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

Commission file number 0-7818

INDEPENDENT BANK CORPORATION

 

(Exact name of registrant as specified in its charter)

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

230 West Main Street, P.O. Box 491, Ionia, Michigan 48846 (Address of principal executive offices)

(616) 527-9450
(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 þ   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 o   NO o

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES 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		24,029,125
Class		Outstanding at November 6, 2009

 

 

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

INDEX

				Number(s)
PART I —		Financial Information
Item 1.		Condensed Consolidated Statements of Financial Condition September 30, 2009 and December 31, 2008			2
		Condensed Consolidated Statements of Operations Three- and Nine-month periods ended September 30, 2009 and 2008			3
		Condensed Consolidated Statements of Cash Flows Nine-month periods ended September 30, 2009 and 2008			4
		Condensed Consolidated Statements of Shareholders’ Equity Nine-month periods ended September 30, 2009 and 2008			5
		Notes to Interim Condensed Consolidated Financial Statements			6-35
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			36-62
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			63
Item 4.		Controls and Procedures			63
PART II —		Other Information
Item 1A		Risk factors			64
Item 2.		Changes in securities, use of proceeds and issuer purchases of equity securities			64
Item 6.		Exhibits			65
EX-11
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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
Condensed Consolidated Statements of Financial Condition

		September 30,				December 31,
		2009				2008
		(unaudited)
		(in thousands)
Assets
Cash and due from banks		$	182,405			$	57,705
Trading securities			90				1,929
Securities available for sale			184,004				215,412
Federal Home Loan Bank and Federal Reserve Bank stock, at cost			27,855				28,063
Loans held for sale, carried at fair value			23,980				27,603
Loans
Commercial			863,556				976,391
Mortgage			770,297				839,496
Installment			318,185				356,806
Finance receivables			435,191				286,836
Total Loans			2,387,229				2,459,529
Allowance for loan losses			(73,710	)			(57,900	)
Net Loans			2,313,519				2,401,629
Other real estate and repossessed assets			31,323				19,998
Property and equipment, net			73,355				73,318
Bank owned life insurance			46,041				44,896
Goodwill			16,734				16,734
Other intangibles			10,783				12,190
Capitalized mortgage loan servicing rights			14,334				11,966
Accrued income and other assets			37,605				44,802
Total Assets		$	2,962,028			$	2,956,245
Liabilities and Shareholders’ Equity
Deposits
Non-interest bearing		$	316,281			$	308,041
Savings and NOW			1,085,557				907,187
Retail time			554,475				668,968
Brokered time			529,521				182,283
Total Deposits			2,485,834				2,066,479
Federal funds purchased							750
Other borrowings			162,341				541,986
Subordinated debentures			92,888				92,888
Financed premiums payable			30,159				26,636
Accrued expenses and other liabilities			32,465				32,629
Total Liabilities			2,803,687				2,761,368
Shareholders’ Equity
Preferred stock, Series A, no par value, $1,000 liquidation preference per share—200,000 shares authorized; 72,000 shares issued and outstanding at September 30, 2009 and December 31, 2008			68,982				68,456
Common stock, $1.00 par value—60,000,000 shares authorized; issued and outstanding: 24,029,125 shares at September 30, 2009 and 23,013,980 shares at December 31, 2008			23,832				22,791
Capital surplus			201,360				200,687
Accumulated deficit			(119,868	)			(73,849	)
Accumulated other comprehensive loss			(15,965	)			(23,208	)
Total Shareholders’ Equity			158,341				194,877
Total Liabilities and Shareholders’ Equity		$	2,962,028			$	2,956,245

See notes to interim condensed consolidated financial statements

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
		(unaudited)
		(in thousands)
Interest Income
Interest and fees on loans		$	45,290			$	46,427			$	134,915			$	141,303
Interest on securities
Taxable			1,475				2,078				4,913				6,558
Tax-exempt			841				1,652				2,924				5,998
Other investments			299				466				862				1,185
Total Interest Income			47,905				50,623				143,614				155,044
Interest Expense
Deposits			9,109				9,577				26,468				36,980
Other borrowings			3,537				7,099				12,021				20,511
Total Interest Expense			12,646				16,676				38,489				57,491
Net Interest Income			35,259				33,947				105,125				97,553
Provision for loan losses			22,285				19,788				77,916				43,456
Net Interest Income After Provision for Loan Losses			12,974				14,159				27,209				54,097
Non-interest Income
Service charges on deposit accounts			6,384				6,416				18,212				18,227
Net gains (losses) on assets
Mortgage loans			2,257				969				8,800				3,977
Securities			121				(6,711	)			3,770				(8,037	)
VISA check card interchange income			1,480				1,468				4,395				4,334
Mortgage loan servicing			(496	)			340				1,011				1,545
Title insurance fees			521				307				1,862				1,108
Other income			2,514				2,659				7,320				7,923
Total Non-interest Income			12,781				5,448				45,370				29,077
Non-interest Expense
Compensation and employee benefits			13,823				14,023				39,728				42,015
Vehicle service contract counterparty contingencies			8,713								11,728
Loan and collection			3,628				2,008				10,893				5,895
Occupancy, net			2,602				2,871				8,210				8,798
Loss on other real estate and repossessed assets			3,558				425				6,758				2,091
Data processing			2,146				1,760				6,252				5,197
Deposit insurance			1,729				275				5,670				1,526
Furniture, fixtures and equipment			1,727				1,662				5,424				5,304
Credit card and bank service fees			1,722				1,273				4,854				3,493
Advertising			1,335				1,575				4,198				3,843
Other expenses			4,174				4,784				12,690				13,936
Total Non-interest Expense			45,157				30,656				116,405				92,098
Loss Before Income Tax			(19,402	)			(11,049	)			(43,826	)			(8,924	)
Income tax (benefit)			(1,088	)			(5,723	)			(1,754	)			(7,285	)
Net Loss			(18,314	)			(5,326	)			(42,072	)			(1,639	)
Preferred dividends			1,075								3,225
Net Loss Applicable to Common Stock		$	(19,389	)		$	(5,326	)		$	(45,297	)		$	(1,639	)
Net Loss Per Common Share
Basic		$	(.81	)		$	(.23	)		$	(1.90	)		$	(.07	)
Diluted			(.81	)			(.23	)			(1.90	)			(.07	)
Dividends Per Common Share
Declared		$	.01			$	.01			$	.03			$	.13
Paid			.01				.01				.03				.33

See notes to interim condensed consolidated financial statements

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows

		Nine months ended
		September 30,
		2009				2008
		(unaudited)
		(in thousands)
Net Loss		$	(42,072	)		$	(1,639	)
Adjustments to Reconcile Loss to Net Cash from (used in) Operating Activities
Proceeds from the sale of trading securities			2,827				111
Proceeds from sales of loans held for sale			453,956				221,196
Disbursements for loans held for sale			(441,533	)			(208,126	)
Provision for loan losses			77,916				43,456
Depreciation, amortization of intangible assets and premiums and accretion of discounts on securities and loans			(32,140	)			(15,677	)
Net gains on sales of mortgage loans			(8,800	)			(3,977	)
Net (gains) losses on securities			(3,770	)			8,037
Deferred loan fees			(460	)			(463	)
Share based compensation			520				441
Increase in accrued income and other assets			(19,328	)			(16,469	)
Increase (decrease) in accrued expenses and other liabilities			1,655				(7,761	)
			30,843				20,768
Net Cash from (used in) Operating Activities			(11,229	)			19,129
Cash Flow from Investing Activities
Proceeds from the sale of securities available for sale			33,921				77,077
Proceeds from the maturity of securities available for sale			4,476				15,220
Principal payments received on securities available for sale			21,470				16,974
Purchases of securities available for sale			(15,806	)			(20,777	)
Purchase of Federal Home Loan Bank stock							(6,224	)
Redemption of Federal Reserve Bank stock			208
Portfolio loans originated, net of principal payments			50,756				3,171
Proceeds from the sale of other real estate			8,093				4,008
Capital expenditures			(6,529	)			(5,541	)
Net Cash from Investing Activities			96,589				83,908
Cash Flow from (used in) Financing Activities
Net increase (decrease) in total deposits			419,355				(344,764	)
Net increase (decrease) in other borrowings and federal funds purchased			(190,636	)			198,386
Proceeds from Federal Home Loan Bank advances			241,524				607,101
Payments of Federal Home Loan Bank advances			(431,283	)			(547,832	)
Repayment of long-term debt							(3,000	)
Net increase in financed premiums payable			3,523				9,836
Dividends paid			(3,143	)			(7,538	)
Proceeds from issuance of common stock							51
Net Cash from (used in) Financing Activities			39,340				(87,760	)
Net Increase in Cash and Cash Equivalents			124,700				15,277
Cash and Cash Equivalents at Beginning of Period			57,705				79,289
Cash and Cash Equivalents at End of Period		$	182,405			$	94,566
Cash paid during the period for
Interest		$	39,231			$	63,827
Income taxes			237				753
Transfer of loans to other real estate			28,281				16,519
Adoption of fair value option — securities transferred from available for sale to trading							15,018

See notes to interim condensed consolidated financial statements

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity

		Nine months ended
		September 30,
		2009				2008
		(unaudited)
		(in thousands)
Balance at beginning of period		$	194,877			$	240,502
Net loss			(42,072	)			(1,639	)
Preferred dividends			(2,700	)
Cash dividends declared			(721	)			(2,992	)
Issuance of common stock			1,194				1,392
Share based compensation			520				441
Net change in accumulated other comprehensive income, net of reclassification adjustment pursuant to the adoption of FASB ASC topic 825 and related tax effect			7,243				(12,419	)
Balance at end of period		$	158,341			$	225,285

See notes to interim condensed consolidated financial statements

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. 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 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, 2008 included in our annual report on Form 10-K.

In our opinion, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary to present fairly our consolidated financial condition as of September 30, 2009 and December 31, 2008, and the results of operations for the three and nine-month periods ended September 30, 2009 and 2008. 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 valuation of derivative financial instruments, the valuation of originated mortgage loan servicing rights, the valuation of deferred tax assets and the valuation of goodwill. Refer to our 2008 Annual Report on Form 10-K for a disclosure of our accounting policies.

2. In July 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) topic 105 “Generally Accepted Accounting Principals” (formerly Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162”). ASC 105 establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”). Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this standard did not have an effect on our consolidated financial statements.

In August 2009, the FASB issued Accounting Standards Update “ASU” 2009-5 “Measuring Liabilities at Fair Value”. This ASU provides amendments to ASC 820-10 “Fair Value Measurements and Disclosures” to address concerns regarding the determination of the fair value of liabilities. Because liabilities are often not “traded”, due to restrictions placed on their transferability, there is typically a very limited amount of trades (if any) from which to draw market participant data. As such, many entities have had to determine the fair value of a liability through the use of a hypothetical transaction. This ASU clarifies the valuation techniques that must be used when the liability subject to the fair value determination is not traded as an asset in an active market. The effective date is the first reporting period beginning after issuance. We do not expect the adoption of this ASU in the fourth quarter of 2009 to have a material effect on our consolidated financial statements.

In June 2009, the FASB issued FASB ASC topic 860 “Transfers and Servicing” (formerly SFAS No. 166 “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140”). This standard removes the concept of a qualifying special-purpose entity and limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized when the transferor has not transferred the entire financial asset to an entity that is not consolidated with the transferor in the financial statements being presented and/or when the transferor has continuing involvement with the transferred financial asset. The effective date of this standard is January 1, 2010. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.

In June 2009, the FASB issued FASB ASC 810-10, “Consolidation” (formerly SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)”). The standard amends tests for variable interest entities to determine whether a variable interest entity must be consolidated. FASB ASC 810-10 requires an entity to perform an analysis to determine whether an entity’s variable interest or interests give it a controlling financial interest in a variable interest entity. This standard requires ongoing reassessments of whether an entity is the primary beneficiary of a variable interest entity and enhanced disclosures that provide more transparent information about an entity’s involvement with a variable interest entity. The effective date of this standard is January 1, 2010. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.

In April 2009, the FASB issued ASC 320-10-65-1 (formerly FASB Staff Position (“FSP”) No. 115-2 and No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”). This standard amends existing guidance for determining whether impairment is other-than-temporary for debt securities and requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference

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

between amortized cost and fair value is recognized in earnings. For securities that do not meet the aforementioned 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. Additionally, this standard expands and increases the frequency of existing disclosures about other-than-temporary impairments for debt and equity securities. This standard is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of this standard in the second quarter of 2009 did not have a material effect on our consolidated financial statements.

In April 2009, the FASB issued ASC 820-10-65-4 (formerly FSP No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset and Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”). This standard emphasizes that even if there has been a significant decrease in the volume and level of activity, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants. This standard provides a number of factors to consider when evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity. In addition, when transactions or quoted prices are not considered orderly, adjustments to those prices based on the weight of available information may be needed to determine the appropriate fair value. This standard is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. The adoption of this standard in the second quarter of 2009 did not have a material effect on our consolidated financial statements.

In April 2009, the FASB issued ASC 825-10-65-1 (formerly FSP No. 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”). This standard amends ASC topic 825 “Financial Instruments” (formerly Statement of Financial Accounting Standards (“SFAS”) No. 107, “Disclosures about Fair Value of Financial Instruments”), to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies that were previously only required in annual financial statements. This standard is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of this standard at June 30, 2009 did not have a material impact on our consolidated financial statements as it only required disclosures which are included in note 13.

In May 2009, the FASB issued ASC topic 855 “Subsequent Events” (formerly SFAS No. 165, “Subsequent Events”). This standard establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This standard is effective for financial statements issued for interim or annual periods ending after June 15, 2009. We adopted this statement during the second quarter of 2009. We have evaluated subsequent events through November 6, 2009 which represents the date our financial statements included in our September 30, 2009 Form 10-Q were filed with the Securities and Exchange Commission (financial statement issue date). We have not evaluated subsequent events relating to these financial statements after that date.

In February 2008, the FASB issued ASC 820-10-65-1 (formerly FSP 157-2, “Effective Date of FASB Statement No. 157”). This standard delays the effective date of SFAS #157, “Fair Value measure for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after

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

November 15, 2008, and interim periods within those fiscal years. The adoption of this standard on January 1, 2009 did not have a material impact on our consolidated financial statements.

In March 2008, the FASB issued ASC 815-10-65-1 (formerly SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133”). This standard amends and expands the disclosure requirements of FASB ASC topic 815 “Derivatives and Hedging” (previously SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”) and requires qualitative disclosure about objectives and strategies for using derivative and hedging instruments, quantitative disclosures about fair value amounts of the instruments and gains and losses on such instruments, as well as disclosures about credit-risk features in derivative agreements. This standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. We adopted this standard on January 1, 2009.

In June 2008, the FASB amended certain provisions of ASC 260-10-45 (formerly FASB Staff Position EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities”). These provisions address whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore need to be included in the earnings allocation in computing earnings per share under the two class method. These provisions are effective for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period earnings per share data presented shall be adjusted retrospectively. The adoption of these provisions on January 1, 2009 had the effect of treating our unvested share payment awards as participating in the earnings allocation when computing our basic earnings per share. Prior period earnings per share data has been adjusted to treat unvested share awards as participating.

3. Securities available for sale consist of the following:

		Amortized				Unrealized
		Cost				Gains				Losses				Fair Value
		(In thousands)
September 30, 2009
U.S. agency residential mortgage-backed		$	49,351			$	1,411			$	95			$	50,667
Private label residential mortgage-backed			40,877				193				7,146				33,924
Other asset-backed			6,015								173				5,842
Obligations of states and political subdivisions			76,257				2,056				197				78,116
Trust preferred			17,906				44				2,495				15,455
Total		$	190,406			$	3,704			$	10,106			$	184,004
December 31, 2008
U.S. agency residential mortgage-backed		$	47,376			$	715			$	62			$	48,029
Private label residential mortgage-backed			48,921								12,034				36,887
Other asset-backed			8,276				338				1,193				7,421
Obligations of states and political subdivisions			105,499				1,638				1,584				105,553
Trust preferred			17,874								5,168				12,706
Preferred stock			3,800				1,016								4,816
Total		$	231,746			$	3,707			$	20,041			$	215,412

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)
September 30, 2009
U.S. agency residential mortgage-backed		$	7,497			$	95											$	7,497			$	95
Private label residential mortgage-backed										$	20,020			$	7,146				20,020				7,146
Other asset backed			2,366				88				2,634				85				5,000				173
Obligations of states and political subdivisions			2,748				46				2,367				151				5,115				197
Trust preferred											10,564				2,495				10,564				2,495
Total		$	12,611			$	229			$	35,585			$	9,877			$	48,196			$	10,106
December 31, 2008
U.S. agency residential mortgage-backed		$	4,827			$	62											$	4,827			$	62
Private label residential mortgage-backed			23,297				5,224			$	13,590			$	6,810				36,887				12,034
Other asset backed			5,838				1,193												5,838				1,193
Obligations of states and subdivisions			31,273				1,507				1,258				77				32,531				1,584
Trust preferred			9,490				2,409				3,132				2,759				12,622				5,168
Total		$	74,725			$	10,395			$	17,980			$	9,646			$	92,705			$	20,041

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. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized in earnings.

For securities that do not meet the aforementioned 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.

U.S. Agency residential mortgage-backed securities — at September 30, 2009 we had 6 securities whose fair market value is less than amortized cost. The unrealized losses are largely attributed to rising interest rates. 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 and other asset-backed securities — at September 30, 2009 we had 19 securities whose fair market value is less than amortized cost. 18 of the issues are rated by a major rating agency as investment grade while 1 is below investment grade. Pricing conditions in the private label residential mortgage and asset-backed security markets are characterized by limited recent transactions, significant implied liquidity risk premiums, a wide bid / ask spread and an absence of new issuances of similar securities. This market has been “closed” to new issuance since the third quarter of 2007. Investors in this asset class have suffered significant losses and at present, there are few active buyers for this product. During the third quarter of 2009, trading activity increased modestly as some buyers came into the market in anticipation of rising demand for these securities from the U.S. Treasury Department’s pending Public-Private Investment Program. The unrealized losses are largely attributable to credit spread widening on these securities. The underlying loans within these securities include Jumbo (60%), Alt A (25%) and manufactured housing (15%).

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

		September 30, 2009								December 31, 2008
						Net								Net
		Fair				Unrealized				Fair				Unrealized
		Value				Gain (Loss)				Value				Gain (Loss)
		(In thousands)
Private label residential mortgage-backed
Jumbo		$	23,865			$	(5,302	)		$	26,139			$	(9,349	)
Alt-A			10,059				(1,651	)			10,748				(2,685	)
Other asset-backed — Manufactured housing			5,842				(173	)			7,421				(855	)

All of the private label mortgage-backed transactions have geographic concentrations in California, ranging from 29% to 60% of the collateral pool. Typical exposure levels to California (median exposure is 43%) are consistent with overall market collateral characteristics. Six transactions have modest exposure to Florida, ranging from 5% to 11%, and one transaction has modest exposure to Arizona (5%). The underlying collateral pools do not have meaningful exposure to Nevada, 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 mortgage-backed securities. The majority of transactions are backed by fully amortizing loans. However, eight transactions have concentrations in interest only loans ranging from 31% to 94%. The structure of the mortgage and asset-backed securities portfolio provides protection to credit losses. The portfolio primarily consists of senior securities as demonstrated by the following: super senior (6%), senior (73%), senior support (13%) and mezzanine (8%). The mezzanine classes are from seasoned transactions (62 to 92 months) with significant levels of subordination (7% to 22%). Each private label mortgage and asset-backed security has sufficient credit enhancement via subordination to 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. While the levels of identified payment problems continue to escalate in certain securities, the amount of subordination protection remains adequate. Additionally, payment performance improved for several structures during the third quarter of 2009. All of these securities are receiving principal and interest payments. Most of these transactions are pass-through structures, receiving pro rata principal and interest payments from a dedicated collateral pool. The non-receipt 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, certain securities, including the one security with a rating below investment grade, were reviewed for recovery utilizing a cash flow projection. The scope of review included securities that account for 97% of the $7.1 million in unrealized losses. In our analysis, recovery was evaluated by discounting the expected cash flows back at the book yield. If the present value of the future cash flows is less than amortized cost, then there would be a credit loss. Our cash flow analysis forecasted cash flow from the underlying loans in each

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

transaction and then applied these cash flows to the bonds in the securitization. The cash flows from the underlying loans considered contractual payment terms (scheduled amortization), prepayments, defaults and severity of loss given default. The analysis used dynamic assumptions for prepayments, defaults and severity. Near term prepayment assumptions were based on recently observed prepayment rates. In many cases, recently observed prepayment rates are depressed due to a sharp decline in new jumbo loan issuance. This loan market is heavily dependent upon securitization for funding, and new securitization transactions have been minimal. Our model projects that prepayment rates gradually revert to historical levels. Near term default assumptions were based on recent default observations as well as the volume of existing real-estate owned, pending foreclosures and severe delinquencies. Default levels generally remain elevated or increase for a period of time sufficient to address the level of distressed loans in the transaction. Our model expects defaults to then decline gradually as the housing market and the economy stabilize, generally after 3 years. Current severity assumptions are based on recent observations. Loss severity is expected to decline gradually as the housing market and the economy stabilize, generally after 3 years. Our cash flow analysis forecasts complete recovery of our cost basis for each of the reviewed securities.

The private label mortgage-backed security with a below investment grade credit rating was evaluated for other than temporary impairment using the cash flow analysis discussed above. At September 30, 2009 this security had a fair value of $4.0 million and an unrealized loss of $4.2 million (amortized cost of $8.2 million). The underlying loans in this transaction are 30 year fixed rate jumbos with an average FICO of 748 and an average loan-to-value ratio of 73%. The loans backing this transaction were originated in 2007 and 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 are rated above investment grade. 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 was the primary evidence used to support a complete recovery of cost basis.

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

Obligations of states and political subdivisions — at September 30, 2009 we had 19 municipal securities whose fair market value is less than amortized cost. The unrealized losses are largely attributed to a widening of market spreads and continued illiquidity for certain issues. The majority of the securities are not rated by a major rating agency. Approximately 50% of the non rated securities originally had a AAA credit rating by virtue of bond insurance. However, the insurance provider no longer has an investment grade rating. The remaining non rated issues are small local issues that did not receive a credit rating due to the size of the transaction. The majority of the non rated securities have a recent satisfactory internal credit review. 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 September 30, 2009 we had 7 securities whose fair market value is less than amortized cost. All of our trust preferred securities are single issue securities issued by a bank. Pricing of trust preferred securities 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. 4 of the 7 securities are rated by a major rating

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

agency as investment grade, while 1 is split rated (this security is rated as investment grade by one major rating agency and below investment grade by another) and the other 2 are non-rated.

Our OTTI analysis is based on a security level financial analysis of the issuer. This review considers: external credit ratings, maturity date of the instrument, the scope of the bank’s operations, relevant financial metrics and recent issuer specific news. The analysis of relevant financial metrics includes: capital adequacy, assets quality, earnings and liquidity. We use the same OTTI review methodology for both rated and non-rated issues.

The two non-rated issues are relatively small banks and neither of these issues were ever rated. The issuers on the trust preferred securities, which had a combined book value of $2.8 million and a combined fair value of $1.8 million as of September 30, 2009, continue to make interest payments and have satisfactory credit metrics.

We recorded OTTI in prior periods on a separate unrated trust preferred security whose fair value at September 30, 2009 now exceeds its amortized cost. Specifically, this issuer has deferred interest payments on all of its trust preferred securities and is operating under a written agreement with the regulatory agencies that specifically prohibits dividend payments. The issuer is a relatively small bank with operations centered in southeast Michigan. The issuer reported a sizable loss in 2008 and has a high volume of nonperforming assets relative to tangible capital. This investment’s amortized cost has been written down to a price of 26.75, or $0.07 million, compared to a par value of 100.00, or $0.25 million.

The following table breaks out our trust preferred securities in further detail as of September 30, 2009 and December 31, 2008:

		September 30, 2009								December 31, 2008
						Net								Net
		Fair				Unrealized				Fair				Unrealized
		Value				Gain (Loss)				Value				Gain (Loss)
		(In thousands)
Trust preferred securities
Rated issues		$	13,551			$	(1,486	)		$	11,114			$	(3,874	)
Unrated issues — no OTTI			1,836				(967	)			1,508				(1,294	)
Unrated issues — with OTTI			68				2				84

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.

During the first quarter of 2009 we recorded an OTTI charge on a certain trust preferred security (discussed above) in the amount of $0.02 million. We recorded no OTTI during the third quarter of 2009.

The amortized cost and fair value of securities available for sale at September 30, 2009, by contractual maturity, follow. The actual maturity will differ from the contractual maturity because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

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

		Amortized				Fair
		Cost				Value
		(In thousands)
Maturing within one year		$	2,574			$	2,596
Maturing after one year but within five years			15,137				15,528
Maturing after five years but within ten years			28,027				28,737
Maturing after ten years			48,425				46,710
			94,163				93,571
U.S. agency residential mortgage-backed			49,351				50,667
Private label residential mortgage-backed			40,877				33,924
Other asset-backed			6,015				5,842
Total		$	190,406			$	184,004

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. Proceeds from the sale of available for sale securities were $33.9 million during nine months ended September 30, 2009. Gross gains of $2.9 million and gross losses of $0.1 million were realized on these sales during the nine months ended September 30, 2009.

Net gains on trading securities were $1.0 million during the nine months ended September 30, 2009 and is included in net gains (losses) on securities in the consolidated statements of operations. Of this amount, $0.1 million relates to gains recognized on trading securities still held at September 30, 2009.

4. 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 and past due more than 90 days amounted to $117.5 million at September 30, 2009, and $125.3 million at December 31, 2008.

Impaired loans are as follows :

		September 30,				December 31,
		2009				2008
		(in thousands)
Impaired loans with no allocated allowance		$	23,323			$	14,228
Impaired loans with an allocated allowance			96,016				76,960
Total impaired loans		$	119,339			$	91,188
Amount of allowance for loan losses allocated		$	22,940			$	16,788

Our average investment in impaired loans was approximately $99.5 million and $82.4 million for the nine-month periods ended September 30, 2009 and 2008, 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 first nine months of 2009 and 2008 was approximately $1.1 million and $0.5 million, respectively, the majority of which was received in cash.

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

An analysis of the allowance for loan losses is as follows:

		Nine months ended
		September 30,
		2009								2008
						Unfunded								Unfunded
		Loans				Commitments				Loans				Commitments
		(in thousands)
Balance at beginning of period		$	57,900			$	2,144			$	45,294			$	1,936
Additions (deduction)
Provision charged to operating expense			78,208				(292	)			44,039				(583	)
Recoveries credited to allowance			2,130								2,707
Loans charged against the allowance			(64,528	)							(38,142	)
Balance at end of period		$	73,710			$	1,852			$	53,898			$	1,353

5. Comprehensive income for the three- and nine-month periods ended September 30 follows:

		Three months ended								Nine months ended
		September 30,								September 30,
		2009				2008				2009				2008
		(in thousands)
Net loss		$	(18,314	)		$	(5,326	)		$	(42,072	)		$	(1,639	)
Net change in unrealized gain (loss) on securities available for sale, net of related tax effect			2,455				(7,529	)			6,456				(13,097	)
Net change in unrealized gain (loss) on derivative instruments, net of related tax effect			(72	)			(43	)			787				678
Comprehensive loss		$	(15,931	)		$	(12,898	)		$	(34,829	)		$	(14,058	)

The net change in unrealized loss on securities available for sale reflects net gains reclassified into earnings as follows:

		Three months ended								Nine months ended
		September 30,								September 30,
		2009				2008				2009				2008
		(in thousands)
Net gain reclassified into earnings		$	68			$	958			$	2,779			$	1,681
Federal income tax expense as a result of the reclassification of these amounts from comprehensive income							335								588

6. Our reportable segments are based upon legal entities. We currently have two reportable segments: Independent Bank (“IB”) and Mepco Finance Corporation (“Mepco”). These business segments are also differentiated based on the products and services provided. We evaluate performance based principally on net income 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 principally based on Brokered CD rates. 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.

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 nine-month periods ended September 30, follows:

As of or for the three months ended September 30,

		IB				Mepco(1)				Other(2)				Elimination(3)				Total
		(in thousands)
2009
Total assets		$	2,493,478			$	465,629			$	255,538			$	(252,617	)		$	2,962,028
Interest income			33,274				14,631												47,905
Net interest income			23,002				13,896				(1,639	)							35,259
Provision for loan losses			22,287				(2	)											22,285
Income (loss) before income tax			(20,072	)			2,405				(1,711	)			(24	)			(19,402	)
Net income (loss)			(18,089	)			1,510				(1,711	)			(24	)			(18,314	)
2008
Total assets		$	2,841,413			$	292,825			$	321,505			$	(317,123	)		$	3,138,620
Interest income			42,266				8,357												50,623
Net interest income			29,067				6,624				(1,744	)							33,947
Provision for loan losses			19,708				80												19,788
Income (loss) before income tax			(13,244	)			4,352				(2,134	)			(23	)			(11,049	)
Net income (loss)			(6,622	)			2,704				(1,393	)			(15	)			(5,326	)

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

As of or for the nine months ended September 30,

		IB				Mepco(1)				Other(2)				Elimination(3)				Total
		(in thousands)
2009
Total assets		$	2,493,478			$	465,629			$	255,538			$	(252,617	)		$	2,962,028
Interest income			104,281				39,333												143,614
Net interest income			73,217				36,914				(5,006	)							105,125
Provision for loan losses			77,609				307												77,916
Income (loss) before income tax			(55,769	)			17,449				(5,435	)			(71	)			(43,826	)
Net income (loss)			(47,656	)			11,090				(5,722	)			216				(42,072	)
2008
Total assets		$	2,841,413			$	292,825			$	321,505			$	(317,123	)		$	3,138,620
Interest income			131,536				23,508												155,044
Net interest income			84,423				18,517				(5,387	)							97,553
Provision for loan losses			43,359				97												43,456
Income (loss) before income tax			(14,834	)			12,524				(6,543	)			(71	)			(8,924	)
Net income (loss)			(5,227	)			7,779				(4,145	)			(46	)			(1,639	)

7. Basic income per share includes weighted average common shares outstanding during the period and participating share awards (see note 2). 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 and the nine-month periods ended September 30 follows:

		Three months								Nine months
		ended								ended
		September 30,								September 30,
		2009				2008				2009				2008
		(in thousands, except per share amounts)
Net loss applicable to common stock		$	(19,389	)		$	(5,326	)		$	(45,297	)		$	(1,639	)
Shares outstanding			24,029				23,014				23,811				22,975
Effect of stock options															14
Stock units for deferred compensation plan for non-employee directors			73				60				70				60
Shares outstanding for calculation of diluted earnings per share			24,102				23,074				23,881				23,049
Net loss per common share
Basic		$	(.81	)		$	(.23	)		$	(1.90	)		$	(.07	)
Diluted(1)			(.81	)			(.23	)			(1.90	)			(.07	)

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

Weighted average stock options outstanding that were anti-dilutive totaled 1.6 million for both the three-months ended September 30, 2009 and 2008, respectively. During the nine-month periods ended September 30, 2009 and 2008, weighted-average anti-dilutive stock options totaled 1.6 million and 1.5 million, respectively.

8. We are required 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.

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

		September 30, 2009
						Average
		Notional				Maturity				Fair
		Amount				(years)				Value
		(dollars in thousands)
Cash Flow Hedges
Pay fixed interest-rate swap agreements		$	135,000				1.6			$	(4,780	)
Interest-rate cap agreements			66,000				0.5				(4	)
		$	201,000				1.2			$	(4,784	)
No hedge designation
Pay fixed interest-rate swap agreements		$	25,000				1.2			$	(433	)
Interest-rate cap agreements			50,000				1.0
Rate-lock mortgage loan commitments			31,129				0.1				670
Mandatory commitments to sell mortgage loans			54,180				0.1				(415	)
Total		$	160,309				0.6			$	(178	)

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 and interest-rate cap agreements.

Through certain special purposes entities we issue trust preferred securities as part of our capital management strategy. Certain of these trust preferred securities are variable rate which exposes us to variability in cash flows . To mitigate our exposure to fluctuations in cash flows resulting from changes in interest rates, on approximately $20.0 million of variable rate trust preferred securities, we entered into a pay-fixed interest-rate swap agreement in September, 2007.

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

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

maximum rate. We pay an upfront premium on interest rate caps which is recognized in earnings in the same period in which the hedged item affects earnings. Unrecognized premiums from interest rate caps aggregated to $0.2 million and $0.5 million at September 30, 2009 and December 31, 2008, respectively.

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 $2.9 million, of unrealized losses on Cash Flow Hedges at September 30, 2009 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 September 30, 2009 is 5.3 years.

We also use long-term, callable 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 callable fixed-rate debt instruments (“Fair Value Hedges”). We had no Fair Value Hedges at September 30, 2009 and December 31, 2008.

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 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 gains on the sale of mortgage loans. We obtain market prices on Mandatory Commitments and Rate Lock Commitments. Net gains on the sale of mortgage loans, as well as net income may be more volatile as a result of these derivative instruments, which are not designated as hedges.

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

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

Fair Values of Derivative Instruments

		Asset Derivatives																Liability Derivatives
		September 30,								December 31,								September 30,								December 31,
		2009								2008								2009								2008
		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				$	4,780			Other liabilities				$	5,622
Interest-rate cap agreements										Other assets				$	2			Other liabilities					4			Other liabilities					10
Total															2								4,784								5,632
Derivatives not designated as hedging intruments
Pay-fixed interest rate swap agreements																		Other liabilities					433			Other liabilities					241
Interest-rate cap agreements										Other assets					202
Rate-lock mortgage loan commitments		Other assets				$	670			Other assets					839
Mandatory commitments to sell mortgage loans																		Other liabilities					415			Other liabilities					663
Total							670								1,041								848								904
Total derivatives						$	670							$	1,043							$	5,632							$	6,536

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

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

Three Month Periods Ended September 30,
										Location of
										Gain (Loss)
										Reclassified
										from				Gain (Loss)
		Gain (Loss)								Accumulated				Reclassified from
		Recognized in								Other				Accumulated Other
		Other								Comprehensive				Comprehensive
		Comprehensive								Income into				Income								Location of				Gain (Loss)
		Income								Income				into Income								Gain (Loss)				Recognized
		(Effective Portion)								(Effective				(Effective Portion)								Recognized				in Income(1)
		2009				2008				Portion)				2009				2008				in Income (1)				2009				2008
		(in thousands)
Cash Flow Hedges
Pay-fixed interest rate swap agreements		$	703			$	112			Interest expense				$	(892	)		$	(256	)		Interest expense								$	(1	)
Interest-rate cap agreements			154				281			Interest expense					(77	)			(203	)		Interest expense				$	8
Total		$	857			$	393							$	(969	)		$	(459	)						$	8			$	(1	)
Fair Value Hedges - pay-variable interest rate swap agreements																						Interest expense
No hedge designation
Pay-fixed interest rate swap agreements																						Interest expense				$	(58	)		$	11
Interest-rate cap agreements																						Interest expense					(208	)			(71	)
Rate-lock mortgage loan commitments																						Mortgage loan gains					92				(67	)
Mandatory commitments to sell mortgage loans																						Mortgage loan gains					(1,287	)			(24	)
Total																										$	(1,461	)		$	(151	)