SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED March 31, 2008

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

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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a 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		22,767,480
Class		Outstanding at May 7, 2008

 

 

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

INDEX

				Number(s)
PART I -		Financial Information
Item 1.		Consolidated Statements of Financial Condition March 31, 2008 and December 31, 2007			2
		Consolidated Statements of Operations Three-month periods ended March 31, 2008 and 2007			3
		Consolidated Statements of Cash Flows Three-month periods ended March 31, 2008 and 2007			4
		Consolidated Statements of Shareholders’ Equity Three-month periods ended March 31, 2008 and 2007			5
		Notes to Interim Consolidated Financial Statements		6-20
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		21-44
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			45
Item 4.		Controls and Procedures			45
PART II -		Other Information
Item 2.		Changes in securities, use of proceeds and issuer purchases of equity securities			46
Item 6.		Exhibits			46
Computation of Earnings Per Share
Certificate of the Chief Executive Officer Pursuant to Section 302
Certificate of the Chief Financial Officer Pursuant to Section 302
Certificate of the Chief Executive Officer Pursuant to Section 906
Certificate of the Chief Financial Officer Pursuant to Section 906

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

Consolidated Statements of Financial Condition

		March 31,				December 31,
		2008				2007
		(unaudited)
		(in thousands)
Assets
Cash and due from banks		$	58,210			$	79,289
Trading securities			12,855
Securities available for sale			345,478				364,194
Federal Home Loan Bank and Federal Reserve Bank stock, at cost			26,352				21,839
Loans held for sale, carried at fair value, at March 31, 2008			33,056				33,960
Loans
Commercial			1,060,290				1,066,276
Mortgage			866,229				873,945
Installment			363,743				368,478
Finance receivables			248,085				238,197
Total Loans			2,538,347				2,546,896
Allowance for loan losses			(49,911	)			(45,294	)
Net Loans			2,488,436				2,501,602
Property and equipment, net			73,343				73,558
Bank owned life insurance			43,413				42,934
Goodwill			66,754				66,754
Other intangibles			14,469				15,262
Capitalized mortgage loan servicing rights			15,297				15,780
Accrued income and other assets			69,748				60,910
Total Assets		$	3,247,411			$	3,276,082
Liabilities and Shareholders’ Equity
Deposits
Non-interest bearing		$	291,000			$	294,332
Savings and NOW			1,005,040				987,299
Retail time			708,156				707,419
Brokered time			247,603				516,077
Total Deposits			2,251,799				2,505,127
Federal funds purchased			45,831				54,452
Other borrowings			543,180				302,539
Subordinated debentures			92,888				92,888
Financed premiums payable			42,145				44,911
Liabilities of discontinued operations							34
Accrued expenses and other liabilities			33,028				35,629
Total Liabilities			3,008,871				3,035,580
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: 23,015,040 shares at March 31, 2008 and 22,647,511 shares at December 31, 2007			22,765				22,601
Capital surplus			196,675				195,302
Retained earnings			19,062				22,770
Accumulated other comprehensive income (loss)			38				(171	)
Total Shareholders’ Equity			238,540				240,502
Total Liabilities and Shareholders’ Equity		$	3,247,411			$	3,276,082

See notes to interim consolidated financial statements

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

		Three Months Ended
		March 31,				March 31,
		2008				2007
		(unaudited)
		(in thousands)
Interest Income
Interest and fees on loans		$	48,126			$	49,953
Interest on securities
Taxable			2,304				2,477
Tax-exempt			2,247				2,600
Other investments			357				314
Total Interest Income			53,034				55,344
Interest Expense
Deposits			16,212				22,408
Other borrowings			6,437				3,304
Total Interest Expense			22,649				25,712
Net Interest Income			30,385				29,632
Provision for loan losses			11,316				8,139
Net Interest Income After Provision for Loan Losses			19,069				21,493
Non-interest Income
Service charges on deposit accounts			5,647				4,888
Net gains (losses) on assets
Mortgage loans			1,867				1,081
Securities			(2,163	)			79
VISA check card interchange income			1,371				950
Mortgage loan servicing			(323	)			527
Title insurance fees			417				414
Other income			2,676				2,731
Total Non-interest Income			9,492				10,670
Non-interest Expense
Compensation and employee benefits			14,184				13,968
Occupancy, net			3,114				2,614
Loan and collection			1,925				1,006
Furniture, fixtures and equipment			1,817				1,900
Data processing			1,725				1,438
Advertising			1,100				1,152
Branch acquisition and conversion costs							422
Goodwill impairment							343
Other expenses			6,386				5,123
Total Non-interest Expense			30,251				27,966
Income (Loss) From Continuing Operations Before Income Tax			(1,690	)			4,197
Income tax expense (benefit)			(2,031	)			305
Income From Continuing Operations			341				3,892
Discontinued operations, net of tax							351
Net Income		$	341			$	4,243
Income Per Share From Continuing Operations
Basic		$	.02				.17
Diluted			.01				.17
Net Income Per Share
Basic		$	.02				.19
Diluted			.01				.18
Dividends Per Common Share
Declared		$	.11				.21
Paid			.21				.20

See notes to interim consolidated financial statements

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

		Three months ended
			March 31,
		2008				2007
		(unaudited)
		(in thousands)
Net Income		$	341			$	4,243
Adjustments to Reconcile Net Income to Net Cash from Operating Activities
Proceeds from sales of loans held for sale			85,916				70,293
Disbursements for loans held for sale			(83,145	)			(71,325	)
Provision for loan losses			11,316				8,288
Depreciation and amortization of premiums and accretion of discounts on securities and loans			(4,524	)			(2,584	)
Net gains on mortgage loans			(1,867	)			(1,081	)
Net (gains) losses on securities			2,163				(79	)
Goodwill impairment							343
Deferred loan fees			(130	)			(82	)
Share based compensation			148
(Increase) decrease in accrued income and other assets			(8,179	)			813
Decrease in accrued expenses and other liabilities			(614	)			(4,776	)
			1,084				(190	)
Net Cash from Operating Activities			1,425				4,053
Cash Flow from Investing Activities
Proceeds from the sale of securities available for sale			7,913				6,367
Proceeds from the maturity of securities available for sale			5,747				8,790
Principal payments received on securities available for sale			5,567				8,094
Purchases of securities available for sale			(15,403	)			(19,000	)
Purchase of Federal Home Loan Bank stock			(4,513	)
Decrease in portfolio loans originated, net of principal payments			9,567				4,135
Acquisition of business offices, less cash paid							210,053
Proceeds from sale of insurance premium finance business							175,901
Capital expenditures			(1,917	)			(2,642	)
Net Cash from Investing Activities			6,961				391,698
Cash Flow (used in) Financing Activities
Net decrease in total deposits			(254,000	)			(107,505	)
Net increase (decrease) in other borrowings and federal funds purchased			141,274				(169,823	)
Proceeds from Federal Home Loan Bank advances			243,000				32,000
Payments of Federal Home Loan Bank advances			(151,754	)			(49,003	)
Repayment of long-term debt			(500	)			(500	)
Net decrease in financed premiums payable			(2,766	)			(1,854	)
Dividends paid			(4,770	)			(4,584	)
Repurchase of common stock							(5,989	)
Proceeds from issuance of common stock			51				68
Net Cash (used in) Financing Activities			(29,465	)			(307,190	)
Net Increase (Decrease) in Cash and Cash Equivalents			(21,079	)			88,561
Change in cash and cash equivalents of discontinued operations							167
Cash and Cash Equivalents at Beginning of Period			79,289				73,142
Cash and Cash Equivalents at End of Period		$	58,210			$	161,870
Cash paid during the period for
Interest		$	25,763			$	28,502
Income taxes			54				4
Transfer of loans to other real estate			6,947				1,059
Adoption of fair value option — securities transferred from available for sale to trading			15,018

See notes to interim consolidated financial statements

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

		Three months ended
		March 31,
		2008				2007
		(unaudited)
		(in thousands)
Balance at beginning of period		$	240,502			$	258,167
Net income			341				4,243
Cash dividends declared			(2,531	)			(4,739	)
Issuance of common stock			1,389				369
Share based compensation			148
Repurchase of common stock							(5,989	)
Net change in accumulated other comprehensive income, net of reclassification adjustment pursuant to the adoption of SFAS #159 and related tax effect			(1,309	)			(234	)
Balance at end of period		$	238,540			$	251,817

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, 2008 and December 31, 2007, and the results of operations for the three-month periods ended March 31, 2008 and 2007. 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 loan servicing rights, the valuation of deferred tax assets and the valuation of goodwill. Refer to our 2007 Annual Report on Form 10-K for a disclosure of our accounting policies.

2. In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements", (“SFAS #157”). This statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position (“FSP”) 157-2, “Effective Date of FASB Statement No. 157". This FSP delays the effective date of SFAS #157 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 November 15, 2008, and interim periods within those fiscal years. The adoption of this statement on January 1, 2008 did not have a material impact on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, (“SFAS #159”). This statement provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. This new standard is effective for us on January 1, 2008. We elected the fair value option for certain securities available for sale that existed at January 1, 2008 and for loans held for sale originated on or after January 1, 2008. The cumulative effect adjustment to retained earnings resulting from the adoption of SFAS #159 was an after tax decrease of $1.5 million. This amount was reclassified from accumulated other comprehensive income.

In November, the Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value through Earnings” (“SAB 109”). Previously, Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments” (“SAB 105”) stated that in measuring the fair value of a derivative loan commitment, a company should not incorporate the expected net future cash flows related to the associated servicing of the loan. SAB 109 supersedes SAB 105 and indicates that the expected net future cash flows related to the associated servicing of the loan should be included in measuring fair value for all written loan commitments that are accounted for at fair value through earnings. SAB 105 also indicated that internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment, and SAB 109 retains that view. SAB 109 was effective for derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. As a result of adoption of SAB 109, gains on mortgage loans increased by $0.4 million, before tax during the first three months of 2008.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

3. 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 $102.2 million at

March 31, 2008, and $77.2 million at December 31, 2007.

Impaired loans totaled approximately $84.9 million, $61.3 million and $29.8 million at March 31, 2008, December 31, 2007 and March 31, 2007, respectively. At those same dates, certain impaired loans with balances of approximately $69.6 million, $53.4 million and $20.6 million, respectively had specific allocations of the allowance for loan losses, which totaled approximately $16.2 million, $10.7 million and $4.9 million, respectively. Our average investment in impaired loans was approximately $73.1 million and $26.5 million for the three-month periods ended March 31, 2008 and 2007, 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 quarters of 2008 and 2007 was approximately $0.2 million and $0.1 million, respectively, of which the majority of these amounts were recorded in cash.

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

		Three months ended
		March 31,
		2008								2007
						Unfunded								Unfunded
		Loans				Commitments				Loans				Commitments
		(in thousands)
Balance at beginning of period		$	45,294			$	1,936			$	26,879			$	1,881
Additions (deduction)
Provision charged to operating expense			11,383				(67	)			7,989				150
Recoveries credited to allowance			569								555
Loans charged against the allowance			(7,335	)							(4,515	)
Balance at end of period		$	49,911			$	1,869			$	30,908			$	2,031

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

		Three months ended
		March 31,
		2008				2007
		(in thousands)
Net income		$	341			$	4,243
Net change in unrealized gain (loss) on securities available for sale, net of related tax effect			172				390
Net change in unrealized gain (loss) on derivative instruments, net of related tax effect			(1,481	)			(523	)
Reclassification adjustment for accretion on settled derivative financial instruments							(101	)
Comprehensive income		$	(968	)		$	4,009

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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

		Three months ended
		March 31,
		2008				2007
		(in thousands)
Gain reclassified into earnings		$				$	79
Federal income tax expense as a result of the reclassification of these amounts from comprehensive income		$				$	28

5. Our reportable segments are based upon legal entities. We currently have two reportable segments: Independent Bank (“IB”) and Mepco Finance Corporation (“Mepco”). We evaluate performance based principally on net income of the respective reportable segments. In September 2007 we consolidated our four existing bank charters into one. Prior to this consolidation we reported each of the four banks as separate segments. Prior period information for the four banks has been consolidated under our current IB segment.

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				Mepco				Other(1)				Elimination				Total
		(in thousands)
2008
Total assets		$	2,961,661			$	277,146			$	337,565			$	(328,961	)		$	3,247,411
Interest income			45,860				7,174												53,034
Net interest income			26,739				5,515				(1,869	)							30,385
Provision for loan losses			11,242				74												11,316
Income (loss) before income tax			(3,031	)			3,821				(2,456	)			(24	)			(1,690	)
Net income (loss)			(497	)			2,373				(1,520	)			(15	)			341
2007
Total assets		$	3,153,381			$	214,776			$	336,946			$	(349,532	)		$	3,355,571
Interest income			50,302				5,198				5				(161	)			55,344
Net interest income			27,969				3,268				(1,563	)			(42	)			29,632
Provision for loan losses			8,010				129												8,139
Income (loss) from continuing operations before income tax			4,976				1,388				(2,337	)			170				4,197
Discontinued operations, net of tax							351												351
Net income (loss)			4,330				1,220				(1,393	)			86				4,243

6. 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, stock units for a deferred compensation plan for non-employee directors and restricted stock awards.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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

		Three months ended
		March 31,
		2008				2007
		(in thousands, except per share amounts)
Income from continuing operations		$	341			$	3,892
Net income		$	341			$	4,243
Shares outstanding			22,639				22,829
Effect of stock options			35				257
Stock units for deferred compensation plan for non-employee directors			62				58
Restricted stock awards			32
Shares outstanding for calculation of diluted earnings per share			22,768				23,144
Income per share from continuing operations
Basic		$	.02			$	.17
Diluted			.01				.17
Net income per share
Basic		$	.02			$	.19
Diluted			.01				.18

Weighted average stock options outstanding that were anti-dilutive totaled 1.4 million and 0.7 million for the three-months ended March 31, 2008 and 2007, respectively.

7. SFAS 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.

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

		March 31, 2008
		Average
		Notional				Maturity				Fair
		Amount				(years)				Value
		(dollars in thousands)
Fair Value Hedges — pay variable interest-rate swap agreements		$	106,159				2.6			$	499
Cash Flow Hedges
Pay fixed interest-rate swap agreements		$	139,500				2.7			$	(2,543	)
Interest-rate cap agreements			178,500				1.2				17
		$	318,000				1.9			$	(2,526	)
No hedge designation
Pay fixed interest-rate swap agreements		$	5,000				0.1			$	(7	)
Pay variable interest-rate swap agreements			5,000				0.1				7
Interest-rate cap agreements			112,000				1.5				22
Rate-lock mortgage loan commitments			25,961				0.1				339
Mandatory commitments to sell mortgage loans			57,581				0.1				(29	)
Total		$	205,542				0.9			$	332

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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 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 $1.0 million and $1.2 million at March 31, 2008 and December 31, 2007, 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 $1.0 million, net of tax, of unrealized losses on Cash Flow Hedges at March 31, 2008 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, 2008 is 6.8 years.

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.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

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 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, 2008 and 2007 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, 2008
Interest-rate cap agreements not designated as hedges		$	(94	)						$	(94	)
Rate Lock Commitments			387								387
Mandatory Commitments			34								34
Ineffectiveness of Fair value hedges			10								10
Ineffectiveness of Cash flow hedges
Cash flow hedges						$	(2,185	)			(2,185	)
Reclassification adjustment							(94	)			(94	)
Total			337				(2,279	)			(1,942	)
Income tax			118				(798	)			(680	)
Net		$	219			$	(1,481	)		$	(1,262	)

		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	)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

8. SFAS No. 141, “Business Combinations,” (“SFAS #141”) and SFAS 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, 2008 and December 31, 2007:

		March 31, 2008								December 31, 2007
		Gross								Gross
		Carrying				Accumulated				Carrying				Accumulated
		Amount				Amortization				Amount				Amortization
		(dollars in thousands)
Amortized intangible assets
Core deposit		$	31,326			$	17,348			$	31,326			$	16,648
Customer relationship			1,302				1,116				1,302				1,099
Covenants not to compete			1,520				1,215				1,520				1,139
Total		$	34,148			$	19,679			$	34,148			$	18,886
Unamortized intangible assets — Goodwill		$	66,754							$	66,754

Amortization of intangibles has been estimated through 2013 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, 2008		$	2,279
Year ending December 31:
2009			1,838
2010			1,310
2011			1,398
2012			1,115
2013 and thereafter			6,529
Total		$	14,469

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				Mepco				Other(1)				Total
		(dollars in thousands)
Goodwill
Balance, December 31, 2007		$	49,676			$	16,735			$	343			$	66,754
Acquired during period
Impairment during period
Balance, March 31, 2008		$	49,676			$	16,735			$	343			$	66,754
Balance, December 31, 2006		$	31,631			$	16,735			$	343			$	48,709
Acquired during period (2)			18,369												18,369
Impairment			(343	)											(343	)
Balance, March 31, 2007		$	49,657			$	16,735			$	343			$	66,735

During the first quarter of 2007 we recorded a goodwill impairment charge of $0.3 million at First Home Financial (FHF) which was acquired in 1998. We test goodwill for impairment and based on the fair value of FHF the goodwill associated with FHF was reduced to zero at March 31, 2007. This amount is included in Goodwill Impairment in the Consolidated Statements of Operations. FHF was a loan origination company based in Grand Rapids, Michigan that specialized in the financing of manufactured homes located in mobile home parks or communities and was a subsidiary of our IB segment above. Revenues and profits had declined at FHF over the last few years and a result of these declines, the operations of FHF ceased effective June 15, 2007 and this entity was dissolved on June 30, 2007.

9. We maintain performance-based compensation plans that include a long-term incentive plan that permits the issuance of share based compensation, including stock options and non-vested share awards. This plan, which is shareholder approved, permits the grant of share based awards for up to 0.1 million shares of common stock. We believe that such awards better align the interests of our officers with our shareholders. Share based compensation awards, are measured at fair value at the date of grant and are expensed over the requisite service period. Common shares issued upon exercise of stock options come from currently authorized but unissued shares.

Pursuant to our performance-based compensation plans we granted 0.2 million shares of non-vested common stock to our officers on January, 16, 2008. The non-vested common stock cliff vests in five years. We use the market value of the common stock on date of grant to measure compensation cost for these non-vested share awards. We also estimate expected forfeitures over the vesting period.

No share based awards were granted during the first quarter of 2007. All share based awards outstanding at December 31, 2005 were fully vested and there were no new or modified share based awards granted during 2006.

During the first quarter of 2008 we modified 0.1 million stock options originally issued in prior years for one former officer. These modified options vested immediately and the expense associated with this modification of $0.01 million was included in compensation and benefits expense for the three month period ended March 31, 2008. The modification consisted of

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

extending the date of exercise subsequent to resignation of the officer from 3 months to 12 months.

A summary of outstanding stock option grants and transactions at March 31, follows:

		Three-months Ended March 31, 2008
										Weighted-
										Average
										Remaining				Aggregated
						Average				Contractual				Intrinsic
		Number of				Exercise				Term				Value (in
		Shares				Price				(years)				thousands)
Outstanding at January 1,			1,658,861			$	19.55
Granted
Exercised			8,228				6.17
Forfeited			10,585				21.41
Outstanding at March 31,			1,640,048			$	19.57				5.17			$	471
Vested and expected to vest at March 31, 2008			1,603,109			$	19.64				5.08			$	471
Exercisable at March 31, 2008			1,417,984			$	20.06				4.56			$	467

A summary of non-vested restricted stock and transactions for the three month periods ended March 31, follows:

		2008
						Weighted
						Average
		Number of				Grant Date
		Shares				Fair Value
Outstanding at January 1,			50,596			$	16.69
Granted			220,023				7.63
Exercised
Forfeited			(6,279	)			9.32
Outstanding at March 31,			264,340			$	9.32

Total compensation cost recognized during the first three months of 2008 and 2007 for stock option and restricted stock grants was $0.1 million and zero, respectively. The corresponding tax benefit relating to this expense was $0.05 million for the first three months of 2008.

At March 31, 2008, the total expected compensation cost related to non vested stock option and restricted stock awards not yet recognized was $2.1 million. The weighted-average period over which this amount will be recognized is 3.5 years.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The following summarizes certain information regarding options exercised during the three-month periods ending March 31:

		Three months ended
		March 31,
		2008				2007
		(in thousands)
Intrinsic value		$	61			$	80
Cash proceeds received		$	51			$	68
Tax benefit realized		$	21			$	28

10. At March 31, 2008 and December 31, 2007 we had approximately $1.3 million and $2.6 million, respectively, of gross unrecognized tax benefits. If recognized, $1.0 million would affect our effective tax rate at March 31, 2008. The decrease in our gross unrecognized tax benefit during the first quarter of 2008 is the result of a favorable development on a tax position prevalent in our industry that we had previously reserved for. We do not expect the total amount of unrecognized tax benefits to significantly increase or decrease during the balance of 2008.

11. As discussed in Note 2, we adopted SFAS #157 and #159 on January 1, 2008. We elected to adopt the fair value option for certain securities available for sale that existed at January 1, 2008 (these securities are now classified as trading securities). We also elected the fair value option for loans held for sale that were originated on or after January 1, 2008. These elections were made for the following reasons: (1) trading securities — these securities are preferred stocks with no stated maturity. As such, other than temporary impairment analysis is subjective. By electing the fair value option, this subjectivity is eliminated. (2) Loans held for sale — recording these loans at fair value will better match the fair value accounting we have historically used on the mandatory commitments to sell these loans we enter into to reduce the impact of price fluctuations of the loans held for sale.

The following table summarizes the impact of adopting the fair value option for the available for sale securities on January 1, 2008. The adoption of SFAS #159 for loans held for sale had no impact on equity as this election was made for such loans that were originated on or after January 1, 2008. Amounts shown represent the cumulative-effect adjustment to retained earnings resulting from the adoption of SFAS #159. These amounts were reclassified from accumulated other comprehensive income.

		January 1,
		2008
Securities available for sale — amortized cost		$	17,353
Securities available for sale — fair value			15,018
Retained earnings cummulative effect adjustment, before tax			(2,335	)
Tax impact			817
Retained earnings cummulative effect, adjustment, after tax		$	(1,518	)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

SFAS #157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS #157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

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

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

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

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

Securities: Where quoted market prices are available in an active market, securities (trading or available for sale) are classified as level 1 of the valuation hierarchy. Level 1 securities include certain preferred stocks, trust preferred securities and mutual funds for which there are quoted prices in active markets. If quoted market prices are not available for the specific security, then fair values are estimated by (1) using quoted market prices of securities with similar characteristics, (2) matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices, or (3) a discounted cash flow analysis whose significant fair value inputs can generally be verified and do not typically involve judgment by management. These securities are classified as level 2 of the valuation hierarchy and include mortgage and other asset backed securities, municipal securities, certain trust preferred securities and one preferred stock security. Certain other securities’ fair values are based upon (1) an internal methodology that compares the observable market yield of the underlying security with the yield of the actual preferred stock and (2) on a liquidity agreement included in the bond indenture. These securities are classified as level 3 of the valuation hierarchy and include one municipal security and one preferred stock security.

Loans held for sale: The fair value of loans held for sale is based on mortgage backed security pricing for comparable assets.

Loans: From time to time, certain loans are considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” (“SFAS #114”). The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2008, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. When the fair value of the collateral is based on an observable market price, we record the impaired loan as nonrecurring Level 2. When the fair value of the collateral is based on an appraised value or when an appraised value is not available, we record the impaired loan as nonrecurring Level 3.

Brokered time deposits: The fair value of brokered time deposits is determined using a discounted cash flow model whose significant fair value inputs can generally be verified and do not typically involve judgment by management.

Capitalized mortgage loan servicing rights: The fair value of capitalized mortgage loan servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. The valuation model inputs and results can be compared to widely available published industry data for reasonableness.

Derivatives — The fair value of derivatives, in general, is determined using a discounted cash flow model whose significant fair value inputs can generally be verified and do not typically involve judgment by management.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Assets and liabilities measured at fair value, including financial liabilities for which we have elected the fair value option, are summarized below:

Changes in Fair Values for the

Three-Month Period Ended

March 31, 2008 for items Measured

Fair Value Measurements at

at Fair Value Pursuant to Election

March 31, 2008 Using

of the Fair Value Option

Quoted

Total

Prices

Change

in Active

in Fair

Fair Value

Markets

Significant

Significant

Values

Measure-

for

Other

Un-

Included

ments

Identical

Observable

observable

in Current

March 31,

Assets

Inputs

Inputs

Net Gains on Assets

Period

2008

(Level 1)

(Level 2)

(Level 3)

Securities

Loans

Earnings

(in thousands)

Measured at Fair Value on a Recurring basis:

Assets

Trading securities

$

12,855

$

9,985

$

2,870

$

(2,163

)

$

(2,163

)

Securities available for sale

345,478

2,651

321,330

$

21,497

Loans held for sale

33,056

33,056

$

400

400

Liabilities

Brokered time deposits

104,737

104,737

Derivatives (1)

1,695

1,695

Measured at Fair Value on a Non-recurring basis:

Assets

Capitalized mortgage loan servicing rights

15,297

15,297

Loans

68,694

68,694

Interest income is recorded within the Consolidated Statements of Operations based on the contractual amount of interest income earned on these financial assets. Dividend income is recorded based on cash dividends.

The following represent impairment charges recognized during the quarter relating to assets measured at fair value on a non-recurring basis:

	•		Capitalized mortgage loan servicing rights, whose individual strata are measured at the lower of cost or fair value had a carrying amount of $16.3 million with a valuation allowance of $1.0 million at March 31, 2008. A charge of $0.7 million was included in earnings during the first three months of 2008.
	•		Loans which are measured for impairment using the fair value of collateral for collateral dependent loans, had a carrying amount of $84.0 million, with a valuation allowance of $15.3 million at March 31, 2008. An additional provision for loan losses of $5.5 million was included in earnings during the first three months of 2008 relating to impaired loans.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The table below presents a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarter ended March 31, 2008:

		Securities
		Available
		For Sale
Beginning balance, January 1, 2008		$	21,497
Total gains (losses) realized and unrealized:
Included in earnings
Included in other comprehensive income
Purchases, issuances and settlements
Transfers in and/or out of Level 3
Ending balance, March 31, 2008		$	21,497
Amount of total gains (losses) for the period included in earnings
attributable to the change in unrealized gains (losses) relating to
assets still held at March 31, 2008		$	0

The following table reflects the difference between the aggregate fair value and the aggregate remaining contractual principal balance outstanding as of March 31, 2008, for loans held for sale for which the fair value option has been elected.

		Aggregate								Contractual
		Fair Value				Difference				Principal
		(in thousands)
Loans held for sale		$	33,056			$	400			$	32,656

12. The results of operations for the three-month period ended March 31, 2008, 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 2007 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.

Bank charter consolidation In September 2007 we completed the consolidation of our four bank charters into one. The primary reasons for this bank consolidation were:

	•		To better streamline our operations and corporate governance structure;
	•		To enhance our risk management processes, particularly credit risk management through more centralized credit management functions;
	•		To allow for more rapid development and deployment of new products and services; and
	•		To improve productivity and resource utilization leading to lower non-interest expenses.

Other than approximately $4 million to $4.5 million (pre-tax) in annual reductions in non-interest expenses, and except as noted above, we do not expect the bank consolidation to have a material impact on our financial condition or results of operations. However, to date the benefit of these reductions in non-interest expenses due to the bank consolidation have been more than offset by higher loan and collection costs and increased staffing associated with the management of significantly higher levels of watch credits, non-performing loans and other real estate owned. (See “Portfolio Loans and asset quality.”)

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 (the “branch acquisition”). 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 the proceeds from this transaction primarily to payoff higher costing short term borrowings and brokered certificates of deposit (“Brokered CDs”). The acquisition of these branches resulted in a subsequent increase in non-interest income, particularly service charges on deposit accounts and VISA check card interchange income. However, non-interest expenses also increased 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. As is customary in branch acquisitions, the purchase price ($28.1 million) was based on acquired deposit balances. We also reimbursed the seller $0.2 million for certain transaction related costs. Approximately $10.8 million of the premium paid was recorded as deposit customer relationship value, including core deposit value and is being amortized over 15 years (the remainder of the premium paid was recorded as goodwill). The branch acquisition has resulted in an increase in the amount of amortization of intangible assets. We also incurred other transaction costs (primarily investment banking fees, legal fees, severance costs and data processing conversion fees) of approximately $0.8 million, about half of which was capitalized as part of the acquisition price and the balance 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. Mepco continues to own and operate its warranty payment plan business. The assets, liabilities and operations of Mepco’s insurance premium finance business have been reclassified as discontinued operations.

Results of Operations

Summary Net income from continuing operations totaled $0.3 million during the three months ended March 31, 2008, compared to $3.9 million during the comparable period in 2007. The decline in net income from continuing operations in 2008 is primarily due to securities losses, an impairment charge on capitalized originated mortgage loan servicing rights and increases in the provision for loan losses and non-interest expenses. These changes were partially offset by increases in net interest income and gains on loan sales and a reduction of federal income taxes due to the release of a previously established tax reserve resulting from a favorable development on the treatment of a particular tax position.

     Key performance ratios

		Three months
		ended March 31,
		2008				2007
Net income from continuing operations (annualized) to
Average assets			0.04	%			0.48	%
Average equity			0.56				6.08
Net income (annualized) to
Average assets			0.04	%			0.53	%
Average equity			0.56				6.63
Earnings per common share from continuing operations
Basic		$	0.02			$	0.17
Diluted			0.01				0.17
Earnings per common share
Basic		$	0.02			$	0.19
Diluted			0.01				0.18

Our focus is on long-term results, taking into consideration certain components of our revenues that are cyclical in nature (such as mortgage banking) which can cause fluctuations in our earnings per share from year to year. Historically, we were successful in growing earnings per share. For example, we achieved an average annual compound growth rate in earnings per share of 18% for the five year period from 2000 through 2005. 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). Based on these standards, we did not achieve our profitability objectives during the first three months of 2008 or in 2007 or 2006. A significant increase in our provision for loan losses was the primary factor contributing to reduced profitability.

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

Tax equivalent net interest income totaled $31.8 million during the first quarter of 2008, which represents a $0.6 million or 1.8% increase 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 $1.4 million and $1.6 million for the first quarters of 2008 and 2007, respectively, and were computed using a 35% tax rate.

The increase in tax equivalent net interest income primarily reflects a 7 basis point rise in our tax equivalent net interest income as a percent of average interest-earning assets (the “net interest margin”) that was partially offset by a $2.8 million decrease in the balance of average interest-earning assets. The decrease in average interest-earning assets is due to a decline in investment securities.

Our tax equivalent net interest income is also adversely impacted by our level of non-accrual loans. In the first quarter of 2008 non-accrual loans averaged $83.0 million compared to $39.5 million in the first quarter of 2007. In addition, we reversed $0.8 million of accrued and unpaid interest on loans placed on non-accrual in the first quarter of 2008 compared to $0.3 million during the first quarter of 2007.

The net interest margin was equal to 4.30% during the first quarter of 2008 compared to 4.23% in the first quarter of 2007. The tax equivalent yield on average interest-earning assets declined to 7.37% in the first quarter of 2008 from 7.74% in the first quarter of 2007. This decrease primarily reflects lower short-term interest rates that have resulted in variable rate loans re-pricing and new loans being originated at lower rates as well as the aforementioned increase in non-accrual loans. The decrease in the tax equivalent yield on average interest-earning assets was more than offset by a 44 basis point decline in our interest expense as a percentage of average interest-earning assets (the “cost of funds”) to 3.07% during the first quarter of 2008 from 3.51% during the first quarter of 2007. The decrease in the our cost of funds also reflects lower short-term interest rates that have resulted in decreased rates on certain short-term and variable rate borrowings and on deposits.

Average Balances and Tax Equivalent Rates

		Three Months Ended
		March 31,
		2008												2007
		Average												Average
		Balance				Interest				Rate				Balance				Interest				Rate
		(dollars in thousands)
Assets
Taxable loans (1)		$	2,564,643			$	48,013				7.52	%		$	2,509,746			$	49,849				8.02	%
Tax-exempt loans (1,2)			9,628				174				7.27				9,513				160				6.82
Taxable securities			162,170				2,304				5.71				185,139				2,477				5.43
Tax-exempt securities (2)			204,890				3,586				7.04				238,654				4,121				7.00
Other investments			24,522				357				5.86				25,563				314				4.98
Interest Earning Assets - Continuing Operations			2,965,853				54,434				7.37				2,968,615				56,921				7.74
Cash and due from banks			52,459												53,228
Taxable loans — discontinued operations															33,084
Other assets, net			225,950												205,532
Total Assets		$	3,244,262											$	3,260,459
Liabilities
Savings and NOW		$	998,429				3,565				1.44			$	903,426				4,249				1.91
Time deposits			1,099,345				12,647				4.63				1,506,171				18,159				4.89
Long-term debt			994				12				4.86				2,994				34				4.61
Other borrowings			529,439				6,425				4.88				199,667				3,270				6.64
Interest Bearing Liabilities- Continuing Operations			2,628,207				22,649				3.47				2,612,258				25,712				3.99
Demand deposits			289,814												282,172
Time deposits — discontinued operations															24,732
Other liabilities			83,426												81,636
Shareholders’ equity			242,815												259,661
Total liabilities and shareholders’ equity		$	3,244,262											$	3,260,459
Tax Equivalent Net Interest Income						$	31,785											$	31,209
Tax Equivalent Net Interest Income as a Percent of Earning Assets											4.30	%											4.23	%