SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(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) 527-9450

NONE

     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 þ NO o

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

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

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

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

Common stock, par value $1		22,584,455
Class		Outstanding at May 7, 2007

 

 

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

INDEX

			Number(s)
PART I — Financial Information
Item 1.	Consolidated Statements of Financial Condition March 31, 2007 and December 31, 2006			2

Consolidated Statements of Operations Three-month periods ended March 31, 2007 and 2006			3
Consolidated Statements of Cash Flows Three-month periods ended March 31, 2007 and 2006			4
Consolidated Statements of Shareholders’ Equity Three-month periods ended March 31, 2007 and 2006			5
Notes to Interim Consolidated Financial Statements			6-15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16-37
Item 3. Quantitative and Qualitative Disclosures about Market Risk			38
Item 4. Controls and Procedures			38
PART II — Other Information
Item 2. Changes in securities, use of proceeds and issuer purchases of equity securities			39
Item 6. Exhibits			39
Computation of Earnings Per Share
302 Certification of Chief Executive Officer
302 Certification of Chief Financial Officer
906 Certification of Chief Executive Officer
906 Certification of Chief Financial Officer

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

Part I

Item 1.

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

		March 31,				December 31,
		2007				2006
		(unaudited)
		(in thousands)
Assets
Cash and due from banks		$	67,209			$	73,142
Federal funds sold and other overnight investments			94,661
Cash and cash equivalents			161,870				73,142
Securities available for sale			430,949				434,785
Federal Home Loan Bank stock, at cost			14,326				14,325
Loans held for sale			33,959				31,846
Loans
Commercial			1,081,502				1,083,921
Real estate mortgage			858,288				865,522
Installment			354,705				350,273
Finance receivables			189,852				183,679
Total Loans			2,484,347				2,483,395
Allowance for loan losses			(30,908	)			(26,879	)
Net Loans			2,453,439				2,456,516
Property and equipment, net			72,230				67,992
Bank owned life insurance			41,557				41,109
Goodwill			66,735				48,709
Other intangibles			18,065				7,854
Assets of discontinued operations			339				189,432
Accrued income and other assets			62,102				64,188
Total Assets		$	3,355,571			$	3,429,898
Liabilities and Shareholders’ Equity
Deposits
Non-interest bearing		$	318,238			$	282,632
Savings and NOW			1,033,586				875,541
Time			1,551,708				1,444,618
Total Deposits			2,903,532				2,602,791
Federal funds purchased							84,081
Other borrowings			60,436				163,681
Subordinated debentures			64,197				64,197
Financed premiums payable			34,861				32,767
Liabilities of discontinued operations							183,676
Accrued expenses and other liabilities			40,728				40,538
Total Liabilities			3,103,754				3,171,731
Shareholders’ Equity
Preferred stock, no par value—200,000 shares authorized; none outstanding
Common stock, $1.00 par value—40,000,000 shares authorized; issued and outstanding: 22,584,455 shares at March 31, 2007 and 22,864,587 shares at December 31, 2006			22,584				22,865
Capital surplus			194,902				200,241
Retained earnings			30,924				31,420
Accumulated other comprehensive income			3,407				3,641
Total Shareholders’ Equity			251,817				258,167
Total Liabilities and Shareholders’ Equity		$	3,355,571			$	3,429,898

See notes to interim consolidated financial statements

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

		Three Months Ended
		March 31,
		2007				2006
		(unaudited)
		(in thousands, except
		per share amounts)
Interest Income
Interest and fees on loans		$	49,953			$	46,046
Securities available for sale
Taxable			2,477				2,848
Tax-exempt			2,600				2,869
Other investments			314				223
Total Interest Income			55,344				51,986
Interest Expense
Deposits			22,408				15,927
Other borrowings			3,304				4,324
Total Interest Expense			25,712				20,251
Net Interest Income			29,632				31,735
Provision for loan losses			8,139				1,386
Net Interest Income After Provision for Loan Losses			21,493				30,349
Non-interest Income
Service charges on deposit accounts			4,888				4,468
Mepco litigation settlement							2,800
Net gains on assets
Real estate mortgage loans			1,081				1,026
Securities			79
VISA check card interchange income			950				791
Real estate mortgage loan servicing			527				653
Title insurance fees			414				442
Other income			2,731				2,358
Total Non-interest Income			10,670				12,538
Non-interest Expense
Compensation and employee benefits			13,968				13,541
Occupancy, net			2,614				2,687
Furniture, fixtures and equipment			1,900				1,783
Data processing			1,438				1,342
Advertising			1,152				987
Branch acquisition and conversion costs			422
Goodwill impairment			343
Other expenses			6,129				5,898
Total Non-interest Expense			27,966				26,238
Income From Continuing Operations Before Income Tax			4,197				16,649
Income tax expense			305				3,593
Income From Continuing Operations			3,892				13,056
Discontinued operations, net of tax			351				(713	)
Net Income		$	4,243			$	12,343
Income Per Share From Continuing Operations
Basic		$	.17			$	.57
Diluted			.17				.56
Net Income Per Share
Basic			.19				.54
Diluted			.18				.53
Dividends Per Common Share
Declared		$	.21			$	.19
Paid			.20				.18

See notes to interim consolidated financial statements

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

		Three months ended
		March 31,
		2007				2006
		(unaudited)
		(in thousands)
Net Income		$	4,243			$	12,343
Adjustments to Reconcile Net Income to Net Cash from Operating Activities
Proceeds from sales of loans held for sale			70,293				61,273
Disbursements for loans held for sale			(71,325	)			(61,321	)
Provision for loan losses			8,288				1,586
Depreciation and amortization of premiums and accretion of discounts on securities and loans			(2,584	)			(2,696	)
Net gains on sales of real estate mortgage loans			(1,081	)			(1,026	)
Net gains on securities			(79	)
Goodwill impairment			343
Deferred loan fees			(82	)			(53	)
Increase (decrease) in accrued income and other assets			813				(3,039	)
Decrease in accrued expenses and other liabilities			(4,776	)			(6,433	)
			(190	)			(11,709	)
Net Cash from Operating Activities			4,053				634
Cash Flow from (used in) Investing Activities
Proceeds from the sale of securities available for sale			6,367
Proceeds from the maturity of securities available for sale			8,790				2,622
Principal payments received on securities available for sale			8,094				9,530
Purchases of securities available for sale			(19,000	)			(400	)
(Increase) decrease portfolio loans originated, net of principal payments			4,135				(54,542	)
Acquisition of business offices, less cash received			210,053
Proceeds from sale of insurance premium finance business			175,901
Capital expenditures			(2,642	)			(4,579	)
Net Cash from (used in) Investing Activities			391,698				(47,369	)
Cash Flow from (used in) Financing Activities
Net increase (decrease) in total deposits			(107,505	)			51,622
Net increase (decrease) in short-term borrowings			(169,823	)			21,093
Proceeds from Federal Home Loan Bank advances			32,000				700
Payments of Federal Home Loan Bank advances			(49,003	)			(25,261	)
Repayment of long-term debt			(500	)			(500	)
Net increase (decrease) in financed premiums payable			(1,854	)			6,765
Dividends paid			(4,584	)			(4,188	)
Repurchase of common stock			(5,989	)			(9,178	)
Proceeds from issuance of common stock			68				213
Net Cash from (used in) Financing Activities			(307,190	)			41,266
Net Increase (Decrease) in Cash and Cash Equivalents			88,561				(5,469	)
Change in cash and cash equivalents of discontinued operations			167				30
Cash and Cash Equivalents at Beginning of Period			73,142				67,522
Cash and Cash Equivalents at End of Period		$	161,870			$	62,083
Cash paid during the period for
Interest		$	28,502			$	22,470
Income taxes			4				63
Transfer of loans to other real estate			1,059				565

See notes to interim consolidated financial statements

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

		Three months ended
		March 31,
		2007				2006
		(unaudited)
		(in thousands)
Balance at beginning of period		$	258,167			$	248,259
Net income			4,243				12,343
Cash dividends declared			(4,739	)			(4,128	)
Issuance of common stock			369				1,771
Repurchase of common stock			(5,989	)			(9,178	)
Net change in accumulated other comprehensive income, net of related tax effect			(234	)			(300	)
Balance at end of period		$	251,817			$	248,767

See notes to interim consolidated financial statements.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. In our opinion, the accompanying unaudited consolidated financial statements contain all the adjustments necessary to present fairly our consolidated financial condition as of March 31, 2007 and December 31, 2006, and the results of operations for the three-month periods ended March 31, 2007 and 2006. Certain reclassifications have been made in the prior year financial statements to conform to the current year presentation. Our critical accounting policies include the assessment for other than temporary impairment on investment securities, the determination of the allowance for loan losses, the valuation of derivative financial instruments, the valuation of originated mortgage servicing rights, the valuation of deferred tax assets and the valuation of goodwill. Refer to our 2006 Annual Report on Form 10-K for a disclosure of our accounting policies.

2. 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. Loans on non-accrual status, past due more than 90 days, or restructured amounted to $48.1 million at March 31, 2007, and $39.2 million at December 31, 2006. (See Management’s Discussion and Analysis of Financial Condition and Results of Operations).

3. Comprehensive income for the three-month periods ended March 31 follows:

		Three months ended
		March 31,
		2007				2006
		(in thousands)
Net income		$	4,243			$	12,343
Net change in unrealized gain on securities available for sale, net of related tax effect			390				(428	)
Net change in unrealized gain (loss) on derivative instruments, net of related tax effect			(523	)			213
Reclassification adjustment for accretion on settled derivative financial instruments			(101	)			(85	)
Comprehensive income		$	4,009			$	12,043

The net change in unrealized gain on securities available for sale reflect net gains and losses reclassified into earnings as follows:

		Three months ended
		March 31,
		2007				2006
		(in thousands)
Gain (loss) reclassified into earnings		$	79			$
Federal income tax expense (benefit) as a result of the reclassification of these amounts from comprehensive income			28

4. Our reportable segments are based upon legal entities. We have five reportable segments: Independent Bank (“IB”), Independent Bank West Michigan (“IBWM”), Independent Bank South Michigan (“IBSM”), Independent Bank East Michigan (“IBEM”) and Mepco Finance Corporation (“Mepco”). We evaluate performance based principally on net income of the respective reportable segments.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

A summary of selected financial information for our reportable segments as of or for the three-month periods ended March 31, follows:

As of or for the three months ended March 31,

		IB				IBWM				IBSM				IBEM				Mepco				Other(1)				Elimination				Total
										(in thousands)
2007
Total assets		$	1,103,707			$	772,973			$	568,275			$	710,977			$	214,776			$	339,617			$	(354,754	)		$	3,355,571
Interest income			16,946				13,592				8,082				11,682				5,198				5				(161	)			55,344
Net interest income			8,938				8,206				4,111				6,714				3,268				(1,563	)			(42	)			29,632
Provision for loan losses			1,063				2,455				1,816				2,676				129												8,139
Income (loss) from continuing operations before income tax			2,792				2,399				(50	)			(165	)			1,388				(2,226	)			59				4,197
Discontinued operations, net of tax																			351												351
Net income (loss)			2,194				1,789				228				119				1,220				(1,321	)			14				4,243
2006
Total assets		$	1,029,276			$	727,604			$	490,211			$	724,119			$	432,301			$	346,789			$	(347,526	)		$	3,402,774
Interest income			15,771				12,301				7,490				11,284				5,307				5				(172	)			51,986
Net interest income			9,901				8,383				4,448				7,296				3,261				(1,512	)			(42	)			31,735
Provision for loan losses			340				232				542				218				54												1,386
Income (loss) from continuing operations before income tax			4,706				4,736				1,963				2,520				1,724				979				21				16,649
Discontinued operations, net of tax																			(713	)											(713	)
Net income (loss)			3,603				3,326				1,579				1,899				355				1,605				(24	)			12,343

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

5. Basic income per share is based on weighted average common shares outstanding during the period. Diluted income per share includes the dilutive effect of additional potential common shares to be issued upon the exercise of stock options and stock units for a deferred compensation plan for non-employee directors.

A reconciliation of basic and diluted earnings per share for the three-month periods ended March 31 follows:

		Three months ended
		March 31,
		2007				2006
		(in thousands, except per share amounts)
Income from continuing operations		$	3,892			$	13,056
Net income		$	4,243			$	12,343
Shares outstanding			22,829				22,938
Effect of stock options			257				340
Stock units for deferred compensation plan for non-employee directors			58				52
Shares outstanding for calculation of diluted earnings per share			23,144				23,330
Income per share from continuing operations
Basic		$	.17			$	.57
Diluted			.17				.56
Net income per share
Basic			.19				.54
Diluted			.18				.53

Weighted average stock options outstanding that were anti-dilutive totaled 0.8 million and 0.5 million for the three-months ended March 31, 2007 and 2006, respectively.

Per share data has been restated for a 5% stock dividend in 2006.

6. Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (“SFAS #133”) which was subsequently amended by SFAS #138, requires companies to record derivatives on the balance sheet as assets and liabilities measured at their fair value. The accounting for increases and decreases in the value of derivatives depends upon the use of derivatives and whether the derivatives qualify for hedge accounting.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Our derivative financial instruments according to the type of hedge in which they are designated under SFAS #133 follows:

						March 31, 2007
						Average
		Notional				Maturity				Fair
		Amount				(years)				Value
		(dollars in thousands)
Fair Value Hedge — pay variable interest-rate swap agreements		$	450,159				2.7			$	(3,112	)
Cash Flow Hedge
Pay fixed interest-rate swap agreements		$	54,500				2.2			$	900
Interest-rate cap agreements			225,500				2.0				945
		$	280,000				2.0			$	1,845
No hedge designation
Pay fixed interest-rate swap agreements		$	5,000				1.1				60
Pay variable interest-rate swap agreements			25,000				0.5				(77	)
Interest-rate cap agreements			55,000				1.7				50
Rate-lock real estate mortgage loan commitments			47,693				0.1				19
Mandatory commitments to sell real estate mortgage loans			46,017				0.1				24
Total		$	178,710				0.7			$	76

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 (See “Asset/liability management”). 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 cash flows due to changes 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 and interest-rate cap agreements.

Pay-fixed interest-rate swaps convert the variable-rate cash flows on debt obligations to fixed-rates. Under interest-rate caps, we will receive cash if interest rates rise above a predetermined level. As a result, we effectively have variable rate debt with an established maximum rate.

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 balance sheet to reflect the then current fair value of Cash Flow Hedges. The related gains or losses are reported in other comprehensive income and are subsequently reclassified into earnings, as a yield adjustment in the same period in which the related interest on the hedged items (primarily variable-rate debt obligations) affect earnings. It is anticipated that approximately $0.3 million, net of tax, of unrealized gains on Cash Flow Hedges at March 31, 2007 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 are immediately recognized as interest expense. The maximum term of any Cash Flow Hedge at March 31, 2007 is 5.2 years.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

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

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

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

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The impact of SFAS #133 on net income and other comprehensive income for the three-month periods ended March 31, 2007 and 2006 is as follows:

		Income (Expense)
						Other
						Comprehensive
		Net Income				Income				Total
						(in thousands)
Change in fair value during the three- month period ended March 31, 2007
Interest-rate swap agreements not designated as hedges		$	17							$	17
Interest-rate cap agreements not designated as hedges			(38	)							(38	)
Rate Lock Commitments			50								50
Mandatory Commitments			(75	)							(75	)
Ineffectiveness of Fair value hedges			5								5
Ineffectiveness of Cash flow hedges			3								3
Cash flow hedges						$	(1,425	)			(1,425	)
Reclassification adjustment							466				466
Total			(38	)			(959	)			(997	)
Income tax			(13	)			(335	)			(348	)
Net		$	(25	)		$	(624	)		$	(649	)

		Income (Expense)
						Other
						Comprehensive
		Net Income				Income				Total
						(in thousands)
Change in fair value during the three- month period ended March 31, 2006
Interest-rate swap agreements not designated as hedges		$	(62	)						$	(62	)
Interest-rate cap agreements not designated as hedges			29								29
Rate Lock Commitments			(160	)							(160	)
Mandatory Commitments			316								316
Ineffectiveness of Fair value hedges			6								6
Cash flow hedges						$	(632	)			(632	)
Reclassification adjustment							829				829
Total			129				197				326
Income tax			45				69				114
Net		$	84			$	128			$	212

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

7. Statement of Financial Accounting Standards No. 141, “Business Combinations,” (“SFAS #141”) and Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” (“SFAS #142”) effects how organizations account for business combinations and for the goodwill and intangible assets that arise from those combinations or are acquired otherwise.

Intangible assets, net of amortization, were comprised of the following at March 31, 2007 and December 31, 2006:

		March 31, 2007								December 31, 2006
		Gross								Gross
		Carrying				Accumulated				Carrying				Accumulated
		Amount				Amortization				Amount				Amortization
						(dollars in thousands)
Amortized intangible assets
Core deposit		$	31,326			$	14,148			$	20,545			$	13,679
Customer relationship			1,302				1,024				1,302				999
Covenants not to compete			1,520				911				1,520				835
Total		$	34,148			$	16,083			$	23,367			$	15,513
Unamortized intangible assets -
Goodwill		$	66,735							$	48,709

Amortization of intangibles has been estimated through 2012 and thereafter in the following table, and does not take into consideration any potential future acquisitions or branch purchases.

		(dollars in thousands)
Nine months ended December 31, 2007		$	2,803
Year ending December 31:
2008			3,072
2009			1,838
2010			1,310
2011			1,398
2012 and thereafter			7,644
Total		$	18,065

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Changes in the carrying amount of goodwill and core deposit intangible by reporting segment for the periods presented were as follows:

		IB				IBWM				IBSM				IBEM				Mepco				Other(1)				Total
										(dollars in thousands)
Goodwill
Balance, December 31, 2006		$	8,394			$	32							$	23,205			$	16,735			$	343			$	48,709
Acquired during period (2)			11,341							$	7,028																18,369
Impairment during period			(343	)																							(343	)
Balance, March 31, 2007		$	19,392			$	32			$	7,028			$	23,205			$	16,735			$	343			$	66,735
Balance, December 31, 2005		$	9,560			$	32							$	23,205			$	18,673			$	343			$	51,813
Acquired during period																			471	(3)							471
Balance, March 31, 2006		$	9,560			$	32							$	23,205			$	19,144			$	343			$	52,284
Core deposit
Balance, December 31, 2006		$	1,562			$	33			$	174			$	5,072			$				$	25			$	6,866
Acquired during period (2)			6,098								4,683																10,781
Amortization			(113	)			(3	)			(37	)			(312	)							(4	)			(469	)
Balance, March 31, 2007		$	7,547			$	30			$	4,820			$	4,760			$				$	21			$	17,178

During the three month period ended March 31, 2007 we recorded a goodwill impairment charge of $0.3 million at First Home Financial (FHF) which was acquired in 1998. FHF is a loan origination company based in Grand Rapids, Michigan that specializes in the financing of manufactured homes located in mobile home parks or communities and is a subsidiary of our IB segment above. Revenues and profits have declined at FHF over the last few years and have continued to decline in the first quarter of 2007. We test goodwill for impairment and based on the fair value of FHF the goodwill associated with FHF was reduced to zero. This amount is included in Goodwill Impairment in the Consolidated Statements of Operations.

8. We maintain performance-based compensation plans that includes a long-term incentive plan that permits the issuance of share based compensation awards, including stock options and restricted stock. Share based compensation awards, including stock options and restricted stock, are measured at fair value at the date of grant and expensed over the requisite service period.

All share based compensation awards outstanding at December 31, 2005 were fully vested and there were no new or modified share based grants during 2006 or the three month period ended March 31, 2007.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

A summary of outstanding stock option grants and transactions for the three month period ended March 31, 2007 follows:

		Number of Shares				Average Exercise Price
Outstanding at January 1, 2007			1,481,276			$	19.82
Granted
Exercised			7,233				9.35
Forfeited
Outstanding at March 31, 2007			1,474,043			$	19.88

The aggregate intrinsic value and weighted-average remaining contractual term of outstanding options at March 31, 2007 were $5.1 million and 6.1 years, respectively.

Common shares issued upon exercise of stock options come from currently authorized but unissued shares. The following summarizes certain information regarding options exercised during the three month periods ending March 31:

		2007				2006
		(in thousands)
Intrinsic value		$	80			$	261
Cash proceeds received		$	68			$	214
Tax benefit realized		$	28			$	92

9. On January 1, 2007 we adopted Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109,” (“FIN #48”), which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS #109, “Accounting for Income Taxes”. FIN #48 prescribes a recognition and measurement threshold for a tax position taken or expected to be taken in a tax return. FIN #48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The adoption of FIN #48 at January 1, 2007 did not have an impact on our financial statements.

At January 1, 2007 (date of adoption) and March 31, 2007 we had approximately $2.4 million and $2.5 million, respectively, of gross unrecognized tax benefits. Included in both of these amounts is approximately $0.1 million of interest. We classify penalties and interest in our financial statements as income taxes. All gross unrecognized tax benefits, if recognized, would affect our effective tax rate.

At January 1, 2007, U.S. Federal tax years 2003 through the present date remain open.

10. In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” (“SFAS #159”). This statement allows entities to voluntarily choose, at specified election dates, to measure many financial assets and financial liabilities (as well as certain non-financial instruments that are similar to financial instruments) at fair value. The election is made on an instrument-by- instrument basis and is irrevocable. The statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Earlier adoption of the Statement is

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

permitted as of the beginning of an entity’s fiscal year, provided the choice to early adopt is made within 120 days of the beginning of the fiscal year of adoption and the entity has not yet issued financial statements for any interim period of that fiscal year. We expect to adopt SFAS #159 on January 1, 2008.

11. On April 23, 2007 we filed a Form 8-K Current Report that included a press release (Exhibit 99.1) dated April 23, 2007 announcing our financial results for the quarter ended March 31, 2007 and supplemental financial data (Exhibit 99.2) to the press release. Those previously reported financial results have been revised to increase our allowance for loan losses and provision for loan losses by $650,000. The increase in the allowance for loan losses is to record a specific reserve on a residential real estate development loan collateralized by property located in East Lansing, Michigan. In the fourth quarter of 2006 a partial charge-off of $1.3 million was recorded on this loan (reducing the balance on the loan from $4.7 million to $3.4 million). Based on an updated appraisal, including a review appraisal received in early May 2007, we have determined that an additional specific reserve of $650,000 is required.

The additional specific reserve results in the following changes to our previously reported financial results:

		As Previously Reported				Adjustment				As Revised
		(in thousands, except per share amounts)
Consolidated Statement of Financial Condition as of March 31, 2007:
Allowance for Loan Losses		$	(30,258	)		$	(650	)		$	(30,908	)
Net loans			2,454,089				(650	)			2,453,439
Total assets			3,356,221				(650	)			3,355,571
Accrued expenses and other liabilities			40,949				(221	)			40,728
Total liabilities			3,103,975				(221	)			3,103,754
Retained earnings			31,353				(429	)			30,924
Total shareholders’ equity			252,246				(429	)			251,817
Total liabilities and shareholders’ equity			3,356,221				(650	)			3,355,571
Consolidated Statement of Operations for the three months ended March 31, 2007:
Provision for loan losses		$	7,489			$	650			$	8,139
Income from continuing operations before income tax			4,847				(650	)			4,197
Income tax expense			526				(221	)			305
Income from continuing operations			4,321				(429	)			3,892
Net income			4,672				(429	)			4,243
Income per share from continuing operations:
Basic			0.19				(0.02	)			0.17
Diluted			0.19				(0.02	)			0.17
Net income per share:
Basic			0.20				(0.01	)			0.19
Diluted			0.20				(0.02	)			0.18

12. The results of operations for the three-month periods ended March 31, 2007, are not necessarily indicative of the results to be expected for the full year.

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 consolidated financial statements contained elsewhere in this report as well as our 2006 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.

Branch acquisition We completed the acquisition of ten branches with total deposits of approximately $241.4 million from TCF National Bank on March 23, 2007. These branches are located in or near Battle Creek, Bay City and Saginaw, Michigan. As a result of this transaction, we received $210.1 million of cash. We used a portion of the proceeds from this transaction to payoff higher costing short term borrowings and brokered certificates of deposit (“Brokered CD’s) that matured prior to March 31, 2007 and the balance of funds were temporarily invested into short-term securities. Over the next several quarters we anticipate paying down maturing Brokered CD’s and short-term borrowings from the maturity or liquidation of these short-term investments. We expect that our interest expense as a percentage of average interest earning assets (our “Cost of Funds”) will decline during the last nine months of 2007 as a result of the payoff of higher costing maturing Brokered CD’s and short-term borrowings. We also anticipate that the acquisition of these branches will result in an increase in non-interest income, particularly service charges on deposit accounts and VISA check card interchange income. However, non-interest expenses will also increase in 2007 due to compensation and benefits for the employees at these branches as well as occupancy, furniture and equipment, data processing, communications, supplies and advertising expenses. We paid an 11.5% premium ($28.1 million), based on the deposit balances one week prior to closing, to acquire these branches and also reimbursed the seller $0.2 million for certain transaction related costs. Approximately $10.8 million of the premium paid was recorded as a core deposit intangible and will be amortized over 15 years. This will result in an increase in the amount of amortization of intangible assets in 2007. We also incurred other transaction costs (primarily investment banking fees, legal fees, severance costs and data processing conversion fees) of approximately $0.9 million, of which $0.5 million was capitalized as part of the acquisition price and $0.4 million was expensed in the first quarter of 2007. In addition, the transaction included $3.7 million for the personal property and real-estate associated with these branches.

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

discontinued operations in the Consolidated Statements of Financial Condition. We have elected to not make any reclassifications in the Consolidated Statements of Cash Flows.

Financial Condition

Summary Our total assets decreased by $74.3 million during the first three months of 2007. The decrease in total assets primarily reflects the aforementioned sale of our insurance premium finance business. Loans, excluding loans held for sale (“Portfolio Loans”), totaled $2.484 billion at March 31, 2007, essentially unchanged from December 31, 2006. (See “Portfolio Loans and asset quality.”)

Deposits totaled $2.904 billion at March 31, 2007, compared to $2.603 billion at December 31, 2006. The $300.7 million increase in total deposits during the period principally reflects the aforementioned branch acquisition. Other borrowings totaled $60.4 million at March 31, 2007, a decrease of $103.2 million from December 31, 2006. This was primarily attributable to the payoff of maturing borrowings with funds from the branch acquisition.

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

     Securities

		Amortized				Unrealized								Fair
		Cost				Gains				Losses				Value
						(in thousands)
Securities available for sale
March 31, 2007		$	425,826			$	8,808			$	3,685			$	430,949
December 31, 2006			430,262				7,367				2,844				434,785

Securities available for sale declined during the first quarter of 2007 because the flat yield curve has created a difficult environment for constructing investment security transactions that meet our profitability objectives. Generally we cannot earn the same interest-rate spread on securities as we can on Portfolio Loans. As a result, purchases of securities will tend to erode some of our profitability measures, including our return on assets.

At both March 31, 2007 and December 31, 2006, we had $12.5 million of asset-backed securities included in securities available for sale. All of our asset-backed securities are backed by mobile home loans and all are rated as investment grade (by the major rating agencies) except for one security with a book value of $1.7 million at March 31, 2007 that was down graded during 2004 to a below investment grade rating. We did not record any impairment charges on this security

during 2007 or 2006 but we did record an impairment charge of $0.2 million on this security in 2005 due primarily to credit related deterioration on the underlying mobile home loan collateral. We continue to closely monitor this particular security as well as our entire mobile home loan asset-backed securities portfolio. We do not foresee, at the present time, any significant risk of loss (related to credit issues) with respect to any of our other asset-backed securities. We did not record impairment charges on any other investment securities during the first quarters of 2007 or 2006.

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

		Three months ended
		March 31,
		2007				2006
		(in thousands)
Proceeds		$	6,367			$	—
Gross gains		$	97			$	—
Gross losses			(18	)			—
Net gains (losses)		$	79			$	—

Portfolio Loans and asset quality In addition to the communities served by our bank branch networks, our principal lending markets also include nearby communities and metropolitan areas. Subject to established underwriting criteria, we also participate in commercial lending transactions with certain non-affiliated banks and may also purchase real estate mortgage loans from third-party originators.

Although the management and board of directors of each of our banks retain authority and responsibility for credit decisions, we have adopted uniform underwriting standards. Further, our loan committee structure as well as the centralization of commercial loan credit services and the loan review process, generally provides requisite controls and promotes compliance with such established underwriting standards. Such centralized functions also facilitate compliance with consumer protection laws and regulations. There can be no assurance that the aforementioned centralization of certain lending procedures and the use of uniform underwriting standards will prevent us from the possibility of incurring significant credit losses in our lending activities and in fact the provision for loan losses increased significantly in the first quarter of 2007 (as well as in the fourth quarter of 2006).

Our 2003 acquisition of Mepco added the financing of insurance premiums for businesses and payment plans to purchase vehicle service contracts for consumers (warranty finance) to our lending activities. In January 2007 we sold Mepco’s insurance premium finance business. Mepco conducts its warranty finance activities across the United States. Mepco generally does not evaluate the creditworthiness of the individual customer but instead primarily relies on the payment plan collateral (the unearned vehicle service contract and unearned sales commission) in the event of default. As a result, we have established and monitor counterparty concentration limits in order to manage our collateral exposure. The counterparty concentration limits are primarily based on the AM Best rating and statutory surplus level for an insurance company and on other factors, including financial evaluation and distribution of concentrations, for warranty administrators and warranty sellers/dealers. The sudden failure of one of Mepco’s major

counterparties (an insurance company or warranty administrator) could expose us to significant losses.

Mepco also has established procedures for payment plan servicing/administration and collections, including the timely cancellation of the vehicle service contract, in order to protect our collateral position in the event of default. Mepco also has established procedures to attempt to prevent and detect fraud since the payment plan origination activities and initial customer contact is entirely done through unrelated third parties (automobile warranty administrators and sellers or automobile dealerships). 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.

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

Future growth of overall Portfolio Loans is dependent upon a number of competitive and economic factors. There was essentially no growth in Portfolio loans during the first quarter of 2007 reflecting both weak economic conditions in Michigan as well as a very competitive pricing climate. Declines in Portfolio Loans or continuing competition that leads to lower relative pricing on new Portfolio Loans could adversely impact our future operating results. We continue to view loan growth consistent with established quality and profitability standards as a major short and long-term challenge.

     Non-performing assets

		March 31,				December 31,
		2007				2006
		(dollars in thousands)
Non-accrual loans		$	41,075			$	35,683
Loans 90 days or more past due and still accruing interest			6,941				3,479
Restructured loans			55				60
Total non-performing loans			48,071				39,222
Other real estate			3,631				3,153
Total non-performing assets		$	51,702			$	42,375
As a percent of Portfolio Loans
Non-performing loans			1.93	%			1.58	%
Allowance for loan losses			1.24				1.08
Non-performing assets to total assets			1.54				1.24
Allowance for loan losses as a percent of non-performing loans			64				69

The increase in non-performing loans since year end 2006 is due primarily to an increase in non-performing commercial loans and real estate mortgage loans. The increase in non-performing commercial loans is due primarily to the addition of one commercial loan with a balance of approximately $4.9 million. This loan is for a commercial real estate development project in southeastern Michigan. Based on an updated appraisal and estimated liquidation and holding

costs, a $1.2 million specific allowance was established on this loan in the first quarter of 2007. The increase in non-performing real estate mortgage loans is primarily due to a rise in foreclosures reflecting both weak economic conditions and soft residential real estate values in many parts of Michigan.

Other real estate (“ORE”) and repossessed assets totaled $3.6 million and $3.2 million at March 31, 2007 and December 31, 2006, respectively. This increase is primarily a result of a $0.5 million rise in commercial ORE.

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 0.65% on an annualized basis in the first quarter of 2007 (or $4.0 million) compared to 0.18% in the first quarter of 2006 (or $1.1 million). The rise in loan net charge-offs reflect increases in the following categories: commercial loans $1.9 million; real estate mortgage loans $0.5 million; and installment/consumer loans $0.4 million. The commercial loan net charge-offs in the first quarter of 2007 include a $0.7 million charge-off a commercial lending relationship in the Lansing, Michigan area that involved borrower fraud. The remainder of the increases in loan net charge-offs primarily reflect higher levels of non-performing assets and lower collateral liquidation values, particularly on residential real estate.

At March 31, 2007, the allowance for loan losses totaled $30.9 million, or 1.24% of Portfolio Loans compared to $26.9 million, or 1.08% of Portfolio Loans at December 31, 2006.

Impaired loans totaled approximately $29.8 million, $23.2 million and $9.8 million at March 31, 2007, December 31, 2006 and March 31, 2006, respectively. At those same dates, certain impaired loans with balances of approximately $20.6 million, $14.0 million and $8.1 million, respectively had specific allocations of the allowance for loan losses, which totaled approximately $4.9 million, $2.6 million and $1.6 million, respectively. Our average investment in impaired loans was approximately $26.5 million and $8.2 million for the three-month periods ended March 31, 2007 and 2006, respectively. Cash receipts on impaired loans on non-accrual status are generally applied to the principal balance. Interest income recognized on impaired loans during both of the first quarters of 2007 and 2006 was approximately $0.1 million, of which the majority of these amounts were recorded in cash.

Allowance for loan losses

		Three months ended
		March 31,
		2007								2006
		Loan				Unfunded				Loan				Unfunded
		Losses				Commitments				Losses				Commitments
						(in thousands)
Balance at beginning of period		$	26,879			$	1,881			$	22,420			$	1,820
Additions (deduction)
Provision charged to operating expense			7,989				150				1,388				(2	)
Recoveries credited to allowance			555								630
Loans charged against the allowance			(4,515	)							(1,714	)
Balance at end of period		$	309,087			$	20,317			$	227,247			$	18,187
Net loans charged against the allowance to average Portfolio Loans (annualized)			0.65	%							0.18	%

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, mix and/or the general terms of the loan portfolios.

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

The second element reflects the application of our loan rating system. This rating system is similar to those employed by state and federal banking regulators. Loans that are rated below a certain predetermined classification are assigned a loss allocation factor for each loan classification category that is based upon a historical analysis of losses incurred. The lower the rating assigned to a loan or category, the greater the allocation percentage that is applied.

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

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

Mepco’s allowance for loan losses is determined in a similar manner as discussed above and takes into account delinquency levels, net charge-offs, unsecured exposure and other subjective factors deemed relevant to their lending activities.

Allocation of the Allowance for Loan Losses

		March 31,				December 31,
		2007				2006
		(in thousands)
Specific allocations		$	4,992			$	2,631
Other adversely rated loans			9,260				9,303
Historical loss allocations			8,833				7,482
Additional allocations based on subjective factors			7,823				7,463
		$	30,908			$	26,879

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

To attract new core deposits, we have implemented a high-performance checking program that utilizes a combination of direct mail solicitations, in-branch merchandising, gifts for customers opening new checking accounts or referring business to our banks and branch staff sales training. This program has generated increases in customer relationships as well as deposit service charges. We believe that the new relationships that result from these marketing and sales efforts provide valuable opportunities to cross sell related financial products and services.

Over the past two to three years we have also expanded our treasury management products and services for commercial businesses and municipalities or other governmental units and have also increased our sales calling efforts in order to attract additional deposit relationships from these sectors. Despite these efforts our core deposit growth has not kept pace with the growth of our Portfolio Loans and we have primarily utilized brokered certificates of deposit (“Brokered CD’s”) to fund this Portfolio Loan growth. We view long-term core deposit growth as a significant challenge. To partially address this challenge, in March 2007 we completed the acquisition of ten branches with deposits totaling $241.4 million as described above. Core deposits generally provide a more stable and lower cost source of funds than alternate sources such as short-term borrowings. As a result, the continued funding of Portfolio Loan growth with alternative sources of funds (as opposed to core deposits) may erode certain of our profitability measures, such as return on assets, and may also adversely impact our liquidity. (See “Liquidity and capital resources.”)

We have implemented strategies that incorporate federal funds purchased, other borrowings and Brokered CDs to fund a portion of our increases in 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.

Alternate sources of funds

		March 31,												December 31,
		2007												2006
						Average												Average
		Amount				Maturity				Rate				Amount				Maturity				Rate
		(dollars in thousands)
Brokered CDs(1)		$	882,128			1.8 years					4.91	%		$	1,055,010			1.9 years					4.72	%
Fixed rate FHLB advances(1)			43,270			5.9 years					6.09				58,272			4.6 years					5.66
Variable rate FHLB advances(1)															2,000			0.5 years					5.31
Securities sold under agreements to
Repurchase(1)															83,431			0.1 years					5.34
Federal funds purchased															84,081			1 day					5.40
Total		$	925,398			2.0 years					4.96	%		$	1,282,794			1.8 years					4.85	%

Other borrowed funds, principally advances from the Federal Home Loan Bank (the “FHLB”) and securities sold under agreements to repurchase (“Repurchase Agreements”), totaled $60.4 million at March 31, 2007, compared to $163.7 million at December 31, 2006. The $103.2 million decrease in other borrowed funds principally reflects the payoff of maturing variable rate FHLB advances and Repurchase Agreements with proceeds from the aforementioned branch acquisition.

Derivative financial instruments are employed to manage our exposure to changes in interest rates. (See “Asset/liability management.”) At March 31, 2007, we employed interest-rate swaps with an aggregate notional amount of $534.7 million and interest rate caps with an aggregate notional amount of $280.5 million. (See note #6 of Notes to Interim Consolidated Financial Statements.)

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

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

At March 31, 2007 we had $895.3 million of time deposits that mature in the next twelve months. Historically, a majority of these maturing time deposits are renewed by our customers or are Brokered CD’s that we expect to replace. Additionally $1.352 billion of our deposits at March 31, 2007 were in account types from which the customer could withdraw the funds on

demand. Changes in the balances of deposits that can be withdrawn upon demand are usually predictable and the total balances of these accounts have generally grown over time as a result of our marketing and promotional activities. There can be no assurance that historical patterns of renewing time deposits or overall growth in deposits will continue in the future. In addition, due to our recent acquisition of ten branches and assumption of $241.4 million of deposits we may experience a higher level of deposit account attrition at these branches over the next several months. The loss of a large amount of these deposits could have a material adverse impact on our results of operations. We have endeavored to make the transition for these new customers as transparent as possible in order to try and minimize any attrition, however there is no certainty that these efforts will be successful.

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

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

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

We have three special purpose entities that have issued $62.4 million of cumulative trust preferred securities outside of Independent Bank Corporation that currently qualifies as Tier 1 capital. These entities have also issued common securities and capital to Independent Bank Corporation. Independent Bank Corporation, in turn, issued subordinated debentures to these special purpose entities equal to the trust preferred securities, common securities and capital issued. The subordinated debentures represent the sole asset of the special purpose entities. The common securities, capital and subordinated debentures are included in our Consolidated Statements of Financial Condition at March 31, 2007, and December 31, 2006.

We have notified holders of $5.0 million of existing trust preferred securities that such securities are being redeemed on May 31, 2007. As a result of this redemption, we will be expensing approximately $0.1 million of unamortized capitalized issuance costs in the second quarter of 2007. We also expect to issue approximately $12.0 million in new trust preferred securities in a pooled offering during the second quarter of 2007. We expect the rate on the new trust preferred securities to be approximately 2% lower than the existing trust preferred securities that are being redeemed on May 31, 2007. We also anticipate redeeming an additional $7.5 million of existing trust preferred securities in November 2007.

In March 2006, the Federal Reserve Board issued a final rule that retains trust preferred securities in the Tier 1 capital of bank holding companies. After a transition period ending March 31, 2009, the aggregate amount of trust preferred securities and certain other capital elements will be limited to 25 percent of Tier 1 capital elements, net of goodwill (net of any associated

deferred tax liability). The amount of trust preferred securities and certain other elements in excess of the limit could be included in the Tier 2 capital, subject to restrictions. Based upon our existing levels of Tier 1 capital, trust preferred securities and goodwill, this final Federal Reserve Board rule would have reduced our Tier 1 capital to average assets ratio by approximately 24 basis points at March 31, 2007, (this calculation assumes no transition period).

To supplement our balance sheet and capital management activities, we periodically repurchase our common stock. The level of share repurchases in a given year generally reflects changes in our need for capital associated with our balance sheet growth. We previously disclosed that our board of directors had authorized the repurchase of up to 750,000 shares. This authorization expires on December 31, 2007. During the first quarter of 2007 we repurchased 295,000 shares at a weighted average price of $20.30 per share. As a result of an increase in intangible assets associated with the above described branch acquisition our tangible capital ratio declined to 5.01% at March 31, 2007. Our internal Capital Policy requires a minimum tangible capital ratio of at least 5% and a targeted tangible capital ratio range of 5.50% to 6.50%. Since we are currently outside of this range, it is unlikely that we will be repurchasing any shares of our common stock over the next two to three quarters (or until such time as our tangible capital ratio returns to the targeted range).

     Capitalization

		March 31,				December 31,
		2007				2006
		(in thousands)
Unsecured debt		$	4,500			$	5,000
Subordinated debentures			64,197				64,197
Amount not qualifying as regulatory capital			(1,847	)			(1,847	)
Amount qualifying as regulatory capital			62,350				62,350
Shareholders’ Equity
Preferred stock, no par value
Common stock, par value $1.00 per share			22,584				22,865
Capital surplus			194,902				200,241
Retained earnings			30,924				31,420
Accumulated other comprehensive income			3,407				3,641
Total shareholders’ equity			251,817				258,167
Total capitalization		$	318,667			$	325,517

Total shareholders’ equity at March 31, 2007 decreased $6.4 million from December 31, 2006, due primarily to share repurchases and cash dividends declared as well as a $0.2 million decrease in accumulated other comprehensive income. Shareholders’ equity totaled $251.8 million, equal to 7.50% of total assets at March 31, 2007. At December 31, 2006, shareholders’ equity was $258.2 million, which was equal to 7.53% of total assets.

Capital ratios

		March 31, 2007				December 31, 2006
Equity capital			7.50	%			7.53	%
Tier 1 leverage (tangible equity capital)			7.13				7.62
Tier 1 risk-based capital			9.02				9.62
Total risk-based capital			10.28				10.75

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

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

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

Results of Operations

Summary Net income from continuing operations totaled $3.9 million during the three months ended March 31, 2007, compared to $13.1 million during the comparable period in 2006. 2006 results include $2.8 million of other income related to the settlement of litigation involving the former owners of Mepco. (See “Litigation Matters.”) The decline in net income from continuing operations in 2007 is primarily due to a decrease in net interest income and increases in the provision for loan losses and non-interest expenses.

Key performance ratios

		Three months
		ended March 31,
		2007				2006
Net income from continuing operations (annualized) to
Average assets			0.48	%			1.57	%
Average equity			6.08				21.33
Net income (annualized) to
Average assets			0.53	%			1.49	%
Average equity			6.63				20.17
Earnings per common share from continuing operations
Basic		$	0.17			$	0.57
Diluted			0.17				0.56
Earnings per common share
Basic		$	0.19			$	0.54
Diluted			0.18				0.53

We believe that our earnings per share growth rate over a long period of time (five years or longer) is the best single measure of our performance. We strive to achieve an average annual long term earnings per share growth rate of approximately 10%. Accordingly, our focus is on long-term results taking into consideration that certain components of our revenues are cyclical in nature (such as mortgage-banking) which can cause fluctuations in our earnings per share from one period to another. Our primary strategies for achieving long-term growth in earnings per share include: earning asset growth (both organic and through acquisitions), diversification of revenues (within the financial services industry), effective capital management (efficient use of our shareholders’ equity) and sound risk management (credit, interest rate, liquidity and regulatory risks). As we have grown in size, and also considering the relatively low economic growth rates in Michigan (our primary market for banking), we believe achieving a 10% average annual long-term growth rate in earnings per share will be challenging. Based on these standards, we did not achieve our profitability objectives in the first quarter of 2007 (or in the last three quarters of 2006). We did however achieve an average annual compound growth rate in earnings per share of 18% for the five year period from 2000 through 2005. Our discussion and analysis of results of operations and financial condition will focus on these elements.

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

Tax equivalent net interest income totaled $31.2 million during the first quarter of 2007, which represents a $2.2 million or 6.7% decrease from the comparable quarter one year earlier. We review yields on certain asset categories and our net interest margin on a fully taxable equivalent basis. This presentation is not in accordance with generally accepted accounting principles (“GAAP”) but is customary in the banking industry. In this non-GAAP presentation, net interest

income is adjusted to reflect tax-exempt interest income on an equivalent before-tax basis. This measure ensures comparability of net interest income arising from both taxable and tax-exempt sources. The adjustments to determine tax equivalent net interest income were $1.6 million and $1.7 million for the first quarters of 2007 and 2006, respectively, and were computed using a 35% tax rate.

The decrease in tax equivalent net interest income primarily reflects a 41 basis point decline in the our tax equivalent net interest income as a percent of average interest-earning assets (the “net interest margin”) that was partially offset by a $60.9 million increase in the balance of average interest-earning assets. The increase in average interest-earning assets is primarily due to growth in loans that was partially offset by a decline in investment securities.

The net interest margin was equal to 4.23% during the first quarter of 2007 compared to 4.64% in the first quarter of 2006. The tax equivalent yield on average interest-earning assets rose to 7.74% in the first quarter of 2007 from 7.46% in the first quarter of 2006. This increase primarily reflects higher short-term interest rates that have resulted in variable rate loans re-pricing and new loans being originated at higher rates. The increase in the tax equivalent yield on average interest-earning assets was more than offset by a 69 basis point rise in our interest expense as a percentage of average interest-earning assets (the “cost of funds”) to 3.51% during the first quarter of 2007 from 2.82% during the first quarter of 2006. The increase in the our cost of funds reflects higher short-term interest rates that have resulted in increased rates on certain short-term and variable rate borrowings and on deposits.

Average Balances and Tax Equivalent Rates

		Three Months Ended
		March 31,
		2007												2006
		Average												Average
		Balance				Interest				Rate				Balance				Interest				Rate
										(dollars in thousands)
Assets
Taxable loans (1)		$	2,509,746			$	49,849				8.02	%		$	2,408,268			$	45,978				7.71	%
Tax-exempt loans (1,2)			9,513				160				6.82				5,894				105				7.22
Taxable securities			185,139				2,477				5.43				220,333				2,848				5.24
Tax-exempt securities (2)			238,654				4,121				7.00				255,798				4,533				7.19
Other investments			25,563				314				4.98				17,437				223				5.19
Interest Earning Assets - Continuing Operations			2,968,615				56,921				7.74				2,907,730				53,687				7.46
Cash and due from banks			53,228												54,357
Taxable loans – discontinued operations			33,084												195,140
Other assets, net			205,532												204,781
Total Assets		$	3,260,459											$	3,362,008
Liabilities
Savings and NOW		$	903,426				4,249				1.91			$	878,731				2,988				1.38
Time deposits			1,506,171				18,159				4.89				1,362,322				12,939				3.85
Long-term debt			2,994				34				4.61				4,994				57				4.63
Other borrowings			199,667				3,270				6.64				322,374				4,267				5.37
Interest Bearing Liabilities- Continuing Operations			2,612,258				25,712				3.99				2,568,421				20,251				3.20
Demand deposits			282,172												275,597
Time deposits – discontinued operations			24,732												167,460
Other liabilities			81,636												102,345
Shareholders’ equity			259,661												248,185
Total liabilities and shareholders’ equity		$	3,260,459											$	3,362,008
Tax Equivalent Net Interest Income						$	31,209											$	33,436
Tax Equivalent Net Interest Income as a Percent of Earning Assets											4.23	%											4.64	%