Loans Past Due 30-59 days	372	506
Loans Past Due 60 to 89 days	55	159
Loans Past Due 90+ days	690	889
Total	1,117	1,554
Loans not Past Due	47,001	54,045
Total loans	48,118	55,599
Installment [Member] | Home Equity Installment - 1st Lien [Member]
Loans on non-accrual status and past due more than 90 days (Non-performing loans) [Abstract]
90+ and Still Accruing	0	0
Non-Accrual	1,079	1,542
Total Non-performing Loans	1,079	1,542
Aging analysis of loans by class [Abstract]
Loans Past Due 30-59 days	498	757
Loans Past Due 60 to 89 days	162	264
Loans Past Due 90+ days	1,079	1,542
Total	1,739	2,563
Loans not Past Due	33,405	41,239
Total loans	35,144	43,802
Installment [Member] | Home Equity Installment - 2nd Lien [Member]
Loans on non-accrual status and past due more than 90 days (Non-performing loans) [Abstract]
90+ and Still Accruing	0	0
Non-Accrual	710	1,023
Total Non-performing Loans	710	1,023
Aging analysis of loans by class [Abstract]
Loans Past Due 30-59 days	542	676
Loans Past Due 60 to 89 days	145	365
Loans Past Due 90+ days	710	1,023
Total	1,397	2,064
Loans not Past Due	42,147	51,224
Total loans	43,544	53,288
Installment [Member] | Loans Not Secured By Real Estate [Member]
Loans on non-accrual status and past due more than 90 days (Non-performing loans) [Abstract]
90+ and Still Accruing	0	0
Non-Accrual	883	880
Total Non-performing Loans	883	880
Aging analysis of loans by class [Abstract]
Loans Past Due 30-59 days	872	1,173
Loans Past Due 60 to 89 days	297	463
Loans Past Due 90+ days	883	880
Total	2,052	2,516
Loans not Past Due	116,454	117,661
Total loans	118,506	120,177
Installment [Member] | Others [Member]
Loans on non-accrual status and past due more than 90 days (Non-performing loans) [Abstract]
90+ and Still Accruing	0	0
Non-Accrual	1	4
Total Non-performing Loans	1	4
Aging analysis of loans by class [Abstract]
Loans Past Due 30-59 days	13	36
Loans Past Due 60 to 89 days	3	10
Loans Past Due 90+ days	1	4
Total	17	50
Loans not Past Due	2,755	3,144
Total loans	2,772	3,194
Payment Plan Receivable [Member] | Full Refund [Member]
Loans on non-accrual status and past due more than 90 days (Non-performing loans) [Abstract]
90+ and Still Accruing	0	0
Non-Accrual	126	491
Total Non-performing Loans	126	491
Aging analysis of loans by class [Abstract]
Loans Past Due 30-59 days	2,075	2,943
Loans Past Due 60 to 89 days	659	951
Loans Past Due 90+ days	126	491
Total	2,860	4,385
Loans not Past Due	87,987	99,284
Total loans	90,847	103,669
Payment Plan Receivable [Member] | Partial Refund [Member]
Loans on non-accrual status and past due more than 90 days (Non-performing loans) [Abstract]
90+ and Still Accruing	0	0
Non-Accrual	137	424
Total Non-performing Loans	137	424
Aging analysis of loans by class [Abstract]
Loans Past Due 30-59 days	208	380
Loans Past Due 60 to 89 days	94	200
Loans Past Due 90+ days	137	424
Total	439	1,004
Loans not Past Due	7,220	9,918
Total loans	7,659	10,922
Payment Plan Receivable [Member] | Others [Member]
Loans on non-accrual status and past due more than 90 days (Non-performing loans) [Abstract]
90+ and Still Accruing	0	0
Non-Accrual	15	23
Total Non-performing Loans	15	23
Aging analysis of loans by class [Abstract]
Loans Past Due 30-59 days	10	23
Loans Past Due 60 to 89 days	8	24
Loans Past Due 90+ days	15	23
Total	33	70
Loans not Past Due	407	357
Total loans	$ 440	$ 427

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Shareholders' Equity (Details) (USD $)						6 Months Ended					1 Months Ended			1 Months Ended	3 Months Ended		6 Months Ended	12 Months Ended
	Jun. 30, 2012	Dec. 31, 2011	Jun. 30, 2012 Series B Preferred Stock [Member]	Apr. 16, 2010 UST [Member] Series A Preferred Stock [Member]	Apr. 02, 2010 UST [Member] Series A Preferred Stock [Member]	Jun. 30, 2012 UST [Member] Series B Preferred Stock [Member]	Mar. 31, 2012 UST [Member] Series B Preferred Stock [Member]	Dec. 31, 2011 UST [Member] Series B Preferred Stock [Member]	Apr. 02, 2010 UST [Member] Series B Preferred Stock [Member]	Apr. 16, 2010 UST [Member] Series B Preferred Stock [Member] Amended and restated warrants [Member]	Apr. 30, 2010 UST [Member] Common Stock [Member] Amended and restated warrants [Member]	Jun. 30, 2012 UST [Member] Common Stock [Member] Amended and restated warrants [Member]	Dec. 12, 2008 UST [Member] Common Stock [Member] Amended and restated warrants [Member]	Jul. 31, 2010 Dutchess [Member] Common Stock [Member]	Mar. 31, 2012 Dutchess [Member] Common Stock [Member]	Dec. 31, 2010 Dutchess [Member] Common Stock [Member]	Jun. 30, 2012 Dutchess [Member] Common Stock [Member]	Dec. 31, 2011 Dutchess [Member] Common Stock [Member]	Apr. 30, 2011 Dutchess [Member] Common Stock [Member]	Jul. 07, 2010 Dutchess [Member] Common Stock [Member]
Class of Stock [Line Items]
Series A Fixed Rate Cumulative Perpetual Preferred Stock (in shares)					72,000
Liquidation preference (in dollars per share)					$ 1,000				$ 1,000
Warrants issued to purchase common stock (in shares)													346,154
Series B Preferred Stock issued (in shares)	74,426	74,426								74,426
Warrants, exercise price (in dollars per share)												$ 7.234
Amended warrants expiration date											Dec. 12, 2018
Accrued dividends				$ 2,400,000		$ 8,600,000		$ 6,600,000
Annual dividend rate (in hundredths)						5.00%
Future annual dividend rate (in hundredths)						9.00%
Number of additional directors that could be elected						2
Annual cash dividends on preferred stock						4,200,000
Annual cash dividend payable after December 13, 2013						7,500,000
Terms of Series B Preferred Stock [Abstract]
Amount of common stock in exchange of trust preferred securities						40,000,000
Minimum redeemable preferred stock			18,600,000			100,000,000
Numerator of common shares fraction (in dollars per share)						$ 750
Denominator of common stocks fraction (in dollars per share)						$ 7.234
Series B Preferred Stock convertible number of common stock (in shares)							11,000,000
Period of mandatory conversion of Series B Preferred Stock						seventh anniversary (April 16, 2017)
Numerator of common stock fraction upon mandatory liquidations (in dollars per share)						$ 1,000
Accrued dividend (in dollars per share)						$ 116		$ 89
Maximum number of common stock to be issued on conversion (in shares)						14,400,000
Preferred stock redemption price (in dollars per share)						$ 1,000
Period used to determine price of stock						20 days
Percentage of preferred stock that can be redeemed (in hundredths)						25.00%
Minimum investment repayment (in hundredths)							5.00%
Minimum investment repayment amount							100,000
Minimum investment repayment under updated guidance							3,700,000
Shares available for sale under an investment agreement (in shares)																				1,500,000
Commitment to purchase common stock														15,000,000
Period committed to purchase common stock														36 months
Discount on sales price of common stock (in hundredths)																				5.00%
Number of shares sold (in shares)															170,000	350,000	950,000	430,000
Aggregate purchase price of common stock sold																	2,300,000
Number of shares that require shareholder approval to sell (in shares)																				700,000
Common stock, additional shares authorized under equity line (in shares)																			2,500,000
Number of shares remaining to be sold (in shares)																	3,100,000
Additional funds available																	$ 7,600,000

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Income Tax (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011
Income Tax [Abstract]
Gross unrecognized tax benefits	$ 2,100,000		$ 2,100,000		$ 2,100,000
Deferred Tax Assets, Valuation Allowance	72,100,000		72,100,000		75,200,000
Income tax expense (benefit)	0	(258,000)	0	(266,000)
Income tax expense benefit due to offset		$ (260,000)		$ (260,000)

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New Accounting Standards

6 Months Ended

Jun. 30, 2012

New Accounting Standards [Abstract]

New Accounting Standards

2.  New Accounting Standards

In May 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-04, "Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs". This ASU amended guidance that will result in common fair value measurement and disclosure requirements between U.S. GAAP and International Financial Reporting Standards ("IFRS"). Under the amended guidance, entities are required to expand disclosure for fair value instruments categorized within Level 3 of the fair value hierarchy to include (1) the valuation processes used; and (2) a narrative description of the sensitivity of the fair value measurement to changes in unobservable inputs for recurring fair value measurements and the interrelationships between those unobservable inputs, if any. They are also required to disclose the categorization by level of the fair value hierarchy for items that are not measured at fair value in the Consolidated Statement of Financial Condition but for which the fair value is required to be disclosed (e.g. portfolio loans). This amended guidance became effective for us at January 1, 2012.  The effect of adopting this standard did not have a material impact on our consolidated operating results or financial condition, but the additional disclosures are included in notes #12 and #13.

In June 2011, the FASB issued ASU 2011-05. This ASU amended guidance on the presentation requirements for comprehensive income. The amended guidance requires an entity to present total comprehensive income, the components of net income and the components of other comprehensive income on the face of the financial statements, either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amended guidance did not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This amended guidance became effective for us at January 1, 2012 and was applied retrospectively.  The effect of adopting this standard did not have a material impact on our consolidated operating results or financial condition, but we have included separate Condensed Consolidated Statements of Comprehensive Income (Loss) immediately following our Condensed Consolidated Statements of Operations in our Condensed Consolidated Financial Statements.

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Derivative Financial Instruments (Details) (USD $)	6 Months Ended
	Jun. 30, 2012	Dec. 31, 2011
Derivative financial instrument according to type of hedge[ Abstract]
Notional Amount	$ 169,239,000
Average Maturity	2 months 12 days
Fair Value	934,000
Fair value of derivative instruments, balance sheet location [Abstract]
Asset Derivatives	1,983,000	857,000
Liability Derivatives	1,921,000	1,883,000
Cash Flow Hedge [Member]
Derivative financial instrument according to type of hedge[ Abstract]
Unrealized Gain (Loss) on Cash Flow Hedge	300,000
Maximum term of cash flow hedge	2 years 6 months
Fair value of derivative instruments, balance sheet location [Abstract]
Liability Derivatives	872,000	1,103,000
Cash Flow Hedge [Member] | Pay Fixed Interest-Rate Swap Agreement [Member]
Derivative financial instrument according to type of hedge[ Abstract]
Notional Amount	10,000,000
Average Maturity	2 years 6 months
Fair Value	(872,000)
No Hedge Designation [Member]
Fair value of derivative instruments, balance sheet location [Abstract]
Asset Derivatives	1,983,000	857,000
Liability Derivatives	1,049,000	780,000
No Hedge Designation [Member] | Mandatory Commitments to Sell Mortgage Loans [Member]
Derivative financial instrument according to type of hedge[ Abstract]
Notional Amount	63,013,000
Average Maturity	1 month 6 days
Fair Value	1,983,000
Fair value of derivative instruments, balance sheet location [Abstract]
Liability Derivatives	696,000
No Hedge Designation [Member] | Rate-Lock Mortgage Loan Commitments [Member]
Derivative financial instrument according to type of hedge[ Abstract]
Notional Amount	103,722,000
Average Maturity	1 month 6 days
Fair Value	(696,000)
No Hedge Designation [Member] | Amended Warrant [Member]
Derivative financial instrument according to type of hedge[ Abstract]
Notional Amount	2,504,000
Average Maturity	6 years 4 months 24 days
Fair Value	(353,000)
Fair value of derivative instruments, balance sheet location [Abstract]
Asset Derivatives	0	0
Other Assets [Member] | No Hedge Designation [Member] | Mandatory Commitments to Sell Mortgage Loans [Member]
Fair value of derivative instruments, balance sheet location [Abstract]
Asset Derivatives	0	0
Other Assets [Member] | No Hedge Designation [Member] | Rate-Lock Mortgage Loan Commitments [Member]
Fair value of derivative instruments, balance sheet location [Abstract]
Asset Derivatives	1,983,000	857,000
Other Liabilities [Member] | Cash Flow Hedge [Member] | Pay Fixed Interest-Rate Swap Agreement [Member]
Fair value of derivative instruments, balance sheet location [Abstract]
Liability Derivatives	872,000	1,103,000
Other Liabilities [Member] | No Hedge Designation [Member] | Mandatory Commitments to Sell Mortgage Loans [Member]
Fair value of derivative instruments, balance sheet location [Abstract]
Liability Derivatives		606,000
Other Liabilities [Member] | No Hedge Designation [Member] | Amended Warrant [Member]
Fair value of derivative instruments, balance sheet location [Abstract]
Liability Derivatives	$ 353,000	$ 174,000

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Intangible Assets (Tables)

6 Months Ended

Jun. 30, 2012

Intangible Assets [Abstract]

Other intangible assets, net of amortization

Other intangible assets, net of amortization, were comprised of the following at June 30, 2012 and December 31, 2011:

		June 30, 2012				December 31, 2011
		Gross				Gross
		Carrying		Accumulated		Carrying		Accumulated
		Amount		Amortization		Amount		Amortization
		(In thousands)
Amortized other intangible assets - core deposits	$	31,326	$	24,261	$	31,326	$	23,717

Estimated amortization of other intangible assets

Amortization of other intangibles has been estimated through 2017 and thereafter in the following table.

	(In thousands)
Six months ended December 31, 2012	$	544
Year ending December 31:
2013		1,078
2014		801
2015		613
2016		613
2017 and thereafter		3,416
Total	$	7,065

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Derivative Financial Instruments (Tables)

6 Months Ended

Jun. 30, 2012

Derivative Financial Instruments [Abstract]

Derivative financial instruments according to type of hedge designation

Our derivative financial instruments according to the type of hedge in which they are designated follows:

	June 30, 2012
			Average
	Notional		Maturity		Fair
	Amount		(years)		Value
	(Dollars in thousands)
Cash Flow Hedges - Pay fixed interest-rate swap agreements	$	10,000		2.5	$	(872	)
No hedge designation
Mandatory commitments to sell mortgage loans	$	63,013		0.1	$	1,983
Rate-lock mortgage loan commitments		103,722		0.1		(696	)
Amended Warrant		2,504		6.4		(353	)
Total	$	169,239		0.2	$	934

Fair value of derivative instruments

Fair Values of Derivative Instruments

	Asset Derivatives						Liability Derivatives
	June 30,			December 31,			June 30,			December 31,
	2012			2011			2012			2011
	Balance			Balance			Balance			Balance
	Sheet	Fair		Sheet	Fair		Sheet	Fair		Sheet	Fair
	Location	Value		Location	Value		Location	Value		Location	Value
	(In thousands)
Derivatives designated as hedging instruments
Pay-fixed interest rate swap agreements							Other liabilities	$	872	Other liabilities	$	1,103
Total									872			1,103
Derivatives not designated as hedging instruments
Rate-lock mortgage loan commitments	Other  assets	$	1,983	Other  assets	$	857
Mandatory commitments to sell mortgage loans	Other  assets		-			-			696	Other liabilities		606
Amended Warrant			-			-	Other liabilities		353	Other liabilities		174
Total			1,983			857			1,049			780
Total derivatives		$	1,983		$	857		$	1,921		$	1,883

Effect of derivative financial instruments on condensed consolidated statement of operation

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

Three Month Periods Ended June 30,
							Location of
							Gain (Loss)
							Reclassified
							from
	Gain (Loss)						Accumulated	Gain (Loss)
	Recognized in						Other	Reclassified from
	Other						Comprehensive	Accumulated Other
	Comprehensive						Income into	Comprehensive						Location of	Gain (Loss)
	Income (Loss)						Income	Loss into Income						Gain (Loss)	Recognized
	(Effective Portion)						(Effective	(Effective Portion)						Recognized	in Income
	2012			2011			Portion)	2012			2011			in Income (1)	2012			2011
	(In thousands)
Cash Flow Hedges
Pay-fixed interest rate swap agreements	$	(24	)	$	(270	)	Interest expense	$	(266	)	$	(341	)		$	-		$	(3	)
Interest-rate cap agreements		-			30		Interest   expense		-			(7	)			-			-
Total	$	(24	)	$	(240	)		$	(266	)	$	(348	)		$	-		$	(3	)
No hedge designation
Rate-lock mortgage loan commitments														Net mortgage loan gains	$	283		$	68
Mandatory commitments to sell mortgage loans														Net mortgage   loan gains		(704	)		196
Amended warrant														(Increase) decrease in  fair value of  U.S. Treasury warrant		(25	)		642
Total															$	(446	)	$	906

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

Six Month Periods Ended June 30,
							Location of
							Gain (Loss)
							Reclassified
							from
	Gain (Loss)						Accumulated	Gain (Loss)
	Recognized in						Other	Reclassified from
	Other						Comprehensive	Accumulated Other
	Comprehensive						Income into	Comprehensive						Location of	Gain (Loss)
	Income (Loss)						Income	Loss into Income						Gain (Loss)	Recognized
	(Effective Portion)						(Effective	(Effective Portion)						Recognized	in Income
	2012			2011			Portion)	2012			2011			in Income (1)	2012			2011
	(In thousands)
Cash Flow Hedges
Pay-fixed interest rate swap agreements	$	(75	)	$	(293	)	Interest expense	$	(596	)	$	(757	)		$	-		$	(3	)
Interest-rate cap agreements		-			30		Interest   expense		-			(15	)			-			-
Total	$	(75	)	$	(263	)		$	(596	)	$	(772	)		$	-		$	(3	)
No hedge designation
Rate-lock mortgage loan commitments														Net mortgage loan gains	$	1,126		$	99
Mandatory commitments to sell mortgage loans														Net mortgage loan gains		(90	)		(1,296	)
Amended warrant														(Increase) decrease in  fair value of   U.S. Treasury warrant		(179	)		996
Total															$	857		$	(201	)

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

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Derivative Financial Instruments, Effect on Statement of Operations (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended				6 Months Ended
	Jun. 30, 2012		Jun. 30, 2011		Jun. 30, 2012		Jun. 30, 2011
Cash Flow Hedge [Member]
Effect of derivative financial instruments on the condensed consolidated fianancial statements of operations [Abstract]
Gain (Loss) Recognized in Other Comprehensive Income (Loss) (Effective Portion)	$ (24)		$ (240)		$ (75)		$ (263)
Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)	(266)		(348)		(596)		(772)
Gain (Loss) Recognized in Income	0		(3)		0		(3)
Cash Flow Hedge [Member] | Pay Fixed Interest-Rate Swap Agreement [Member]
Effect of derivative financial instruments on the condensed consolidated fianancial statements of operations [Abstract]
Gain (Loss) Recognized in Other Comprehensive Income (Loss) (Effective Portion)	(24)		(270)		(75)		(293)
Gain (Loss) Recognized in Income	0		(3)		0		(3)
Cash Flow Hedge [Member] | Pay Fixed Interest-Rate Swap Agreement [Member] | Interest Expense [Member]
Effect of derivative financial instruments on the condensed consolidated fianancial statements of operations [Abstract]
Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)	(266)		(341)		(596)		(757)
Cash Flow Hedge [Member] | Interest-Rate Cap Agreement [Member]
Effect of derivative financial instruments on the condensed consolidated fianancial statements of operations [Abstract]
Gain (Loss) Recognized in Other Comprehensive Income (Loss) (Effective Portion)	0		30		0		30
Gain (Loss) Recognized in Income	0		0		0		0
Cash Flow Hedge [Member] | Interest-Rate Cap Agreement [Member] | Interest Expense [Member]
Effect of derivative financial instruments on the condensed consolidated fianancial statements of operations [Abstract]
Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)	0		(7)		0		(15)
No Hedge Designation [Member]
Effect of derivative financial instruments on the condensed consolidated fianancial statements of operations [Abstract]
Gain (Loss) Recognized in Income	(446)		906		857		(201)
No Hedge Designation [Member] | Rate-Lock Mortgage Loan Commitments [Member] | Net Mortgage Loan Gains [Member]
Effect of derivative financial instruments on the condensed consolidated fianancial statements of operations [Abstract]
Gain (Loss) Recognized in Income	283	[1]	68	[1]	1,126	[1]	99	[1]
No Hedge Designation [Member] | Mandatory Commitments to Sell Mortgage Loans [Member] | Net Mortgage Loan Gains [Member]
Effect of derivative financial instruments on the condensed consolidated fianancial statements of operations [Abstract]
Gain (Loss) Recognized in Income	(704)	[1]	196	[1]	(90)	[1]	(1,296)	[1]
No Hedge Designation [Member] | Amended Warrant [Member] | (Increase) Decrease in Fair Value of U.S. Treasury Warrants [Member]
Effect of derivative financial instruments on the condensed consolidated fianancial statements of operations [Abstract]
Gain (Loss) Recognized in Income	$ (25)	[1]	$ 642	[1]	$ (179)	[1]	$ 996	[1]

[1] For cash flow hedges, this location and amount refers to the ineffective portion.

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Share Based Compensation (Tables)

6 Months Ended

Jun. 30, 2012

Share Based Compensation [Abstract]

Summary of outstanding stock option grants and transactions

A summary of outstanding stock option grants and transactions follows:

	Six-months ended June 30, 2012
						Weighted- Average Remaining		Aggregated
	Number of Shares			Average Exercise Price		Contractual Term (years)		Intrinsic Value (in thousands)
Outstanding at January 1, 2012		180,862		$	7.98
Granted		-			-
Exercised		-			-
Exchanged		-			-
Forfeited		(11,200	)		1.92
Expired		(5,495	)		90.66
Outstanding at June 30, 2012		164,167		$	5.62		8.26	$	70
Vested and expected to vest at
June 30, 2012		154,970		$	5.84		8.22	$	65
Exercisable at June 30, 2012		79,282		$	9.59		7.47	$	23

Summary of non-vested restricted stock and stock units and transactions

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

	2012
	Number of Shares			Weighted Average Grant Date Fair Value
Outstanding at January 1, 2012		165,045		$	17.90
Granted		-			-
Vested		(4,496	)		166.90
Forfeited		(522	)		93.14
Outstanding at June 30, 2012		160,027		$	13.47

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Regulatory Matters (Tables)

6 Months Ended

Jun. 30, 2012

Regulatory Matters [Abstract]

Actual capital amounts and ratios

Our actual capital amounts and ratios follow:

						Minimum for					Minimum for
						Adequately Capitalized					Well-Capitalized
	Actual					Institutions					Institutions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
June 30, 2012
Total capital to risk-weighted assets
Consolidated	$	183,061		12.29	%	$	119,150		8.00	%	NA		NA
Independent Bank		185,594		12.48			118,933		8.00		$	148,667		10.00	%
Tier 1 capital to risk-weighted assets
Consolidated	$	156,419		10.50	%	$	59,575		4.00	%	NA		NA
Independent Bank		166,591		11.21			59,467		4.00		$	89,200		6.00	%
Tier 1 capital to average assets
Consolidated	$	156,419		6.55	%	$	95,522		4.00	%	NA		NA
Independent Bank		166,591		6.98			95,416		4.00		$	119,270		5.00	%
December 31, 2011
Total capital to risk-weighted assets
Consolidated	$	174,547		11.31	%	$	123,470		8.00	%	NA		NA
Independent Bank		175,868		11.41			123,254		8.00		$	154,068		10.00	%
Tier 1 capital to risk-weighted assets
Consolidated	$	144,265		9.35	%	$	61,735		4.00	%	NA		NA
Independent Bank		156,104		10.13			61,627		4.00		$	92,441		6.00	%
Tier 1 capital to average assets
Consolidated	$	144,265		6.25	%	$	92,338		4.00	%	NA		NA
Independent Bank		156,104		6.77			92,268		4.00		$	115,335		5.00	%

Components of regulatory capital

The components of our regulatory capital are as follows:

	Consolidated						Independent Bank
	June 30,			December 31,			June 30,			December 31,
	2012			2011			2012			2011
	(In thousands)
Total shareholders' equity	$	113,172		$	102,627		$	164,453		$	152,987
Add (deduct)
Qualifying trust preferred securities		41,062			38,183			-			-
Accumulated other comprehensive       loss		10,014			11,921			9,967			11,583
Intangible assets		(7,065	)		(7,609	)		(7,065	)		(7,609	)
Disallowed capitalized mortgage loan servicing rights		(764	)		(857	)		(764	)		(857	)
Tier 1 capital		156,419			144,265			166,591			156,104
Qualifying trust preferred securities		7,606			10,485			-			-
Allowance for loan losses and allowance for unfunded lending commitments limited to 1.25% of total risk-weighted assets		19,036			19,797			19,003			19,764
Total risk-based capital	$	183,061		$	174,547		$	185,594		$	175,868

Actual capital ratios to minimum ratios imposed by board resolution

	Independent						Minimum
	Bank			Minimum			Ratio
	Actual as of			Ratios			Required to
	June 30,			Established			be Well-
	2012			by our Board			Capitalized
Total Capital to Risk-Weighted Assets		12.48	%		11.00	%		10.00	%
Tier 1 Capital to Average Total Assets		6.98			8.00			5.00

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Preparation of Financial Standards

6 Months Ended

Jun. 30, 2012

Preparation of Financial Statements [Abstract]

Preparation of Financial Statements

1.   Preparation of Financial Statements

The interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading.  The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 2011 included in our Annual Report on Form 10-K.

In our opinion, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary to present fairly our consolidated financial condition as of June 30, 2012 and December 31, 2011, and the results of operations for the three and six-month periods ended June 30, 2012 and 2011.  The results of operations for the three and six-month periods ended June 30, 2012, are not necessarily indicative of the results to be expected for the full year.  Certain reclassifications have been made in the prior period financial statements to conform to the current period presentation.  Our critical accounting policies include the assessment for other than temporary impairment ("OTTI") on investment securities,  the determination of the allowance for loan losses, the determination of vehicle service contract counterparty contingencies, the valuation of originated mortgage loan servicing rights and the valuation of deferred tax assets.  Refer to our 2011 Annual Report on Form 10-K for a disclosure of our accounting policies.

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Fair Value Disclosures (Tables)

6 Months Ended

Jun. 30, 2012

Fair Value Disclosures [Abstract]

Assets and liabilities measured at fair value

Assets and liabilities measured at fair value, including financial assets for which we have elected the fair value option, were as follows:

			Fair Value Measurements Using
			Quoted
			Prices
			in Active
			Markets		Significant		Significant
			for		Other		Un-
	Fair Value		Identical		Observable		observable
	Measure-		Assets		Inputs		Inputs
	ments		(Level 1)		(Level 2)		(Level 3)
	(In thousands)
June 30, 2012:
Measured at Fair Value on a Recurring Basis:
Assets
Trading securities	$	86	$	86	$	-	$	-
Securities available for sale
U.S. agency		38,143		-		38,143		-
U.S. agency residential mortgage-backed		157,164		-		157,164		-
Private label residential mortgage-backed		7,679		-		7,679		-
Obligations of states and political subdivisions		40,964		-		40,964		-
Trust preferred		3,097		-		3,097		-
Loans held for sale		43,386		-		43,386		-
Derivatives (1)		1,983		-		1,983		-
Liabilities
Derivatives (2)		1,921		-		1,568		353
Measured at Fair Value on a Non-recurring basis:
Assets
Capitalized mortgage loan servicing rights (3)		9,354		-		-		9,354
Impaired loans (4)
Commercial
Income producing - real estate		5,867		-		-		5,867
Land, land development & construction-real estate		3,062		-		-		3,062
Commercial and industrial		7,779		-		-		7,779
Mortgage
1-4 Family		2,256		-		-		2,256
Resort Lending		306		-		-		306
Other real estate (5)
Commercial
Income producing - real estate		860		-		-		860
Land, land development & construction-real estate		6,376		-		-		6,376
Commercial and industrial		248		-		-		248
Mortgage
1-4 Family		1,086		-		-		1,086
Resort Lending		4,824		-		-		4,824
Installment
Home equity installment - 1st lien		100		-		-		100
Loans held for sale relating to branch sale		53,180		-		53,180		-
Fixed assets held for sale relating to branch sale		8,491		-		8,491		-

(1) Included in accrued income and other assets

(2) Included in accrued expenses and other liabilities

(3) Only includes servicing rights that are carried at fair value due to recognition of a valuation allowance.

(4) Only includes impaired loans with specific loss allocations based on collateral value.

(5) Only includes other real estate with subsequent write downs to fair value.

			Fair Value Measurements Using
			Quoted
			Prices
			in Active
			Markets		Significant		Significant
			for		Other		Un-
	Fair Value		Identical		Observable		observable
	Measure-		Assets		Inputs		Inputs
	ments		(Level 1)		(Level 2)		(Level 3)
	(In thousands)
December 31, 2011:
Measured at Fair Value on a Recurring Basis:
Assets
Trading securities	$	77	$	77	$	-	$	-
Securities available for sale
U.S. agency		25,017		-		25,017		-
U.S. agency residential mortgage-backed		94,206		-		94,206		-
Private label residential mortgage-backed		8,268		-		8,268		-
Obligations of states and political subdivisions		27,317		-		27,317		-
Trust preferred		2,636		-		2,636		-
Loans held for sale		44,801		-		44,801		-
Derivatives (1)		857		-		857		-
Liabilities
Derivatives (2)		1,883		-		1,709		174
Measured at Fair Value on a Non-recurring basis:
Assets
Capitalized mortgage loan servicing rights (3)		11,004		-		-		11,004
Impaired loans (4)
Commercial
Income producing - real estate		8,022		-		-		8,022
Land, land development & construction-real estate		5,702		-		-		5,702
Commercial and industrial		5,613		-		-		5,613
Mortgage
1-4 Family		3,263		-		-		3,263
Resort Lending		1,064		-		-		1,064
Other real estate (5)
Commercial
Income producing - real estate		1,388		-		-		1,388
Land, land development & construction-real estate		7,512		-		-		7,512
Commercial and industrial		497		-		-		497
Mortgage
1-4 Family		2,079		-		-		2,079
Resort Lending		5,297		-		-		5,297
Home equity line of credit - 1st lien		53		-		-		53
Installment
Home equity installment - 1st lien		100		-		-		100

(1) Included in accrued income and other assets

(2) Included in accrued expenses and other liabilities

(3) Only includes servicing rights that are carried at fair value due to recognition of a valuation allowance.

(4) Only includes impaired loans with specific loss allocations based on collateral value.

(5) Only includes other real estate with subsequent write downs to fair value.

Changes in fair value for financial assets

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

	Changes in Fair Values for the Six-Month
	Periods Ended June 30 for Items Measured at
	Fair Value Pursuant to Election of the Fair Value Option
	2012						2011
					Total						Total
					Change						Change
					in Fair						in Fair
					Values						Values
					Included						Included
	Net Gains (Losses)				in Current		Net Gains (Losses)				in Current
	on Assets				Period		on Assets				Period
	Securities		Loans		Earnings		Securities		Loans		Earnings
	(In thousands)
Trading securities	$	9	$	-	$	9	$	124	$	-	$	124
Loans held for sale		-		241		241		-		717		717

Reconciliation for all liabilities measured at fair value on recurring basis

A reconciliation for all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30 follows:

	(Liability)
	Amended Warrant
	Three months ended						Six months ended
	June 30,						June 30,
	2012			2011			2012			2011
Beginning balance	$	(328	)	$	(957	)	$	(174	)	$	(1,311	)
Total gains (losses) realized and unrealized:
Included in results of operations		(25	)		642			(179	)		996
Included in other comprehensive income		-			-			-			-
Purchases, issuances, settlements, maturities and calls		-			-			-			-
Transfers in and/or out of Level 3		-			-			-			-
Ending balance	$	(353	)	$	(315	)	$	(353	)	$	(315	)
Amount of total gains (losses) for the period  included in earnings attributable to the change in unrealized gains (losses) relating to assets  and liabilities still held at June 30	$	(25	)	$	642		$	(179	)	$	996

Aggregate fair value and aggregate remaining contractual principal balance for loans held for sale

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

	Aggregate Fair Value		Difference		Contractual Principal
	(In thousands)
Loans held for sale
June 30, 2012	$	43,386	$	1,644	$	41,742
December 31, 2011		44,801		1,403		43,398

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Loans, Loan Ratings by Loan Class, Commercial Segment (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012		Dec. 31, 2011
Credit scores by loan class for mortgage and installment segments [Abstract]
Accrued interest included in recorded investment	$ 5,007		$ 5,831
Subsidiary's outstanding payment plan insured by third party (in hundredths)	91.80%
Subsidiary's payment outstanding payment plan 2, insured by third party (in hundredths)	7.70%
Credit ratings of insurer or risk retention group counterparties [Abstract]
Payment Plan Receivables, Full Refund	90,847		103,669
Payment Plan Receivable, Partial Refund	7,659		10,922
Payment Plan Receivable, Other	440		427
Total	98,946		115,018
Commercial [Member]
Financing Receivable, Recorded Investment [Line Items]
Non-watch 1-6	495,854		510,415
Watch 7-8	74,282		89,642
Substandard Accrual 9	21,568		24,520
Substandard Non Accrual 10-11	22,013		28,762
Commercial loans, Total	613,717		653,339
Commercial [Member] | Income Producing - Real Estate [Member]
Financing Receivable, Recorded Investment [Line Items]
Non-watch 1-6	173,267		201,655
Watch 7-8	34,030		52,438
Substandard Accrual 9	3,193		5,785
Substandard Non Accrual 10-11	8,277		13,788
Commercial loans, Total	218,767		273,666
Commercial [Member] | Land, Land Development and Construction Real Estate [Member]
Financing Receivable, Recorded Investment [Line Items]
Non-watch 1-6	28,353		33,515
Watch 7-8	8,409		9,421
Substandard Accrual 9	2,785		4,800
Substandard Non Accrual 10-11	4,804		6,990
Commercial loans, Total	44,351		54,726
Commercial [Member] | Commercial and Industrial [Member]
Financing Receivable, Recorded Investment [Line Items]
Non-watch 1-6	294,234		275,245
Watch 7-8	31,843		27,783
Substandard Accrual 9	15,590		13,935
Substandard Non Accrual 10-11	8,932		7,984
Commercial loans, Total	350,599		324,947
Commercial [Member] | Accrued interest included in total [Member]
Financing Receivable, Recorded Investment [Line Items]
Non-watch 1-6	1,386		1,677
Watch 7-8	212		381
Substandard Accrual 9	75		126
Substandard Non Accrual 10-11	0		0
Commercial loans, Total	1,673		2,184
Mortgage [Member]
Credit scores by loan class for mortgage and installment segments [Abstract]
800 and above	49,404	[1]	54,233	[1]
750-799	150,232	[1]	165,077	[1]
700-749	115,446	[1]	124,668	[1]
650-699	81,231	[1]	86,921	[1]
600-649	56,178	[1]	61,278	[1]
550-599	41,815	[1]	45,443	[1]
500-549	33,505	[1]	36,662	[1]
Under 500	12,483	[1]	14,424	[1]
Unknown	9,474	[1]	4,915	[1]
Total	549,768	[1]	593,621	[1]
Accrued interest included in recorded investment	2,558	[1]	2,745	[1]
Mortgage [Member] | 1-4 Family [Member]
Credit scores by loan class for mortgage and installment segments [Abstract]
800 and above	24,454	[1]	26,509	[1]
750-799	59,134	[1]	63,746	[1]
700-749	52,303	[1]	55,047	[1]
650-699	51,716	[1]	54,579	[1]
600-649	38,761	[1]	40,977	[1]
550-599	27,954	[1]	29,732	[1]
500-549	26,443	[1]	28,573	[1]
Under 500	10,678	[1]	12,434	[1]
Unknown	8,689	[1]	4,082	[1]
Total	300,132	[1]	315,679	[1]
Accrued interest included in recorded investment	1,368	[1]	1,404	[1]
Mortgage [Member] | Resort Lending [Member]
Credit scores by loan class for mortgage and installment segments [Abstract]
800 and above	16,742	[1]	17,345	[1]
750-799	71,244	[1]	76,381	[1]
700-749	49,423	[1]	53,210	[1]
650-699	20,267	[1]	21,579	[1]
600-649	10,220	[1]	12,750	[1]
550-599	9,041	[1]	10,698	[1]
500-549	3,024	[1]	3,716	[1]
Under 500	557	[1]	565	[1]
Unknown	578	[1]	579	[1]
Total	181,096	[1]	196,823	[1]
Accrued interest included in recorded investment	832	[1]	928	[1]
Mortgage [Member] | Home Equity Line of Credit - 1st Lien [Member]
Credit scores by loan class for mortgage and installment segments [Abstract]
800 and above	2,800	[1]	4,062	[1]
750-799	5,707	[1]	8,058	[1]
700-749	3,577	[1]	4,280	[1]
650-699	2,387	[1]	2,854	[1]
600-649	2,363	[1]	2,485	[1]
550-599	1,550	[1]	1,547	[1]
500-549	1,459	[1]	1,615	[1]
Under 500	508	[1]	539	[1]
Unknown	71	[1]	80	[1]
Total	20,422	[1]	25,520	[1]
Accrued interest included in recorded investment	105	[1]	123	[1]
Mortgage [Member] | Home Equity Line of Credit - 2nd Lien [Member]
Credit scores by loan class for mortgage and installment segments [Abstract]
800 and above	5,408	[1]	6,317	[1]
750-799	14,147	[1]	16,892	[1]
700-749	10,143	[1]	12,131	[1]
650-699	6,861	[1]	7,909	[1]
600-649	4,834	[1]	5,066	[1]
550-599	3,270	[1]	3,466	[1]
500-549	2,579	[1]	2,758	[1]
Under 500	740	[1]	886	[1]
Unknown	136	[1]	174	[1]
Total	48,118	[1]	55,599	[1]
Accrued interest included in recorded investment	253	[1]	290	[1]
Installment [Member]
Credit scores by loan class for mortgage and installment segments [Abstract]
800 and above	25,813	[1]	28,828	[1]
750-799	65,775	[1]	70,199	[1]
700-749	38,502	[1]	41,649	[1]
650-699	26,774	[1]	31,870	[1]
600-649	16,625	[1]	18,388	[1]
550-599	10,189	[1]	11,499	[1]
500-549	8,024	[1]	9,360	[1]
Under 500	2,702	[1]	3,455	[1]
Unknown	5,562	[1]	5,213	[1]
Total	199,966	[1]	220,461	[1]
Accrued interest included in recorded investment	776	[1]	902	[1]
Installment [Member] | Home Equity Installment - 1st Lien [Member]
Credit scores by loan class for mortgage and installment segments [Abstract]
800 and above	4,188	[1]	5,466	[1]
750-799	8,736	[1]	11,651	[1]
700-749	5,342	[1]	6,899	[1]
650-699	5,413	[1]	7,144	[1]
600-649	4,673	[1]	4,943	[1]
550-599	3,121	[1]	3,435	[1]
500-549	2,634	[1]	3,021	[1]
Under 500	975	[1]	1,160	[1]
Unknown	62	[1]	83	[1]
Total	35,144	[1]	43,802	[1]
Accrued interest included in recorded investment	142	[1]	176	[1]
Installment [Member] | Home Equity Installment - 2nd Lien [Member]
Credit scores by loan class for mortgage and installment segments [Abstract]
800 and above	3,811	[1]	5,047	[1]
750-799	12,808	[1]	16,475	[1]
700-749	8,690	[1]	10,693	[1]
650-699	6,869	[1]	8,407	[1]
600-649	4,877	[1]	5,412	[1]
550-599	2,984	[1]	3,221	[1]
500-549	2,791	[1]	3,145	[1]
Under 500	687	[1]	854	[1]
Unknown	27	[1]	34	[1]
Total	43,544	[1]	53,288	[1]
Accrued interest included in recorded investment	168	[1]	208	[1]
Installment [Member] | Loans Not Secured By Real Estate [Member]
Credit scores by loan class for mortgage and installment segments [Abstract]
800 and above	17,761	[1]	18,245	[1]
750-799	43,719	[1]	41,501	[1]
700-749	23,724	[1]	23,174	[1]
650-699	13,903	[1]	15,646	[1]
600-649	6,681	[1]	7,599	[1]
550-599	3,859	[1]	4,573	[1]
500-549	2,444	[1]	3,011	[1]
Under 500	1,001	[1]	1,391	[1]
Unknown	5,414	[1]	5,037	[1]
Total	118,506	[1]	120,177	[1]
Accrued interest included in recorded investment	444	[1]	489	[1]
Installment [Member] | Others 2 [Member]
Credit scores by loan class for mortgage and installment segments [Abstract]
800 and above	53	[1]	70	[1]
750-799	512	[1]	572	[1]
700-749	746	[1]	883	[1]
650-699	589	[1]	673	[1]
600-649	394	[1]	434	[1]
550-599	225	[1]	270	[1]
500-549	155	[1]	183	[1]
Under 500	39	[1]	50	[1]
Unknown	59	[1]	59	[1]
Total	2,772	[1]	3,194	[1]
Accrued interest included in recorded investment	22	[1]	29	[1]
AM Best Rating [Member]
Credit ratings of insurer or risk retention group counterparties [Abstract]
Payment Plan Receivables, Full Refund	30,724		32,461
Payment Plan Receivable, Partial Refund	5,603		165
Payment Plan Receivable, Other	0		269
Total	36,327		32,895
AM Best Rating A+ [Member]
Credit ratings of insurer or risk retention group counterparties [Abstract]
Payment Plan Receivables, Full Refund	0		0
Payment Plan Receivable, Partial Refund	0		118
Payment Plan Receivable, Other	201		7
Total	201		125
AM Best Rating, A Minus Rating [Member]
Credit ratings of insurer or risk retention group counterparties [Abstract]
Payment Plan Receivables, Full Refund	20,094		27,056
Payment Plan Receivable, Partial Refund	2,056		10,639
Payment Plan Receivable, Other	0		0
Total	22,150		37,695
AM Best Rating, B+ Rating [Member]
Credit ratings of insurer or risk retention group counterparties [Abstract]
Payment Plan Receivables, Full Refund	421		1,390
Payment Plan Receivable, Partial Refund	0		0
Payment Plan Receivable, Other	0		0
Total	421		1,390
AM Best Rating, B RatingB [Member]
Credit ratings of insurer or risk retention group counterparties [Abstract]
Payment Plan Receivables, Full Refund	0		0
Payment Plan Receivable, Partial Refund	0		0
Payment Plan Receivable, Other	0		0
Total	0		0
Not Rated [Member]
Credit ratings of insurer or risk retention group counterparties [Abstract]
Payment Plan Receivables, Full Refund	39,608		42,762
Payment Plan Receivable, Partial Refund	0		0
Payment Plan Receivable, Other	239		151
Total	$ 39,847		$ 42,913

[1] Credit scores have been updated within the last twelve months.

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Branch Sale (Details) (USD $)	6 Months Ended
	Jun. 30, 2012	Dec. 31, 2011	Jun. 30, 2012 Midland, Michigan [Member]	May 23, 2012 Midland, Michigan [Member]	May 23, 2012 Battle Creek, Michigan market area [Member]	May 23, 2012 Northeast Michigan [Member]
Branch Location [Line Items]
Number of branches to be sold				21	6	15
Loans [Abstract]
Commercial	$ 612,044,000	$ 651,155,000	$ 31,729,000
Mortgage	547,210,000	590,876,000	8,699,000
Installment	199,190,000	219,559,000	13,699,000
Total loans	1,457,390,000	1,576,608,000	54,127,000
Allowance for loan losses	(51,346,000)	(58,884,000)	(781,000)
Adjustment to lower of cost or fair value			(166,000)
Net loans	1,406,044,000	1,517,724,000	53,180,000
Deposits [Abstract]
Non-interest bearing	471,718,000	497,718,000	65,059,000
Savings and interest-bearing checking	852,214,000	1,019,603,000	231,470,000
Retail time	392,544,000	526,525,000	123,732,000
Total deposits			420,261,000
Net adjustments			(2,740,000)
Net deposits	1,765,336,000	2,086,125,000	417,521,000
Percentage of deposit premium on identified core deposits (in hundredths)	3.10%
Discount percentage of branches being sold (in hundredths)	1.75%
Fair value of fixed assets expected to be sold	8,500,000
Cost of fixed assets expected to be sold, net of accumulated depreciation	11,100,000
Amount of remaining unamortized intangible assets	$ 2,700,000

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Condensed Consolidated Statements of Financial Condition (unaudited) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Assets
Cash and due from banks	$ 60,838	$ 62,777
Interest bearing deposits	358,920	278,331
Cash and Cash Equivalents	419,758	341,108
Trading securities	86	77
Securities available for sale	247,047	157,444
Federal Home Loan Bank and Federal Reserve Bank stock, at cost	20,494	20,828
Loans held for sale, carried at fair value	43,386	44,801
Loans held for sale relating to branch sale, carried at lower of cost or fair value	53,180	0
Loans
Commercial	612,044	651,155
Mortgage	547,210	590,876
Installment	199,190	219,559
Payment plan receivables	98,946	115,018
Total loans	1,457,390	1,576,608
Allowance for loan losses	(51,346)	(58,884)
Net loans	1,406,044	1,517,724
Other real estate and repossessed assets	29,504	34,042
Property and equipment, net	50,802	62,548
Bank-owned life insurance	50,094	49,271
Other intangibles	7,065	7,609
Capitalized mortgage loan servicing rights	10,651	11,229
Prepaid FDIC deposit insurance assessment	11,008	12,609
Vehicle service contract counterparty receivables, net	28,879	29,298
Fixed assets held for sale relating to branch sale	8,491	0
Accrued income and other assets	16,976	18,818
Total Assets	2,403,465	2,307,406
Deposits
Non-interest bearing	471,718	497,718
Savings and interest-bearing checking	852,214	1,019,603
Retail time	392,544	526,525
Brokered time	48,860	42,279
Total Deposits	1,765,336	2,086,125
Deposits held for sale relating to branch sale	417,521	0
Other borrowings	17,929	33,387
Subordinated debentures	50,175	50,175
Vehicle service contract counterparty payables	7,118	6,633
Accrued expenses and other liabilities	32,214	28,459
Total Liabilities	2,290,293	2,204,779
Shareholders' Equity
Convertible preferred stock, no par value, 200,000 shares authorized; 74,426 shares issued and outstanding at June 30, 2012 and December 31, 2011; liquidation preference: $83,061 at June 30, 2012 and $81,023 at December 31, 2011	82,004	79,857
Common stock, no par value, 500,000,000 shares authorized; issued and outstanding: 8,749,220 shares at June 30, 2012 and 8,491,526 shares at December 31, 2011	249,751	248,950
Accumulated deficit	(208,569)	(214,259)
Accumulated other comprehensive loss	(10,014)	(11,921)
Total Shareholders' Equity	113,172	102,627
Total Liabilities and Shareholders' Equity	$ 2,403,465	$ 2,307,406

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Intangible Assets (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Amortized other intangible assets - core deposits [Abstract]
Gross Carrying Amount	$ 31,326	$ 31,326
Accumulated Amortization	24,261	23,717
Estimated amortization of other intangibles [Abstract]
Six months ended December 31, 2012	544
Year ending December 31:
2013	1,078
2014	801
2015	613
2016	613
2017 and thereafter	3,416
Total	$ 7,065

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Condensed Consolidated Statements of Cash Flows (unaudited) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Condensed Consolidated Statements of Cash Flows (unaudited) [Abstract]
Net Income (Loss)	$ 7,837	$ (7,364)
Adjustments to Reconcile Net Income (Loss) to Net Cash from Operating Activities
Proceeds from sales of loans held for sale	246,587	187,558
Disbursements for loans held for sale	(237,733)	(160,040)
Provision for loan losses	6,187	14,858
Deferred loan fees	(404)	(214)
Depreciation, amortization of intangible assets and premiums and accretion of discounts on securities and loans	(2,351)	(6,442)
Net gains on sales of mortgage loans	(7,439)	(3,728)
Net gains on securities	(853)	(328)
Securities impairment recognized in earnings	262	142
Net losses on other real estate and repossessed assets	1,620	2,183
Vehicle service contract counterparty contingencies	797	3,657
Share based compensation	304	455
Decrease in accrued income and other assets	3,288	4,346
Increase in accrued expenses and other liabilities	4,262	2,632
Total Adjustments	14,527	45,079
Net Cash from Operating Activities	22,364	37,715
Cash Flow from (used in) Investing Activities
Proceeds from the sale of securities available for sale	18,999	70,322
Proceeds from the maturity of securities available for sale	60,728	295
Principal payments received on securities available for sale	11,220	3,872
Purchases of securities available for sale	(179,262)	(83,906)
Redemption of Federal Home Loan Bank stock	0	2,397
Redemption of Federal Reserve Bank stock	334	228
Net decrease in portfolio loans (loans originated, net of principal payments)	53,220	108,369
Proceeds from the collection of vehicle service contract counterparty receivables	396	671
Proceeds from the sale of other real estate and repossessed assets	8,912	10,084
Capital expenditures	(3,257)	(1,554)
Net Cash from (used in) Investing Activities	(28,710)	110,778
Cash Flow from (used in) Financing Activities
Net increase (decrease) in total deposits	99,472	(187,153)
Net increase (decrease) in other borrowings	9	(8)
Proceeds from Federal Home Loan Bank advances	12,000	7,000
Payments of Federal Home Loan Bank advances	(27,467)	(37,115)
Net increase in vehicle service contract counterparty payables	485	2,858
Proceeds from issuance of common stock	497	1,335
Net Cash from (used in) Financing Activities	84,996	(213,083)
Net Increase (Decrease) in Cash and Cash Equivalents	78,650	(64,590)
Cash and Cash Equivalents at Beginning of Period	341,108	385,374
Cash and Cash Equivalents at End of Period	419,758	320,784
Cash paid during the period for
Interest	5,914	11,361
Income taxes	186	26
Transfers to other real estate and repossessed assets	5,994	10,462
Transfer of payment plan receivables to vehicle service contract counterparty receivables	849	8,010
Transfers to loans held for sale	54,127	0
Transfers to fixed assets held for sale	11,065	0
Transfers to deposits held for sale	$ 420,261	$ 0

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Securities (Details) (USD $)	3 Months Ended			6 Months Ended												6 Months Ended							6 Months Ended	12 Months Ended	6 Months Ended	12 Months Ended	6 Months Ended	3 Months Ended		6 Months Ended		3 Months Ended		6 Months Ended		3 Months Ended		6 Months Ended				6 Months Ended		6 Months Ended	12 Months Ended	6 Months Ended	12 Months Ended
	Jun. 30, 2012	Mar. 31, 2012	Jun. 30, 2011	Jun. 30, 2012		Jun. 30, 2011		Dec. 31, 2011	Jun. 30, 2012 Below Investment Grade 1 [Member]	Jun. 30, 2012 Below Investment Grade 2 [Member]	Jun. 30, 2012 Below Investment Grade 3 [Member]	Jun. 30, 2012 U.S. Agency [Member]	Dec. 31, 2011 U.S. Agency [Member]	Jun. 30, 2012 U.S. Agency Residential Mortgage-Backed [Member]	Dec. 31, 2011 U.S. Agency Residential Mortgage-Backed [Member]	Jun. 30, 2012 Private Label Residential Mortgage-Backed [Member]	Dec. 31, 2011 Private Label Residential Mortgage-Backed [Member]	Jun. 30, 2012 Private Label Residential Mortgage-Backed [Member] California [Member]	Jun. 30, 2012 Private Label Residential Mortgage-Backed [Member] Florida [Member]	Jun. 30, 2012 Private Label Residential Mortgage-Backed [Member] Nevada [Member]	Jun. 30, 2012 Private Label Residential Mortgage-Backed [Member] Maximum [Member]	Jun. 30, 2012 Private Label Residential Mortgage-Backed [Member] Minimum [Member]	Jun. 30, 2012 Jumbo [Member]	Dec. 31, 2011 Jumbo [Member]	Jun. 30, 2012 Alt - A [Member]	Dec. 31, 2011 Alt - A [Member]	Jun. 30, 2012 Seasoned ARM Transactions [Member]	Jun. 30, 2012 Fixed Rate Jumbo [Member]	Jun. 30, 2011 Fixed Rate Jumbo [Member]	Jun. 30, 2012 Fixed Rate Jumbo [Member]	Jun. 30, 2011 Fixed Rate Jumbo [Member]	Jun. 30, 2012 Hybrid ARM Alt - A [Member]	Jun. 30, 2011 Hybrid ARM Alt - A [Member]	Jun. 30, 2012 Hybrid ARM Alt - A [Member]	Jun. 30, 2011 Hybrid ARM Alt - A [Member]	Jun. 30, 2012 Hybrid ARM Jumbos [Member]	Jun. 30, 2011 Hybrid ARM Jumbos [Member]	Jun. 30, 2012 Hybrid ARM Jumbos [Member]	Jun. 30, 2011 Hybrid ARM Jumbos [Member]	Jun. 30, 2012 Obligations of States and Political Subdivisions [Member]	Dec. 31, 2011 Obligations of States and Political Subdivisions [Member]	Jun. 30, 2012 Trust Preferred [Member]	Dec. 31, 2011 Trust Preferred [Member]	Jun. 30, 2012 Rated Issues [Member]	Dec. 31, 2011 Rated Issues [Member]	Jun. 30, 2012 Unrated Issues - No OTTI [Member]	Dec. 31, 2011 Unrated Issues - No OTTI [Member]
Available-for-sale Securities, Amortized Cost Basis [Abstract]
Amortized cost	$ 249,240,000			$ 249,240,000				$ 161,023,000				$ 38,039,000	$ 24,980,000	$ 156,231,000	$ 93,415,000	$ 9,887,000	$ 11,066,000																							$ 40,383,000	$ 26,865,000	$ 4,700,000	$ 4,697,000
Unrealized gains	1,761,000			1,761,000				1,575,000				124,000	58,000	994,000	1,007,000	0	0																							643,000	510,000	0	0
Unrealized losses	3,954,000			3,954,000				5,154,000				20,000	21,000	61,000	216,000	2,208,000	2,798,000																							62,000	58,000	1,603,000	2,061,000
Fair Value	247,047,000			247,047,000				157,444,000				38,143,000	25,017,000	157,164,000	94,206,000	7,679,000	8,268,000																							40,964,000	27,317,000	3,097,000	2,636,000
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value [Abstract]
Less Than Twelve Months, Fair Value	46,206,000			46,206,000				53,228,000				7,507,000	9,974,000	30,497,000	42,500,000	0	163,000																							8,202,000	0	0	591,000
Less Than Twelve Months, Unrealized Losses	126,000			126,000				1,545,000				20,000	21,000	44,000	216,000	0	90,000																							62,000	0	0	1,218,000
Twelve Months or More, Fair Value	20,871,000			20,871,000				11,876,000				0	0	10,097,000	0	7,677,000	8,102,000																							0	1,729,000	3,097,000	2,045,000
Twelve Months or More, Unrealized Losses	3,828,000			3,828,000				3,609,000				0	0	17,000	0	2,208,000	2,708,000																							0	58,000	1,603,000	843,000
Total, Fair value	67,077,000			67,077,000				65,104,000				7,507,000	9,974,000	40,594,000	42,500,000	7,677,000	8,265,000																							8,202,000	1,729,000	3,097,000	2,636,000
Total, Unrealized Losses	3,954,000			3,954,000				5,154,000				20,000	21,000	61,000	216,000	2,208,000	2,798,000																							62,000	58,000	1,603,000	2,061,000
Number of securities with market fair value less than amortized cost												2		8		8																								9		4
Number of issues rated as investment grade																2																								7		1
Number of securities rated below investment grade																4
Number of securities that are split rated																2
Number of securities not rated																																										2
Number of bonds with impairment in excess of ten percent																6
Percentage of excess impairment on bonds (in hundredths)																10.00%
Mortgage Backed Securities Issued By Private Enterprises [Abstract]
Fair Value																							5,738,000	6,454,000	1,941,000	1,814,000
Net Unrealized Gain Loss																							(1,602,000)	(1,937,000)	(606,000)	(861,000)
Percentage of credit widing (in hundredths)																							(75.00%)		(25.00%)
Number of transactions with geographic concentration																		7	3	1
Collateral pool, minimum (in hundredths)																		22.00%	5.00%	(5.00%)
Collateral pool, maximum (in hundredths)																		58.00%	7.00%
Typical median exposure (in hundredths)																		47.00%
Number of transactions with concentration in loans																6
Percentage of loans with interest only for for a specified period of time (in hundredths)																					94.00%	31.00%
Super senior (in hundredths)																22.00%
Senior (in hundredths)																43.00%
Senior support (in hundredths)																25.00%
Mezzanine (in hundredths)																10.00%
Seasoned transaction period				94 months
Level of subordination (in hundredths)																(8.60%)
Review of credit performance				current period as well as cumulative realized losses; the level of severe payment problems, which includes other real estate (ORE), foreclosures, bankruptcy and 90 day delinquencies; and the level of less severe payment problems, which consists of 30 and 60 day delinquencies.
Normalized prepayment rate, minimum (in hundredths)																											10.00%
Normalized prepayment rate, maximum (in hundredths)																											18.00%
Number of transactions with fixed rate collateral																1
Projected period of decline in loan defaults				3 years
Expected loss severity period				3 years
Period loss severity are expected to decline				4 years
The number of private label mortgage backed securities currently below investment grade with OTTI																3
Fair value of private label mortgage backed securities currently below investment grade with OTTI									3,300,000	1,700,000	100,000
Private label mortgage backed securities with OTTI and below investment grade, unrealized losses									1,000,000	300,000	30,000
Private label mortgage backed securities with OTTI and below investment grade, amortized cost									4,300,000	2,000,000	100,000
Loan transactions period																														30 years				30 years				30 years
Average fico required for underlying loans																												744		744		717		717		738		738
Average loan-to-value (in hundredths)																														72.00%				78.00%				57.00%
Loan origination date																														2007				2005				2005
Credit related to OTTI																												645,000		645,000		457,000		457,000		380,000		380,000
OTTI changes recorded in earnings	85,000	85,000	0	262,000		142,000																						85,000	0	170,000	52,000	0	0	32,000	0	0	0	60,000	90,000
Non-rated securities, amortized cost																																										2,800,000
Non Rated Trust Preferred Securities Fair Value																																										1,500,000
Trust preferred securities [Abstract]
Fair Value																																												1,564,000	1,405,000	1,533,000	1,231,000
Net Unrealized Gain (Loss)																																												(329,000)	(484,000)	(1,274,000)	(1,577,000)
Available-for-sale Securities, Debt Maturities, Amortized Cost Basis, Fiscal Year Maturity [Abstract]
Maturing within one year	1,323,000			1,323,000
Maturing after one year but within five years	6,491,000			6,491,000
Maturing after five years but within ten years	15,318,000			15,318,000
Maturing after ten years	59,990,000			59,990,000
Available-for-sale Securities, Debt Maturities, Amortized Cost Basis	83,122,000			83,122,000
U.S. agency residential mortgage-backed	156,231,000			156,231,000
Private label residential mortgage-backed	9,887,000			9,887,000
Total	249,240,000			249,240,000
Available-for-sale Securities, Debt Maturities, Fair Value, Fiscal Year Maturity [Abstract]
Maturing within one year	1,341,000			1,341,000
Maturing after one year but within five years	6,711,000			6,711,000
Maturing after five years but within ten years	15,531,000			15,531,000
Maturing after ten years	58,621,000			58,621,000
Available-for-sale Securities, Debt Maturities, Fair Value, Total	82,204,000			82,204,000
U.S. agency residential mortgage backed	157,164,000			157,164,000
Private label residential mortgage-backed	7,679,000			7,679,000
Total	247,047,000			247,047,000
Other than Temporary Impairment, Credit Losses Recognized in Earnings [Roll Forward]
Balance at beginning of period	1,647,000	1,470,000	852,000	1,470,000		710,000
Additions to credit losses on securities for which no previous OTTI was recognized	0		0	0		0
Increases to credit losses on securities for which OTTI was previously recognized	85,000		0	262,000		142,000
Balance at end of period	1,732,000	1,647,000	852,000	1,732,000		852,000
Gain and losses realized on sale of securities available for sale [Abstract]
Proceeds				18,999,000		70,322,000
Realized Gains				843,000		279,000
Realized Losses				0	[1]	75,000	[1]
OTTI not reported in earning				262,000		142,000
Trading Securities, Realized Gain (Loss)				$ 10,000		$ 124,000

[1] Losses in 2012 and 2011 exclude $0.262 million and $0.142 million, respectively of credit related OTTI recognized in earnings.

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Shareholders' Equity

6 Months Ended

Jun. 30, 2012

Shareholders' Equity [Abstract]

Shareholders' Equity

15.  Shareholders' Equity

On April 2, 2010, we entered into an exchange agreement with the UST pursuant to which the UST agreed to exchange all 72,000 shares of our Series A Fixed Rate Cumulative Perpetual Preferred Stock, with an original liquidation preference of $1,000 per share ("Series A Preferred Stock"), beneficially owned and held by the UST, plus accrued and unpaid dividends on such Series A Preferred Stock, for shares of our Series B Fixed Rate Cumulative Mandatorily Convertible Preferred Stock, with an original liquidation preference of $1,000 per share ("Series B Preferred Stock"). As part of the terms of the exchange agreement, we also agreed to amend and restate the terms of the warrant, dated December 12, 2008, issued to the UST to purchase 346,154 shares of our common stock.

On April 16, 2010, we closed the transactions described in the exchange agreement and we issued to the UST (1) 74,426 shares of our Series B Preferred Stock and (2) an Amended and Restated Warrant to purchase 346,154 shares of our common stock at an exercise price of $7.234 per share and expiring on December 12, 2018 (the "Amended Warrant") for all of the 72,000 shares of Series A Preferred Stock and the original warrant that had been issued to the UST in December 2008 pursuant to the TARP Capital Purchase Program, plus approximately $2.4 million in accrued dividends on such Series A Preferred Stock.

With the exception of being convertible into shares of our common stock, the terms of the Series B Preferred Stock are substantially similar to the terms of the Series A Preferred Stock that was exchanged. The Series B Preferred Stock qualifies as Tier 1 regulatory capital and pays cumulative dividends quarterly at a rate of 5% per annum through February 14, 2014, and at a rate of 9% per annum thereafter. The Series B Preferred Stock is non-voting, other than class voting rights on certain matters that could adversely affect the Series B Preferred Stock. If dividends on the Series B Preferred Stock have not been paid for an aggregate of six quarterly dividend periods or more, whether consecutive or not, the holders of the Series B Preferred Stock, voting together with holders of any then outstanding voting parity stock, have the right to elect two additional directors at our next annual meeting of shareholders or at a special meeting of shareholders called for that purpose. These directors would be elected annually and serve until all accrued and unpaid dividends on the Series B Preferred Stock have been paid. Beginning in December of 2009, we suspended payment of quarterly dividends. The cash dividends payable to the UST amount to approximately $4.2 million per year until December of 2013, at which time they would increase to approximately $7.5 million per year.  Because we have deferred dividends on the Series B Preferred Stock for at least six quarterly dividend periods, the UST currently has the right to elect two directors to our board. At this time, in lieu of electing such directors, the UST requested us to allow (and we have allowed) an observer to attend our Board of Directors meetings beginning in the third quarter of 2011. The UST continues to retain the right to elect two directors as described above.

Under the terms of the Series B Preferred Stock, UST (and any subsequent holder of the Series B Preferred Stock) has the right to convert the Series B Preferred Stock into our common stock at any time. In addition, we have the right to compel a conversion of the Series B Preferred Stock into common stock, subject to the following conditions:

(i) we shall have received all appropriate approvals from the Board of Governors of the Federal Reserve System;

(ii) we shall have issued our common stock in exchange for at least $40 million aggregate original liquidation amount of the trust preferred securities issued by the Company's trust subsidiaries, IBC Capital Finance II, IBC Capital Finance III, IBC Capital Finance IV, and Midwest Guaranty Trust I;

(iii) we shall have closed one or more transactions (on terms reasonably acceptable to the UST, other than the price per share of common stock) in which investors, other than the UST, have collectively provided a minimum aggregate amount of $100 million in cash proceeds to us in exchange for our common stock; and

(iv) we shall have made the anti-dilution adjustments to the Series B Preferred Stock, if any, required by the terms of the Series B Preferred Stock.

If converted by the holder or by us pursuant to either of the above-described conversion rights, each share of Series B Preferred Stock (liquidation amount of $1,000 per share) will convert into a number of shares of our common stock equal to a fraction, the numerator of which is $750 and the denominator of which is $7.234, which was the market price of our common stock at the time the exchange agreement was signed (as such market price was determined pursuant to the terms of the Series B Preferred Stock), referred to as the "conversion rate." This conversion rate is subject to certain anti-dilution adjustments that may result in a greater number of shares being issued to the holder of the Series B Preferred Stock. If converted by the holder or by us pursuant to either of the above-described conversion rights, as of June 30, 2012, the Series B Preferred Stock and accrued and unpaid dividends would have been convertible into approximately 11.0 million shares of our common stock.

Unless earlier converted by the holder or by us as described above, the Series B Preferred Stock will convert into shares of our common stock on a mandatory basis on the seventh anniversary (April 16, 2017) of the issuance of the Series B Preferred Stock. In any such mandatory conversion, each share of Series B Preferred Stock (liquidation amount of $1,000 per share) will convert into a number of shares of our common stock equal to a fraction, the numerator of which is $1,000 and the denominator of which is the market price of our common stock at the time of such mandatory conversion (as such market price is determined pursuant to the terms of the Series B Preferred Stock).

At the time any Series B Preferred Stock are converted into our common stock, we will be required to pay all accrued and unpaid dividends on the Series B Preferred Stock being converted in cash or, at our option, in shares of our common stock, in which case the number of shares to be issued will be equal to the amount of accrued and unpaid dividends to be paid in common stock divided by the market value of our common stock at the time of conversion (as such market price is determined pursuant to the terms of the Series B Preferred Stock). Accrued and unpaid dividends on the Series B Preferred Stock totaled $8.6 million (approximately $116 per share of Series B Preferred Stock) and $6.6 million (approximately $89 per share of Series B Preferred Stock) at June 30, 2012 and December 31, 2011, respectively.  These amounts are recorded in Convertible Preferred Stock on the Condensed Consolidated Statements of Financial Condition.

The maximum number of shares of our common stock that may be issued upon conversion of all shares of the Series B Preferred Stock and any accrued dividends on Series B Preferred Stock is 14.4 million, unless we receive shareholder approval to issue a greater number of shares.

The Series B Preferred Stock may be redeemed by us, subject to the approval of the Board of Governors of the Federal Reserve System, at any time, in an amount up to the cash proceeds (minimum of approximately $18.6 million) from qualifying equity offerings of common stock (plus any net increase to our retained earnings after the original issue date). If the Series B Preferred Stock is redeemed prior to the first dividend payment date falling on or after the second anniversary of the original issue date, the redemption price will be equal to the $1,000 liquidation amount per share plus any accrued and unpaid dividends. If the Series B Preferred Stock is redeemed on or after such date, the redemption price will be the greater of (a) the $1,000 liquidation amount per share plus any accrued and unpaid dividends and (b) the product of the applicable Conversion Rate (as described above) and the average of the market prices per share of our common stock (as such market price is determined pursuant to the terms of the Series B Preferred Stock) over a 20 trading day period beginning on the trading day immediately after we give notice of redemption to the holder (plus any accrued and unpaid dividends). In any redemption, we must redeem at least 25% of the number of Series B Preferred Stock shares originally issued to the UST, unless fewer of such shares are then outstanding (in which case all of the Series B Preferred Stock must be redeemed).  In addition to the terms of the Series B Preferred Stock discussed above, the UST updated its Frequently Asked Questions regarding the Capital Purchase Program ("CPP") as of March 1, 2012 to permit any CPP participant to repay its investment, in part, subject to a minimum repayment of the greater of (i) 5% of the aggregate liquidation amount of the preferred stock issued to the UST or (ii) $100,000.  Under this updated guidance, we could repay a minimum of approximately $3.7 million, subject to the approval of the Board of Governors of the Federal Reserve System, in a partial redemption of the Series B Preferred Stock.

On July 7, 2010 we executed an Investment Agreement and Registration Rights Agreement with Dutchess Opportunity Fund, II, LP ("Dutchess") for the sale of up to 1.50 million shares of our common stock. These agreements serve to establish an equity line facility as a contingent source of liquidity at the parent company level. Pursuant to the Investment Agreement, Dutchess committed to purchase up to $15.0 million of our common stock over a 36-month period ending November 1, 2013. We have the right, but no obligation, to draw on this equity line facility from time to time during such 36-month period by selling shares of our common stock to Dutchess. The sales price would be at a 5% discount to the market price of our common stock at the time of the draw; as such market price is determined pursuant to the terms of the Investment Agreement. Through June 30, 2012, 0.95 million shares of our common stock were sold to Dutchess pursuant to the Investment Agreement (0.17 million shares during the second quarter of 2012, 0.43 million shares during 2011 and 0.35 million shares during the fourth quarter of 2010) for an aggregate purchase price of $2.3 million. In order to comply with Nasdaq rules, we needed shareholder approval to sell more than approximately 0.7 million more shares to Dutchess pursuant to the Investment Agreement. In April 2011, our shareholders approved a resolution at our Annual Meeting to authorize us to sell up to 2.5 million additional shares under this equity line, so we now have additional flexibility to take advantage of this contingent source of liquidity. Remaining shares approved to sell pursuant to the Investment Agreement totaled 3.1 million shares at June 30, 2012. Based on our closing stock price on June 30, 2012, additional funds available under the Investment Agreement totaled approximately $7.6 million at June 30, 2012.

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Loans (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011
Analysis of allowance for loan losses by portfolio segment [Roll Forward]
Balance at beginning of period	$ 56,006	$ 65,761	$ 58,884	$ 67,915
Additions (deductions) [Abstract]
Provision for loan losses	1,056	4,156	6,187	14,858
Recoveries credited to allowance	1,351	1,247	3,231	2,182
Loans charged against the allowance	(6,286)	(10,645)	(16,175)	(24,436)
Reclassification to loans held for sale	(781)		(781)
Balance at end of period	51,346	60,519	51,346	60,519
Allowance for loan losses:[Abstract]
Individually evaluated for impairment	21,730		21,730		22,299
Collectively evaluated for impairment	29,616		29,616		36,585
Total ending allowance balance	51,346		51,346		58,884
Loans [Abstract]
Individually evaluated for impairment	165,914		165,914		159,930
Collectively evaluated for impairment	1,296,483		1,296,483		1,422,509
Total loans recorded investment	1,462,397		1,462,397		1,582,439
Accrued interest included in recorded investment	5,007		5,007		5,831
Total loans	1,457,390		1,457,390		1,576,608
Commercial [Member]
Analysis of allowance for loan losses by portfolio segment [Roll Forward]
Balance at beginning of period	16,441	21,279	18,183	23,836
Additions (deductions) [Abstract]
Provision for loan losses	1,194	1,333	2,690	6,043
Recoveries credited to allowance	390	512	1,396	731
Loans charged against the allowance	(2,379)	(5,427)	(6,623)	(12,913)
Reclassification to loans held for sale	(170)		(170)
Balance at end of period	15,476	17,697	15,476	17,697
Allowance for loan losses:[Abstract]
Individually evaluated for impairment	9,855		9,855		10,252
Collectively evaluated for impairment	5,621		5,621		7,931
Total ending allowance balance	15,476		15,476		18,183
Loans [Abstract]
Individually evaluated for impairment	66,703		66,703		58,674
Collectively evaluated for impairment	547,014		547,014		594,665
Total loans recorded investment	613,717		613,717		653,339
Accrued interest included in recorded investment	1,673		1,673		2,184
Total loans	612,044		612,044		651,155
Mortgage [Member]
Analysis of allowance for loan losses by portfolio segment [Roll Forward]
Balance at beginning of period	23,271	23,771	22,885	22,642
Additions (deductions) [Abstract]
Provision for loan losses	570	2,964	4,805	8,333
Recoveries credited to allowance	572	385	1,120	740
Loans charged against the allowance	(2,950)	(3,968)	(7,347)	(8,563)
Reclassification to loans held for sale	(192)		(192)
Balance at end of period	21,271	23,152	21,271	23,152
Allowance for loan losses:[Abstract]
Individually evaluated for impairment	10,201		10,201		10,285
Collectively evaluated for impairment	11,070		11,070		12,600
Total ending allowance balance	21,271		21,271		22,885
Loans [Abstract]
Individually evaluated for impairment	91,494		91,494		93,702
Collectively evaluated for impairment	458,274		458,274		499,919
Total loans recorded investment	549,768		549,768		593,621
Accrued interest included in recorded investment	2,558		2,558		2,745
Total loans	547,210		547,210		590,876
Installment [Member]
Analysis of allowance for loan losses by portfolio segment [Roll Forward]
Balance at beginning of period	5,534	6,719	6,146	6,769
Additions (deductions) [Abstract]
Provision for loan losses	229	446	518	1,681
Recoveries credited to allowance	389	348	715	707
Loans charged against the allowance	(953)	(1,224)	(2,180)	(2,868)
Reclassification to loans held for sale	(218)		(218)
Balance at end of period	4,981	6,289	4,981	6,289
Allowance for loan losses:[Abstract]
Individually evaluated for impairment	1,674		1,674		1,762
Collectively evaluated for impairment	3,307		3,307		4,384
Total ending allowance balance	4,981		4,981		6,146
Loans [Abstract]
Individually evaluated for impairment	7,717		7,717		7,554
Collectively evaluated for impairment	192,249		192,249		212,907
Total loans recorded investment	199,966		199,966		220,461
Accrued interest included in recorded investment	776		776		902
Total loans	199,190		199,190		219,559
Payment Plan Receivable [Member]
Analysis of allowance for loan losses by portfolio segment [Roll Forward]
Balance at beginning of period	206	333	197	389
Additions (deductions) [Abstract]
Provision for loan losses	(7)	37	23	45
Recoveries credited to allowance	0	2	0	4
Loans charged against the allowance	(4)	(26)	(25)	(92)
Reclassification to loans held for sale	0		0
Balance at end of period	195	346	195	346
Allowance for loan losses:[Abstract]
Individually evaluated for impairment	0		0		0
Collectively evaluated for impairment	195		195		197
Total ending allowance balance	195		195		197
Loans [Abstract]
Individually evaluated for impairment	0		0		0
Collectively evaluated for impairment	98,946		98,946		115,018
Total loans recorded investment	98,946		98,946		115,018
Accrued interest included in recorded investment	0		0		0
Total loans	98,946		98,946		115,018
Unallocated [Member]
Analysis of allowance for loan losses by portfolio segment [Roll Forward]
Balance at beginning of period	10,554	13,659	11,473	14,279
Additions (deductions) [Abstract]
Provision for loan losses	(930)	(624)	(1,849)	(1,244)
Recoveries credited to allowance	0	0	0	0
Loans charged against the allowance	0	0	0	0
Reclassification to loans held for sale	(201)		(201)
Balance at end of period	9,423	13,035	9,423	13,035
Allowance for loan losses:[Abstract]
Individually evaluated for impairment	0		0		0
Collectively evaluated for impairment	9,423		9,423		11,473
Total ending allowance balance	$ 9,423		$ 9,423		$ 11,473

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Securities (Tables)

6 Months Ended

Jun. 30, 2012

Securities [Abstract]

Securities available for sale

Securities available for sale consist of the following:

	Amortized		Unrealized
	Cost		Gains		Losses		Fair Value
	(In thousands)
June 30, 2012
U.S. agency	$	38,039	$	124	$	20	$	38,143
U.S. agency residential mortgage-backed		156,231		994		61		157,164
Private label residential mortgage-backed		9,887		-		2,208		7,679
Obligations of states and political subdivisions		40,383		643		62		40,964
Trust preferred		4,700		-		1,603		3,097
Total	$	249,240	$	1,761	$	3,954	$	247,047
December 31, 2011
U.S. agency	$	24,980	$	58	$	21	$	25,017
U.S. agency residential mortgage-backed		93,415		1,007		216		94,206
Private label residential mortgage-backed		11,066		-		2,798		8,268
Obligations of states and political subdivisions		26,865		510		58		27,317
Trust preferred		4,697		-		2,061		2,636
Total	$	161,023	$	1,575	$	5,154	$	157,444

Investments in a continuous unrealized loss position

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

	Less Than Twelve Months				Twelve Months or More				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(In thousands)
June 30, 2012
U.S. agency	$	7,507	$	20	$	-	$	-	$	7,507	$	20
U.S. agency residential     mortgage-backed		30,497		44		10,097		17		40,594		61
Private label residential mortgage-backed		-		-		7,677		2,208		7,677		2,208
Obligations of states and political subdivisions		8,202		62		-		-		8,202		62
Trust preferred		-		-		3,097		1,603		3,097		1,603
Total	$	46,206	$	126	$	20,871	$	3,828	$	67,077	$	3,954
December 31, 2011
U.S. agency	$	9,974	$	21	$	-	$	-	$	9,974	$	21
U.S. agency residential mortgage-backed		42,500		216		-		-		42,500		216
Private label residential mortgage-backed		163		90		8,102		2,708		8,265		2,798
Obligations of states and      political subdivisions		-		-		1,729		58		1,729		58
Trust preferred		591		1,218		2,045		843		2,636		2,061
Total	$	53,228	$	1,545	$	11,876	$	3,609	$	65,104	$	5,154

Unrealized losses largely attributable to credit spread

The unrealized losses are largely attributable to credit spread widening on these securities since their acquisition. The underlying loans within these securities include Jumbo (75%) and Alt A (25%) at June 30, 2012.

	June 30, 2012					December 31, 2011
			Net					Net
	Fair		Unrealized			Fair		Unrealized
	Value		Gain (Loss)			Value		Gain (Loss)
	(In thousands)
Private label residential mortgage-backed
Jumbo	$	5,738	$	(1,602	)	$	6,454	$	(1,937	)
Alt-A		1,941		(606	)		1,814		(861	)

Trust preferred securities

The following table breaks out our trust preferred securities in further detail as of June 30, 2012 and December 31, 2011:

	June 30, 2012					December 31, 2011
			Net					Net
	Fair		Unrealized			Fair		Unrealized
	Value		Gain (Loss)			Value		Gain (Loss)
	(In thousands)
Trust preferred securities
Rated issues	$	1,564	$	(329	)	$	1,405	$	(484	)
Unrated issues - no OTTI		1,533		(1,274	)		1,231		(1,577	)

Credit losses recognized in earnings on securities available for sale

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

	Three months ended				Six months ended
	June 30,				June 30,
	2012		2011		2012		2011
	(In thousands)
Balance at beginning of period	$	1,647	$	852	$	1,470	$	710
Additions to credit losses on securities for which no previous OTTI was recognized		-		-		-		-
Increases to credit losses on securities for which OTTI was previously recognized		85		-		262		142
Balance at end of period	$	1,732	$	852	$	1,732	$	852

Amortized cost and fair value of securities available for sale by contractual maturity

The amortized cost and fair value of securities available for sale at June 30, 2012, by contractual maturity, follow. The actual maturity may differ from the contractual maturity because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Fair
	Cost		Value
	(In thousands)
Maturing within one year	$	1,323	$	1,341
Maturing after one year but within five years		6,491		6,711
Maturing after five years but within ten years		15,318		15,531
Maturing after ten years		59,990		58,621
		83,122		82,204
U.S. agency residential mortgage-backed		156,231		157,164
Private label residential mortgage-backed		9,887		7,679
Total	$	249,240	$	247,047

Gains and losses realized on sale of securities available for sale

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

			Realized
	Proceeds		Gains		Losses(1)
	(In thousands)
2012	$	18,999	$	843	$	-
2011		70,322		279		75

(1) Losses in 2012 and 2011 exclude $0.262 million and $0.142 million, respectively of credit related OTTI recognized in earnings.

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Condensed Consolidated Statements of Shareholders' Equity (unaudited) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Balance	$ 102,627	$ 119,085
Net income (loss)	7,837	(7,364)
Issuance of common stock	497	1,335
Share based compensation	304	455
Net change in accumulated other comprehensive loss, net of related tax effect	1,907	930
Balance	$ 113,172	$ 114,441

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Condensed Consolidated Statements of Financial Condition (unaudited) (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Shareholders' Equity
Convertible preferred stock, par value (in dollars per share)	$ 0	$ 0
Convertible preferred stock, shares authorized (in shares)	200,000	200,000
Convertible preferred stock, shares issued (in shares)	74,426	74,426
Convertible preferred stock, shares outstanding (in shares)	74,426	74,426
Convertible preferred stock, liquidation preference	$ 83,061	$ 81,023
Common stock, par value (in dollars per share)	$ 0	$ 0
Common stock, shares authorized (in shares)	500,000,000	500,000,000
Common stock, shares issued (in shares)	8,749,220	8,491,526
Common stock, shares outstanding (in shares)	8,749,220	8,491,526

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Income Tax

6 Months Ended

Jun. 30, 2012

Income Tax [Abstract]

Income Tax

10.  Income Tax

At both June 30, 2012 and December 31, 2011, we had approximately $2.1 million of gross unrecognized tax benefits.  We do not expect the total amount of unrecognized tax benefits to significantly increase or decrease during the balance of 2012.

As a result of being in a net operating loss carryforward position, we have established a deferred tax asset valuation allowance of $72.1 million and $75.2 million as of June 30, 2012 and December 31, 2011, respectively against all of our net deferred tax assets.  Accordingly, we are not recognizing much income tax expense (benefit) related to any income or loss before income tax.  The income tax expense (benefit) was zero for the three and six month periods ending June 30, 2012.  Income tax (benefit) was $(0.26) million and $(0.27) million for the three and six month periods ending June 30, 2011, respectively.  The benefit recognized during these periods was primarily the result of current period adjustments to other comprehensive income ("OCI"), net of state income tax expense and adjustments to the deferred tax asset valuation allowance.

Generally, the amount of income tax expense or benefit allocated to operations is determined without regard to the tax effects of other categories of income or loss, such as other comprehensive income (loss). However, an exception to the general rule is provided when, in the presence of a valuation allowance against deferred tax assets, there is a pretax loss from operations and pretax income from other categories in the current period.  In such instances, income from other categories must offset the current loss from operations, the tax benefit of such offset being reflected in operations. For the three and six month periods ending June 30, 2011 this resulted in an income tax (benefit) of $(0.26) million in both periods.

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Document and Entity Information	6 Months Ended
	Jun. 30, 2012	Aug. 09, 2012
Document and Entity Information [Abstract]
Entity Registrant Name	INDEPENDENT BANK CORP /MI/
Entity Central Index Key	0000039311
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		8,773,629
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q2
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2012

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Regulatory Matters

6 Months Ended

Jun. 30, 2012

Regulatory Matters [Abstract]

Regulatory Matters

11.  Regulatory Matters

Capital guidelines adopted by Federal and State regulatory agencies and restrictions imposed by law limit the amount of cash dividends our Bank can pay to us. Under these guidelines, the amount of dividends that may be paid in any calendar year is limited to the Bank's current year's net profits, combined with the retained net profits of the preceding two years. It is not our intent to have dividends paid in amounts which would reduce the capital of our Bank to levels below those which we consider prudent and in accordance with guidelines of regulatory authorities.

In December 2009, the Board of Directors of Independent Bank Corporation adopted resolutions (as subsequently amended) that impose the following restrictions:

● We will not pay dividends on our outstanding common stock or the outstanding preferred stock held by the UST and we will not pay distributions on our outstanding trust preferred securities without, in each case, the prior written approval of the Federal Reserve Board ("FRB") and the Michigan Office of Financial and Insurance Regulation ("OFIR");

● We will not incur or guarantee any additional indebtedness without the prior approval of the FRB;

● We will not repurchase or redeem any of our common stock without the prior approval of the FRB; and

● We will not rescind or materially modify any of these limitations without notice to the FRB and the OFIR.

In December 2009, the Board of Directors of Independent Bank adopted resolutions (as subsequently amended) designed to enhance certain aspects of the Bank's performance and, most importantly, to improve the Bank's capital position. These resolutions require the following:

● The adoption by the Bank of a capital restoration plan designed to help the Bank achieve the minimum capital ratios established by the Bank's Board of Directors as described below;

● The enhancement of the Bank's documentation of the rationale for discounts applied to collateral valuations on impaired loans and improved support for the identification, tracking, and reporting of loans classified as TDR's;

• The adoption of certain changes and enhancements to our liquidity monitoring and contingency planning and our interest rate risk management practices;

● Additional reporting to the Bank's Board of Directors regarding initiatives and plans pursued by management to improve the Bank's risk management practices;

● Prior approval of the FRB and the OFIR for any dividends or distributions to be paid by the Bank to Independent Bank Corporation; and

● Notice to the FRB and the OFIR of any rescission of or material modification to any of these resolutions.

The substance of all of the resolutions described above was developed in conjunction with discussions held with the FRB and the OFIR. Based on those discussions, we acted proactively to adopt the resolutions described above to address those areas of the Bank's financial condition and operations that we believe most require our focus at this time.

On October 25, 2011, the respective Boards of Directors of the Company and the Bank entered into a Memorandum of Understanding ("MOU") with the FRB and OFIR. The MOU largely duplicates certain of the provisions in the Board resolutions described above, but also has the following specific requirements:

● Submission of a joint revised capital plan (the "Capital Plan") by November 30, 2011 to maintain sufficient capital at the Company on a consolidated basis and at the Bank on a stand-alone basis;

● Submission of quarterly progress reports regarding disposition plans for any assets in excess of $1.0 million that are in ORE, are 90 days or more past due, are on our "watch list", or were adversely classified in our most recent examination;

● Enhanced reporting and monitoring at Mepco regarding risk management and the internal classification of assets; and

● Enhanced interest rate risk modeling practices.

We submitted our Capital Plan on a timely basis and believe that we are generally in compliance with the provisions of the MOU, however, we must still execute on certain strategies outlined in our Capital Plan.

We are also subject to various regulatory capital requirements. The prompt corrective action regulations establish quantitative measures to ensure capital adequacy and require minimum amounts and ratios of total 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 regulatory filings as of June 30, 2012 and December 31, 2011 categorized our Bank as well capitalized. Management is not aware of any conditions or events that would have changed the most recent Federal Deposit Insurance Corporation ("FDIC")  categorization.

Our actual capital amounts and ratios follow:

						Minimum for					Minimum for
						Adequately Capitalized					Well-Capitalized
	Actual					Institutions					Institutions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
June 30, 2012
Total capital to risk-weighted assets
Consolidated	$	183,061		12.29	%	$	119,150		8.00	%	NA		NA
Independent Bank		185,594		12.48			118,933		8.00		$	148,667		10.00	%
Tier 1 capital to risk-weighted assets
Consolidated	$	156,419		10.50	%	$	59,575		4.00	%	NA		NA
Independent Bank		166,591		11.21			59,467		4.00		$	89,200		6.00	%
Tier 1 capital to average assets
Consolidated	$	156,419		6.55	%	$	95,522		4.00	%	NA		NA
Independent Bank		166,591		6.98			95,416		4.00		$	119,270		5.00	%
December 31, 2011
Total capital to risk-weighted assets
Consolidated	$	174,547		11.31	%	$	123,470		8.00	%	NA		NA
Independent Bank		175,868		11.41			123,254		8.00		$	154,068		10.00	%
Tier 1 capital to risk-weighted assets
Consolidated	$	144,265		9.35	%	$	61,735		4.00	%	NA		NA
Independent Bank		156,104		10.13			61,627		4.00		$	92,441		6.00	%
Tier 1 capital to average assets
Consolidated	$	144,265		6.25	%	$	92,338		4.00	%	NA		NA
Independent Bank		156,104		6.77			92,268		4.00		$	115,335		5.00	%

NA - Not applicable

The components of our regulatory capital are as follows:

	Consolidated						Independent Bank
	June 30,			December 31,			June 30,			December 31,
	2012			2011			2012			2011
	(In thousands)
Total shareholders' equity	$	113,172		$	102,627		$	164,453		$	152,987
Add (deduct)
Qualifying trust preferred securities		41,062			38,183			-			-
Accumulated other comprehensive       loss		10,014			11,921			9,967			11,583
Intangible assets		(7,065	)		(7,609	)		(7,065	)		(7,609	)
Disallowed capitalized mortgage loan servicing rights		(764	)		(857	)		(764	)		(857	)
Tier 1 capital		156,419			144,265			166,591			156,104
Qualifying trust preferred securities		7,606			10,485			-			-
Allowance for loan losses and allowance for unfunded lending commitments limited to 1.25% of total risk-weighted assets		19,036			19,797			19,003			19,764
Total risk-based capital	$	183,061		$	174,547		$	185,594		$	175,868

In November, 2011, our Board adopted the Capital Plan and submitted such Capital Plan to the FRB and the OFIR. The Capital Plan was updated in February, 2012.  The FRB and OFIR have accepted such Capital Plan, assuming the execution of certain strategies and the attainment of the required Tier 1 Capital to Average Total Assets Ratio of 8%.

The primary objective of our Capital Plan is to achieve and thereafter maintain the minimum capital ratios required by the Board resolutions adopted in December 2009 (as subsequently amended). The minimum capital ratios established by our Board are higher than the ratios required in order to be considered "well-capitalized" under federal standards. The Board imposed these higher ratios in order to ensure that we have sufficient capital to withstand potential continuing losses based on our prevailing elevated level of non-performing assets and given certain other risks and uncertainties we face. As of June 30, 2012, our Bank continued to meet the requirements to be considered "well-capitalized" under federal regulatory standards and met one of the minimum capital ratio goals established by our Board.

Set forth below are the actual capital ratios of our Bank as of June 30, 2012, the minimum capital ratios imposed by the Board resolutions, and the minimum ratios necessary to be considered "well-capitalized" under federal regulatory standards:

	Independent						Minimum
	Bank			Minimum			Ratio
	Actual as of			Ratios			Required to
	June 30,			Established			be Well-
	2012			by our Board			Capitalized
Total Capital to Risk-Weighted Assets		12.48	%		11.00	%		10.00	%
Tier 1 Capital to Average Total Assets		6.98			8.00			5.00

If we are unable to achieve both minimum capital ratios set forth in our Capital Plan it may adversely affect our business and financial condition. An inability to improve our capital position could make it difficult for us to withstand continued losses. In addition, we believe that if our financial condition and performance fail to improve, we may not be able to remain well-capitalized under federal regulatory standards. In that case, our primary bank regulators may impose additional regulatory restrictions and requirements on us. If we fail to remain well-capitalized under federal regulatory standards, we will be prohibited from accepting or renewing brokered certificates of deposit without the prior consent of the FDIC, which would likely have an adverse impact on our business and financial condition. If our regulators take more formal enforcement action against us, it would likely increase our expenses and could limit our business operations. There could be other expenses associated with a continued deterioration of our capital, such as increased deposit insurance premiums payable to the FDIC. At the present time, based on our current forecasts and expectations, we believe that our Bank can remain above "well-capitalized" for regulatory purposes for the foreseeable future, even without additional capital, due to our projected further decline in total assets (principally loans), our improved performance in 2012 and the impact of a pending branch sale (see note #16).

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Condensed Consolidated Statements of Operations (unaudited) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended				6 Months Ended
	Jun. 30, 2012		Jun. 30, 2011		Jun. 30, 2012		Jun. 30, 2011
Interest Income
Interest and fees on loans	$ 23,696		$ 28,102		$ 48,042		$ 57,586
Interest on securities
Taxable	933		344		1,591		811
Tax-exempt	244		298		540		630
Other investments	382		383		778		818
Total Interest Income	25,255		29,127		50,951		59,845
Interest Expense
Deposits	2,305		4,511		4,729		9,456
Other borrowings	1,120		1,232		2,292		2,555
Total Interest Expense	3,425		5,743		7,021		12,011
Net Interest Income	21,830		23,384		43,930		47,834
Provision for loan losses	1,056		4,156		6,187		14,858
Net Interest Income After Provision for Loan Losses	20,774		19,228		37,743		32,976
Non-interest Income
Service charges on deposit accounts	4,552		4,784		8,753		9,066
Interchange income	2,407		2,308		4,729		4,476
Net gains (losses) on assets
Mortgage loans	3,579		1,793		7,439		3,728
Securities	169		115		853		328
Other than temporary impairment loss on securities
Total impairment loss	(85)		327		(262)		(142)
Loss recognized in other comprehensive loss	0		(327)		0		0
Net impairment loss recognized in earnings	(85)		0		(262)		(142)
Mortgage loan servicing	(1,088)		(126)		(352)		770
Title insurance fees	489		318		997		791
(Increase) decrease in fair value of U.S. Treasury warrant	(25)		642		(179)		996
Other	3,044		2,622		5,648		5,154
Total Non-interest Income	13,042		12,456		27,626		25,167
Non-interest Expense
Compensation and employee benefits	13,506		13,029		25,988		25,378
Loan and collection	2,407		3,580		5,297		7,447
Occupancy, net	2,490		2,663		5,206		5,764
Data processing	2,450		2,415		4,789		4,725
Furniture, fixtures and equipment	1,307		1,502		2,601		2,920
Net losses on other real estate and repossessed assets	633		777		1,620		2,183
Legal and professional	1,268		801		2,165		1,579
Communications	826		889		1,701		1,837
FDIC deposit insurance	816		652		1,673		1,887
Credit card and bank service fees	624		1,013		1,275		2,060
Advertising	639		670		1,195		1,224
Vehicle service contract counterparty contingencies	326		1,311		797		3,657
Provision for loss reimbursement on sold loans	126		363		558		769
Cost (recoveries) related to unfunded lending commitments	(12)		89		(59)		184
Other	2,077		2,151		2,726		4,159
Total Non-interest Expense	29,483		31,905		57,532		65,773
Income (Loss) Before Income Tax	4,333		(221)		7,837		(7,630)
Income tax benefit	0		(258)		0		(266)
Net Income (Loss)	4,333		37		7,837		(7,364)
Convertible preferred stock dividends and discount accretion	1,092		1,051		2,148		2,059
Net Income (Loss) Applicable to Common Stock	$ 3,241		$ (1,014)		$ 5,689		$ (9,423)
Net Income (Loss) Per Common Share [Abstract]
Basic (in dollars per share)	$ 0.38		$ (0.12)		$ 0.66		$ (1.16)
Diluted (in dollars per share)	$ 0.11	[1]	$ (0.12)	[1]	$ 0.19	[1]	$ (1.16)	[1]
Dividends Per Common Share
Declared (in dollars per share)	$ 0.00		$ 0.00		$ 0.00		$ 0.00
Paid (in dollars per share)	$ 0.00		$ 0.00		$ 0.00		$ 0.00

[1] Basic income (loss) per share includes weighted average common shares outstanding during the period and participating share awards.

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Segments

6 Months Ended

Jun. 30, 2012

Segments [Abstract]

Segments

5.  Segments

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

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

A summary of selected financial information for our reportable segments as of or for the three-month and six-month periods ended June 30 follows:

As of or for the three months ended June 30,

	IB		Mepco			Other(1)			Elimination(2)			Total
	(In thousands)
2012
Total assets	$	2,246,538	$	154,248		$	169,019		$	(166,340	)	$	2,403,465
Interest income		21,550		3,705			-			-			25,255
Net interest income		19,766		2,799			(735	)		-			21,830
Provision for loan losses		1,063		(7	)		-			-			1,056
Income (loss) before income tax		4,944		337			(925	)		(23	)		4,333
Net income (loss)		5,059		222			(925	)		(23	)		4,333

2011
Total assets	$	2,094,597	$	223,799		$	171,396		$	(172,184	)	$	2,317,608
Interest income		23,733		5,394			-			-			29,127
Net interest income		20,073		3,987			(676	)		-			23,384
Provision for loan losses		4,122		34			-			-			4,156
Income (loss) before income tax		367		(322	)		(243	)		(23	)		(221	)
Net income (loss)		510		(207	)		(243	)		(23	)		37

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

(2)Includes parent company's investment in subsidiaries and cash balances maintained at subsidiary.

As of or for the six months ended June 30,

	IB		Mepco		Other(1)			Elimination(2)			Total
	(In thousands)
2012
Total assets	$	2,246,538	$	154,248	$	169,019		$	(166,340	)	$	2,403,465
Interest income		43,395		7,556		-			-			50,951
Net interest income		39,705		5,681		(1,456	)		-			43,930
Provision for loan losses		6,166		21		-			-			6,187
Income (loss) before income tax		7,957		1,893		(1,966	)		(47	)		7,837
Net income (loss)		8,601		1,249		(1,966	)		(47	)		7,837

2011
Total assets	$	2,094,597		$	223,799		$	171,396		$	(172,184	)	$	2,317,608
Interest income		48,313			11,532			-			-			59,845
Net interest income		40,604			8,574			(1,344	)		-			47,834
Provision for loan losses		14,821			37			-			-			14,858
Income (loss) before income tax		(5,869	)		(912	)		(802	)		(47	)		(7,630	)
Net income (loss)		(5,933	)		(582	)		(802	)		(47	)		(7,364	)

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

(2)Includes parent company's investment in subsidiaries and cash balances maintained at subsidiary.

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Loans

6 Months Ended

Jun. 30, 2012

Loans [Abstract]

Loans

4.  Loans

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

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

										Payment
										Plan
	Commercial			Mortgage			Installment			Receivables			Unallocated			Total
	(In thousands)
2012
Balance at beginning of period	$	16,441		$	23,271		$	5,534		$	206		$	10,554		$	56,006
Additions (deductions)
Provision for loan losses		1,194			570			229			(7	)		(930	)		1,056
Recoveries credited to allowance		390			572			389			-			-			1,351
Loans charged against the allowance		(2,379	)		(2,950	)		(953	)		(4	)		-			(6,286	)
Reclassification to loans held for sale		(170	)		(192	)		(218	)		-			(201	)		(781	)
Balance at end of period	$	15,476		$	21,271		$	4,981		$	195		$	9,423		$	51,346
2011
Balance at beginning of period	$	21,279		$	23,771		$	6,719		$	333		$	13,659		$	65,761
Additions (deductions)
Provision for loan losses		1,333			2,964			446			37			(624	)		4,156
Recoveries credited to allowance		512			385			348			2			-			1,247
Loans charged against the allowance		(5,427	)		(3,968	)		(1,224	)		(26	)		-			(10,645	)
Balance at end of period	$	17,697		$	23,152		$	6,289		$	346		$	13,035		$	60,519

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

										Payment
										Plan
	Commercial			Mortgage			Installment			Receivables			Unallocated			Total
	(In thousands)
2012
Balance at beginning of period	$	18,183		$	22,885		$	6,146		$	197		$	11,473		$	58,884
Additions (deductions)
Provision for loan losses		2,690			4,805			518			23			(1,849	)		6,187
Recoveries credited to allowance		1,396			1,120			715			-			-			3,231
Loans charged against the allowance		(6,623	)		(7,347	)		(2,180	)		(25	)		-			(16,175	)
Reclassification to loans held for sale		(170	)		(192	)		(218	)		-			(201	)		(781	)
Balance at end of period	$	15,476		$	21,271		$	4,981		$	195		$	9,423		$	51,346
2011
Balance at beginning of period	$	23,836		$	22,642		$	6,769		$	389		$	14,279		$	67,915
Additions (deductions)
Provision for loan losses		6,043			8,333			1,681			45			(1,244	)		14,858
Recoveries credited to allowance		731			740			707			4			-			2,182
Loans charged against the allowance		(12,913	)		(8,563	)		(2,868	)		(92	)		-			(24,436	)
Balance at end of period	$	17,697		$	23,152		$	6,289		$	346		$	13,035		$	60,519

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

							Payment
							Plan
	Commercial		Mortgage		Installment		Receivables		Unallocated		Total
	(In thousands)
June 30, 2012
Allowance for loan losses:
Individually evaluated for impairment	$	9,855	$	10,201	$	1,674	$	-	$	-	$	21,730
Collectively evaluated for impairment		5,621		11,070		3,307		195		9,423		29,616
Total ending allowance balance	$	15,476	$	21,271	$	4,981	$	195	$	9,423	$	51,346
Loans
Individually evaluated for impairment	$	66,703	$	91,494	$	7,717	$	-			$	165,914
Collectively evaluated for impairment		547,014		458,274		192,249		98,946				1,296,483
Total loans recorded     investment		613,717		549,768		199,966		98,946				1,462,397
Accrued interest included in recorded investment		1,673		2,558		776		-				5,007
Total loans	$	612,044	$	547,210	$	199,190	$	98,946			$	1,457,390
December 31, 2011
Allowance for loan losses:
Individually evaluated for impairment	$	10,252	$	10,285	$	1,762	$	-	$	-	$	22,299
Collectively evaluated for impairment		7,931		12,600		4,384		197		11,473		36,585
Total ending allowance balance	$	18,183	$	22,885	$	6,146	$	197	$	11,473	$	58,884
Loans
Individually evaluated for impairment	$	58,674	$	93,702	$	7,554	$	-			$	159,930
Collectively evaluated     for impairment		594,665		499,919		212,907		115,018				1,422,509
Total loans recorded     investment		653,339		593,621		220,461		115,018				1,582,439
Accrued interest included     in recorded investment		2,184		2,745		902		-				5,831
Total loans	$	651,155	$	590,876	$	219,559	$	115,018			$	1,576,608

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

	90+ and				Total Non-
	Still		Non-		Performing
	Accruing		Accrual		Loans
	(In thousands)
June 30, 2012
Commercial
Income producing - real estate	$	280	$	8,277	$	8,557
Land, land development and    construction - real estate		125		4,804		4,929
Commercial and industrial		338		8,932		9,270
Mortgage
1-4 family		-		11,593		11,593
Resort lending		-		6,475		6,475
Home equity line of credit - 1st lien		-		592		592
Home equity line of credit - 2nd lien		-		690		690
Installment
Home equity installment - 1st lien		-		1,079		1,079
Home equity installment - 2nd lien		-		710		710
Loans not secured by real estate		-		883		883
Other		-		1		1
Payment plan receivables
Full refund		-		126		126
Partial refund		-		137		137
Other		-		15		15
Total recorded investment	$	743	$	44,314	$	45,057
Accrued interest included in recorded investment	$	4	$	-	$	4
December 31, 2011
Commercial
Income producing - real estate	$	490	$	13,788	$	14,278
Land, land development and    construction - real estate		43		6,990		7,033
Commercial and industrial		-		7,984		7,984
Mortgage
1-4 family		54		15,929		15,983
Resort lending		-		8,819		8,819
Home equity line of credit - 1st lien		-		523		523
Home equity line of credit - 2nd lien		-		889		889
Installment
Home equity installment - 1st lien		-		1,542		1,542
Home equity installment - 2nd lien		-		1,023		1,023
Loans not secured by real estate		-		880		880
Other		-		4		4
Payment plan receivables
Full refund		-		491		491
Partial refund		-		424		424
Other		-		23		23
Total recorded investment	$	587	$	59,309	$	59,896
Accrued interest included in   recorded investment	$	13	$	-	$	13

An aging analysis of loans by class follows:

	Loans Past Due								Loans not		Total
	30-59 days		60-89 days		90+ days		Total		Past Due		Loans
	(In thousands)
June 30, 2012
Commercial
Income producing - real estate	$	2,280	$	1,887	$	3,823	$	7,990	$	210,777	$	218,767
Land, land development and construction - real estate		191		-		1,555		1,746		42,605		44,351
Commercial and industrial		2,820		999		4,498		8,317		342,282		350,599
Mortgage
1-4 family		2,501		1,003		11,593		15,097		285,035		300,132
Resort lending		169		383		6,475		7,027		174,069		181,096
Home equity line of credit - 1st lien		334		101		592		1,027		19,395		20,422
Home equity line of credit - 2nd lien		372		55		690		1,117		47,001		48,118
Installment
Home equity installment - 1st lien		498		162		1,079		1,739		33,405		35,144
Home equity installment - 2nd lien		542		145		710		1,397		42,147		43,544
Loans not secured by real estate		872		297		883		2,052		116,454		118,506
Other		13		3		1		17		2,755		2,772
Payment plan receivables
Full refund		2,075		659		126		2,860		87,987		90,847
Partial refund		208		94		137		439		7,220		7,659
Other		10		8		15		33		407		440
Total recorded investment	$	12,885	$	5,796	$	32,177	$	50,858	$	1,411,539	$	1,462,397
Accrued interest included in recorded investment	$	111	$	78	$	4	$	193	$	4,814	$	5,007
December 31, 2011
Commercial
Income producing - real estate	$	1,701	$	937	$	6,408	$	9,046	$	264,620	$	273,666
Land, land development and    construction - real estate		487		66		2,720		3,273		51,453		54,726
Commercial and industrial		1,861		1,132		3,516		6,509		318,438		324,947
Mortgage
1-4 family		3,507		1,418		15,983		20,908		294,771		315,679
Resort lending		2,129		932		8,819		11,880		184,943		196,823
Home equity line of credit - 1st lien		96		196		523		815		24,705		25,520
Home equity line of credit - 2nd lien		506		159		889		1,554		54,045		55,599
Installment
Home equity installment - 1st lien		757		264		1,542		2,563		41,239		43,802
Home equity installment - 2nd lien		676		365		1,023		2,064		51,224		53,288
Loans not secured by real estate		1,173		463		880		2,516		117,661		120,177
Other		36		10		4		50		3,144		3,194
Payment plan receivables
Full refund		2,943		951		491		4,385		99,284		103,669
Partial refund		380		200		424		1,004		9,918		10,922
Other		23		24		23		70		357		427
Total recorded investment	$	16,275	$	7,117	$	43,245	$	66,637	$	1,515,802	$	1,582,439
Accrued interest included in recorded investment	$	160	$	105	$	13	$	278	$	5,553	$	5,831

Impaired loans are as follows :

	June 30,		December 31,
	2012		2011
Impaired loans with no allocated allowance
TDR	$	26,170	$	26,945
Non - TDR		235		423
Impaired loans with an allocated allowance
TDR - allowance based on collateral		17,137		20,142
TDR - allowance based on present value cash flow		111,396		98,130
Non - TDR - allowance based on collateral		10,479		13,773
Non - TDR - allowance based on present value cash flow		-		-
Total impaired loans	$	165,417	$	159,413
Amount of allowance for loan losses allocated
TDR - allowance based on collateral	$	4,860	$	6,004
TDR - allowance based on present value cash flow		13,384		12,048
Non - TDR - allowance based on collateral		3,486		4,247
Non - TDR - allowance based on present value cash flow		-		-
Total amount of allowance for loan losses allocated	$	21,730	$	22,299

Impaired loans by class  are as follows (1):

	June 30, 2012						December 31, 2011
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:	(In thousands)
Commercial
Income producing - real estate	$	1,848	$	2,692	$	-	$	4,626	$	6,386	$	-
Land, land development & construction-real estate		2,794		2,787		-		219		243		-
Commercial and industrial		3,332		3,657		-		3,593		3,677		-
Mortgage
1-4 family		7,651		10,350		-		6,975		9,242		-
Resort lending		5,913		6,375		-		7,156		7,680		-
Home equity line of credit - 1st lien		22		40		-		-		-		-
Home equity line of credit - 2nd lien		45		118		-		134		211		-
Installment
Home equity installment - 1st lien		2,100		2,204		-		2,100		2,196		-
Home equity installment - 2nd lien		2,239		2,238		-		1,987		1,987		-
Loans not secured by real estate		529		600		-		637		688		-
Other		22		22		-		24		24		-
		26,495		31,083		-		27,451		32,334		-
With an allowance recorded:
Commercial
Income producing - real estate		26,935		30,985		3,094		22,781		29,400		3,642
Land, land development & construction-real estate		10,203		12,703		2,945		12,362		14,055		3,633
Commercial and industrial		21,591		25,376		3,816		15,093		18,357		2,977
Mortgage
1-4 family		59,255		60,826		6,980		61,214		63,464		7,716
Resort lending		18,561		18,926		3,190		18,159		19,351		2,534
Home equity line of credit - 1st lien		47		47		31		64		73		35
Home equity line of credit - 2nd lien		-		-		-		-		-		-
Installment
Home equity installment - 1st lien		1,397		1,430		673		1,232		1,293		660
Home equity installment - 2nd lien		1,151		1,220		921		1,421		1,458		1,062
Loans not secured by real estate		279		287		80		153		156		40
Other		-		-		-		-		-		-
		139,419		151,800		21,730		132,479		147,607		22,299
Total
Commercial
Income producing - real estate		28,783		33,677		3,094		27,407		35,786		3,642
Land, land development & construction-real estate		12,997		15,490		2,945		12,581		14,298		3,633
Commercial and industrial		24,923		29,033		3,816		18,686		22,034		2,977
Mortgage
1-4 family		66,906		71,176		6,980		68,189		72,706		7,716
Resort lending		24,474		25,301		3,190		25,315		27,031		2,534
Home equity line of credit - 1st lien		69		87		31		64		73		35
Home equity line of credit - 2nd lien		45		118		-		134		211		-
Installment
Home equity installment - 1st lien		3,497		3,634		673		3,332		3,489		660
Home equity installment - 2nd lien		3,390		3,458		921		3,408		3,445		1,062
Loans not secured by real estate		808		887		80		790		844		40
Other		22		22		-		24		24		-
Total	$	165,914	$	182,883	$	21,730	$	159,930	$	179,941	$	22,299
Accrued interest included in recorded investment	$	497					$	517

(1) There were no impaired payment plan receivables at June 30, 2012 or December 31, 2011.

Average recorded investment in and interest income earned on impaired loans by class for the three month periods ending June 30, follows:

	2012				2011
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:	(In thousands)
Commercial
Income producing - real estate	$	2,211	$	13	$	1,922	$	12
Land, land development & construction-real estate		2,877		36		514		14
Commercial and industrial		3,896		44		1,800		17
Mortgage
1-4 family		7,615		75		9,258		102
Resort lending		6,134		60		8,543		125
Home equity line of credit - 1st lien		11		-		-		-
Home equity line of credit - 2nd lien		46		1		116		1
Installment
Home equity installment - 1st lien		1,827		32		1,919		28
Home equity installment - 2nd lien		1,987		30		1,999		28
Loans not secured by real estate		473		7		705		10
Other		23		-		14		1
		27,100		298		26,790		338
With an allowance recorded:
Commercial
Income producing - real estate		24,300		120		16,824		33
Land, land development & construction-real estate		10,495		52		8,133		37
Commercial and industrial		18,954		156		9,253		92
Mortgage
1-4 family		59,285		650		63,492		668
Resort lending		18,499		192		22,469		152
Home equity line of credit - 1st lien		59		-		24		1
Home equity line of credit - 2nd lien		47		-		10		-
Installment
Home equity installment - 1st lien		1,709		9		1,521		14
Home equity installment - 2nd lien		1,469		6		1,561		14
Loans not secured by real estate		241		3		150		-
Other		-		-		-		-
		135,058		1,188		123,437		1,011
Total
Commercial
Income producing - real estate		26,511		133		18,746		45
Land, land development & construction-real estate		13,372		88		8,647		51
Commercial and industrial		22,850		200		11,053		109
Mortgage
1-4 family		66,900		725		72,750		770
Resort lending		24,633		252		31,012		277
Home equity line of credit - 1st lien		70		-		24		1
Home equity line of credit - 2nd lien		93		1		126		1
Installment
Home equity installment - 1st lien		3,536		41		3,440		42
Home equity installment - 2nd lien		3,456		36		3,560		42
Loans not secured by real estate		714		10		855		10
Other		23		-		14		1
Total	$	162,158	$	1,486	$	150,227	$	1,349

(1) There were no impaired payment plan receivables during the three month periods ending June 30, 2012 and 2011.

Average recorded investment in and interest income earned on impaired loans by class for the six month periods ending June 30, follows:

	2012				2011
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:	(In thousands)
Commercial
Income producing - real estate	$	3,016	$	30	$	2,796	$	30
Land, land development & construction-real estate		1,991		36		876		27
Commercial and industrial		3,795		46		3,143		17
Mortgage
1-4 family		7,401		149		9,095		214
Resort lending		6,474		126		7,584		223
Home equity line of credit - 1st lien		7		-		-		-
Home equity line of credit - 2nd lien		75		2		108		2
Installment
Home equity installment - 1st lien		1,918		52		1,870		48
Home equity installment - 2nd lien		1,987		51		1,963		49
Loans not secured by real estate		528		13		540		16
Other		23		1		9		1
		27,215		506		27,984		627
With an allowance recorded:
Commercial
Income producing - real estate		23,793		267		16,618		122
Land, land development & construction-real estate		11,117		105		9,667		69
Commercial and industrial		17,667		270		10,335		141
Mortgage
1-4 family		59,928		1,300		63,714		1,351
Resort lending		18,386		370		24,417		396
Home equity line of credit - 1st lien		60		1		16		1
Home equity line of credit - 2nd lien		31		-		15		-
Installment
Home equity installment - 1st lien		1,550		30		1,467		28
Home equity installment - 2nd lien		1,453		25		1,511		30
Loans not secured by real estate		211		5		185		1
Other		-		-		-		-
		134,196		2,373		127,945		2,139
Total
Commercial
Income producing - real estate		26,809		297		19,414		152
Land, land development & construction-real estate		13,108		141		10,543		96
Commercial and industrial		21,462		316		13,478		158
Mortgage
1-4 family		67,329		1,449		72,809		1,565
Resort lending		24,860		496		32,001		619
Home equity line of credit - 1st lien		67		1		16		1
Home equity line of credit - 2nd lien		106		2		123		2
Installment
Home equity installment - 1st lien		3,468		82		3,337		76
Home equity installment - 2nd lien		3,440		76		3,474		79
Loans not secured by real estate		739		18		725		17
Other		23		1		9		1
Total	$	161,411	$	2,879	$	155,929	$	2,766

(1) There were no impaired payment plan receivables during the six month periods ending June 30, 2012 and 2011.

Our average investment in impaired loans was approximately $162.2 million and $150.2 million for the three-month periods ended June 30, 2012 and 2011, respectively and $161.4 million and $155.9 million for the six-month periods ended June 30, 2012 and 2011, respectively.  Cash receipts on impaired loans on non-accrual status are generally applied to the principal balance.  Interest income recognized on impaired loans during the three months ending June 30, 2012 and 2011 was approximately $1.5 million and $1.3 million, respectively and was approximately $2.9 million and $2.8 million during the six months ending June 30, 2012 and 2011, respectively .

Troubled debt restructurings follow:

	June 30, 2012
	Commercial		Retail			Total
	(In thousands)
Performing TDR's	$	44,573	$	87,294		$	131,867
Non-performing TDR's(1)		11,298		11,538	(2)		22,836
Total	$	55,871	$	98,832		$	154,703
	December 31, 2011
	Commercial		Retail			Total
	(In thousands)
Performing TDR's	$	29,799	$	86,770		$	116,569
Non-performing TDR's(1)		14,567		14,081	(2)		28,648
Total	$	44,366	$	100,851		$	145,217

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

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

The Company has allocated $18.2 million and $18.1 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2012 and December 31, 2011, respectively.

During the three and six months ending June 30, 2012, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans generally included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

Modifications involving a reduction of the stated interest rate of the loan have generally been for periods ranging from 9 months to 60 months but have extended to as much as 480 months in certain circumstances. Modifications involving an extension of the maturity date have generally been for periods ranging from 1 month to 60 months but have extended to as much as 472 months in certain circumstances.

Loans that have been classified as troubled debt restructurings during the three-month period endedJune 30, 2012 follows:

			Pre-modification		Post-modification
	Number of		Recorded		Recorded
	Contracts		Balance		Balance
	(Dollars in thousands)
Commercial
Income producing - real estate		12	$	8,045	$	7,974
Land, land development & construction-real estate		1		49		77
Commercial and industrial		19		4,286		4,001
Mortgage
1-4 family		28		3,504		3,372
Resort lending		11		3,031		2,917
Home equity line of credit - 1st lien		-		-		-
Home equity line of credit - 2nd lien		-		-		-
Installment
Home equity installment - 1st lien		6		118		115
Home equity installment - 2nd lien		6		317		313
Loans not secured by real estate		9		252		233
Other		-		-		-
Total		92	$	19,602	$	19,002

Loans that have been classified as troubled debt restructurings during the six-month period endedJune 30, 2012 follows:

			Pre-modification		Post-modification
	Number of		Recorded		Recorded
	Contracts		Balance		Balance
	(Dollars in thousands)
Commercial
Income producing - real estate		14	$	8,268	$	8,191
Land, land development & construction-real estate		3		2,887		2,913
Commercial and industrial		33		8,196		7,895
Mortgage
1-4 family		43		4,802		4,639
Resort lending		18		5,206		5,072
Home equity line of credit - 1st lien		1		15		6
Home equity line of credit - 2nd lien		-		-		-
Installment
Home equity installment - 1st lien		10		426		426
Home equity installment - 2nd lien		13		511		507
Loans not secured by real estate		10		277		258
Other		-		-		-
Total		145	$	30,588	$	29,907

The troubled debt restructurings described above increased the allowance for loan losses by $0.4 million and resulted in $0.3 million charge offs during the three months ending June 30, 2012 and increased the allowance by $0.6 million and resulted in $0.3 million charge offs during the six months ending June 30, 2012.

Loans that have been classified as troubled debt restructurings during the past twelve months and thathave subsequently defaulted during the three-month period ended June 30, 2012 follows:

	Number of		Recorded
	Contracts		Balance
	(Dollars in thousands)
Commercial
Income producing - real estate		-	$	-
Land, land development & construction-real estate		-		-
Commercial and industrial		1		41
Mortgage
1-4 family		2		148
Resort lending		-		-
Home equity line of credit - 1st lien		-		-
Home equity line of credit - 2nd lien		-		-
Installment
Home equity installment - 1st lien		-		-
Home equity installment - 2nd lien		1		20
Loans not secured by real estate		-		-
Other		-		-
		4	$	209

Loans that have been classified as troubled debt restructurings during the past twelve months and thathave subsequently defaulted during the six-month period ended June 30, 2012 follows:

	Number of		Recorded
	Contracts		Balance
	(Dollars in thousands)
Commercial
Income producing - real estate		2	$	434
Land, land development & construction-real estate		1		136
Commercial and industrial		8		914
Mortgage
1-4 family		2		148
Resort lending		1		117
Home equity line of credit - 1st lien		-		-
Home equity line of credit - 2nd lien		-		-
Installment
Home equity installment - 1st lien		1		26
Home equity installment - 2nd lien		1		20
Loans not secured by real estate		-		-
Other		-		-
		16	$	1,795

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

The troubled debt restructurings that subsequently defaulted described above decreased the allowance for loan losses by $0.1 million as a result of charge offs of $0.2 million during the three months ending June 30, 2012 and decreased the allowance for loan losses by $0.3 million as a result of charge offs of $0.6 million during the six months ending June 30, 2012.

The terms of certain other loans were modified during the three months ending June 30, 2012 that did not meet the definition of a troubled debt restructuring.  The modification of these loans could have included modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.

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

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

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

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

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

Rating 9: These loans are generally referred to as our "substandard accruing" commercial credits. This rating includes loans to borrowers that exhibit a well-defined weakness where payment default is probable and loss is possible if deficiencies are not corrected. Generally, loans with this rating are considered collectible as to both principal and interest primarily due to collateral coverage.

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

Rating 12: These loans are generally referred to as our "loss" commercial credits. This rating includes loans to borrowers that are deemed incapable of repayment and are charged-off.

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

	Commercial
					Substandard		Non-
	Non-watch		Watch		Accrual		Accrual
	1-6		7-8		9		10-11		Total
					(In thousands)
June 30, 2012
Income producing - real estate	$	173,267	$	34,030	$	3,193	$	8,277	$	218,767
Land, land development and  construction - real estate		28,353		8,409		2,785		4,804		44,351
Commercial and industrial		294,234		31,843		15,590		8,932		350,599
Total	$	495,854	$	74,282	$	21,568	$	22,013	$	613,717
Accrued interest included in total	$	1,386	$	212	$	75	$	-	$	1,673
December 31, 2011
Income producing - real estate	$	201,655	$	52,438	$	5,785	$	13,788	$	273,666
Land, land development and  construction - real estate		33,515		9,421		4,800		6,990		54,726
Commercial and industrial		275,245		27,783		13,935		7,984		324,947
Total	$	510,415	$	89,642	$	24,520	$	28,762	$	653,339
Accrued interest included in total	$	1,677	$	381	$	126	$	-	$	2,184

For each of our mortgage and consumer segment classes we generally monitor credit quality based on the credit scores of the borrowers. These credit scores are generally updated at least annually.

The following table summarizes credit scores by loan class for our mortgage and installment loan segments:

	Mortgage (1)
					Home		Home
			Resort		Equity		Equity
	1-4 Family		Lending		1st Lien		2nd Lien		Total
	(In thousands)
June 30, 2012
800 and above	$	24,454	$	16,742	$	2,800	$	5,408	$	49,404
750-799		59,134		71,244		5,707		14,147		150,232
700-749		52,303		49,423		3,577		10,143		115,446
650-699		51,716		20,267		2,387		6,861		81,231
600-649		38,761		10,220		2,363		4,834		56,178
550-599		27,954		9,041		1,550		3,270		41,815
500-549		26,443		3,024		1,459		2,579		33,505
Under 500		10,678		557		508		740		12,483
Unknown		8,689		578		71		136		9,474
Total	$	300,132	$	181,096	$	20,422	$	48,118	$	549,768
Accrued interest included in total	$	1,368	$	832	$	105	$	253	$	2,558
December 31, 2011
800 and above	$	26,509	$	17,345	$	4,062	$	6,317	$	54,233
750-799		63,746		76,381		8,058		16,892		165,077
700-749		55,047		53,210		4,280		12,131		124,668
650-699		54,579		21,579		2,854		7,909		86,921
600-649		40,977		12,750		2,485		5,066		61,278
550-599		29,732		10,698		1,547		3,466		45,443
500-549		28,573		3,716		1,615		2,758		36,662
Under 500		12,434		565		539		886		14,424
Unknown		4,082		579		80		174		4,915
Total	$	315,679	$	196,823	$	25,520	$	55,599	$	593,621
Accrued interest included in total	$	1,404	$	928	$	123	$	290	$	2,745

	Installment(1)
	Home		Home		Loans not
	Equity		Equity		Secured by
	1st Lien		2nd Lien		Real Estate		Other		Total
	(In thousands)
June 30, 2012
800 and above	$	4,188	$	3,811	$	17,761	$	53	$	25,813
750-799		8,736		12,808		43,719		512		65,775
700-749		5,342		8,690		23,724		746		38,502
650-699		5,413		6,869		13,903		589		26,774
600-649		4,673		4,877		6,681		394		16,625
550-599		3,121		2,984		3,859		225		10,189
500-549		2,634		2,791		2,444		155		8,024
Under 500		975		687		1,001		39		2,702
Unknown		62		27		5,414		59		5,562
Total	$	35,144	$	43,544	$	118,506	$	2,772	$	199,966
Accrued interest included in total	$	142	$	168	$	444	$	22	$	776
December 31, 2011
800 and above	$	5,466	$	5,047	$	18,245	$	70	$	28,828
750-799		11,651		16,475		41,501		572		70,199
700-749		6,899		10,693		23,174		883		41,649
650-699		7,144		8,407		15,646		673		31,870
600-649		4,943		5,412		7,599		434		18,388
550-599		3,435		3,221		4,573		270		11,499
500-549		3,021		3,145		3,011		183		9,360
Under 500		1,160		854		1,391		50		3,455
Unknown		83		34		5,037		59		5,213
Total	$	43,802	$	53,288	$	120,177	$	3,194	$	220,461
Accrued interest included in total	$	176	$	208	$	489	$	29	$	902

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

Mepco Finance Corporation ("Mepco") is a wholly-owned subsidiary of our Bank that operates a vehicle service contract payment plan business throughout the United States. See note #14 for more information about Mepco's business. As of June 30, 2012, approximately 91.8% of Mepco's outstanding payment plan receivables relate to programs in which a third party insurer or risk retention group is obligated to pay Mepco the full refund owing upon cancellation of the related service contract (including with respect to both the portion funded to the service contract seller and the portion funded to the administrator). These receivables are shown as "Full Refund" in the table below. Another approximately 7.7% of Mepco's outstanding payment plan receivables as of June 30, 2012, relate to programs in which a third party insurer or risk retention group is obligated to pay Mepco the refund owing upon cancellation only with respect to the unearned portion previously funded by Mepco to the administrator (but not to the service contract seller). These receivables are shown as "Partial Refund" in the table below. The balance of Mepco's outstanding payment plan receivables relate to programs in which there is no insurer or risk retention group that has any contractual liability to Mepco for any portion of the refund amount. These receivables are shown as "Other" in the table below. For each class of our payment plan receivables we monitor credit ratings of the counterparties as we evaluate the credit quality of this portfolio.

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

	Payment Plan Receivables
	Full		Partial
	Refund		Refund		Other		Total
	(In thousands)
June 30, 2012
AM Best rating
A +	$	-	$	-	$	201	$	201
A		30,724		5,603		-		36,327
A -		20,094		2,056		-		22,150
B +		421		-		-		421
B		-		-		-		-
Not rated		39,608		-		239		39,847
Total	$	90,847	$	7,659	$	440	$	98,946
December 31, 2011
AM Best rating
A +	$	-	$	118	$	7	$	125
A		32,461		165		269		32,895
A -		27,056		10,639		-		37,695
B +		1,390		-		-		1,390
B		-		-		-		-
Not rated		42,762		-		151		42,913
Total	$	103,669	$	10,922	$	427	$	115,018

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

XML

Branch Sale

6 Months Ended

Jun. 30, 2012

Branch Sale [Abstract]

Branch sale related information [Text Block]

16.  Branch Sale

On May 23, 2012 we executed a definitive agreement to sell 21 branches to Chemical Bank, headquartered in Midland, Michigan (the "Branch Sale").  The branches to be sold include 6 branch locations in the Battle Creek, Michigan market area and 15 branch locations in Northeast Michigan.

We expect that the Branch Sale will result in the transfer of approximately $417.5 million of deposits to Chemical Bank in exchange for the payment of a deposit premium of approximately $12.4 million.  This represents a deposit premium of approximately 3.1% on identified core deposits. Certain non-core deposits will be transferred at no premium. Chemical Bank will also have the right to purchase certain loans associated with the branches being sold, at a discount of 1.75%.  Currently, we estimate that approximately $53.2 million of loans will be sold to Chemical Bank.  These loans are classified as held for sale in the June 30, 2012 Condensed Consolidated Statement of Financial Condition and are carried at the lower of cost or fair value.  Certain fixed assets with a fair value at June 30, 2012 of approximately $8.5 million (cost, net of accumulated depreciation of approximately $11.1 million) are expected to be sold and are also classified as held for sale in the June 30, 2012 Condensed Consolidated Statement of Financial Condition.  In addition, approximately $2.7 million of remaining unamortized intangible assets at June 30, 2012 relate to customers and deposits associated with the pending Branch Sale. The Branch Sale is expected to be completed by the end of the third quarter of 2012, subject to customary regulatory approvals and the satisfaction of other terms and conditions of sale.

The following summarizes estimated loans and deposits related to the Branch Sale:
 

	June 30,
	2012
Loans:
Commercial	$	31,729
Mortgage		8,699
Installment		13,699
Total loans		54,127
Allowance for Loan Losses		(781	)
Adjustment to lower of cost or fair value		(166	)
Net loans	$	53,180
Deposits
Non-interest bearing	$	65,059
Savings and interest bearing-checking		231,470
Retail time		123,732
Total deposits	$	420,261
Net adjustments		(2,740	)
Net deposits		417,521

XML

Fair Value Disclosures

6 Months Ended

Jun. 30, 2012

Fair Value Disclosures [Abstract]

Fair Value Disclosures

12.  Fair Value Disclosures

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

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

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

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

Level 3:  Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

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

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

Loans held for sale:  The fair value of mortgage loans held for sale is based on mortgage backed security pricing for comparable assets (recurring Level 2).  The fair value of loans held for sale relating to branch sale is based on a discount provided for in the branch sale agreement (non-recurring Level 2).

Impaired loans with specific loss allocations based on collateral value:  From time to time, certain loans are considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. We measure our investment in an impaired loan based on one of three methods: the loan's observable market price, the fair value of the collateral or the present value of expected future cash flows discounted at the loan's effective interest rate. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2012 and December 31, 2011, all of our total impaired loans were evaluated based on either the fair value of the collateral or the present value of expected future cash flows discounted at the loan's effective interest rate. When the fair value of the collateral is based on an appraised value or when an appraised value is not available we record the impaired loan as nonrecurring Level 3.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments can be significant and thus will typically result in a Level 3 classification of the inputs for determining fair value.

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

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by us.  Once received, an independent third party (for commercial properties over $0.25 million) or a member of  our special assets group (for commercial properties under $0.25 million and retail properties) reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.  On an annual basis, we compare the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment, if any, should be made to the appraisal value to arrive at fair value.  For commercial properties we typically do not discount an appraisal while for retail properties we generally discount the value by 5%.  In addition, we will adjust the appraised values for expected liquidation costs including sales commissions and transfer taxes.

Capitalized mortgage loan servicing rights:  The fair value of capitalized mortgage loan servicing rights is based on a valuation model used by an independent third party that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. Since the secondary servicing market has not been active since the later part of 2009, model assumptions are generally unobservable and are based upon the best information available including data relating to our own servicing portfolio, reviews of mortgage servicing assumption and valuation surveys and input from various mortgage servicers and, therefore, are recorded as nonrecurring Level 3.  At June 30, 2012 these assumptions included a weighted average ("WA") discount rate of 10.5%, WA cost to service of $79, WA ancillary income of $44 and WA float rate of 0.96%.  Management evaluates the third party valuation for reasonableness each quarter as part of our financial reporting control processes.

Derivatives:  The fair value of interest rate swap agreements, in general, is determined using a discounted cash flow model whose significant fair value inputs can generally be verified and do not typically involve judgment by management (recurring Level 2).  The fair value of the Amended Warrant at June 30, 2012 was estimated based on an internal update of an independent third party analysis that was performed at March 31, 2012 (the December 31, 2011 fair value was also based on an independent valuation performed at that date).  Nearly all key variables remained consistent between March 31, 2012 (the last date a third party valuation was performed) and June 30, 2012.  The internal update primarily focused on the change in our stock price during the second quarter of 2012, which was not significant.  The third party valuation uses a simulation analysis which considers potential outcomes for a large number of independent scenarios regarding the future prices of our common stock.  The simulation analysis relies on a binomial lattice model, a standard technique usually applied to the valuation of stock options. The binomial lattice maps out possible price paths of our common stock, the underlying asset of the Amended Warrant. The simulation is based on a 500-step lattice covering the term of the Amended Warrant. The binomial lattice requires specification of 14 variables, of which several are unobservable in the market including probability of a non-permitted capital raise (1.0% at June 30, 2012 and December 31, 2011), expected discount to stock price in an equity raise (10%), dollar amount of expected capital raise ($100 million) and expected time of equity raise (April, 2013 at June 30, 2012 and December 31, 2011).  As a result of these unobservable inputs, the resulting fair value of the Amended Warrant is classified as Level 3 pricing.  Changes in these variables would have an impact on the fair value of the Amended Warrant.  If the probability of a non-permitted capital raise increased to 2.5%, 5.0% or 10.0%, the value of the Amended Warrant is estimated to increase to $0.40 million, $0.45 million and $0.58 million, respectively.

Fixed assets held for sale relating to branch sale:  The fair value of fixed assets held for sale was determined based upon a value agreed upon in the branch sale agreement (non-recurring Level 2).

Assets and liabilities measured at fair value, including financial assets for which we have elected the fair value option, were as follows:

			Fair Value Measurements Using
			Quoted
			Prices
			in Active
			Markets		Significant		Significant
			for		Other		Un-
	Fair Value		Identical		Observable		observable
	Measure-		Assets		Inputs		Inputs
	ments		(Level 1)		(Level 2)		(Level 3)
	(In thousands)
June 30, 2012:
Measured at Fair Value on a Recurring Basis:
Assets
Trading securities	$	86	$	86	$	-	$	-
Securities available for sale
U.S. agency		38,143		-		38,143		-
U.S. agency residential mortgage-backed		157,164		-		157,164		-
Private label residential mortgage-backed		7,679		-		7,679		-
Obligations of states and political subdivisions		40,964		-		40,964		-
Trust preferred		3,097		-		3,097		-
Loans held for sale		43,386		-		43,386		-
Derivatives (1)		1,983		-		1,983		-
Liabilities
Derivatives (2)		1,921		-		1,568		353
Measured at Fair Value on a Non-recurring basis:
Assets
Capitalized mortgage loan servicing rights (3)		9,354		-		-		9,354
Impaired loans (4)
Commercial
Income producing - real estate		5,867		-		-		5,867
Land, land development & construction-real estate		3,062		-		-		3,062
Commercial and industrial		7,779		-		-		7,779
Mortgage
1-4 Family		2,256		-		-		2,256
Resort Lending		306		-		-		306
Other real estate (5)
Commercial
Income producing - real estate		860		-		-		860
Land, land development & construction-real estate		6,376		-		-		6,376
Commercial and industrial		248		-		-		248
Mortgage
1-4 Family		1,086		-		-		1,086
Resort Lending		4,824		-		-		4,824
Installment
Home equity installment - 1st lien		100		-		-		100
Loans held for sale relating to branch sale		53,180		-		53,180		-
Fixed assets held for sale relating to branch sale		8,491		-		8,491		-

(1) Included in accrued income and other assets

(2) Included in accrued expenses and other liabilities

(3) Only includes servicing rights that are carried at fair value due to recognition of a valuation allowance.

(4) Only includes impaired loans with specific loss allocations based on collateral value.

(5) Only includes other real estate with subsequent write downs to fair value.

			Fair Value Measurements Using
			Quoted
			Prices
			in Active
			Markets		Significant		Significant
			for		Other		Un-
	Fair Value		Identical		Observable		observable
	Measure-		Assets		Inputs		Inputs
	ments		(Level 1)		(Level 2)		(Level 3)
	(In thousands)
December 31, 2011:
Measured at Fair Value on a Recurring Basis:
Assets
Trading securities	$	77	$	77	$	-	$	-
Securities available for sale
U.S. agency		25,017		-		25,017		-
U.S. agency residential mortgage-backed		94,206		-		94,206		-
Private label residential mortgage-backed		8,268		-		8,268		-
Obligations of states and political subdivisions		27,317		-		27,317		-
Trust preferred		2,636		-		2,636		-
Loans held for sale		44,801		-		44,801		-
Derivatives (1)		857		-		857		-
Liabilities
Derivatives (2)		1,883		-		1,709		174
Measured at Fair Value on a Non-recurring basis:
Assets
Capitalized mortgage loan servicing rights (3)		11,004		-		-		11,004
Impaired loans (4)
Commercial
Income producing - real estate		8,022		-		-		8,022
Land, land development & construction-real estate		5,702		-		-		5,702
Commercial and industrial		5,613		-		-		5,613
Mortgage
1-4 Family		3,263		-		-		3,263
Resort Lending		1,064		-		-		1,064
Other real estate (5)
Commercial
Income producing - real estate		1,388		-		-		1,388
Land, land development & construction-real estate		7,512		-		-		7,512
Commercial and industrial		497		-		-		497
Mortgage
1-4 Family		2,079		-		-		2,079
Resort Lending		5,297		-		-		5,297
Home equity line of credit - 1st lien		53		-		-		53
Installment
Home equity installment - 1st lien		100		-		-		100

(1) Included in accrued income and other assets

(2) Included in accrued expenses and other liabilities

(3) Only includes servicing rights that are carried at fair value due to recognition of a valuation allowance.

(4) Only includes impaired loans with specific loss allocations based on collateral value.

(5) Only includes other real estate with subsequent write downs to fair value.

There were no transfers between Level 1 and Level 2 during the six months ended June 30, 2012 and 2011.

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

	Changes in Fair Values for the Six-Month
	Periods Ended June 30 for Items Measured at
	Fair Value Pursuant to Election of the Fair Value Option
	2012						2011
					Total						Total
					Change						Change
					in Fair						in Fair
					Values						Values
					Included						Included
	Net Gains (Losses)				in Current		Net Gains (Losses)				in Current
	on Assets				Period		on Assets				Period
	Securities		Loans		Earnings		Securities		Loans		Earnings
	(In thousands)
Trading securities	$	9	$	-	$	9	$	124	$	-	$	124
Loans held for sale		-		241		241		-		717		717

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

The following represent impairment charges recognized during the three and six month periods ended June 30, 2012 and 2011 relating to assets measured at fair value on a non-recurring basis:

· Capitalized mortgage loan servicing rights, whose individual strata are measured at fair value, had a carrying amount of $9.4 million which is net of a valuation allowance of $6.8 million at June 30, 2012 and had a carrying amount of $11.0 million which is net of a valuation allowance of $6.5 million at December 31, 2011.  A recovery (charge) of $(0.9) million and $(0.2) million was included in our results of operations for the three and six month periods ending June 30, 2012, respectively and $(0.6) million and $(0.1) million during the same periods in 2011.

· Loans which are measured for impairment using the fair value of collateral for collateral dependent loans, had a carrying amount of $27.6 million, with a valuation allowance of $8.3 million at June 30, 2012 and had a carrying amount of $33.9 million, with a valuation allowance of $10.3 million at December 31, 2011.  An additional provision for loan losses relating to impaired loans of $0.6 million and $2.2 million was included in our results of operations for the three and six month periods ending June 30, 2012, respectively and $2.9 million and $5.7 million during the same periods in 2011.

· Other real estate, which is measured using the fair value of the property, had a carrying amount of $13.5 million which is net of a valuation allowance of $10.7 million at June 30, 2012 and a carrying amount of $16.9 million which is net of a valuation allowance of $14.7 million at December 31, 2011.  An additional charge relating to ORE measured at fair value of $0.5 million and $1.2 million was included in our results of operations during the three and six month periods ended June 30, 2012, respectively and $0.8 million and $2.1 million during the same periods in 2011.

A reconciliation for all liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30 follows:

	(Liability)
	Amended Warrant
	Three months ended						Six months ended
	June 30,						June 30,
	2012			2011			2012			2011
Beginning balance	$	(328	)	$	(957	)	$	(174	)	$	(1,311	)
Total gains (losses) realized and unrealized:
Included in results of operations		(25	)		642			(179	)		996
Included in other comprehensive income		-			-			-			-
Purchases, issuances, settlements, maturities and calls		-			-			-			-
Transfers in and/or out of Level 3		-			-			-			-
Ending balance	$	(353	)	$	(315	)	$	(353	)	$	(315	)
Amount of total gains (losses) for the period  included in earnings attributable to the change in unrealized gains (losses) relating to assets  and liabilities still held at June 30	$	(25	)	$	642		$	(179	)	$	996

During 2010, we entered into an amended and restated warrant with the UST that would allow them to purchase our common stock at a fixed price (see note #15). Because of certain anti-dilution features included in the Amended Warrant, it is not considered to be indexed to our common stock and is therefore accounted for as a derivative instrument (see note #7). Any change in value of this warrant is recorded in other income in our Condensed Consolidated Statements of Operations.

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

	Aggregate Fair Value		Difference		Contractual Principal
	(In thousands)
Loans held for sale
June 30, 2012	$	43,386	$	1,644	$	41,742
December 31, 2011		44,801		1,403		43,398

XML

Intangible Assets

6 Months Ended

Jun. 30, 2012

Intangible Assets [Abstract]

Intangible Assets

8.  Intangible Assets

Other intangible assets, net of amortization, were comprised of the following at June 30, 2012 and December 31, 2011:

		June 30, 2012				December 31, 2011
		Gross				Gross
		Carrying		Accumulated		Carrying		Accumulated
		Amount		Amortization		Amount		Amortization
		(In thousands)
Amortized other intangible assets - core deposits	$	31,326	$	24,261	$	31,326	$	23,717

Amortization of other intangibles has been estimated through 2017 and thereafter in the following table.

	(In thousands)
Six months ended December 31, 2012	$	544
Year ending December 31:
2013		1,078
2014		801
2015		613
2016		613
2017 and thereafter		3,416
Total	$	7,065

 

XML

Earnings Per Common Share

6 Months Ended

Jun. 30, 2012

Earnings Per Common Share [Abstract]

Earnings Per Common Share

6.    Earnings Per Common Share

		Three months ended					Six months ended
		June 30,					June 30,
		2012		2011			2012		2011
		(in thousands, except per share amounts)
Net income (loss) applicable to common stock	$	3,241	$	(1,014	)	$	5,689	$	(9,423	)
Convertible preferred stock dividends		1,092		-			2,148		-
Net income (loss) applicable to common stock for calculation of diluted earnings per share(1) (2)	$	4,333	$	(1,014	)	$	7,837	$	(9,423	)
Weighted average shares outstanding		8,607		8,287			8,570		8,111
Effect of convertible preferred stock		31,987		41,207			31,987		41,207
Restricted stock units		140		139			140		104
Stock units for deferred compensation plan for non- employee directors		58		7			41		7
Effect of stock options		7		-			-		-
Weighted average shares outstanding for  calculation of diluted income (loss) per share(1)		40,799		49,640			40,738		49,429
Net income (loss) per common share
Basic	$	.38	$	(.12	)	$	.66	$	(1.16	)
Diluted(2)		.11		(.12	)		.19		(1.16	)

 (1) For any period in which a loss is recorded, dividends on convertible preferred stock are not added back in the diluted per share calculation.  For any period in which a loss is recorded, the assumed conversion of convertible preferred stock, assumed exercise of common stock warrants, assumed exercise of stock options, restricted stock units and stock units for a deferred compensation plan for non-employee directors would have an anti-dilutive impact on the loss per share and thus are ignored in the diluted per share calculation.

(2) Basic income (loss) per share includes weighted average common shares outstanding during the period and participating share awards.

Weighted average stock options outstanding that were not considered in computing diluted loss per share because they were anti-dilutive totaled 0.04 million and 0.05 million for the three-month periods ended June 30, 2012 and 2011, respectively and totaled 0.2 million and 0.05 million for the six-month periods ended June 30, 2012 and 2011, respectively.The warrant to purchase 346,154 shares of our common stock (see note #15) was not considered in computing the diluted loss per share in all periods in 2012 and 2011 as it was anti-dilutive.

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Derivative Financial Instruments

6 Months Ended

Jun. 30, 2012

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

7.      Derivative Financial Instruments

We are required to record derivatives on our Condensed Consolidated Statements of Financial Condition as assets and liabilities measured at their fair value.  The accounting for increases and decreases in the value of derivatives depends upon the use of derivatives and whether the derivatives qualify for hedge accounting.

Our derivative financial instruments according to the type of hedge in which they are designated follows:

	June 30, 2012
			Average
	Notional		Maturity		Fair
	Amount		(years)		Value
	(Dollars in thousands)
Cash Flow Hedges - Pay fixed interest-rate swap agreements	$	10,000		2.5	$	(872	)
No hedge designation
Mandatory commitments to sell mortgage loans	$	63,013		0.1	$	1,983
Rate-lock mortgage loan commitments		103,722		0.1		(696	)
Amended Warrant		2,504		6.4		(353	)
Total	$	169,239		0.2	$	934

We 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 interest rate risk position via simulation modeling reports. The goal of our asset/liability management efforts is to maintain profitable financial leverage within established risk parameters.

We use variable-rate and short-term fixed-rate (less than 12 months) debt obligations to fund a portion of our balance sheet, which exposes us to variability in interest rates. To meet our objectives, we may periodically enter into derivative financial instruments to mitigate exposure to fluctuations in cash flows resulting from changes in interest rates ("Cash Flow Hedges").  Cash Flow Hedges currently include certain pay-fixed interest-rate swaps.  Pay-fixed interest-rate swaps convert the variable-rate cash flows on debt obligations to fixed-rates.

We record the fair value of Cash Flow Hedges in accrued income and other assets and accrued expenses and other liabilities.  On an ongoing basis, we adjust our Condensed Consolidated Statements of Financial Condition to reflect the then current fair value of Cash Flow Hedges.  The related gains or losses are reported in other comprehensive income or loss and are subsequently reclassified into earnings, as a yield adjustment in the same period in which the related interest on the hedged items (primarily variable-rate debt obligations) affect earnings.  It is anticipated that approximately $0.3 million, of unrealized losses on Cash Flow Hedges at June 30, 2012 will be reclassified to earnings over the next twelve months.  To the extent that the Cash Flow Hedges are not effective, the ineffective portion of the Cash Flow Hedges is immediately recognized as interest expense.  The maximum term of any Cash Flow Hedge at June 30, 2012 is 2.5 years.

Certain financial derivative instruments have not been designated as hedges. The fair value of these derivative financial instruments has been recorded on our Condensed Consolidated Statements of Financial Condition and 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, we enter into rate-lock mortgage loan commitments with customers ("Rate Lock Commitments").  These commitments expose us to interest rate risk.  We also enter into mandatory commitments to sell mortgage loans ("Mandatory Commitments") to reduce the impact of price fluctuations of mortgage loans held for sale and Rate Lock Commitments.  Mandatory Commitments help protect our loan sale profit margin from fluctuations in interest rates. The changes in the fair value of Rate Lock Commitments and Mandatory Commitments are recognized currently as part of net gains on mortgage loans.  We obtain market prices on Mandatory Commitments and Rate Lock Commitments.  Net gains on mortgage loans, as well as net income (loss) may be more volatile as a result of these derivative instruments, which are not designated as hedges.

During 2010, we entered into an amended and restated warrant with the U.S. Department of the Treasury ("UST") that would allow them to purchase our common stock at a fixed price (see note #15). Because of certain anti-dilution features included in the Amended Warrant (as defined in note #15), it is not considered to be indexed to our common stock and is therefore accounted for as a derivative instrument and recorded as a liability. Any change in value of the Amended Warrant is recorded in other income in our Condensed Consolidated Statements of Operations.

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

Fair Values of Derivative Instruments

	Asset Derivatives						Liability Derivatives
	June 30,			December 31,			June 30,			December 31,
	2012			2011			2012			2011
	Balance			Balance			Balance			Balance
	Sheet	Fair		Sheet	Fair		Sheet	Fair		Sheet	Fair
	Location	Value		Location	Value		Location	Value		Location	Value
	(In thousands)
Derivatives designated as hedging instruments
Pay-fixed interest rate swap agreements							Other liabilities	$	872	Other liabilities	$	1,103
Total									872			1,103
Derivatives not designated as hedging instruments
Rate-lock mortgage loan commitments	Other  assets	$	1,983	Other  assets	$	857
Mandatory commitments to sell mortgage loans	Other  assets		-			-			696	Other liabilities		606
Amended Warrant			-			-	Other liabilities		353	Other liabilities		174
Total			1,983			857			1,049			780
Total derivatives		$	1,983		$	857		$	1,921		$	1,883

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

Three Month Periods Ended June 30,
							Location of
							Gain (Loss)
							Reclassified
							from
	Gain (Loss)						Accumulated	Gain (Loss)
	Recognized in						Other	Reclassified from
	Other						Comprehensive	Accumulated Other
	Comprehensive						Income into	Comprehensive						Location of	Gain (Loss)
	Income (Loss)						Income	Loss into Income						Gain (Loss)	Recognized
	(Effective Portion)						(Effective	(Effective Portion)						Recognized	in Income
	2012			2011			Portion)	2012			2011			in Income (1)	2012			2011
	(In thousands)
Cash Flow Hedges
Pay-fixed interest rate swap agreements	$	(24	)	$	(270	)	Interest expense	$	(266	)	$	(341	)		$	-		$	(3	)
Interest-rate cap agreements		-			30		Interest   expense		-			(7	)			-			-
Total	$	(24	)	$	(240	)		$	(266	)	$	(348	)		$	-		$	(3	)
No hedge designation
Rate-lock mortgage loan commitments														Net mortgage loan gains	$	283		$	68
Mandatory commitments to sell mortgage loans														Net mortgage   loan gains		(704	)		196
Amended warrant														(Increase) decrease in  fair value of  U.S. Treasury warrant		(25	)		642
Total															$	(446	)	$	906

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

Six Month Periods Ended June 30,
							Location of
							Gain (Loss)
							Reclassified
							from
	Gain (Loss)						Accumulated	Gain (Loss)
	Recognized in						Other	Reclassified from
	Other						Comprehensive	Accumulated Other
	Comprehensive						Income into	Comprehensive						Location of	Gain (Loss)
	Income (Loss)						Income	Loss into Income						Gain (Loss)	Recognized
	(Effective Portion)						(Effective	(Effective Portion)						Recognized	in Income
	2012			2011			Portion)	2012			2011			in Income (1)	2012			2011
	(In thousands)
Cash Flow Hedges
Pay-fixed interest rate swap agreements	$	(75	)	$	(293	)	Interest expense	$	(596	)	$	(757	)		$	-		$	(3	)
Interest-rate cap agreements		-			30		Interest   expense		-			(15	)			-			-
Total	$	(75	)	$	(263	)		$	(596	)	$	(772	)		$	-		$	(3	)
No hedge designation
Rate-lock mortgage loan commitments														Net mortgage loan gains	$	1,126		$	99
Mandatory commitments to sell mortgage loans														Net mortgage loan gains		(90	)		(1,296	)
Amended warrant														(Increase) decrease in  fair value of   U.S. Treasury warrant		(179	)		996
Total															$	857		$	(201	)

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

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Share Based Compensation

6 Months Ended

Jun. 30, 2012

Share Based Compensation [Abstract]

Share Based Compensation

9.  Share Based Compensation

We maintain share based payment plans that include a non-employee director stock purchase plan and a long-term incentive plan that permits the issuance of share based compensation, including stock options and non-vested share awards. The long-term incentive plan, which is shareholder approved, permits the grant of additional share based awards for up to 0.5 million shares of common stock as of June 30, 2012.  The non-employee director stock purchase plan permits the grant of additional share based payments for up to 0.4 million shares of common stock as of June 30, 2012.  Share based awards and payments are measured at fair value at the date of grant and are expensed over the requisite service period.  Common shares issued upon exercise of stock options come from currently authorized but unissued shares.

During the first quarter of 2012 our president's annual salary was increased by $0.03 million, effective January 1, 2012.  One half of this increase is currently being paid in the form of common stock (also referred to as "salary stock").  During the first quarter of 2011, pursuant to a management transition plan, our chief executive officer's annual salary was increased by $0.2 million effective January 1, 2011.  This increase is currently being paid entirely in the form of salary stock.  These shares are issued each pay period and vest immediately.

During the first quarter of 2011, we issued 0.14 million restricted stock units to five of our executive officers.  These restricted stock units do not vest for a minimum of two years and until we repay in full our obligations related to the Troubled Asset Relief Program ("TARP").

Beginning in the second quarter of 2011 our directors elected to receive their quarterly cash retainer fees in the form of common stock currently (or on a deferred basis pursuant to a deferred compensation and stock purchase plan).  Shares equal in value to each director's quarterly cash retainer are issued each quarter and vest immediately.  We have issued 0.13 million shares and 0.03 million shares to directors during the first six months of 2012 and 2011, respectively and expensed their value during those same periods.

Total compensation expense recognized for stock option grants, restricted stock grants, restricted stock unit grants and salary stock was $0.2 million and $0.1 million during the three and six month periods ended June 30, 2012, and was $0.2 million and $0.4 million during the same periods in 2011.  The corresponding tax benefit relating to this expense was zero for the three and six month periods ended June 30, 2012 and 2011, respectively.  Total expense recognized for non-employee director share based payments was $0.1 million in both three month periods ended June 30, 2012 and 2011 and $0.2 million and $0.1 million in the six month periods ended June 30, 2012 and 2011, respectively.

At June 30, 2012, the total expected compensation cost related to non-vested stock options, restricted stock and restricted stock unit awards not yet recognized was $0.7 million.  The weighted-average period over which this amount will be recognized is 2.6 years.

A summary of outstanding stock option grants and transactions follows:

	Six-months ended June 30, 2012
						Weighted- Average Remaining		Aggregated
	Number of Shares			Average Exercise Price		Contractual Term (years)		Intrinsic Value (in thousands)
Outstanding at January 1, 2012		180,862		$	7.98
Granted		-			-
Exercised		-			-
Exchanged		-			-
Forfeited		(11,200	)		1.92
Expired		(5,495	)		90.66
Outstanding at June 30, 2012		164,167		$	5.62		8.26	$	70
Vested and expected to vest at
June 30, 2012		154,970		$	5.84		8.22	$	65
Exercisable at June 30, 2012		79,282		$	9.59		7.47	$	23

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

	2012
	Number of Shares			Weighted Average Grant Date Fair Value
Outstanding at January 1, 2012		165,045		$	17.90
Granted		-			-
Vested		(4,496	)		166.90
Forfeited		(522	)		93.14
Outstanding at June 30, 2012		160,027		$	13.47

There were no stock option exercises during the six month periods ending June 30, 2012 and 2011, respectively.

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Branch Sale (Tables)

6 Months Ended

Jun. 30, 2012

Branch Sale [Abstract]

Schedule of summarizes estimated loans and deposits related branch sale

The following summarizes estimated loans and deposits related to the Branch Sale:
 

	June 30,
	2012
Loans:
Commercial	$	31,729
Mortgage		8,699
Installment		13,699
Total loans		54,127
Allowance for Loan Losses		(781	)
Adjustment to lower of cost or fair value		(166	)
Net loans	$	53,180
Deposits
Non-interest bearing	$	65,059
Savings and interest bearing-checking		231,470
Retail time		123,732
Total deposits	$	420,261
Net adjustments		(2,740	)
Net deposits		417,521

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Contingent Liabilities (Details) (Accounts Receivables Due to Mepco [Member], USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011
Accounts Receivables Due to Mepco [Member]
Loss Contingencies [Line Items]
Installment payments period for service contract, minimum			12 months
Installment payments period for service contract, maximum			24 months
Aggregate amount of counterparty obligations	$ 28.9		$ 28.9		$ 29.3
VSC counterparty contingency expense	$ 0.3	$ 1.3	$ 0.8	$ 3.7

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Contingent Liabilities

6 Months Ended

Jun. 30, 2012

Contingent Liabilities [Abstract]

Contingent Liabilities

14. Contingent Liabilities

Our Mepco segment conducts its payment plan business activities across the United States. Mepco acquires the payment plans from companies (which we refer to as Mepco's "counterparties") at a discount from the face amount of the payment plan. Each payment plan (which are classified as payment plan receivables in our Condensed Consolidated Statements of Financial Condition) permits a consumer to purchase a vehicle service contract by making installment payments, generally for a term of 12 to 24 months, to the sellers of those contracts (one of the "counterparties"). Mepco thereafter collects the payments from consumers. In acquiring the payment plan, Mepco generally funds a portion of the cost to the seller of the service contract and a portion of the cost to the administrator of the service contract. The administrator, in turn, pays the necessary contractual liability insurance policy ("CLIP") premium to the insurer or risk retention group.

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

Upon the cancellation of a service contract and the completion of the billing process to the counterparties for amounts due to Mepco, there is a decrease in the amount of "payment plan receivables" and an increase in the amount of "vehicle service contract counterparty receivables" until such time as the amount due from the counterparty is collected. These amounts represent funds actually due to Mepco from its counterparties for cancelled service contracts. At June 30, 2012, the aggregate amount of such obligations owing to Mepco by counterparties, net of write-downs and reserves made through the recognition of vehicle service contract counterparty contingencies expense, totaled $28.9 million. This compares to a balance of $29.3 million at December 31, 2011. Mepco is currently in the process of working to recover these receivables, including through liquidation of collateral, claims against the bankruptcy estate of a counterparty that previously represented a significant portion of Mepco's business, and litigation against counterparties.

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

When counterparties do not honor their contractual obligations to Mepco to repay advanced funds, we recognize estimated losses. Mepco pursues collection (including commencing legal action if necessary) of funds due to it under its various contracts with counterparties.  Charges related to estimated losses for vehicle service contract counterparty contingencies included in non-interest expenses were $0.3 million and $1.3 million for the three months ended June 30, 2012 and 2011, respectively and $0.8 million and $3.7 million for the six months ended June 30, 2012 and 2011, respectively.  These charges are being classified in non-interest expense because they are associated with a default or potential default of a contractual obligation under our counterparty contracts as opposed to loss on the administration of the payment plan itself.

The determination of losses related to vehicle service contract counterparty contingencies requires a significant amount of judgment because a number of factors can influence the amount of loss that we may ultimately incur. These factors include our estimate of future cancellations of vehicle service contracts, our evaluation of collateral that may be available to recover funds due from our counterparties, and the amount collected from counterparties in connection with their contractual obligations. Mepco is currently involved in litigation with certain of its counterparties in an attempt to collect amounts owing from those counterparties for cancelled service contracts.

We apply a rigorous process, based upon observable contract activity and past experience, to estimate probable incurred losses and quantify the necessary reserves for our vehicle service contract counterparty contingencies, but there can be no assurance that our modeling process will successfully identify all such losses. As a result, we could record future losses associated with vehicle service contract counterparty contingencies that may be significantly different than the levels that we recorded during the first six months of 2012 and 2011.

We believe our assumptions regarding the collection of vehicle service contract counterparty receivables are reasonable, and we based them on our good faith judgments using data currently available. We also believe the current amount of reserves we have established and the vehicle service contract counterparty contingencies expense that we have recorded are appropriate given our estimate of probable incurred losses at the applicable Condensed Consolidated Statement of Financial Condition date. However, because of the uncertainty surrounding the numerous and complex assumptions made, actual losses could exceed the charges we have taken to date.

We are also involved in various litigation matters in the ordinary course of business. At the present time, we do not believe any of these matters will have a significant impact on our Condensed Consolidated Financial Statements.  The aggregate amount we have accrued for losses we consider probable as a result of these litigation matters is immaterial. However, because of the inherent uncertainty of outcomes from any litigation matter, we believe it is reasonably possible we may incur losses in addition to the amounts we have accrued. However, at this time, we are unable to estimate the range of additional losses that are reasonably possible because of a number of factors, including the fact that certain of these litigation matters are still in their early stages and involve claims for which, at this point, we believe have little to no merit.

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

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Segments (Tables)

6 Months Ended

Jun. 30, 2012

Segments [Abstract]

Selected financial information for reportable segments

A summary of selected financial information for our reportable segments as of or for the three-month and six-month periods ended June 30 follows:

As of or for the three months ended June 30,

	IB		Mepco			Other(1)			Elimination(2)			Total
	(In thousands)
2012
Total assets	$	2,246,538	$	154,248		$	169,019		$	(166,340	)	$	2,403,465
Interest income		21,550		3,705			-			-			25,255
Net interest income		19,766		2,799			(735	)		-			21,830
Provision for loan losses		1,063		(7	)		-			-			1,056
Income (loss) before income tax		4,944		337			(925	)		(23	)		4,333
Net income (loss)		5,059		222			(925	)		(23	)		4,333

2011
Total assets	$	2,094,597	$	223,799		$	171,396		$	(172,184	)	$	2,317,608
Interest income		23,733		5,394			-			-			29,127
Net interest income		20,073		3,987			(676	)		-			23,384
Provision for loan losses		4,122		34			-			-			4,156
Income (loss) before income tax		367		(322	)		(243	)		(23	)		(221	)
Net income (loss)		510		(207	)		(243	)		(23	)		37

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

(2)Includes parent company's investment in subsidiaries and cash balances maintained at subsidiary.

As of or for the six months ended June 30,

	IB		Mepco		Other(1)			Elimination(2)			Total
	(In thousands)
2012
Total assets	$	2,246,538	$	154,248	$	169,019		$	(166,340	)	$	2,403,465
Interest income		43,395		7,556		-			-			50,951
Net interest income		39,705		5,681		(1,456	)		-			43,930
Provision for loan losses		6,166		21		-			-			6,187
Income (loss) before income tax		7,957		1,893		(1,966	)		(47	)		7,837
Net income (loss)		8,601		1,249		(1,966	)		(47	)		7,837

2011
Total assets	$	2,094,597		$	223,799		$	171,396		$	(172,184	)	$	2,317,608
Interest income		48,313			11,532			-			-			59,845
Net interest income		40,604			8,574			(1,344	)		-			47,834
Provision for loan losses		14,821			37			-			-			14,858
Income (loss) before income tax		(5,869	)		(912	)		(802	)		(47	)		(7,630	)
Net income (loss)		(5,933	)		(582	)		(802	)		(47	)		(7,364	)

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

(2)Includes parent company's investment in subsidiaries and cash balances maintained at subsidiary.

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Fair Value Disclosures (Details) (USD $)	3 Months Ended			6 Months Ended			12 Months Ended
	Jun. 30, 2012		Jun. 30, 2011	Jun. 30, 2012		Jun. 30, 2011	Dec. 31, 2011
Fair Value Disclosures [Abstract]
Value of collateral-dependent impaired loans that will be reviewed by independent third party, minimum	$ 250,000			$ 250,000
Value of collateral-dependent impaired loans that will be reviewed by special assets group, maximum	250,000			250,000
Discount on appraisal value of retails properties (in hundredths)				5.00%
Capitalized mortgage loan servicing rights, valuation assumption [Abstract]
Weighted average discount rate (in hundredths)				10.50%
Weighted average cost to service				79
Weighted average ancillary income				44
Weighted average float rate (in hundredths)				0.96%
Fair value of amended warrants, assumptions [Abstract]
Steps in simulation model used to determine fair value of amended warrants				500-step lattice
Number of binomial lattice specified variables				14
Probability of non-permitted capital raise (in hundredths)	1.00%			1.00%
Expected discount to stock price in an equity raise (in hundredths)	(10.00%)			(10.00%)
Amount of expected capital raise	(100,000,000)			(100,000,000)
Expected time of equity raise				April, 2013 at June 30, 2012 and December 31, 2011
Increase in probability of non-permitted capital raise, minimum (in hundredths)				2.50%
Increase in probability of non-permitted capital raise, average (in hundredths)				5.00%
Increase in probability of non-permitted capital raise, maximum (in hundredths)				10.00%
Increase in amended warrants, minimum				400,000
Increase in amended warrants, average				450,000
Increase in amended warrants, maximum				580,000
Assets [Abstract]
Fixed assets held for sale relating to branch sale	8,491,000			8,491,000			0
Impairment charges recognized [Abstract]
Capitalized mortgage loan servicing rights, carrying amount	9,400,000			9,400,000			11,000,000
Capitalized mortgage loan servicing rights, valuation allowance				6,800,000			6,500,000
Capitalized mortgage loan servicing rights recoveries	(900,000)		(600,000)	(200,000)		(100,000)
Collateral dependent loans, carrying amount	27,600,000			27,600,000			33,900,000
Collateral dependent loans, valuation allowance	8,300,000			8,300,000			10,300,000
Additional provision for loan losses on impaired loans	600,000		2,900,000	2,200,000		5,700,000
Other Real Estate, carrying amount	13,500,000			13,500,000			16,900,000
Other real estate, valuation allowance				10,700,000			14,700,000
Other real estate, additional charge	500,000		800,000	1,200,000		2,100,000
Reconciliation for all liabilities measured at fair value, Amended warrant [Roll Forward]
Beginning balance	(328,000)		(957,000)	(174,000)		(1,311,000)	(1,311,000)
Total gains (losses) realized and unrealized [Abstract]
Included in results of operations	(25,000)		642,000	(179,000)		996,000
Included in other comprehensive income	0		0	0		0
Purchases, issuances, settlements, maturities and calls	0		0	0		0
Transfers in and/or out of Level 3	0		0	0		0
Ending balance	(353,000)		(315,000)	(353,000)		(315,000)	(174,000)
Amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at March 31	(25,000)		642,000	(179,000)		996,000
Fair value option - Loans held for sale [Abstract]
Loans held for sale	43,386,000			43,386,000			44,801,000
Difference	1,644,000			1,644,000			1,403,000
Aggregate Fair Value [Member]
Fair value option - Loans held for sale [Abstract]
Loans held for sale	43,386,000			43,386,000			44,801,000
Contractual Principal [Member]
Fair value option - Loans held for sale [Abstract]
Loans held for sale	41,742,000			41,742,000			43,398,000
Trading Securities [Member]
Changes in fair value for financial assets [Abstract]
Net Gains (Losses) on Assets, Securities				9,000		124,000
Net Gains (Losses) on Assets, Loans				0		0
Total Change in Fair Values Included in Current Period Earnings				9,000		124,000
Loans Held For Sale [Member]
Changes in fair value for financial assets [Abstract]
Net Gains (Losses) on Assets, Securities				0		0
Net Gains (Losses) on Assets, Loans				241,000		717,000
Total Change in Fair Values Included in Current Period Earnings				241,000		717,000
Fair Value Measurements [Member] | Fair Value, Measurements, Recurring [Member]
Assets [Abstract]
Trading securities	86,000			86,000			77,000
Securities available for sale [Abstract]
U.S. agency	38,143,000			38,143,000			25,017,000
US government agency residential mortgage backed, Fair Value Disclosure	157,164,000			157,164,000			94,206,000
Private label residential mortgage-backed	7,679,000			7,679,000			8,268,000
Obligations of states and political subdivisions	40,964,000			40,964,000			27,317,000
Trust preferred	3,097,000			3,097,000			2,636,000
Loans held for sale	43,386,000			43,386,000			44,801,000
Derivatives	1,983,000	[1]		1,983,000	[1]		857,000	[1]
Liabilities [Abstract]
Derivatives	1,049,000	[2]		1,049,000	[2]		1,883,000	[2]
Fair Value Measurements [Member] | Fair Value, Measurements, Nonrecurring [Member]
Assets [Abstract]
Capitalized mortgage loan servicing rights	9,354,000	[3]		9,354,000	[3]		11,004,000	[3]
Loans held for sale relating to branch sale	53,180,000			53,180,000
Fixed assets held for sale relating to branch sale	8,491,000			8,491,000
Fair Value Measurements [Member] | Fair Value, Measurements, Nonrecurring [Member] | Impaired Loans [Member]
Commercial [Abstract]
Income producing - real estate	5,867,000	[4]		5,867,000	[4]		8,022,000	[4]
Land, land development & construction - real estate	3,062,000	[4]		3,062,000	[4]		5,702,000	[4]
Commercial and industrial	7,779,000	[4]		7,779,000	[4]		5,613,000	[4]
Mortgage [Abstract]
1-4 Family	2,256,000	[4]		2,256,000	[4]		3,263,000	[4]
Resort Lending	306,000	[4]		306,000	[4]		1,064,000	[4]
Commercial [Abstract]
Income producing - real estate	5,867,000	[4]		5,867,000	[4]		8,022,000	[4]
Land, land development & construction - real estate	3,062,000	[4]		3,062,000	[4]		5,702,000	[4]
Commercial and industrial	7,779,000	[4]		7,779,000	[4]		5,613,000	[4]
Mortgage [Abstract]
1-4 Family	2,256,000	[4]		2,256,000	[4]		3,263,000	[4]
Resort Lending	306,000	[4]		306,000	[4]		1,064,000	[4]
Fair Value Measurements [Member] | Fair Value, Measurements, Nonrecurring [Member] | Other Real Estate [Member]
Commercial [Abstract]
Income producing - real estate	860,000	[5]		860,000	[5]		1,388,000	[5]
Land, land development & construction - real estate	6,376,000	[5]		6,376,000	[5]		7,512,000	[5]
Commercial and industrial	248,000	[5]		248,000	[5]		497,000	[5]
Mortgage [Abstract]
1-4 Family	1,086,000	[5]		1,086,000	[5]		2,079,000	[5]
Resort Lending	4,824,000	[5]		4,824,000	[5]		5,297,000	[5]
Commercial [Abstract]
Income producing - real estate	860,000	[5]		860,000	[5]		1,388,000	[5]
Land, land development & construction - real estate	6,376,000	[5]		6,376,000	[5]		7,512,000	[5]
Commercial and industrial	248,000	[5]		248,000	[5]		497,000	[5]
Mortgage [Abstract]
1-4 Family	1,086,000	[5]		1,086,000	[5]		2,079,000	[5]
Resort Lending	4,824,000	[5]		4,824,000	[5]		5,297,000	[5]
Home equity line of credit - 1st lien							53,000	[5]
Installment [Abstract]
Home equity installment - 1st lien	100,000	[5]		100,000	[5]		100,000	[5]
Quoted Prices in Active Markets for Identical Assets, Level 1 [Member]
Assets [Abstract]
Trading securities	100,000			100,000
Securities available for sale [Abstract]
Derivatives	0			0
Liabilities [Abstract]
Derivatives	0			0
Quoted Prices in Active Markets for Identical Assets, Level 1 [Member] | Fair Value, Measurements, Recurring [Member]
Assets [Abstract]
Trading securities	86,000			86,000			77,000
Securities available for sale [Abstract]
U.S. agency	0			0			0
US government agency residential mortgage backed, Fair Value Disclosure	0			0			0
Private label residential mortgage-backed	0			0			0
Obligations of states and political subdivisions	0			0			0
Trust preferred	0			0			0
Loans held for sale	0			0			0
Derivatives	0	[1]		0	[1]		0	[1]
Liabilities [Abstract]
Derivatives	0	[2]		0	[2]		0	[2]
Quoted Prices in Active Markets for Identical Assets, Level 1 [Member] | Fair Value, Measurements, Nonrecurring [Member]
Assets [Abstract]
Capitalized mortgage loan servicing rights	0	[3]		0	[3]		0	[3]
Loans held for sale relating to branch sale	0			0
Fixed assets held for sale relating to branch sale	0			0
Quoted Prices in Active Markets for Identical Assets, Level 1 [Member] | Fair Value, Measurements, Nonrecurring [Member] | Impaired Loans [Member]
Commercial [Abstract]
Income producing - real estate	0	[4]		0	[4]		0	[4]
Land, land development & construction - real estate	0	[4]		0	[4]		0	[4]
Commercial and industrial	0	[4]		0	[4]		0	[4]
Mortgage [Abstract]
1-4 Family	0	[4]		0	[4]		0	[4]
Resort Lending	0	[4]		0	[4]		0	[4]
Commercial [Abstract]
Income producing - real estate	0	[4]		0	[4]		0	[4]
Land, land development & construction - real estate	0	[4]		0	[4]		0	[4]
Commercial and industrial	0	[4]		0	[4]		0	[4]
Mortgage [Abstract]
1-4 Family	0	[4]		0	[4]		0	[4]
Resort Lending	0	[4]		0	[4]		0	[4]
Quoted Prices in Active Markets for Identical Assets, Level 1 [Member] | Fair Value, Measurements, Nonrecurring [Member] | Other Real Estate [Member]
Commercial [Abstract]
Income producing - real estate	0	[5]		0	[5]		0	[5]
Land, land development & construction - real estate	0	[5]		0	[5]		0	[5]
Commercial and industrial	0	[5]		0	[5]		0	[5]
Mortgage [Abstract]
1-4 Family	0	[5]		0	[5]		0	[5]
Resort Lending	0	[5]		0	[5]		0	[5]
Commercial [Abstract]
Income producing - real estate	0	[5]		0	[5]		0	[5]
Land, land development & construction - real estate	0	[5]		0	[5]		0	[5]
Commercial and industrial	0	[5]		0	[5]		0	[5]
Mortgage [Abstract]
1-4 Family	0	[5]		0	[5]		0	[5]
Resort Lending	0	[5]		0	[5]		0	[5]
Home equity line of credit - 1st lien							0	[5]
Installment [Abstract]
Home equity installment - 1st lien	0	[5]		0	[5]		0	[5]
Significant Other Observable Inputs, Level 2 [Member]
Assets [Abstract]
Trading securities	0			0
Securities available for sale [Abstract]
Derivatives	2,000,000			2,000,000
Liabilities [Abstract]
Derivatives	1,500,000			1,500,000
Significant Other Observable Inputs, Level 2 [Member] | Fair Value, Measurements, Recurring [Member]
Assets [Abstract]
Trading securities	0			0			0
Securities available for sale [Abstract]
U.S. agency	38,143,000			38,143,000			25,017,000
US government agency residential mortgage backed, Fair Value Disclosure	157,164,000			157,164,000			94,206,000
Private label residential mortgage-backed	7,679,000			7,679,000			8,268,000
Obligations of states and political subdivisions	40,964,000			40,964,000			27,317,000
Trust preferred	3,097,000			3,097,000			2,636,000
Loans held for sale	43,386,000			43,386,000			44,801,000
Derivatives	1,983,000	[1]		1,983,000	[1]		857,000	[1]
Liabilities [Abstract]
Derivatives	696,000	[2]		696,000	[2]		1,709,000	[2]
Significant Other Observable Inputs, Level 2 [Member] | Fair Value, Measurements, Nonrecurring [Member]
Assets [Abstract]
Capitalized mortgage loan servicing rights	0	[3]		0	[3]		0	[3]
Loans held for sale relating to branch sale	53,180,000			53,180,000
Fixed assets held for sale relating to branch sale	8,491,000			8,491,000
Significant Other Observable Inputs, Level 2 [Member] | Fair Value, Measurements, Nonrecurring [Member] | Impaired Loans [Member]
Commercial [Abstract]
Income producing - real estate	0	[4]		0	[4]		0	[4]
Land, land development & construction - real estate	0	[4]		0	[4]		0	[4]
Commercial and industrial	0	[4]		0	[4]		0	[4]
Mortgage [Abstract]
1-4 Family	0	[4]		0	[4]		0	[4]
Resort Lending	0	[4]		0	[4]		0	[4]
Commercial [Abstract]
Income producing - real estate	0	[4]		0	[4]		0	[4]
Land, land development & construction - real estate	0	[4]		0	[4]		0	[4]
Commercial and industrial	0	[4]		0	[4]		0	[4]
Mortgage [Abstract]
1-4 Family	0	[4]		0	[4]		0	[4]
Resort Lending	0	[4]		0	[4]		0	[4]
Significant Other Observable Inputs, Level 2 [Member] | Fair Value, Measurements, Nonrecurring [Member] | Other Real Estate [Member]
Commercial [Abstract]
Income producing - real estate	0	[5]		0	[5]		0	[5]
Land, land development & construction - real estate	0	[5]		0	[5]		0	[5]
Commercial and industrial	0	[5]		0	[5]		0	[5]
Mortgage [Abstract]
1-4 Family	0	[5]		0	[5]		0	[5]
Resort Lending	0	[5]		0	[5]		0	[5]
Commercial [Abstract]
Income producing - real estate	0	[5]		0	[5]		0	[5]
Land, land development & construction - real estate	0	[5]		0	[5]		0	[5]
Commercial and industrial	0	[5]		0	[5]		0	[5]
Mortgage [Abstract]
1-4 Family	0	[5]		0	[5]		0	[5]
Resort Lending	0	[5]		0	[5]		0	[5]
Home equity line of credit - 1st lien							0	[5]
Installment [Abstract]
Home equity installment - 1st lien	0	[5]		0	[5]		0	[5]
Significant Unobservable Inputs, Level 3 [Member]
Assets [Abstract]
Trading securities	0			0
Securities available for sale [Abstract]
Derivatives	0			0
Liabilities [Abstract]
Derivatives	400,000			400,000
Significant Unobservable Inputs, Level 3 [Member] | Fair Value, Measurements, Recurring [Member]
Assets [Abstract]
Trading securities	0			0			0
Securities available for sale [Abstract]
U.S. agency	0			0			0
US government agency residential mortgage backed, Fair Value Disclosure	0			0			0
Private label residential mortgage-backed	0			0			0
Obligations of states and political subdivisions	0			0			0
Trust preferred	0			0			0
Loans held for sale	0			0			0
Derivatives	0	[1]		0	[1]		0	[1]
Liabilities [Abstract]
Derivatives	353,000	[2]		353,000	[2]		174,000	[2]
Significant Unobservable Inputs, Level 3 [Member] | Fair Value, Measurements, Nonrecurring [Member]
Assets [Abstract]
Capitalized mortgage loan servicing rights	9,354,000	[3]		9,354,000	[3]		11,004,000	[3]
Loans held for sale relating to branch sale	0			0
Fixed assets held for sale relating to branch sale	0			0
Significant Unobservable Inputs, Level 3 [Member] | Fair Value, Measurements, Nonrecurring [Member] | Impaired Loans [Member]
Commercial [Abstract]
Income producing - real estate	5,867,000	[4]		5,867,000	[4]		8,022,000	[4]
Land, land development & construction - real estate	3,062,000	[4]		3,062,000	[4]		5,702,000	[4]
Commercial and industrial	7,779,000	[4]		7,779,000	[4]		5,613,000	[4]
Mortgage [Abstract]
1-4 Family	2,256,000	[4]		2,256,000	[4]		3,263,000	[4]
Resort Lending	306,000	[4]		306,000	[4]		1,064,000	[4]
Commercial [Abstract]
Income producing - real estate	5,867,000	[4]		5,867,000	[4]		8,022,000	[4]
Land, land development & construction - real estate	3,062,000	[4]		3,062,000	[4]		5,702,000	[4]
Commercial and industrial	7,779,000	[4]		7,779,000	[4]		5,613,000	[4]
Mortgage [Abstract]
1-4 Family	2,256,000	[4]		2,256,000	[4]		3,263,000	[4]
Resort Lending	306,000	[4]		306,000	[4]		1,064,000	[4]
Significant Unobservable Inputs, Level 3 [Member] | Fair Value, Measurements, Nonrecurring [Member] | Other Real Estate [Member]
Commercial [Abstract]
Income producing - real estate	860,000	[5]		860,000	[5]		1,388,000	[5]
Land, land development & construction - real estate	6,376,000	[5]		6,376,000	[5]		7,512,000	[5]
Commercial and industrial	248,000	[5]		248,000	[5]		497,000	[5]
Mortgage [Abstract]
1-4 Family	1,086,000	[5]		1,086,000	[5]		2,079,000	[5]
Resort Lending	4,824,000	[5]		4,824,000	[5]		5,297,000	[5]
Commercial [Abstract]
Income producing - real estate	860,000	[5]		860,000	[5]		1,388,000	[5]
Land, land development & construction - real estate	6,376,000	[5]		6,376,000	[5]		7,512,000	[5]
Commercial and industrial	248,000	[5]		248,000	[5]		497,000	[5]
Mortgage [Abstract]
1-4 Family	1,086,000	[5]		1,086,000	[5]		2,079,000	[5]
Resort Lending	4,824,000	[5]		4,824,000	[5]		5,297,000	[5]
Home equity line of credit - 1st lien							53,000	[5]
Installment [Abstract]
Home equity installment - 1st lien	$ 100,000	[5]		$ 100,000	[5]		$ 100,000	[5]

[1] Included in accrued income and other assets.

[2] Included in accrued expenses and other liabilities.

[3] Only includes servicing rights that are carried at fair value due to recognition of a valuation allowance.

[4] Only includes impaired loans with specific loss allocations based on collateral value.

[5] Only includes other real estate with subsequent write downs to fair value.

XML

Segments (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended				6 Months Ended
	Jun. 30, 2012		Jun. 30, 2011		Jun. 30, 2012		Jun. 30, 2011		Dec. 31, 2011
Segments [Abstract]
Number of reportable segments					2
Selected financial information for reportable segments [Abstract]
Total assets	$ 2,403,465		$ 2,317,608		$ 2,403,465		$ 2,317,608		$ 2,307,406
Interest income	25,255		29,127		50,951		59,845
Net interest income	21,830		23,384		43,930		47,834
Provision for loan losses	1,056		4,156		6,187		14,858
Income (loss) before income tax	4,333		(221)		7,837		(7,630)
Net income (loss)	4,333		37		7,837		(7,364)
IB [Member]
Selected financial information for reportable segments [Abstract]
Total assets	2,246,538		2,094,597		2,246,538		2,094,597
Interest income	21,550		23,733		43,395		48,313
Net interest income	19,766		20,073		39,705		40,604
Provision for loan losses	1,063		4,122		6,166		14,821
Income (loss) before income tax	4,944		367		7,957		(5,869)
Net income (loss)	5,059		510		8,601		(5,933)
Mepco [Member]
Selected financial information for reportable segments [Abstract]
Total assets	154,248		223,799		154,248		223,799
Interest income	3,705		5,394		7,556		11,532
Net interest income	2,799		3,987		5,681		8,574
Provision for loan losses	(7)		34		21		37
Income (loss) before income tax	337		(322)		1,893		(912)
Net income (loss)	222		(207)		1,249		(582)
Other [Member]
Selected financial information for reportable segments [Abstract]
Total assets	169,019	[1]	171,396	[1]	169,019	[1]	171,396	[1]
Interest income	0	[1]	0	[1]	0	[1]	0	[1]
Net interest income	(735)	[1]	(676)	[1]	(1,456)	[1]	(1,344)	[1]
Provision for loan losses	0	[1]	0	[1]	0	[1]	0	[1]
Income (loss) before income tax	(925)	[1]	(243)	[1]	(1,966)	[1]	(802)	[1]
Net income (loss)	(925)	[1]	(243)	[1]	(1,966)	[1]	(802)	[1]
Elimination [Member]
Selected financial information for reportable segments [Abstract]
Total assets	(166,340)	[2]	(172,184)	[2]	(166,340)	[2]	(172,184)	[2]
Interest income	0	[2]	0	[2]	0	[2]	0	[2]
Net interest income	0	[2]	0	[2]	0	[2]	0	[2]
Provision for loan losses	0	[2]	0	[2]	0	[2]	0	[2]
Income (loss) before income tax	(23)	[2]	(23)	[2]	(47)	[2]	(47)	[2]
Net income (loss)	$ (23)	[2]	$ (23)	[2]	$ (47)	[2]	$ (47)	[2]

[1] Includes amounts relating to our parent company and certain insignificant operations

[2] Includes parent company's investment in subsidiaries and cash balances maintained at subsidiary.

XML

Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) [Abstract]
Net income (loss)	$ 4,333	$ 37	$ 7,837	$ (7,364)
Unrealized losses on available for sale securities
Unrealized gain (loss) arising during period	2,756	394	1,896	715
Change in unrealized losses for which a portion of other than temporary impairment has been recognized in earnings	204	738	333	411
Reclassification adjustment for (gains) losses included in income	(151)	(64)	(843)	(204)
Unrealized losses on available for sale securities, net	2,809	1,068	1,386	922
Unrealized losses on derivative instruments
Unrealized loss arising during period	(24)	(240)	(75)	(263)
Reclassification adjustment for expense recognized in earnings	120	201	305	403
Reclassification adjustment for accretion on settled derivatives	146	147	291	369
Unrealized gains on derivative instruments	242	108	521	509
Other comprehensive income (loss), before tax	3,051	1,176	1,907	1,431
Income tax expense related to components of other comprehensive income (loss)	0	501	0	501
Other comprehensive income	3,051	675	1,907	930
Comprehensive income (loss)	$ 7,384	$ 712	$ 9,744	$ (6,434)

XML

Securities

6 Months Ended

Jun. 30, 2012

Securities [Abstract]

Securities

3.  Securities

Securities available for sale consist of the following:

	Amortized		Unrealized
	Cost		Gains		Losses		Fair Value
	(In thousands)
June 30, 2012
U.S. agency	$	38,039	$	124	$	20	$	38,143
U.S. agency residential mortgage-backed		156,231		994		61		157,164
Private label residential mortgage-backed		9,887		-		2,208		7,679
Obligations of states and political subdivisions		40,383		643		62		40,964
Trust preferred		4,700		-		1,603		3,097
Total	$	249,240	$	1,761	$	3,954	$	247,047
December 31, 2011
U.S. agency	$	24,980	$	58	$	21	$	25,017
U.S. agency residential mortgage-backed		93,415		1,007		216		94,206
Private label residential mortgage-backed		11,066		-		2,798		8,268
Obligations of states and political subdivisions		26,865		510		58		27,317
Trust preferred		4,697		-		2,061		2,636
Total	$	161,023	$	1,575	$	5,154	$	157,444

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

	Less Than Twelve Months				Twelve Months or More				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(In thousands)
June 30, 2012
U.S. agency	$	7,507	$	20	$	-	$	-	$	7,507	$	20
U.S. agency residential     mortgage-backed		30,497		44		10,097		17		40,594		61
Private label residential mortgage-backed		-		-		7,677		2,208		7,677		2,208
Obligations of states and political subdivisions		8,202		62		-		-		8,202		62
Trust preferred		-		-		3,097		1,603		3,097		1,603
Total	$	46,206	$	126	$	20,871	$	3,828	$	67,077	$	3,954
December 31, 2011
U.S. agency	$	9,974	$	21	$	-	$	-	$	9,974	$	21
U.S. agency residential mortgage-backed		42,500		216		-		-		42,500		216
Private label residential mortgage-backed		163		90		8,102		2,708		8,265		2,798
Obligations of states and      political subdivisions		-		-		1,729		58		1,729		58
Trust preferred		591		1,218		2,045		843		2,636		2,061
Total	$	53,228	$	1,545	$	11,876	$	3,609	$	65,104	$	5,154

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

U.S. Agency and U.S. Agency residential mortgage-backed securities - at June 30, 2012 we had two U.S. Agency and eight U.S. Agency residential mortgage-backed securities whose fair market value is less than amortized cost. The unrealized losses on U.S. Agency residential mortgage-backed securities are largely attributed to widening discount margins. As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Private label residential mortgage backed securities - at June 30, 2012 we had eight securities whose fair value is less than amortized cost.  Two of the issues are rated by a major rating agency as investment grade while four are below investment grade and two are split rated.  Six of these bonds have impairment in excess of 10% and all of these holdings have been impaired for more than 12 months.

The unrealized losses are largely attributable to credit spread widening on these securities since their acquisition. The underlying loans within these securities include Jumbo (75%) and Alt A (25%) at June 30, 2012.

	June 30, 2012					December 31, 2011
			Net					Net
	Fair		Unrealized			Fair		Unrealized
	Value		Gain (Loss)			Value		Gain (Loss)
	(In thousands)
Private label residential mortgage-backed
Jumbo	$	5,738	$	(1,602	)	$	6,454	$	(1,937	)
Alt-A		1,941		(606	)		1,814		(861	)

Seven of the private label residential mortgage-backed transactions have geographic concentrations in California, ranging from 22% to 58% of the collateral pool. Typical exposure levels to California (median exposure is 47%) are consistent with overall market collateral characteristics. Three transactions have modest exposure to Florida, ranging from 5% to 7% and one transaction has modest exposure to Nevada (5%). The underlying collateral pools do not have meaningful exposure to Arizona, Michigan or Ohio. None of the issues involve subprime mortgage collateral. Thus the impact of this market segment is only indirect, in that it has impacted liquidity and pricing in general for private label residential mortgage-backed securities. The majority of transactions are backed by fully amortizing loans. However, six transactions have concentrations in loans that pay interest only for a specified period of time and will fully amortize thereafter ranging from 31% to 94% (at origination date). The structure of the residential mortgage securities portfolio provides protection to credit losses. The portfolio primarily consists of senior securities as demonstrated by the following: super senior (22%), senior (43%), senior support (25%) and mezzanine (10%). The mezzanine class is from a seasoned transaction (94 months) with a significant level of subordination (8.60%). Except for the additional discussion below relating to other than temporary impairment, each private label residential mortgage-backed security has sufficient credit enhancement via subordination to reasonably assure full realization of book value. This assertion is based on a transaction level review of the portfolio.

Individual security reviews include: external credit ratings, forecasted weighted average life, recent prepayment speeds, underwriting characteristics of the underlying collateral, the structure of the securitization and the credit performance of the underlying collateral. The review of underwriting characteristics considers: average loan size, type of loan (fixed or ARM), vintage, rate, FICO, loan-to-value, scheduled amortization, occupancy, purpose, geographic mix and loan documentation. The review of the securitization structure focuses on the priority of cash flows to the bond, the priority of the bond relative to the realization of credit losses and the level of subordination available to absorb credit losses. The review of credit performance includes: current period as well as cumulative realized losses; the level of severe payment problems, which includes other real estate (ORE), foreclosures, bankruptcy and 90 day delinquencies; and the level of less severe payment problems, which consists of 30 and 60 day delinquencies.

All of these securities are receiving some principal and interest payments. Most of these transactions are passthrough structures, receiving pro rata principal and interest payments from a dedicated collateral pool for loans that are performing. The nonreceipt of interest cash flows is not expected and thus not presently considered in our discounted cash flow methodology discussed below.

In addition to the review discussed above, all private label residential mortgage-backed securities are reviewed for OTTI utilizing a cash flow projection. The cash flow analysis forecasts cash flow from the underlying loans in each transaction and then applies these cash flows to the bonds in the securitization. The cash flows from the underlying loans considers contractual payment terms (scheduled amortization), prepayments, defaults and severity of loss given default. The analysis uses dynamic assumptions for prepayments, defaults and loss severity. Near term prepayment assumptions are based on recently observed prepayment rates. More weight is given to longer term historic performance (12 months). In some cases, recently observed prepayment rates are lower than historic norms due to the absence of new jumbo loan issuances. This loan market is heavily dependent upon securitization for funding, and new securitization transactions have been minimal. Our model projections anticipate that prepayment rates gradually revert to historical levels. For seasoned ARM transactions, normalized prepayment rates range from 10% to 18% CPR which is at the lower end of historically observed speeds for seasoned ARM collateral. For fixed rate collateral (one transaction), the prepayment speeds are projected to rise modestly.

Default assumptions are largely based on the volume of existing real-estate owned, pending foreclosures and severe delinquencies. Other considerations include the quality of loan underwriting, recent default experience, realized loss performance and the volume of less severe delinquencies. Default levels generally are projected to remain elevated or increase for a period of time sufficient to address the level of distressed loans in the transaction. Our projections expect defaults to then decline, generally beginning in year three. Current loss severity assumptions are based on recent observations when meaningful data is available. Loss severity is expected to remain elevated for the next three years as recent housing data remains weak. Severity is expected to decline beginning in year four as the back log of foreclosure and distressed sales clear the market. Except for three securities discussed in further detail below (all three are currently below investment grade), our cash flow analysis forecasts complete recovery of our cost basis for each reviewed security.

At June 30, 2012 three below investment grade private label residential mortgage-backed securities with fair values of $3.3 million, $1.7 million and $0.1 million, respectively and unrealized losses of $1.0 million, $0.3 million and $0.03 million, respectively (amortized cost of $4.3 million, $2.0 million and $0.1 million, respectively) had losses that were considered other than temporary.

The underlying loans in the first transaction are 30 year fixed rate jumbos with an average FICO of 744 and an average loan-to-value ratio of 72%. The loans backing this transaction were originated in 2007 and this is our only security backed by 2007 vintage loans. We believe that this vintage is a key differentiating factor between this security and the others in our portfolio that do not have unrealized losses that are considered OTTI. The bond is a senior security that is receiving principal and interest payments similar to principal reductions in the underlying collateral. The cash flow analysis described above calculated $0.645 million of cumulative credit related OTTI as of June 30, 2012 on this security.   $0.085 million and zero of this credit related OTTI was recognized in our Condensed Consolidated Statements of Operations during the three months ended June 30, 2012 and 2011, respectively and $0.170 million and $0.052 million of this credit related OTTI was recognized during the six months ended June 30, 2012 and 2011, respectively, with the balance being recognized in previous periods. The remaining non-credit related unrealized loss was attributed to other factors and is reflected in other comprehensive income (loss) during those same periods.

The underlying loans in the second transaction are 30 year hybrid ARM Alt-A with an average FICO of 717 and an average loan-to-value ratio of 78%. The loans backing this transaction were originated in 2005.  The bond is a super senior security that is receiving principal and interest payments similar to principal reductions in the underlying collateral.  The cash flow analysis described above calculated $0.457 million of cumulative credit related OTTI as of June 30, 2012 on this security.   There was no credit related OTTI recognized in our Condensed Consolidated Statements of Operations during the three months ended June 30, 2012 and 2011 while $0.032 million and zero of this credit related OTTI was recognized during the six months ended June 30, 2012 and 2011, respectively, with the balance being recognized in previous periods. The remaining non-credit related unrealized loss was attributed to other factors and is reflected in other comprehensive income (loss) during those same periods.

The underlying loans in the third transaction are 30 year hybrid ARM jumbos with an average FICO of 738 and an average loan-to-value ratio of 57%. The loans backing this transaction were originated in 2005. The bond is a senior support security that is receiving principal and interest payments similar to principal reductions in the underlying collateral.  The cash flow analysis described above calculated $0.380 million of cumulative credit related OTTI as of June 30, 2012 on this security.   There was no credit related OTTI recognized in our Condensed Consolidated Statements of Operations during the three months ended June 30, 2012 and 2011, while $0.060 million and $0.090 million of this credit related OTTI was recognized during the six months ended June 30, 2012 and 2011, respectively, with the balance being recognized in previous periods. The remaining non-credit related unrealized loss was attributed to other factors and is reflected in other comprehensive income (loss) during those same periods.

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

Obligations of states and political subdivisions - at June 30, 2012 we had nine municipal securities whose fair value is less than amortized cost. The unrealized losses are largely attributed to widening of market spreads.  Seven of the impaired securities are rated by a major rating agency as investment grade.  The non rated securities have a periodic internal credit review according to established procedures. As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Trust preferred securities - at June 30, 2012 we had four securities whose fair value is less than amortized cost. All of our trust preferred securities are single issue securities issued by a trust subsidiary of a bank holding company. The pricing of trust preferred securities over the past several years has suffered from significant credit spread widening fueled by uncertainty regarding potential losses of financial companies, the absence of a liquid functioning secondary market and potential supply concerns from financial companies issuing new debt to recapitalize themselves.

One of the four securities is rated by two major rating agencies as investment grade, while one is rated one grade below investment grade by two major rating agencies and the other two are non-rated. The non-rated issues are relatively small banks and were never rated. The issuers of these non-rated trust preferred securities, which had a total amortized cost of $2.8 million and total fair value of $1.5 million as of June 30, 2012, continue to have satisfactory credit metrics and one continues to make interest payments.  One non-rated issue began deferring dividend payments in the third quarter of 2011 apparently due to an increase in non-performing assets.  Nevertheless, this issuer continues to have satisfactory capital measures and interim profitability.

The following table breaks out our trust preferred securities in further detail as of June 30, 2012 and December 31, 2011:

	June 30, 2012					December 31, 2011
			Net					Net
	Fair		Unrealized			Fair		Unrealized
	Value		Gain (Loss)			Value		Gain (Loss)
	(In thousands)
Trust preferred securities
Rated issues	$	1,564	$	(329	)	$	1,405	$	(484	)
Unrated issues - no OTTI		1,533		(1,274	)		1,231		(1,577	)

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

We recorded credit related OTTI charges in earnings on securities available for sale of $0.085 million and zero during the three month periods ended June 30, 2012 and 2011, respectively and $0.262 million and $0.142 million during the six month periods ended June 30, 2012 and 2011, respectively (see discussion above).

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

	Three months ended				Six months ended
	June 30,				June 30,
	2012		2011		2012		2011
	(In thousands)
Balance at beginning of period	$	1,647	$	852	$	1,470	$	710
Additions to credit losses on securities for which no previous OTTI was recognized		-		-		-		-
Increases to credit losses on securities for which OTTI was previously recognized		85		-		262		142
Balance at end of period	$	1,732	$	852	$	1,732	$	852

The amortized cost and fair value of securities available for sale at June 30, 2012, by contractual maturity, follow. The actual maturity may differ from the contractual maturity because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Fair
	Cost		Value
	(In thousands)
Maturing within one year	$	1,323	$	1,341
Maturing after one year but within five years		6,491		6,711
Maturing after five years but within ten years		15,318		15,531
Maturing after ten years		59,990		58,621
		83,122		82,204
U.S. agency residential mortgage-backed		156,231		157,164
Private label residential mortgage-backed		9,887		7,679
Total	$	249,240	$	247,047

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

			Realized
	Proceeds		Gains		Losses(1)
	(In thousands)
2012	$	18,999	$	843	$	-
2011		70,322		279		75

(1) Losses in 2012 and 2011 exclude $0.262 million and $0.142 million, respectively of credit related OTTI recognized in earnings.

During 2012 and 2011 our trading securities consisted of various preferred stocks.  During the first six months of 2012 and 2011 we recognized gains on trading securities of $0.010 million and $0.124 million, respectively, that are included in net gains (losses) on securities in the Condensed Consolidated Statements of Operations.  Both of these amounts, relate to gains  recognized on trading securities still held at each respective period end.

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Earnings Per Common Share (Tables)

6 Months Ended

Jun. 30, 2012

Earnings Per Common Share [Abstract]

Reconciliation of basic and diluted loss per share

6.    Earnings Per Common Share

		Three months ended					Six months ended
		June 30,					June 30,
		2012		2011			2012		2011
		(in thousands, except per share amounts)
Net income (loss) applicable to common stock	$	3,241	$	(1,014	)	$	5,689	$	(9,423	)
Convertible preferred stock dividends		1,092		-			2,148		-
Net income (loss) applicable to common stock for calculation of diluted earnings per share(1) (2)	$	4,333	$	(1,014	)	$	7,837	$	(9,423	)
Weighted average shares outstanding		8,607		8,287			8,570		8,111
Effect of convertible preferred stock		31,987		41,207			31,987		41,207
Restricted stock units		140		139			140		104
Stock units for deferred compensation plan for non- employee directors		58		7			41		7
Effect of stock options		7		-			-		-
Weighted average shares outstanding for  calculation of diluted income (loss) per share(1)		40,799		49,640			40,738		49,429
Net income (loss) per common share
Basic	$	.38	$	(.12	)	$	.66	$	(1.16	)
Diluted(2)		.11		(.12	)		.19		(1.16	)

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Loans, Impaired Financing Receivables (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011
Impaired loans [Abstract]
TDR	$ 26,170		$ 26,170		$ 26,945
Non - TDR	235		235		423
TDR - allowance based on collateral	17,137		17,137		20,142
TDR - allowance based on present value cash flow	111,396		111,396		98,130
Non - TDR - allowance based on collateral	10,479		10,479		13,773
Non - TDR - allowance based on present value cash flow	0		0		0
Total impaired loans	165,417		165,417		159,413
Amount of allowance for loan losses allocated [Abstract]
TDR - allowance based on collateral	4,860		4,860		6,004
TDR - allowance based on present value cash flow	13,384		13,384		12,048
Non - TDR - allowance based on collateral	3,486		3,486		4,247
Non - TDR - allowance based on present value cash flow	0		0		0
Allowance For Loan Losses Allocated	21,730		21,730		22,299
Impaired Loans by class [Abstract]
Recorded Investment	165,417		165,417		159,413
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	162,158	150,227	161,411	155,929
Interest Income Recognized	1,486	1,349	2,879	2,766
With No Related Allowance Recorded [Member]
Impaired loans [Abstract]
Total impaired loans	26,495		26,495		27,451
Impaired Loans by class [Abstract]
Recorded Investment	26,495		26,495		27,451
Unpaid Principal Balance	31,083		31,083		32,334
Related Allowance	0		0		0
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	27,100	26,790
Interest Income Recognized	298	338
With An Allowance Recorded [Member]
Impaired loans [Abstract]
Total impaired loans	139,419		139,419		132,479
Impaired Loans by class [Abstract]
Recorded Investment	139,419		139,419		132,479
Unpaid Principal Balance	151,800		151,800		147,607
Related Allowance	21,730		21,730		22,299
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment			134,196	127,945
Interest Income Recognized			2,373	2,139
Total Recorded Investment [Member]
Impaired loans [Abstract]
Total impaired loans	165,914		165,914		159,930
Impaired Loans by class [Abstract]
Recorded Investment	165,914		165,914		159,930
Unpaid Principal Balance	182,883		182,883		179,941
Related Allowance	21,730		21,730		22,299
Accrued Interest Included in Recorded Investment [Member]
Impaired loans [Abstract]
Total impaired loans	497		497		517
Impaired Loans by class [Abstract]
Recorded Investment	497		497		517
1-4 Family [Member] | With No Related Allowance Recorded [Member]
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment			7,401	9,095
Interest Income Recognized			149	214
Loans Not Secured By Real Estate [Member] | With An Allowance Recorded [Member]
Impaired loans [Abstract]
Total impaired loans	279		279		153
Impaired Loans by class [Abstract]
Recorded Investment	279		279		153
Unpaid Principal Balance	287		287		156
Related Allowance	80		80		40
Others 2 [Member] | With An Allowance Recorded [Member]
Impaired loans [Abstract]
Total impaired loans	0		0		0
Impaired Loans by class [Abstract]
Recorded Investment	0		0		0
Unpaid Principal Balance	0		0		0
Related Allowance	0		0		0
Home Equity Installment - 1st Lien [Member] | With An Allowance Recorded [Member]
Impaired loans [Abstract]
Total impaired loans	1,397		1,397		1,232
Impaired Loans by class [Abstract]
Recorded Investment	1,397		1,397		1,232
Unpaid Principal Balance	1,430		1,430		1,293
Related Allowance	673		673		660
Home Equity Installment - 2nd Lien [Member] | With An Allowance Recorded [Member]
Impaired loans [Abstract]
Total impaired loans	1,151		1,151		1,421
Impaired Loans by class [Abstract]
Recorded Investment	1,151		1,151		1,421
Unpaid Principal Balance	1,220		1,220		1,458
Related Allowance	921		921		1,062
Commercial [Member] | Income Producing - Real Estate [Member]
Impaired loans [Abstract]
Total impaired loans	28,783		28,783		27,407
Impaired Loans by class [Abstract]
Recorded Investment	28,783		28,783		27,407
Unpaid Principal Balance	33,677		33,677		35,786
Related Allowance	3,094		3,094		3,642
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	26,511	18,746	26,809	19,414
Interest Income Recognized	133	45	297	152
Commercial [Member] | Income Producing - Real Estate [Member] | With No Related Allowance Recorded [Member]
Impaired loans [Abstract]
Total impaired loans	1,848		1,848		4,626
Impaired Loans by class [Abstract]
Recorded Investment	1,848		1,848		4,626
Unpaid Principal Balance	2,692		2,692		6,386
Related Allowance	0		0		0
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	2,211	1,922	3,016	2,796
Interest Income Recognized	13	12	30	30
Commercial [Member] | Income Producing - Real Estate [Member] | With An Allowance Recorded [Member]
Impaired loans [Abstract]
Total impaired loans	26,935		26,935		22,781
Impaired Loans by class [Abstract]
Recorded Investment	26,935		26,935		22,781
Unpaid Principal Balance	30,985		30,985		29,400
Related Allowance	3,094		3,094		3,642
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	24,300	16,824	23,793	16,618
Interest Income Recognized	120	33	267	122
Commercial [Member] | Land, Land Development and Construction Real Estate [Member]
Impaired loans [Abstract]
Total impaired loans	12,997		12,997		12,581
Impaired Loans by class [Abstract]
Recorded Investment	12,997		12,997		12,581
Unpaid Principal Balance	15,490		15,490		14,298
Related Allowance	2,945		2,945		3,633
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	13,372	8,647	13,108	10,543
Interest Income Recognized	88	51	141	96
Commercial [Member] | Land, Land Development and Construction Real Estate [Member] | With No Related Allowance Recorded [Member]
Impaired loans [Abstract]
Total impaired loans	2,794		2,794		219
Impaired Loans by class [Abstract]
Recorded Investment	2,794		2,794		219
Unpaid Principal Balance	2,787		2,787		243
Related Allowance	0		0		0
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	2,877	514	1,991	876
Interest Income Recognized	36	14	36	27
Commercial [Member] | Land, Land Development and Construction Real Estate [Member] | With An Allowance Recorded [Member]
Impaired loans [Abstract]
Total impaired loans	10,203		10,203		12,362
Impaired Loans by class [Abstract]
Recorded Investment	10,203		10,203		12,362
Unpaid Principal Balance	12,703		12,703		14,055
Related Allowance	2,945		2,945		3,633
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	10,495	8,133	11,117	9,667
Interest Income Recognized	52	37	105	69
Commercial [Member] | Commercial and Industrial [Member]
Impaired loans [Abstract]
Total impaired loans	24,923		24,923		18,686
Impaired Loans by class [Abstract]
Recorded Investment	24,923		24,923		18,686
Unpaid Principal Balance	29,033		29,033		22,034
Related Allowance	3,816		3,816		2,977
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	22,850	11,053	21,462	13,478
Interest Income Recognized	200	109	316	158
Commercial [Member] | Commercial and Industrial [Member] | With No Related Allowance Recorded [Member]
Impaired loans [Abstract]
Total impaired loans	3,332		3,332		3,593
Impaired Loans by class [Abstract]
Recorded Investment	3,332		3,332		3,593
Unpaid Principal Balance	3,657		3,657		3,677
Related Allowance	0		0		0
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	3,896	1,800	3,795	3,143
Interest Income Recognized	44	17	46	17
Commercial [Member] | Commercial and Industrial [Member] | With An Allowance Recorded [Member]
Impaired loans [Abstract]
Total impaired loans	21,591		21,591		15,093
Impaired Loans by class [Abstract]
Recorded Investment	21,591		21,591		15,093
Unpaid Principal Balance	25,376		25,376		18,357
Related Allowance	3,816		3,816		2,977
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	18,954	9,253	17,667	10,335
Interest Income Recognized	156	92	270	141
Mortgage [Member] | With No Related Allowance Recorded [Member]
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment			75	108
Interest Income Recognized			2	2
Mortgage [Member] | 1-4 Family [Member]
Impaired loans [Abstract]
Total impaired loans	66,906		66,906		68,189
Impaired Loans by class [Abstract]
Recorded Investment	66,906		66,906		68,189
Unpaid Principal Balance	71,176		71,176		72,706
Related Allowance	6,980		6,980		7,716
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	66,900	72,750	67,329	72,809
Interest Income Recognized	725	770	1,449	1,565
Mortgage [Member] | 1-4 Family [Member] | With No Related Allowance Recorded [Member]
Impaired loans [Abstract]
Total impaired loans	7,651		7,651		6,975
Impaired Loans by class [Abstract]
Recorded Investment	7,651		7,651		6,975
Unpaid Principal Balance	10,350		10,350		9,242
Related Allowance	0		0		0
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	7,615	9,258
Interest Income Recognized	75	102
Mortgage [Member] | 1-4 Family [Member] | With An Allowance Recorded [Member]
Impaired loans [Abstract]
Total impaired loans	59,255		59,255		61,214
Impaired Loans by class [Abstract]
Recorded Investment	59,255		59,255		61,214
Unpaid Principal Balance	60,826		60,826		63,464
Related Allowance	6,980		6,980		7,716
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	59,285	63,492	59,928	63,714
Interest Income Recognized	650	668	1,300	1,351
Mortgage [Member] | Resort Lending [Member]
Impaired loans [Abstract]
Total impaired loans	24,474		24,474		25,315
Impaired Loans by class [Abstract]
Recorded Investment	24,474		24,474		25,315
Unpaid Principal Balance	25,301		25,301		27,031
Related Allowance	3,190		3,190		2,534
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	24,633	31,012	24,860	32,001
Interest Income Recognized	252	277	496	619
Mortgage [Member] | Resort Lending [Member] | With No Related Allowance Recorded [Member]
Impaired loans [Abstract]
Total impaired loans	5,913		5,913		7,156
Impaired Loans by class [Abstract]
Recorded Investment	5,913		5,913		7,156
Unpaid Principal Balance	6,375		6,375		7,680
Related Allowance	0		0		0
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	6,134	8,543	6,474	7,584
Interest Income Recognized	60	125	126	223
Mortgage [Member] | Resort Lending [Member] | With An Allowance Recorded [Member]
Impaired loans [Abstract]
Total impaired loans	18,561		18,561		18,159
Impaired Loans by class [Abstract]
Recorded Investment	18,561		18,561		18,159
Unpaid Principal Balance	18,926		18,926		19,351
Related Allowance	3,190		3,190		2,534
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	18,499	22,469	18,386	24,417
Interest Income Recognized	192	152	370	396
Mortgage [Member] | Home Equity Line of Credit - 1st Lien [Member]
Impaired loans [Abstract]
Total impaired loans	69		69		64
Impaired Loans by class [Abstract]
Recorded Investment	69		69		64
Unpaid Principal Balance	87		87		73
Related Allowance	31		31		35
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	70	24	67	16
Interest Income Recognized	0	1	1	1
Mortgage [Member] | Home Equity Line of Credit - 1st Lien [Member] | With No Related Allowance Recorded [Member]
Impaired loans [Abstract]
Total impaired loans	22		22		0
Impaired Loans by class [Abstract]
Recorded Investment	22		22		0
Unpaid Principal Balance	40		40		0
Related Allowance	0		0		0
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	11	0	7	0
Interest Income Recognized	0	0	0	0
Mortgage [Member] | Home Equity Line of Credit - 1st Lien [Member] | With An Allowance Recorded [Member]
Impaired loans [Abstract]
Total impaired loans	47		47		64
Impaired Loans by class [Abstract]
Recorded Investment	47		47		64
Unpaid Principal Balance	47		47		73
Related Allowance	31		31		35
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	59	24	60	16
Interest Income Recognized	0	1	1	1
Mortgage [Member] | Home Equity Line of Credit - 2nd Lien [Member]
Impaired loans [Abstract]
Total impaired loans	45		45		134
Impaired Loans by class [Abstract]
Recorded Investment	45		45		134
Unpaid Principal Balance	118		118		211
Related Allowance	0		0		0
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	93	126	106	123
Interest Income Recognized	1	1	2	2
Mortgage [Member] | Home Equity Line of Credit - 2nd Lien [Member] | With No Related Allowance Recorded [Member]
Impaired loans [Abstract]
Total impaired loans	45		45		134
Impaired Loans by class [Abstract]
Recorded Investment	45		45		134
Unpaid Principal Balance	118		118		211
Related Allowance	0		0		0
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	46	116
Interest Income Recognized	1	1
Mortgage [Member] | Home Equity Line of Credit - 2nd Lien [Member] | With An Allowance Recorded [Member]
Impaired loans [Abstract]
Total impaired loans	0		0		0
Impaired Loans by class [Abstract]
Recorded Investment	0		0		0
Unpaid Principal Balance	0		0		0
Related Allowance	0		0		0
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	47	10
Interest Income Recognized	0	0
Mortgage [Member] | Home Equity Installment - 2nd Lien [Member] | With An Allowance Recorded [Member]
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment			31	15
Interest Income Recognized			0	0
Installment [Member] | With No Related Allowance Recorded [Member]
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment			27,215	27,984
Interest Income Recognized			506	627
Installment [Member] | With An Allowance Recorded [Member]
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	135,058	123,437
Interest Income Recognized	1,188	1,011
Installment [Member] | Loans Not Secured By Real Estate [Member]
Impaired loans [Abstract]
Total impaired loans	808		808		790
Impaired Loans by class [Abstract]
Recorded Investment	808		808		790
Unpaid Principal Balance	887		887		844
Related Allowance	80		80		40
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	714	855	739	725
Interest Income Recognized	10	10	18	17
Installment [Member] | Loans Not Secured By Real Estate [Member] | With No Related Allowance Recorded [Member]
Impaired loans [Abstract]
Total impaired loans	529		529		637
Impaired Loans by class [Abstract]
Recorded Investment	529		529		637
Unpaid Principal Balance	600		600		688
Related Allowance	0		0		0
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	473	705	528	540
Interest Income Recognized	7	10	13	16
Installment [Member] | Loans Not Secured By Real Estate [Member] | With An Allowance Recorded [Member]
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	241	150	211	185
Interest Income Recognized	3	0	5	1
Installment [Member] | Others 2 [Member]
Impaired loans [Abstract]
Total impaired loans	22		22		24
Impaired Loans by class [Abstract]
Recorded Investment	22		22		24
Unpaid Principal Balance	22		22		24
Related Allowance	0		0		0
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	23	14	23	9
Interest Income Recognized	0	1	1	1
Installment [Member] | Others 2 [Member] | With No Related Allowance Recorded [Member]
Impaired loans [Abstract]
Total impaired loans	22		22		24
Impaired Loans by class [Abstract]
Recorded Investment	22		22		24
Unpaid Principal Balance	22		22		24
Related Allowance	0		0		0
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	23	14	23	9
Interest Income Recognized	0	1	1	1
Installment [Member] | Others 2 [Member] | With An Allowance Recorded [Member]
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	0	0	0	0
Interest Income Recognized	0	0	0	0
Installment [Member] | Home Equity Installment - 1st Lien [Member]
Impaired loans [Abstract]
Total impaired loans	3,497		3,497		3,332
Impaired Loans by class [Abstract]
Recorded Investment	3,497		3,497		3,332
Unpaid Principal Balance	3,634		3,634		3,489
Related Allowance	673		673		660
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	3,536	3,440	3,468	3,337
Interest Income Recognized	41	42	82	76
Installment [Member] | Home Equity Installment - 1st Lien [Member] | With No Related Allowance Recorded [Member]
Impaired loans [Abstract]
Total impaired loans	2,100		2,100		2,100
Impaired Loans by class [Abstract]
Recorded Investment	2,100		2,100		2,100
Unpaid Principal Balance	2,204		2,204		2,196
Related Allowance	0		0		0
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	1,827	1,919	1,918	1,870
Interest Income Recognized	32	28	52	48
Installment [Member] | Home Equity Installment - 1st Lien [Member] | With An Allowance Recorded [Member]
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	1,709	1,521	1,550	1,467
Interest Income Recognized	9	14	30	28
Installment [Member] | Home Equity Installment - 2nd Lien [Member]
Impaired loans [Abstract]
Total impaired loans	3,390		3,390		3,408
Impaired Loans by class [Abstract]
Recorded Investment	3,390		3,390		3,408
Unpaid Principal Balance	3,458		3,458		3,445
Related Allowance	921		921		1,062
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	3,456	3,560	3,440	3,474
Interest Income Recognized	36	42	76	79
Installment [Member] | Home Equity Installment - 2nd Lien [Member] | With No Related Allowance Recorded [Member]
Impaired loans [Abstract]
Total impaired loans	2,239		2,239		1,987
Impaired Loans by class [Abstract]
Recorded Investment	2,239		2,239		1,987
Unpaid Principal Balance	2,238		2,238		1,987
Related Allowance	0		0		0
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	1,987	1,999	1,987	1,963
Interest Income Recognized	30	28	51	49
Installment [Member] | Home Equity Installment - 2nd Lien [Member] | With An Allowance Recorded [Member]
Average recorded investment in and interest income earned on impaired loans by class [Abstract]
Average Recorded Investment	1,469	1,561	1,453	1,511
Interest Income Recognized	$ 6	$ 14	$ 25	$ 30

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Fair Values of Financial Instruments

6 Months Ended

Jun. 30, 2012

Fair Values of Financial Instruments [Abstract]

Fair Values of Financial Instruments

13.  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.

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

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

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

Net loans and loans held for sale:  The fair value of loans is calculated by discounting estimated future cash flows using estimated market discount rates that reflect credit and interest-rate risk inherent in the loans resulting in a Level 3 classification.  Impaired loans are valued at the lower of cost or fair value as described in note #12.  Loans held for sale are classified as Level 2 as described in note #12.

Accrued interest receivable and payable:  The recorded book balance of accrued interest receivable and payable approximate fair value and are classified at the same Level as the asset and liability they are associated with.

Derivative financial instruments:  Interest rate swaps have principally been valued based on the discounted value of contractual cash flows using a discount rate approximating current market rates and are classified as Level 2 as described in note #12  and the Amended Warrant has been valued based on a simulation analysis which considers potential outcomes for a large number of independent scenarios and is classified as Level 3 as described in note #12.

Deposits:  Deposits without a stated maturity, including demand deposits, savings, NOW and money market accounts, have a fair value equal to the amount payable on demand.  Each of these instruments is classified as Level 1.  Deposits with a stated maturity, such as certificates of 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 resulting in a Level 2 classification.  Deposits include those held for sale relating to branch sale.

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

Subordinated debentures:  Subordinated debentures have generally been valued based on a quoted market price of the specific or similar instruments resulting in a Level 1 or Level 2 classification.

The estimated recorded book balances and fair values follows:

	June 30, 2012
					Fair Value Measurements Using
					Quoted
					Prices
					in Active
					Markets		Significant		Significant
					for		Other		Un-
	Recorded		Fair Value		Identical		Observable		observable
	Book		Measure-		Assets		Inputs		Inputs
	Balance		ments		(Level 1)		(Level 2)		(Level 3)
	(In thousands)
Assets
Cash and due from banks	$	60,800	$	60,800	$	60,800	$	-	$	-
Interest bearing deposits		358,900		358,900		358,900		-		-
Trading securities		100		100		100		-		-
Securities available for sale		247,000		247,000		-		247,000		-
Federal Home Loan Bank and Federal Reserve Bank Stock		20,500		NA		NA		NA		NA
Net loans and loans held for sale		1,502,600		1,441,800		-		96,600		1,345,200
Accrued interest receivable		6,100		6,100		50		900		5,150
Derivative financial instruments		2,000		2,000		-		2,000		-
Liabilities
Deposits with no stated maturity	$	1,617,700	$	1,617,700	$	1,617,700	$	-	$	-
Deposits with stated maturity		565,100		567,600		-		567,600		-
Other borrowings		17,900		22,000		-		22,000		-
Subordinated debentures		50,200		34,600		6,500		28,100		-
Accrued interest payable		6,200		6,200		2,500		3,700		-
Derivative financial instruments		1,900		1,900		-		1,500		400

	December 31, 2011
	Recorded
	Book		Estimated
	Balance		Fair Value
	(In thousands)
Assets
Cash and due from banks	$	62,800	$	62,800
Interest bearing deposits		278,300		278,300
Trading securities		80		80
Securities available for sale		157,400		157,400
Federal Home Loan Bank and Federal   Reserve Bank Stock		20,800	NA
Net loans and loans held for sale		1,562,500		1,475,700
Accrued interest receivable		6,200		6,200
Derivative financial instruments		900		900
Liabilities
Deposits with no stated maturity	$	1,517,300	$	1,517,300
Deposits with stated maturity		568,800		571,600
Other borrowings		33,400		37,900
Subordinated debentures		50,200		16,100
Accrued interest payable		5,100		5,100
Derivative financial instruments		1,900		1,900

The fair values for commitments to extend credit and standby letters of credit are estimated to approximate their aggregate book balance, which is nominal and therefore are not disclosed.

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

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

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