10-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2011 or

o  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from____________to_____________

Commission file number 0-7818

INDEPENDENT BANK CORPORATION

(Exact name of Registrant as specified in its charter)

MICHIGAN	38-2032782
(State or other jurisdiction of incorporation)	(I.R.S. employer identification no.)
230 W. Main St., P.O. Box 491, Ionia, Michigan	48846
(Address of principal executive offices)	(Zip Code)
Registrant's telephone number, including area code	(616)    527-5820

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $1.00 Par Value	NASDAQ
(Title of class)	(Name of Exchange)
8.25% Cumulative Trust Preferred Securities	NASDAQ
(Title of class)	(Name of Exchange)

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b of the Exchange Act). Yes o No x

The aggregate market value of common stock held by non-affiliates of the Registrant as of June 30, 2011, was $16,550,000.

The number of shares outstanding of the Registrant's common stock as of March 12, 2012 was 8,543,725.

Documents incorporated by reference

Portions of our definitive proxy statement, and annual report, to be delivered to shareholders in connection with the April 24, 2012 Annual Meeting of Shareholders are incorporated by reference into Part I, Part II, Part III, and Part IV of this Form 10-K.

The Exhibit Index appears on Pages 43-45

FORWARD-LOOKING STATEMENTS

Discussions and statements in this Annual Report on Form 10-K that are not statements of historical fact, including, without limitation, statements that include terms such as “will,” “may,” “should,” “believe,” “expect,” “forecast,” “anticipate,” “estimate,” “project,” “intend,” “likely,” “optimistic” and “plan,” and statements about future or projected financial and operating results, plans, projections, objectives, expectations, and intentions and other statements that are not historical facts, are forward-looking statements. Forward-looking statements include, but are not limited to, descriptions of plans and objectives for future operations, products or services; projections of our future revenue, earnings or other measures of economic performance; forecasts of credit losses and other asset quality trends; predictions as to our bank’s ability to maintain certain regulatory capital standards; our expectation that we will have sufficient cash on hand to meet expected obligations during 2012; and descriptions of steps we may take to improve our capital position. These forward-looking statements express our current expectations, forecasts of future events, or long-term goals and, by their nature, are subject to assumptions, risks, and uncertainties.  Although we believe that the expectations, forecasts, and goals reflected in these forward-looking statements are reasonable, actual results could differ materially for a variety of reasons, including, among others:

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

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

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

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

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

· further adverse developments in the vehicle service contract industry;

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

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

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

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

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

1

PART I

ITEM 1.     BUSINESS

Independent Bank Corporation was incorporated under the laws of the State of Michigan on September 17, 1973, for the purpose of becoming a bank holding company.  We are registered under the Bank Holding Company Act of 1956, as amended, and own the outstanding stock of Independent Bank  (the "bank") which is organized under the laws of the State of Michigan.

Aside from the stock of our bank, we have no other substantial assets.  We conduct no business except for the collection of dividends from our bank and the payment of dividends to our shareholders and the payment of interest on subordinated debentures.  Currently we are not paying any dividends on our common stock or preferred stock and are deferring interest on our subordinated debentures.  Certain employee retirement plans (including employee stock ownership and deferred compensation plans) as well as health and other insurance programs have been established by us.  The costs of these plans are borne by our subsidiaries.

We have no material patents, trademarks, licenses or franchises except the corporate franchise of our bank which permits it to engage in commercial banking pursuant to Michigan law.

Our bank's main office location is Ionia, Michigan and it had total loans (excluding loans held for sale) and total deposits of $1.577 billion and $2.086 billion, respectively, at December 31, 2011.

Our bank transacts business in the single industry of commercial banking.  Most of our bank's offices provide full-service lobby and drive-thru services in the communities they serve.  Automatic teller machines are also provided at most locations.

Our bank's activities cover all phases of banking, including checking and savings accounts, commercial lending, direct and indirect consumer financing, mortgage lending and safe deposit box services.  Mepco Finance Corporation, a subsidiary of our bank, acquires and services payment plans used by consumers to purchase vehicle service contracts provided and administered by third parties.  In addition, our bank offers title insurance services through a separate subsidiary and provides investment and insurance services through a third party agreement with PrimeVest Financial Services, Inc.  Our bank does not offer trust services.  Our principal markets are the rural and suburban communities across Lower Michigan that are served by our bank's branch network.  Our bank serves its markets through its main office and a total of 100 branches, 3 drive-thru facilities and 2 loan production offices.  The ongoing economic stress in Michigan has adversely impacted many of our markets which is manifested in higher levels of loan defaults and lower demand for credit.

Our bank competes with other commercial banks, savings banks, credit unions, mortgage banking companies, securities brokerage companies, insurance companies, and money market mutual funds.  Many of these competitors have substantially greater resources than we do and offer certain services that we do not currently provide.  Such competitors may also have greater lending limits than our bank.  In addition, non-bank competitors are generally not subject to the extensive regulations applicable to us.

Price (the interest charged on loans and/or paid on deposits) remains a principal means of competition within the financial services industry.  Our bank also competes on the basis of service and convenience in providing financial services.

The principal sources of revenue, on a consolidated basis, are interest and fees on loans, other interest income and non-interest income.  The sources of revenue for the three most recent years are as follows:

	2011			2010			2009
Interest and fees on loans		68.4	%		64.5	%		71.5	%
Other interest income		2.6			3.0			4.5
Non-interest income		29.0			32.5			24.0
		100.0	%		100.0	%		100.0	%

As of December 31, 2011, we had 940 full-time employees and 245 part-time employees.

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ITEM 1.    BUSINESS (Continued)

Recent Developments

Since 2009, we have been focused on strengthening our capital base in the face of weak economic conditions.  Our bank began to experience rising levels of non-performing loans and higher provisions for loan losses in 2006 as the Michigan economy experienced economic stress ahead of national trends. Although our bank remained profitable through the second quarter of 2008, it began incurring losses in the third quarter of 2008, which losses pressured its capital ratios.  While our bank has always remained well-capitalized under federal regulatory guidelines, we projected that due to our elevated levels of non-performing assets, as well as anticipated losses in the future, an increase in equity capital would likely be necessary in order for our bank to remain well-capitalized.

In 2009, we retained financial and legal advisors to assist us in reviewing our capital alternatives. We also took steps at that time to preserve our capital, including discontinuing cash dividends on our common stock and exercising our right to defer all quarterly distributions on our outstanding trust preferred securities and the preferred stock we issued to the U.S. Department of the Treasury (the “Treasury”) pursuant to the Troubled Asset Relief Program (“TARP”).  In December 2009, the Board of Directors of our bank adopted resolutions requiring our bank to achieve certain minimum capital ratios.  The minimum ratios established by our bank's Board are higher than the minimum ratios necessary to be considered well-capitalized under federal regulatory standards, which we considered prudent given our elevated levels of non-performing assets and the continuing economic stress in Michigan.  Set forth below are the minimum capital ratios imposed by our bank’s Board and the minimum ratios necessary to be considered well-capitalized under federal regulatory standards:

	Independent Bank - Actual as of December 31, 2011	Minimum Ratios Established by Our Board	Required to be Well-Capitalized
Total Capital to Risk-Weighted Assets	11.41%	11.00%	10.00%
Tier 1 Capital to Average Total Assets	6.77%	8.00%	5.00%

In January 2010, our Board of Directors adopted a capital restoration plan (the “Capital Plan”) that documents our objectives and plans for meeting these ratios. The three primary initiatives of our Capital Plan are:

● the conversion of our 72,000 shares of Series A Fixed Rate Cumulative Perpetual Preferred Stock, with an original liquidation preference of $1,000 per share (“Series A Preferred Stock”) issued to the Treasury under the Capital Purchase Program (“CPP”) of TARP into shares of our common stock;

● an offer to exchange shares of our common stock for our outstanding trust preferred securities; and

● a public offering of our common stock for cash.

In anticipation of pursuing these capital initiatives, we engaged independent third parties to perform a review (“stress test”) on our commercial and retail loan portfolios to confirm that the similar analyses we performed internally were reasonable and did not materially understate our projected loan losses. Based on the conclusions of these reviews, which were completed in January 2010, we determined that we did not need to modify our projections used for purposes of our Capital Plan.

To date, we have made progress on a number of initiatives to advance the Capital Plan:

● On January 29, 2010, we held a special shareholder meeting at which our shareholders approved (1) an increase in the number of shares of common stock we are authorized to issue from 60 million to 500 million, (2) the conversion of the preferred stock held by the Treasury into shares of our common stock, (3) the issuance of shares of our common stock in exchange for our outstanding trust preferred securities, and (4) an option exchange program pursuant to which our employees (excluding directors and certain executive officers) were able to exchange underwater options for new options at approximately a value-for-value exchange.  This option exchange was completed in March 2010.

3

ITEM 1.    BUSINESS (Continued)

● On April 16, 2010, we closed an Exchange Agreement with the Treasury pursuant to which the Treasury exchanged $72 million in aggregate liquidation value of our Series A Preferred Stock, plus approximately $2.4 million in accrued but unpaid dividends on such shares, into 74,426 shares of our Series B Fixed Rate Cumulative Mandatorily Convertible Preferred Stock, with an original liquidation preference of $1,000 per share (“Series B Convertible Preferred Stock”). As part of this exchange, we also amended and restated the terms of the Warrant issued to the Treasury in December 2008 to purchase 346,154 shares of our common stock in order to adjust the initial exercise price of the Warrant to be equal to the conversion price applicable to the Series B Convertible Preferred Stock.

The shares of Series B Convertible Preferred Stock are convertible into shares of our common stock. Subject to the receipt of applicable approvals, the Treasury has the right to convert the Series B Convertible Preferred Stock into our common stock at any time. We have the right to compel a conversion of the Series B Convertible Preferred Stock into our common stock at any time provided the following conditions are met:

(1) we receive appropriate approvals from the Board of Governors of the Federal Reserve System (the "Federal Reserve");

(2) at least $40 million aggregate liquidation amount of our trust preferred securities are exchanged for shares of our common stock;

(3) we complete a new cash equity raise of not less than $100 million on terms acceptable to the Treasury in its sole discretion (other than with respect to the price offered per share); and

(4) we make any required anti-dilution adjustments to the rate at which the Series B Convertible Preferred Stock is converted into our common stock.

● On June 23, 2010, we completed the exchange of an aggregate of 5,109,125 newly issued shares of our common stock for $41.4 million in aggregate liquidation amount of our outstanding trust preferred securities and $2.3 million of accrued and unpaid interest. This transaction satisfied one of the conditions to our ability to compel a conversion of the Series B Convertible Preferred Stock held by the Treasury.

● On August 31, 2010, we effected a reverse stock split of our issued and outstanding common stock. Pursuant to this reverse split, each 10 shares of our common stock issued and outstanding immediately prior to the reverse split was converted into 1 share of our common stock.  We conducted this reverse split primarily as a means to maintain our share price above $1.00 per share in order to continue to meet Nasdaq listing standards. All share or per share information included in this Annual Report on Form 10-K has been retroactively restated to reflect the effects of the reverse split.

We have taken steps toward the advancement of the final phase of our Capital Plan, an offering of our common stock for cash, but have not commenced such offering.  The offering has currently been delayed while we reevaluate our strategic alternatives in consultation with our financial advisors and the U.S. Treasury.  In particular, we are evaluating the merits of a smaller capital raise with a goal of preserving the potential future use of our net deferred tax asset, which totaled approximately $75.2 million as of December 31, 2011, and on which we had established a full valuation allowance.  As of December 31, 2011, we met one of the two target capital ratios set forth in our Capital Plan as the bank's total capital to risk-weighted assets ratio of 11.41% exceeded the target of 11%.

In addition to the forgoing, on July 7, 2010 we executed an Investment Agreement and Registration Rights Agreement with Dutchess Opportunity Fund, II, LP (“Dutchess”) for the sale of shares of our common stock. These agreements serve to establish an equity line facility as a contingent source of liquidity at the parent company level. Pursuant to the Investment Agreement, Dutchess committed to purchase up to $15.0 million of our common stock over a 36-month period ending November 1, 2013. We have the right, but no obligation, to draw on this equity line facility from time to time during such 36-month period by selling shares of our common stock to Dutchess. The sales price is at a 5% discount to the market price of our common stock at the time of the draw (as such market price is determined pursuant to the terms of the Investment Agreement). To date, we have sold a total of 777,974 shares (345,177 shares in the fourth quarter of 2010, 253,759 shares in the first quarter of 2011 and 179,038 shares in the second quarter of 2011) of our common stock to Dutchess under this equity line for total net proceeds of $1.8 million.  At the present time, we have shareholder approval to sell approximately 3.2 million additional shares under this equity line.

4

ITEM 1.    BUSINESS (Continued)

On October 25, 2011, the respective Boards of Directors of the holding company and our bank entered into a Memorandum of Understanding (the "MOU") with the FRB and the Michigan Office of Financial and Insurance Regulation (the "OFIR").  The MOU largely duplicates certain of the provisions in the Board resolutions described above, but also has the following specific requirements:

• Submission of a joint revised capital plan by November 30, 2011 to maintain sufficient capital at the holding company on a consolidated basis and at the bank on a stand-alone basis;

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

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

• Enhanced interest rate risk modeling practices.

We believe we have met all of the requirements of the MOU.

Supervision and Regulation

The following is a summary of certain statutes and regulations affecting us.  This summary is qualified in its entirety by reference to the particular statutes and regulations.  A change in applicable laws or regulations may have a material effect on us and our bank.

General

Financial institutions and their holding companies are extensively regulated under federal and state law.  Consequently, our growth and earnings performance can be affected not only by management decisions and general and local economic conditions, but also by the statutes administered by, and the regulations and policies of, various governmental regulatory authorities.  Those authorities include, but are not limited to, the Federal Reserve, the Federal Deposit Insurance Corporation (the "FDIC"), the OFIR, the Internal Revenue Service, and state taxing authorities.  The effect of such statutes, regulations and policies and any changes thereto can be significant and cannot necessarily be predicted.

Federal and state laws and regulations generally applicable to financial institutions and their holding companies regulate, among other things, the scope of business, investments, reserves against deposits, capital levels, lending activities and practices, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends.  The system of supervision and regulation applicable to us establishes a comprehensive framework for our operations and is intended primarily for the protection of the FDIC's deposit insurance funds, our depositors, and the public, rather than our shareholders.

Federal law and regulations establish supervisory standards applicable to the lending activities of our bank, including internal controls, credit underwriting, loan documentation and loan-to-value ratios for loans secured by real property.

Regulatory Developments

Emergency Economic Stabilization Act of 2008.On October 3, 2008, Congress enacted the Emergency Economic Stabilization Act of 2008 ("EESA"). The EESA enables the federal government, under terms and conditions developed by the Treasury, to insure troubled assets, including mortgage-backed securities, and collect premiums from participating financial institutions. The EESA includes, among other provisions: (a) the $700 billion Troubled Assets Relief Program (TARP), under which the Treasury is authorized to purchase, insure, hold, and sell a wide variety of financial instruments, particularly those that are based on or related to residential or commercial mortgages originated or issued on or before March 14, 2008; and (b) an increase in the amount of deposit insurance provided by the FDIC. Both of these specific provisions are discussed below.

5

ITEM 1.    BUSINESS (Continued)

Troubled Assets Relief Program (TARP).  Under TARP, the Treasury authorized a voluntary Capital Purchase Program (CPP) to purchase senior preferred shares of qualifying financial institutions that elected to participate. Participating companies must adopt certain standards for executive compensation, including (a) prohibiting "golden parachute" payments (as defined in the EESA) to senior executive officers; (b) requiring recovery of any compensation paid to senior executive officers based on criteria that is later proven to be materially inaccurate; and (c) prohibiting incentive compensation that encourages unnecessary and excessive risks that threaten the value of the financial institution. The terms of the CPP also limit certain uses of capital by the issuer, including repurchases of company stock and increases in dividends.

On December 12, 2008, we participated in the CPP and issued $72 million in capital to the Treasury in the form of Series A Preferred Stock that paid cash dividends at the rate of 5% per annum through February 14, 2014, and 9% per annum thereafter. In addition, the Treasury received a Warrant to purchase 346,154 shares of our common stock at a price of $31.20 per share.  As described above, on April 16, 2010, we closed on an exchange transaction with the Treasury in which the Treasury accepted our newly issued shares of Series B Convertible Preferred Stock in exchange for the entire $72 million in aggregate liquidation value of the shares of Series A Preferred Stock, plus the value of all accrued and unpaid dividends on such shares of Series A Preferred Stock (approximately $2.4 million).  The shares of Series B Convertible Preferred Stock have an aggregate liquidation amount equal to $74,426,000.

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

The Treasury (and any subsequent holder of the shares) has the right to convert the Series B Convertible Preferred Stock into our common stock at any time, subject to the receipt of any applicable approvals.  We have the right to compel a conversion of the Series B Convertible Preferred Stock into our common stock if the following conditions are met:

• we receive appropriate approvals from the Federal Reserve;

• at least $40 million aggregate liquidation amount of trust preferred securities have been exchanged for our common stock;

• we complete a new cash equity raise of not less than $100 million on terms acceptable to the Treasury in its sole discretion (other than with respect to the price offered per share); and

• we make any required anti-dilution adjustments to the rate at which the Series B Convertible Preferred Stock is converted into our common stock.

6

ITEM 1.    BUSINESS (Continued)

If converted by the Treasury (or any subsequent holder) or by us pursuant to either of the above-described conversion rights, each share of Series B Convertible Preferred Stock (liquidation amount of $1,000 per share) will convert into a number of shares of our common stock equal to a fraction, the numerator of which is $750 and the denominator of which is $7.234, referred to as the "conversion rate," provided that such conversion rate will be subject to certain anti-dilution adjustments.  If converted by the holder or by us pursuant to either of the above-described conversion rights, as of December 31, 2011, the Series B Convertible Preferred Stock and accrued and unpaid dividends would have been convertible into approximately 12.7 million shares of our common stock.  This conversion rate will be subject to certain anti-dilution adjustments that may result in a greater number of shares being issued to the holder of the Series B Convertible Preferred Stock.

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

At the time any shares of Series B Convertible Preferred Stock are converted into our common stock, we will be required to pay all accrued and unpaid dividends on the Series B Convertible Preferred Stock being converted in cash or, at our option, in shares of our common stock, in which case the number of shares to be issued will be equal to the amount of accrued and unpaid dividends to be paid in common stock divided by the market price of our common stock at the time of conversion (as such market price is determined pursuant to the terms of the Series B Convertible Preferred Stock).  Accrued and unpaid dividends on the Series B Convertible Preferred Stock totaled approximately $6.6 million at December 31, 2011.

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

The Series B Convertible Preferred Stock may be redeemed by us, subject to the approval of the Federal Reserve, at any time, in an amount up to the cash proceeds (minimum of approximately $18.6 million) from qualifying equity offerings of common stock (plus any net increase to our retained earnings after the original issue date). If the Series B Convertible Preferred Stock is redeemed prior to the first dividend payment date falling on or after the second anniversary of the original issue date, the redemption price will be equal to the $1,000 liquidation amount per share plus any accrued and unpaid dividends. If the Series B Convertible Preferred Stock is redeemed on or after such date, the redemption price will be the greater of (a) the $1,000 liquidation amount per share plus any accrued and unpaid dividends and (b) the product of the applicable conversion rate (as described above) and the average of the market prices per share of our common stock (as such market price is determined pursuant to the terms of the Series B Convertible Preferred Stock) over a 20 trading day period beginning on the trading day immediately after we give notice of redemption to the holder (plus any accrued and unpaid dividends). In any redemption, we must redeem at least 25% of the number of Series B Convertible Preferred Stock shares originally issued to the Treasury, unless fewer of such shares are then outstanding (in which case all of the Series B Convertible Preferred Stock must be redeemed).

In connection with such exchange transaction, we also amended and restated the terms of the Warrant issued to the Treasury in December 2008 to adjust the initial exercise price of the Warrant to be equal to the initial conversion price applicable to the Series B Convertible Preferred Stock described above.

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ITEM 1.    BUSINESS (Continued)

Federal Deposit Insurance Coverage.  The EESA temporarily raised the limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor, and the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010 (the "Dodd-Frank Act")  made this temporary increase in the insurance limit permanent.  In October 2008, the FDIC also announced the Temporary Liquidity Guarantee Program.  Under one component of this program, the Transaction Account Guarantee Program (TAGP), the FDIC temporarily provided unlimited coverage for non-interest bearing transaction accounts (as defined in the TAGP) for participating institutions that did not opt out.  This temporary coverage expired on December 31, 2010; however, the Dodd-Frank Act extended protection similar to that provided under the TAGP through December 31, 2012.

Financial Stability Plan.On February 10, 2009, the Treasury announced the Financial Stability Plan ("FSP"), which is a comprehensive set of measures intended to shore up the U.S. financial system and earmarks the balance of the unused funds originally authorized under the EESA. The major elements of the FSP include: (i) a capital assistance program that will invest in convertible preferred stock of certain qualifying institutions, (ii) a consumer and business lending initiative to fund new consumer loans, small business loans and commercial mortgage asset-backed securities issuances, (iii) a new public-private investment fund that will leverage public and private capital with public financing to purchase up to $500 billion to $1 trillion of legacy "toxic assets" from financial institutions, and (iv) assistance for homeowners by providing up to $75 billion to reduce mortgage payments and interest rates and establishing loan modification guidelines for government and private programs.

American Recovery and Reinvestment Act of 2009.On February 17, 2009, Congress enacted the American Recovery and Reinvestment Act of 2009 ("ARRA"). In enacting the ARRA, Congress intended to provide a stimulus to the U.S. economy in light of the significant economic downturn. The ARRA includes federal tax cuts, expansion of unemployment benefits and other social welfare provisions, and numerous domestic spending efforts in education, healthcare and infrastructure. The ARRA also includes numerous non-economic recovery related items, including a limitation on executive compensation in federally-aided financial institutions, including banks that have received or will receive assistance under TARP.

Under the ARRA, a financial institution (including our bank) will be subject to the following restrictions and standards throughout the period in which any obligation arising from financial assistance provided under TARP remains outstanding:

· Limits on compensation incentives for risk-taking by senior executive officers;

· Requirement of recovery of any compensation paid based on inaccurate financial information;

· Prohibition on "golden parachute payments" (as defined in the AARA);

· Prohibition on compensation plans that would encourage manipulation of reported earnings to enhance the compensation of employees;

· Establishment of board compensation committees by publicly-registered TARP recipients comprised entirely of independent directors, for the purpose of reviewing employee compensation plans;

· Prohibition on bonuses, retention awards, and incentive compensation, except for payments of long-term restricted stock; and

· Limitation on luxury expenditures.

In addition, TARP recipients are required to permit a separate, non-binding  shareholder vote to approve the compensation of executives. The chief executive officer and chief financial officer of each TARP recipient will be required to provide a written certification of compliance with these standards to the SEC.

8

ITEM 1.BUSINESS (Continued)

Homeowner Affordability and Stability Plan.On February 18, 2009, President Obama announced the Homeowner Affordability and Stability Plan ("HASP"). The HASP is intended to support a recovery in the housing market and ensure that workers can continue to pay off their mortgages through the following elements:

· Provide access to low-cost refinancing for responsible homeowners suffering from falling home prices;

· A $75 billion homeowner stability initiative to prevent foreclosure and help responsible families stay in their homes; and

· Support of low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac.

The Treasury has issued extensive guidance on the scope and mechanics of various components of HASP.  We continue to monitor these developments and assess their potential impact on our business.

Dodd-Frank Act.  On July 21, 2010, the President signed the Dodd-Frank Act in law.  This new federal law includes the following:

· the creation of the new Consumer Financial Protection Bureau with power to promulgate and, with respect to financial institutions with more than $10 billion in assets, enforce consumer protection laws;

· the creation of the Financial Stability Oversight Council chaired by the Secretary of the Treasury with authority to identify institutions and practices that might pose a systemic risk to the U.S. economy;

· provisions affecting corporate governance and executive compensation of all companies whose securities are registered with the SEC;

· a provision that broadens the base for FDIC insurance assessments and permanently increases FDIC deposit insurance to $250,000;

· a provision under which interchange fees for debit cards of issuers with at least $10 billion in assets are set by the Federal Reserve under a restrictive "reasonable and proportional cost" per transaction standard;

· a provision that requires bank regulators to set minimum capital levels for bank holding companies that are at least as strong as those required for their insured depository subsidiaries, subject to a grandfather clause for financial institutions with less than $15 billion in assets as of December 31, 2009; and

· new restrictions on how mortgage brokers and loan originators may be compensated.

Although a number of the regulations required by the Dodd-Frank Act have been issued, many of the new requirements have not yet been implemented and will likely be subject to implementing regulations over the course of several years.  As these provisions continue to be implemented, we expect they may impact our business operations and may negatively affect our earnings and financial condition by affecting our ability to offer certain products or earn certain fees and by exposing us to increased compliance and other costs.  At this time, it is difficult to assess the full impact of the Dodd-Frank Act on our business.

Future Legislation.  Various other legislative and regulatory initiatives, including proposals to overhaul the banking regulatory system, are from time to time introduced in Congress and state legislatures, as well as regulatory agencies.  Such future legislation regarding financial institutions may change banking statutes and our operating environment in substantial and unpredictable ways, and could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance depending on whether any such potential legislation is introduced and enacted. The nature and extent of future legislative and regulatory changes affecting financial institutions is very unpredictable. We cannot determine the ultimate effect that any such potential legislation, if enacted, would have upon our financial condition or results of operations.

Independent Bank Corporation

We are a bank holding company and, as such, are registered with, and subject to regulation by, the Federal Reserve under the Bank Holding Company Act, as amended (the "BHCA").  Under the BHCA, we are subject to periodic examination by the Federal Reserve and are required to file periodic reports of operations and such additional information as the Federal Reserve may require.

9

ITEM 1.    BUSINESS (Continued)

Federal Reserve policy historically has required bank holding companies to act as a source of strength to their bank subsidiaries and to commit capital and financial resources to support those subsidiaries. The Dodd-Frank Act codified this policy as a statutory requirement. Such support may be required by the Federal Reserve at times when we might otherwise determine not to provide it.

In addition, if the OFIR deems a bank's capital to be impaired, the OFIR may require a bank to restore its capital by special assessment upon a bank holding company, as the bank's sole shareholder.  If the bank holding company failed to pay such assessment, the directors of that bank would be required, under Michigan law, to sell the shares of bank stock owned by the bank holding company to the highest bidder at either public or private auction and use the proceeds of the sale to restore the bank's capital.

Any capital loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank.  In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Investments and Activities. In general, any direct or indirect acquisition by a bank holding company of any voting shares of any bank which would result in the bank holding company's direct or indirect ownership or control of more than 5% of any class of voting shares of such bank, and any merger or consolidation of the bank holding company with another bank holding company, will require the prior written approval of the Federal Reserve under the BHCA.  In acting on such applications, the Federal Reserve must consider various statutory factors including the effect of the proposed transaction on competition in relevant geographic and product markets, and each party's financial condition, managerial resources, and record of performance under the Community Reinvestment Act.

In addition and subject to certain exceptions, the Change in the Bank Control Act ("Control Act") and regulations promulgated thereunder by the Federal Reserve, require any person acting directly or indirectly, or through or in concert with one or more persons, to give the Federal Reserve 60 days' written notice before acquiring control of a bank holding company.  Transactions which are presumed to constitute the acquisition of control include the acquisition of any voting securities of a bank holding company having securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, if, after the transaction, the acquiring person (or persons acting in concert) owns, controls or holds with power to vote 10% or more of any class of voting securities of the institution.  The acquisition may not be consummated subsequent to such notice if the Federal Reserve issues a notice within 60 days, or within certain extensions of such period, disapproving the acquisition.

The merger or consolidation of an existing bank subsidiary of a bank holding company with another bank, or the acquisition by such a subsidiary of the assets of another bank, or the assumption of the deposit and other liabilities by such a subsidiary requires the prior written approval of the responsible Federal depository institution regulatory agency under the Bank Merger Act, based upon a consideration of statutory factors similar to those outlined above with respect to the BHCA.  In addition, in certain cases an application to, and the prior approval of, the Federal Reserve under the BHCA and/or OFIR under Michigan banking laws, may be required.

With certain limited exceptions, the BHCA prohibits any bank holding company from engaging, either directly or indirectly through a subsidiary, in any activity other than managing or controlling banks unless the proposed non-banking activity is one that the Federal Reserve has determined to be so closely related to banking as to be a proper incident thereto.  Under current Federal Reserve regulations, such permissible non-banking activities include such things as mortgage banking, equipment leasing, securities brokerage, and consumer and commercial finance company operations.  Well-capitalized and well-managed bank holding companies may, however, engage de novo in certain types of non-banking activities without prior notice to, or approval of, the Federal Reserve, provided that written notice of the new activity is given to the Federal Reserve within 10 business days after the activity is commenced.  If a bank holding company wishes to engage in a non-banking activity by acquiring a going concern, prior notice and/or prior approval will be required, depending upon the activities in which the company to be acquired is engaged, the size of the company to be acquired and the financial and managerial condition of the acquiring bank holding company.

10

ITEM 1.    BUSINESS (Continued)

Eligible bank holding companies that elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance activities and any other activity that the Federal Reserve, in consultation with the Treasury, determines by regulation or order is financial in nature, incidental to any such financial activity or complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally.  The BHCA generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank or financial holding companies.  We have not applied for approval to operate as a financial holding company and have no current intention of doing so.

Capital Requirements.  The Federal Reserve uses capital adequacy guidelines in its examination and regulation of bank holding companies.  If capital falls below minimum guidelines, a bank holding company may, among other things, be denied approval to acquire or establish additional banks or non-bank businesses.

The Federal Reserve's capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: (i) a leverage capital requirement expressed as a percentage of total assets, and (ii) a risk-based requirement expressed as a percentage of total risk-weighted assets.  The leverage capital requirement consists of a minimum ratio of Tier 1 capital (which consists principally of shareholders' equity) to total assets of 3% for the most highly rated companies with minimum requirements of 4% to 5% for all others.  The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, of which at least one-half must be Tier 1 capital.

The risk-based and leverage standards presently used by the Federal Reserve are minimum requirements, and higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations.

Included in our Tier 1 capital as of December 31, 2011, is $38.2 million of trust preferred securities (classified on our balance sheet as "Subordinated debentures").  The Federal Reserve has issued rules regarding trust preferred securities as a component of the Tier 1 capital of bank holding companies. The aggregate amount of trust preferred securities and certain other capital elements is limited to 25 percent of Tier 1 capital elements, net of goodwill (net of any associated deferred tax liability). The amount of trust preferred securities and certain other elements in excess of the limit could be included in the Tier 2 capital, subject to restrictions.  The provisions of the Dodd-Frank Act imposed additional limitations on the ability to include trust preferred securities as Tier 1 capital; however, these additional limitations do not apply to our outstanding trust preferred securities.

The federal bank regulatory agencies are required biennially to review risk-based capital standards to ensure that they adequately address interest rate risk, concentration of credit risk and risks from non-traditional activities.

Dividends.  Most of our revenues are received in the form of dividends paid by our bank.  Thus, our ability to pay dividends to our shareholders is indirectly limited by statutory restrictions on the ability of our bank to pay dividends, as discussed below.  Further, in a policy statement, the Federal Reserve has expressed its view that a bank holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income or which can only be funded in ways that weaken the bank holding company's financial health, such as by borrowing.  Additionally, the Federal Reserve possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations.  Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies.  The "prompt corrective action" provisions of federal law and regulation authorizes the Federal Reserve to restrict the amount of dividends that an insured bank can pay which fails to meet specified capital levels.

In addition to the restrictions on dividends imposed by the Federal Reserve, the Michigan Business Corporation Act provides that dividends may be legally declared or paid only if after the distribution, a corporation can pay its debts as they come due in the usual course of business and its total assets equal or exceed the sum of its liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of any holders of preferred stock whose preferential rights are superior to those receiving the distribution.

11

ITEM 1.    BUSINESS (Continued)

Because we have suspended all dividends on the shares of the Series B Convertible Preferred Stock and all quarterly payments on our outstanding trust preferred securities, we are currently prohibited from paying any cash dividends on our common stock.  In addition, in December of 2009, our Board of Directors adopted resolutions that prohibit us from paying any dividends on our common stock without, in each case, the prior written approval of the Federal Reserve and the OFIR.

Federal Securities Regulation.  Our common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We are therefore subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act.

Our Bank

General.Independent Bank is a Michigan banking corporation, is a member of the Federal Reserve System, and its deposit accounts are insured by the Deposit Insurance Fund ("DIF") of the FDIC.  As a member of the Federal Reserve System and a Michigan chartered bank, our bank is subject to the examination, supervision, reporting and enforcement requirements of the Federal Reserve as its primary federal regulator and OFIR as the chartering authority for Michigan banks. These agencies and the federal and state laws applicable to our bank and its operations extensively regulate various aspects of the banking business including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and on deposits, the maintenance of non-interest bearing reserves on deposit accounts, and the safety and soundness of banking practices.

Deposit Insurance.As an FDIC-insured institution, our bank is required to pay deposit insurance premium assessments to the FDIC.  Under the FDIC's risk-based assessment system for deposit insurance premiums, all insured depository institutions are placed into one of four categories (Risk Categories I, II, III, and IV), based primarily on their level of capital and supervisory evaluations.

Historically, assessment rates for deposit insurance premiums have been largely based on the risk category of the institution and the amount of its deposits.  However, the Dodd-Frank Act passed in 2010 required the FDIC to establish rules setting insurance premium assessments based on an institution's total assets minus its tangible equity instead of  deposits. On February 7, 2011, the FDIC adopted a final rule under which, effective for assessments for the second quarter of 2011 and payable at the end of September 2011, the initial base assessment rate for institutions in Risk Category I (generally, well-capitalized institutions with a CAMELS composite rating of 1 or 2) is set at an annual rate of between 5 and 9 basis points.  The initial base assessment rate for institutions in Risk Categories II, III, and IV is set at annual rates of 14, 23, and 35 basis points, respectively, and the initial base assessment rate for institutions with at least $10 billion in assets and certain "highly complex institutions" is set at an annual rate of between 5 and 35 basis points.  These initial base assessment rates are adjusted to determine an institution's final assessment rate based on its brokered deposits and unsecured debt.  In addition, the rates are subject to a new depository institution debt adjustment, which is meant to offset the benefit received by institutions that issue long-term, unsecured liabilities when those liabilities are held by other insured depository institutions. However, institutions may exclude from the unsecured debt amount used in calculating the depository institution debt adjustment an amount equal to no more than 3% of their Tier 1 capital. Total base assessment rates after adjustments, other than the depository institution debt adjustment, range from 2.5 to 9 basis points for Risk Category I, 9 to 24 basis points for Risk Category II, 18 to 33 basis points for Risk Category III, 30 to 45 basis points for Risk Category IV, and 2.5 to 45 basis points for institutions with at least $10 billion in assets and certain "highly complex institutions."

On December 15, 2010, the FDIC established 2.0% as the Designated Reserve Ratio ("DRR"), that is, the ratio of the DIF to insured deposits. The FDIC adopted a plan under which it will meet the statutory minimum DRR of 1.35% by September 30, 2020, the deadline imposed by the Dodd-Frank Act.  The Dodd-Frank Act requires the FDIC to partially offset the effect of the increase in the DRR on institutions with assets less than $10 billion.

12

ITEM 1.    BUSINESS (Continued)

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

In addition, in 2008, the bank elected to participate in the FDIC's Transaction Account Guarantee Program (TAGP), which required us to pay an additional assessment to the FDIC.  Under the TAGP, funds in non-interest bearing transaction accounts, in interest-bearing transaction accounts with an interest rate of 0.25% or less (after June 30, 2010), and in Interest on Lawyers Trust Accounts (IOLTA) had a temporary unlimited guarantee from the FDIC.  This temporary coverage expired on December 31, 2010.  The Dodd-Frank Act extended protection similar to that provided under the TAGP through December 31, 2012 for only non-interest bearing transaction accounts.  This coverage applies to all insured depository institutions, and there is no separate FDIC assessment for the insurance.  Furthermore, this unlimited coverage is separate from, and in addition to, the coverage provided to depositors with respect to other accounts held at an insured depository institution.

FICO Assessments.  Our bank, as a member of the DIF, is subject to assessments to cover the payments on outstanding obligations of the Financing Corporation ("FICO").  FICO was created to finance the recapitalization of the Federal Savings and Loan Insurance Corporation, the predecessor to the FDIC's Savings Association Insurance Fund which was created to insure the deposits of thrift institutions and was merged with the Bank Insurance Fund into the newly formed DIF in 2006.  From now until the maturity of the outstanding FICO obligations in 2019, DIF members will share the cost of the interest on the FICO bonds on a pro rata basis.  It is estimated that FICO assessments during this period will be approximately 0.070% of deposits.

OFIR Assessments.  Michigan banks are required to pay supervisory fees to the OFIR to fund their operations.  The amount of supervisory fees paid by a bank is based upon the bank's total assets.

Capital Requirements. The Federal Reserve has established the following minimum capital standards for state-chartered, FDIC-insured member banks, such as our bank:  a leverage requirement consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated banks with minimum requirements of 4% to 5% for all others, and a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital.  Tier 1 capital consists principally of shareholders' equity.  These capital requirements are minimum requirements.  Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions.  For example, Federal Reserve regulations provide that higher capital may be required to take adequate account of, among other things, interest rate risk and the risks posed by concentrations of credit, nontraditional activities, or securities trading activities.

13

ITEM 1.    BUSINESS (Continued)

Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions.  The extent of the regulators' powers depends on whether the institution in question is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," or "critically undercapitalized."  Federal regulations define these capital categories as follows:

	Total Risk-Based Capital Ratio	Tier 1 Risk-Based Capital Ratio	Leverage Ratio
Well capitalized	10% or above	6% or above	5% or above
Adequately capitalized	8% or above	4% or above	4% or above
Undercapitalized	Less than 8%	Less than 4%	Less than 4%
Significantly undercapitalized	Less than 6%	Less than 3%	Less than 3%
Critically undercapitalized	--	--	A ratio of tangible equity to total assets of 2% or less

At December 31, 2011, our bank's ratios exceeded minimum requirements for the well-capitalized category.  In December 2009, the Board of Directors of our bank adopted resolutions requiring our bank to achieve minimum capital ratios that are higher than the minimum requirements described in the Federal Reserve's capital guidelines.  See "Recent Developments" above for more information.

Depending upon the capital category to which an institution is assigned, the regulators' corrective powers include:  requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rates the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution.

In general, a depository institution may be reclassified to a lower category than is indicated by its capital levels if the appropriate federal depository institution regulatory agency determines the institution to be otherwise in an unsafe or unsound condition or to be engaged in an unsafe or unsound practice.  This could include a failure by the institution, following receipt of a less-than-satisfactory rating on its most recent examination report, to correct the deficiency.

Dividends.  Under Michigan law, banks are restricted as to the maximum amount of dividends they may pay on their common stock.Our bank may not pay dividends except out of its net income after deducting its losses and bad debts.  A Michigan state bank may not declare or pay a dividend unless the bank will have a surplus amounting to at least 20% of its capital after the payment of the dividend.

As a member of the Federal Reserve System, our bank is required to obtain the prior approval of the Federal Reserve for the declaration or payment of a dividend if the total of all dividends declared in any year will exceed the total of (a) the bank's retained net income (as defined by federal regulation) for that year, plus (b) the bank's retained net income for the preceding two years.

Federal law also generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized.  In addition, the Federal Reserve may prohibit the payment of dividends by a bank if such payment is determined, by reason of the financial condition of the bank, to be an unsafe and unsound banking practice or if the bank is in default of payment of any assessment due to the FDIC.

In addition to these restrictions, in December of 2009, the Board of Directors of our bank adopted resolutions that prohibit our bank from paying any dividends to our holding company without the prior written approval of the Federal Reserve and the OFIR.  See "Recent Developments" above for more information.

14

ITEM 1.    BUSINESS (Continued)

Insider Transactions. Our bank is subject to certain restrictions imposed by the Federal Reserve Act on "covered transactions" with us or our subsidiaries, which include investments in our stock or other securities issued by us or our subsidiaries, the acceptance of our stock or other securities issued by us or our subsidiaries as collateral for loans, and extensions of credit to us or our subsidiaries.  Certain limitations and reporting requirements are also placed on extensions of credit by our bank to the directors and officers of the Company, the bank, and the subsidiaries of the bank, to the principal shareholders of the Company, and to "related interests" of such directors, officers, and principal shareholders.  In addition, federal law and regulations may affect the terms upon which any person becoming one of our directors or officers or a principal shareholder may obtain credit from banks with which our bank maintains a correspondent relationship.

Safety and Soundness Standards. Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), the FDIC adopted guidelines to establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines establish standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality, and earnings.

Investment and Other Activities.  Under federal law and regulations, FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank.  FDICIA, as implemented by FDIC regulations, also prohibits FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging as a principal in any activity that is not permitted for a national bank or its subsidiary, respectively, unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the bank's primary federal regulator determines the activity would not pose a significant risk to the DIF.  Impermissible investments and activities must be otherwise divested or discontinued within certain time frames set by the bank's primary federal regulator in accordance with federal law.  These restrictions are not currently expected to have a material impact on the operations of our bank.

Consumer Banking.Our bank's business includes making a variety of types of loans to individuals.  In making these loans, our bank is subject to state usury and regulatory laws and to various federal statutes, including the privacy of consumer financial information provisions of the Gramm Leach-Bliley Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, and the regulations promulgated under these statutes, which (among other things) prohibit discrimination, specify disclosures to be made to borrowers regarding credit and settlement costs, and regulate the mortgage loan servicing activities of our bank, including the maintenance and operation of escrow accounts and the transfer of mortgage loan servicing.  In receiving deposits, our bank is subject to extensive regulation under state and federal law and regulations, including the Truth in Savings Act, the Expedited Funds Availability Act, the Bank Secrecy Act, the Electronic Funds Transfer Act, and the Federal Deposit Insurance Act.  Violation of these laws could result in the imposition of significant damages and fines upon our bank and its directors and officers.

Branching Authority.  Michigan banks, such as our bank, have the authority under Michigan law to establish branches anywhere in the State of Michigan, subject to receipt of all required regulatory approvals.  Banks may establish interstate branch networks through acquisitions of other banks.  The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed only if specifically authorized by state law.

Michigan permits both U.S. and non-U.S. banks to establish branch offices in Michigan.  The Michigan Banking Code permits, in appropriate circumstances and with the approval of the OFIR (1) acquisition of Michigan banks by FDIC-insured banks or savings banks located in other states, (2) sale by a Michigan bank of branches to an FDIC-insured bank or savings bank located in a state in which a Michigan bank could purchase branches of the purchasing entity, (3) consolidation of Michigan banks and FDIC-insured banks or savings banks located in other states having laws permitting such consolidation, (4) establishment of branches in Michigan by FDIC-insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting a Michigan bank to establish a branch in such jurisdiction, and (5) establishment by foreign banks of branches located in Michigan.

15

ITEM 1.    BUSINESS (Continued)

Mepco Finance Corporation

Our subsidiary, Mepco Finance Corporation, is engaged in the business of acquiring and servicing payment plans used by consumers throughout the United States who have purchased a vehicle service contract and choose to make monthly payments for their coverage.  In the typical transaction, no interest or other finance charge is charged to these consumers.  As a result, Mepco is generally not subject to regulation under consumer lending laws.  However, Mepco is subject to various federal and state laws designed to protect consumers, including laws against unfair and deceptive trade practices and laws regulating Mepco's payment processing activities, such as the Electronic Funds Transfer Act.

Mepco purchases payment plans from companies (which we refer to as Mepco’s “counterparties”) that provide vehicle service contracts to consumers. The payment plans (which are classified as payment plan receivables in our consolidated statements of financial condition) permit a consumer to purchase a service contract by making installment payments, generally for a term of 12 to 24 months, to the sellers of those contracts (one of the “counterparties”). Mepco does not have recourse against the consumer for nonpayment of a payment plan, and therefore does not evaluate the creditworthiness of the individual customer. When consumers stop making payments or exercise their right to voluntarily cancel the contract, the remaining unpaid balance of the payment plan is normally recouped by Mepco from the counterparties that sold the contract and provided the coverage. The refund obligations of these counterparties are not fully secured. We record losses or charges in vehicle service contract contingencies expense, included in non-interest expenses, for estimated defaults by these counterparties in their obligations to Mepco.

Our annual reports on Forms 10-K, quarterly reports on Forms 10-Q, current reports on Forms 8-K, and all amendments to those reports are available free of charge through our website at www.IndependentBank.com as soon as reasonably practicable after filing with the SEC.

16

ITEM 1.     BUSINESS -- STATISTICAL DISCLOSURE

I.      (A)     DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;

         (B)     INTEREST RATES AND INTEREST DIFFERENTIAL

   (C)     INTEREST RATES AND DIFFERENTIAL

The information set forth in the tables captioned "Average Balances and Rates" and "Change in Net Interest Income" of our annual report, to be delivered to shareholders in connection with the April 24, 2012 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), is incorporated herein by reference.

II.                INVESTMENT PORTFOLIO

(A)  The following table sets forth the book value of securities at December 31:

	2011		2010			2009
	(in thousands)
Trading - Preferred stock	$	77		$	32	$	54

Available for sale
U.S agency residential mortgage-backed	$	94,206	$	13,331	$	47,522
States and political subdivisions		27,317		31,259		67,132
U.S agency		25,017		--		--
Private label residential mortgage-backed		8,268		14,184		30,975
Trust preferred		2,636		9,090		13,017
Other asset-backed		--		--		5,505
Total	$	157,444	$	67,864	$	164,151

         (B)  The following table sets forth contractual maturities of securities at December 31, 2011 and the weighted average yield of such securities:

						Maturing					Maturing
	Maturing					After One					After Five					Maturing
	Within					But Within					But Within					After
	One Year					Five Years					Ten Years					Ten Years
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
	(dollars in thousands)
Trading – Preferred stock																$	77		0.00	%
Tax equivalent adjustment for calculations of yield																$	--
Available for sale
U.S agency residential mortgage-backed	$	3		4.68	%	$	64,090		2.17	%	$	28,891		2.86	%	$	1,222		1.73	%
States and political subdivisions		1,493		4.76			7,366		4.08			11,748		3.74			6,710		4.36
U.S. agency		--					--					10,026		1.00			14,991		1.72
Private label residential mortgage-backed		--					163		5.95			3,885		4.23			4,220		5.65
Trust preferred		--					--					--					2,636		4.21
Total	$	1,496		4.76	%	$	71,619		2.38	%	$	54,550		2.80	%	$	29,779		3.09	%
Tax equivalent adjustment for calculations of yield	$	--				$	--				$	--				$	--

The rates set forth in the tables above for obligations of state and political subdivisions have not been restated on a tax equivalent basis due to the current net operating loss carryforward position and the deferred tax asset valuation allowance.

17

ITEM 1.     BUSINESS -- STATISTICAL DISCLOSURE  (Continued)

III.              LOAN PORTFOLIO

(A)  The following table sets forth total loans outstanding at December 31:

		2011		2010		2009		2008		2007
		(in thousands)
Loans held for sale	$	44,801	$	50,098	$	34,234	$	27,603	$	33,960
Mortgage		590,876		658,679		749,298		839,496		873,945
Commercial		651,155		707,530		840,367		976,391		1,066,276
Installment		219,559		245,644		303,366		356,806		368,478
Payment plan receivables		115,018		201,263		406,341		286,836		209,631
Total Loans	$	1,621,409	$	1,863,214	$	2,333,606	$	2,487,132	$	2,552,290

The loan portfolio is periodically and systematically reviewed, and the results of these reviews are reported to the Board of Directors of our bank.  The purpose of these reviews is to assist in assuring proper loan documentation, to facilitate compliance with consumer protection laws and regulations, to provide for the early identification of potential problem loans (which enhances collection prospects) and to evaluate the adequacy of the allowance for loan losses.

(B)  The following table sets forth scheduled loan repayments (excluding 1-4 family residential mortgages and installment loans) at December 31, 2011:

			Due
	Due		After One		Due
	Within		But Within		After
	One Year		Five Years		Five Years		Total
	(in thousands)
Mortgage	$	31,096	$	10,444	$	3,582	$	45,122
Commercial		260,427		342,896		47,832		651,155
Payment plan receivables		49,803		65,215		--		115,018
Total	$	341,326	$	418,555	$	51,414	$	811,295

The following table sets forth loans due after one year which have predetermined (fixed) interest rates and/or adjustable (variable) interest rates at December 31, 2011:

	Fixed		Variable
	Rate		Rate		Total
	(in thousands)
Due after one but within five years	$	408,116	$	10,439	$	418,555
Due after five years		47,895		3,519		51,414
Total	$	456,011	$	13,958	$	469,969

18

ITEM 1.     BUSINESS -- STATISTICAL DISCLOSURE  (Continued)

                   LOAN PORTFOLIO (Continued)

(C)  The following table sets forth loans on non-accrual, loans ninety days or more past due and troubled debt restructured loans at December 31:

	2011		2010		2009		2008		2007
	(in thousands)
(a)  Loans accounted for on a non-accrual basis (1, 2)	$	59,309	$	66,652	$	105,965	$	122,639	$	72,682
(b)  Aggregate amount of loans ninety days or more past due (excludes loans in (a) above)		574		928		3,940		2,626		4,394
(c)  Loans not included above which are "troubled debt restructurings" as defined by accounting guidance		116,569		113,812		71,961		9,160		173
Total	$	176,452	$	181,392	$	181,866	$	134,425	$	77,249

 (1) The accrual of interest income is discontinued when a loan becomes 90 days past due and the borrower's capacity to repay the loan and collateral values appear insufficient.  Non-accrual loans may be restored to accrual status when interest and principal payments are current and the loan appears otherwise collectible.

(2) Interest in the amount of $9,512,000 would have been earned in 2011 had loans in categories (a) and (c) remained at their original terms; however, only $5,273,000 was included in interest income for the year with respect to these loans.

Other loans of concern identified by the loan review department which are not included as non-performing in the table above were zero at December 31, 2011.

At December 31, 2011, there was no concentration of loans exceeding 10% of total loans which is not already disclosed as a category of loans in this section "Loan Portfolio" (Item III(A)).

There were no other interest-bearing assets at December 31, 2011, that would be required to be disclosed above (Item III(C)), if such assets were loans.

There were no foreign loans at December 31, 2011.  Total loans in 2010 and 2009 include $0.1 million and $1.7 million, respectively of payment plan receivables from customers domiciled in Canada.  There were no other foreign loans outstanding prior to that time.

19

ITEM 1.     BUSINESS -- STATISTICAL DISCLOSURE  (Continued)

IV.              SUMMARY OF LOAN LOSS EXPERIENCE

(A)  The following table sets forth loan balances and summarizes the changes in the allowance for loan losses for each of the years ended December 31:

		2011						2010						2009
		(dollars in thousands)
Total loans outstanding at the end of the year (net of unearned fees)	$	1,621,409					$	1,863,214					$	2,333,606
Average total loans outstanding for  the year (net of unearned fees)	$	1,711,948					$	2,082,117					$	2,470,568
				Unfunded						Unfunded						Unfunded
	Loan			Commit-			Loan			Commit-			Loan			Commit-
	Losses			ments			Losses			ments			Losses			ments
Balance at beginning of year	$	67,915		$	1,322		$	81,717		$	1,858		$	57,900		$	2,144
Loans charged-off
Mortgage		15,608						20,263						22,869
Commercial		20,491						36,108						51,840
Installment		5,439						7,726						7,562
Payment plan receivables		186						82						25
Total loans charged-off		41,724						64,179						82,296
Recoveries of loans previously charged-off
Mortgage		1,441						1,155						791
Commercial		1,850						969						731
Installment		1,451						1,475						1,271
Payment plan receivables		5						13						2
Total recoveries		4,747						3,612						2,795
Net loans charged-off		36,977						60,567						79,501
Additions (deductions) included in operations		27,946			(36	)		46,765			(536	)		103,318			(286	)
Balance at end of year	$	58,884		$	1,286		$	67,915		$	1,322		$	81,717		$	1,858
Net loans charged-off as a percent of average loans outstanding (includes  loans held for sale) for the year		2.16	%					2.91	%					3.22	%
Allowance for loan losses as a percent of loans outstanding (includes  loans held for sale) at the end of the year		3.63						3.65						3.50

20

ITEM 1.     BUSINESS -- STATISTICAL DISCLOSURE  (Continued)

IV.              SUMMARY OF LOAN LOSS EXPERIENCE (Continued)

		2008					2007
		(dollars in thousands)
Total loans outstanding at the end of  the year (net of unearned fees)	$	2,487,132				$	2,552,290
Average total loans outstanding for the year (net of unearned fees)	$	2,569,368				$	2,541,305
				Unfunded					Unfunded
	Loan			Commit-		Loan			Commit-
	Losses			ments		Losses			ments
Balance at beginning of year	$	45,294		$	1,936	$	26,879		$	1,881
Loans charged-off
Mortgage		11,942					6,644
Commercial		43,641					14,236
Installment		6,364					5,943
Payment plan receivables		49					213
Total loans charged-off		61,996					27,036
Recoveries of loans previously charged-off
Mortgage		318					381
Commercial		1,800					328
Installment		1,340					1,629
Payment plan receivables		31					8
Total recoveries		3,489					2,346
Net loans charged-off		58,507					24,690
Additions (deductions) included in operations		71,113			208		43,105			55
Balance at end of year	$	57,900		$	2,144	$	45,294		$	1,936
Net loans charged-off as a percent of average loans outstanding (includes loans  held for sale) for the year		2.28	%				.97	%
Allowance for loan losses as a percent of loans outstanding (includes loans  held for sale) at the end of the year		2.33					1.77

The allowance for loan losses reflected above is a valuation allowance in its entirety and the only allowance available to absorb probable incurred loan losses.

Further discussion of the provision and allowance for loan losses (a critical accounting policy) as well as non-performing loans, is presented in Management's Discussion and Analysis of Financial Condition and Results of Operations in our annual report, to be delivered to shareholders in connection with the April 24, 2012 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), and is incorporated herein by reference.

21

ITEM 1.     BUSINESS -- STATISTICAL DISCLOSURE  (Continued)

IV.              SUMMARY OF LOAN LOSS EXPERIENCE  (Continued)

(B)  We have allocated the allowance for loan losses to provide for probable incurred losses within the categories of loans set forth in the table below.   The amount of the allowance that is allocated and the ratio of loans within each category to total loans at December 31 follow:

	2011					2010					2009
			Percent					Percent					Percent
	Allowance		of Loans to			Allowance		of Loans to			Allowance		of Loans to
	Amount		Total Loans			Amount		Total Loans			Amount		Total Loans
	(dollars in thousands)
Commercial	$	18,183		40.2	%	$	23,836		38.0	%	$	41,259		36.1	%
Mortgage		22,885		39.2			22,642		38.0			18,434		33.5
Installment		6,146		13.5			6,769		13.2			6,404		13.0
Payment plan receivables		197		7.1			389		10.8			754		17.4
Unallocated		11,473					14,279					14,866
Total	$	58,884		100.0	%	$	67,915		100.0	%	$	81,717		100.0	%

	2008					2007
			Percent					Percent
	Allowance		of Loans to			Allowance		of Loans to
	Amount		Total Loans			Amount		Total Loans
	(dollars in thousands)
Commercial	$	33,090		39.3	%	$	27,829		41.8	%
Mortgage		8,729		34.9			4,657		35.6
Installment		4,264		14.3			3,224		14.4
Payment plan receivables		486		11.5			475		8.2
Unallocated		11,331					9,109
Total	$	57,900		100.0	%	$	45,294		100.0	%

22

ITEM 1.     BUSINESS -- STATISTICAL DISCLOSURE  (Continued)

V.                DEPOSITS

The following table sets forth average deposit balances and the weighted-average rates paid thereon for the years ended December 31:

		2011					2010					2009
		Average					Average					Average
		Balance	Rate				Balance	Rate				Balance	Rate
		(dollars in thousands)
Non-interest bearing demand	$	467,305				$	349,376				$	321,802
Savings and NOW		1,006,305		0.22	%		1,089,992		0.26	%		992,529		0.58	%
Time deposits		656,944		1.98			978,098		2.59			1,019,624		2.91
Total	$	2,130,554		0.72	%	$	2,417,466		1.17	%	$	2,333,955		1.52	%

The following table summarizes time deposits in amounts of $100,000 or more by time remaining until maturity at December 31, 2011:

	(in thousands)
Three months or less	$	39,163
Over three through six months		21,909
Over six months through one year		52,187
Over one year		75,360
Total	$	188,619

VI.              RETURN ON EQUITY AND ASSETS

The ratio of net income (loss) to average shareholders' equity and to average total assets, and certain other ratios, for the years ended December 31 follow:

	2011			2010			2009			2008			2007
Income (loss) from continuing operations as a percent of(1)
Average common equity		(68.44	)%		(54.38	)%		(90.72	)%		(39.01	)%		3.96	%
Average total assets		(1.02	)		(0.75	)		(3.17	)		(2.88	)		0.31
Net income (loss) as a percent of(1)
Average common equity		(68.44	)		(54.38	)		(90.72	)		(39.01	)		4.12
Average total assets		(1.02	)		(0.75	)		(3.17	)		(2.88	)		0.32
Dividends declared per share as a percent of diluted net income per share		0.00			0.00		NM			NM				185.43
Average shareholders' equity as a percent of average total assets		4.76			3.92			5.80			7.50			7.72

(1)For 2011, 2010, 2009 and 2008, these amounts are calculated using loss from continuing operations applicable to common stock and net loss applicable to common stock.

NM – Not meaningful.

Additional performance ratios are set forth in Selected Consolidated Financial Data in our annual report, to be delivered to shareholders in connection with the April 24, 2012 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), and is incorporated herein by reference.  Any significant changes in the current trend of the above ratios are reviewed in Management's Discussion and Analysis of Financial Condition and Results of Operations in our annual report, to be delivered to shareholders in connection with the April 24, 2012 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), and is incorporated herein by reference.

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VII.             SHORT-TERM BORROWINGS

Short-term borrowings are discussed in note 9 to the consolidated financial statements incorporated herein by reference to Item 8, Part II of this report.

24

ITEM 1A.RISK FACTORS

Our results of operations, financial condition, and business may be materially and adversely affected if we are unable to successfully implement our Capital Plan.

Our Capital Plan, which is described in more detail under “Business – Recent Developments” above, has a primary objective of achieving and thereafter maintaining certain minimum capital ratios required by resolutions adopted by our bank's Board of Directors in December 2009 (as subsequently amended).  In 2009 and 2010, we engaged in various transactions to help us achieve the minimum capital ratios set forth in the Capital Plan, which are also described under "Business – Recent Developments" above.  However, we have not yet completed the final initiative of our Capital Plan, which is a public offering for cash.  As of December 31, 2011, our bank met one of the two minimum capital ratios set forth in the resolutions, but not both.

We are currently reevaluating our alternatives for achieving the objectives of the Capital Plan, including the size and timing of any common stock offering.  In particular, we are evaluating the merits of a smaller capital raise with a goal of preserving the potential future use of our net deferred tax asset, which totaled approximately $75.2 million as of December 31, 2011, and on which we had established a $75.2 million valuation allowance.  This evaluation will also take into account our ongoing operating results, as well as input from our financial advisors and the Treasury.

However, whatever strategy we pursue to reach the objectives of the Capital Plan will involve risks and uncertainties.  The successful implementation of our Capital Plan is, in many respects, largely out of our control as it primarily depends on factors such as our ability to raise new capital, which depends on factors such as the stability of the financial markets, other macro economic conditions, and investors’ perception of the ability of the Michigan economy to continue to recover from the current recession.  In addition, other risks, including each of those described in these "Risk Factors," could negatively affect our operating performance in significant ways, which would in turn have a negative impact on our ability to reach the goals set forth in our Capital Plan.

If we are unable to achieve the minimum capital ratios set forth in our Capital Plan, it would likely materially and adversely affect our business, financial condition, and the value of our securities. An inability to improve our capital position would make it very difficult for us to withstand continued losses as a result of continued economic difficulties in Michigan and other factors, as described elsewhere in this “Risk Factors” section.  It is possible that our bank’s capital could fall below the levels necessary to remain well-capitalized under federal regulatory standards.  In that case, our primary bank regulators may impose regulatory restrictions and requirements on us through a regulatory enforcement action. If our bank fails to remain well-capitalized under federal regulatory standards, it will be prohibited from accepting or renewing brokered deposits without the prior consent of the FDIC, which would likely have a material adverse impact on our business and financial condition. If our regulators take enforcement action against us, it would likely increase our expenses (due to additional costs associated with complying with such enforcement action) and could limit our business operations (due to restrictions imposed by the enforcement action). There could be other expenses associated with a continued deterioration of our capital, such as increased deposit insurance premiums payable to the FDIC.

If we do not remain well-capitalized, meet certain minimum capital levels or certain profitability requirements or if we incur a rapid decline in net worth we could lose our ability to sell and/or service loans to Fannie Mae or Freddie Mac. This could impact our ability to generate gains on the sale of loans and generate servicing income. A forced liquidation of our servicing portfolio could also impact the value that could be recovered on this asset. Fannie Mae has the most stringent eligibility requirements covering capital levels, profitability and decline in net worth. Fannie Mae requires seller/servicers to be well-capitalized. For the profitability requirement, we cannot record four or more consecutive quarterly losses and experience a 30% decline in net worth over the same period. Finally, our net worth cannot decline by more than 25% in one quarter or more than 40% over two consecutive quarters. The highest level of capital we are required to maintain is at least $2.5 million plus 0.25% of loans serviced for Freddie Mac.

Additional restrictions would make it increasingly difficult for us to withstand the current economic conditions, any continued deterioration in our loan portfolio, or any additional charges related to estimated potential incurred losses for Mepco from vehicle service contract counterparty contingencies. We could then be required to engage in a sale or other transaction with a third party or our bank could be placed into receivership by bank regulators. Any such event could be expected to result in a loss of the entire value of our outstanding shares of common stock and it could also result in a loss of the entire value of our outstanding trust preferred securities and preferred stock.

25

We may not achieve results similar to our current financial projections.

In our annual report, to be delivered to shareholders in connection with the April 24, 2012 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), we disclose certain information regarding our potential future financial performance, including  our belief that our bank can remain above “well-capitalized” for regulatory purposes for the foreseeable future, even without additional capital, and attain the bank regulatory capital ratios required by the Capital Plan in 2012 and our belief that our bank can return to profitability in 2012.  These projections and assumptions were based on information about circumstances and conditions existing as of the date of this Annual Report on Form 10-K. The projections are based on estimates and assumptions that are inherently uncertain and, though considered reasonable by us, are subject to significant business, economic, and competitive uncertainties and contingencies, all of which are difficult to predict and many of which are beyond our control. Accordingly, there can be no assurance that actual results will not be significantly different than the information disclosed.  It is possible that our bank may not be able to remain well-capitalized as we work through asset quality issues and seek to return to consistent profitability.  Any significant deterioration in or inability to improve our capital position would make it very difficult for us to withstand continued losses that we may incur and that may be increased or made more likely as a result of continued economic difficulties and other factors.  We do not intend to update any such forward-looking information. Neither we nor any other person or entity assumes any responsibility for the accuracy or validity of these projections, as the projections are not, and should not be taken as, a guarantee of our future financial performance or condition.

We have credit risk inherent in our loan portfolios, and our allowance for loan losses may not be sufficient to cover actual loan losses.

Our loan customers may not repay their loans according to their respective terms, and the collateral securing the payment of these loans may be insufficient to cover any losses we may incur. We have experienced and may continue to experience significant credit losses which could have a material adverse effect on our operating results. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. Non-performing loans amounted to $59.9 million and $67.6 million at December 31, 2011 and December 31, 2010, respectively. Our allowance coverage ratio of non-performing loans was 98.3% and 100.5% at December 31, 2011 and December 31, 2010, respectively. In determining the size of the allowance for loan losses, we rely on our experience and our evaluation of current economic conditions. If our assumptions or judgments prove to be incorrect, our current allowance for loan losses may not be sufficient to cover certain loan losses inherent in our loan portfolio, and adjustments may be necessary to account for different economic conditions or adverse developments in our loan portfolio. Material additions to our allowance would adversely impact our operating results. In addition, federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize additional loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs required by these regulatory agencies would have a material adverse effect on our results of operations and financial condition.

Although we have performed internal and external testing of our loan portfolio to help ensure the adequacy of our allowance for loan losses, if the assumptions or judgments used in these analyses prove to be incorrect, our current allowance for loan losses may not be sufficient to cover loan losses inherent in our loan portfolio.  In addition, these analyses were completed in early 2010, and we have not undertaken updated analyses with the same level of detail. Material additions to our allowance would adversely impact our operating results. In addition, federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize additional loan charge-offs, notwithstanding any internal or external analysis that has been performed.

26

Our business has been and may continue to be adversely affected by current conditions in the financial markets and economic conditions generally, and particularly by economic conditions in Michigan.

Our success depends to a great extent upon the general economic conditions in Michigan’s lower peninsula. We have in general experienced a slowing economy in Michigan since 2001. Unlike larger banks that are more geographically diversified, we provide banking services to customers primarily in Michigan’s lower peninsula. Our loan portfolio, the ability of the borrowers to repay these loans, and the value of the collateral securing these loans will be impacted by local economic conditions. The economic difficulties faced in Michigan have had and may continue to have many adverse consequences, including the following:

• Loan delinquencies may increase;

• Problem assets and foreclosures may increase;

• Demand for our products and services may decline; and

• Collateral for our loans may decline in value, in turn reducing customers’ borrowing power and reducing the value of assets and collateral associated with existing loans.

Additionally, the overall capital and credit markets have experienced unprecedented levels of volatility and disruption since the start of the U.S. recession. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. As a consequence of the U.S. recession, business activity across a wide range of industries faces serious difficulties due to the lack of consumer spending and the extreme lack of liquidity in the global credit markets. Unemployment has also increased significantly and may continue to increase. While Michigan's unemployment rate has declined in recent months, it is still among the highest of all states.

While we believe we started to see some positive trends in the Michigan economy in 2010 and 2011, the general business environment has continued to have an overall adverse effect on our business during 2010 and 2011. If conditions do not show some meaningful and sustainable improvement, our business, financial condition, and results of operations will likely continue to be adversely affected by economic conditions.

Current market developments, particularly in real estate markets, may adversely affect our industry, business and results of operations.

Dramatic declines in the housing market in recent years, with falling home prices and increasing foreclosures and unemployment, have resulted in, and may continue to result in, significant write-downs of asset values by us and other financial institutions. These write-downs have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. As a result of these conditions, many lenders and institutional investors have reduced, and in some cases ceased to provide, funding to borrowers including financial institutions.

Although we believe the Michigan economy started to show signs of stabilization in 2010 and 2011, it is possible conditions will not stabilize or recover at or even close to the pace expected.

This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility, and widespread reduction of business activity generally. The resulting lack of available credit, lack of confidence in the financial sector, increased volatility in the financial markets, and reduced business activity could materially and adversely affect our business, financial condition and results of operations.

Further negative market developments may continue to negatively affect consumer confidence levels and may continue to contribute to increases in delinquencies and default rates, which may impact our charge-offs and provisions for credit losses. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial services industry.

27

The assumptions we make in calculating estimated potential losses  on vehicle service contract counterparty receivables for Mepco may be inaccurate, which could lead to vehicle service contract counterparty contingencies expense that is materially greater than the charges we have taken to date.

One of our subsidiaries, Mepco, is engaged in the business of acquiring and servicing payment plans for consumers who purchase vehicle service contracts and similar products. The receivables generated in this business involve a different, and generally higher, level of risk of delinquency or collection than generally associated with the loan portfolios of our bank. Upon cancellation of the payment plans acquired by Mepco (whether due to voluntary cancellation by the consumer or non-payment), the third party entities that provide the service contracts or other products to consumers (which we refer to as Mepco's "counterparties") become obligated to refund Mepco the unearned portion of the sales price previously funded by Mepco.  These obligations of Mepco's counterparties are shown as "vehicle service contract counterparty receivables" in our Consolidated Statements of Financial Condition.  At December 31, 2011, the aggregate amount of such obligations owing to Mepco by counterparties, net of write-downs and reserves made through the recognition of "vehicle service contract counterparty contingencies expense," totaled $29.3 million.  This compares to a balance of $37.3 million at December 31, 2010.

In most cases, there is no collateral to secure the counterparties’ refund obligations to Mepco, but Mepco has the contractual right to offset unpaid refund obligations against amounts Mepco would otherwise be obligated to fund to the counterparties. In addition, even when other collateral is involved, the refund obligations of these counterparties are not fully secured. Mepco incurs losses when it is unable to fully recover funds owing to it by counterparties upon cancellation of the underlying service contracts.

Historically, Mepco's counterparties generally fulfilled their obligations to Mepco to refund Mepco the amounts owed upon cancellation of the service contracts.  However, events in the vehicle service contract industry starting in approximately 2009 have significantly increased the size of these counterparty obligations.  These events, which included allegations that several service contract providers violated telemarketing and other consumer protection laws, contributed to significantly higher cancellation rates for outstanding service contracts and significantly lower sales of new service contract products which, in turn, contributed to several of Mepco's counterparties either going out of business or defaulting on their obligations to Mepco.  Although Mepco generally has recourse against more than one counterparty upon the cancellation of a service contract, Mepco has not historically had to enforce its rights against one counterparty (e.g., the administrator of a particular service contract that cancelled) based upon the default of a second counterparty (e.g., the seller of the service contract).  As Mepco has begun to enforce these rights in recent years, certain of its counterparties are challenging their payment obligations to Mepco.  Mepco is currently involved in litigation with several counterparties to enforce Mepco's rights to collect refunds owing from those counterparties.  We expect we will need to initiate additional lawsuits against other counterparties that do not pay their obligations to Mepco.  Mepco is also taking other steps to collect the outstanding amount of its vehicle service contract counterparty receivables, including through liquidation of collateral and claims against the bankruptcy estate of a counterparty that previously represented a significant portion of Mepco’s business.

In evaluating the collectability of these receivables, Mepco estimates probable incurred losses that Mepco expects to incur as a result of being unable to fully collect all amounts owing to Mepco.  The aggregate amount of these probable incurred losses (shown as vehicle service contract counterparty contingencies expense in our Consolidated Statements of Operations) recorded in past years has grown from $0 in 2007, to $1.0 million in 2008, to $31.2 million in 2009, and declined to $18.6 million in 2010 and $11.0 million in 2011.

The determination of these losses requires a significant amount of judgment because a number of factors can influence the amount of loss that we may ultimately incur. These factors include our estimate of future cancellations of vehicle service contracts (including cancellations that may result from a counterparty discontinuing its business operations), our evaluation of collateral that may be available to recover funds due from our counterparties, and the amount collected from counterparties in connection with their contractual obligations.  We apply a rigorous process, based upon observable contract activity and past experience, to estimate probable incurred losses for our vehicle service contract counterparty contingencies, but there can be no assurance that our modeling process will successfully identify all such losses.  Because of the uncertainty surrounding the numerous and complex assumptions made, actual losses could exceed the charges we have taken to date, and the additional losses we incur could be material.

28

Mepco has historically contributed a meaningful amount of profit to our consolidated results of operations, but we have shrunk the size of its business significantly since 2009 as a result of the events and risks referenced above.

For 2008 and 2007, Mepco had net income of $10.7 million and $5.5 million, respectively. With the counterparty losses experienced by Mepco since late 2009 (as referenced in the previous risk factor), Mepco reported net losses of $11.7 million in 2009 (which included a $16.7 million goodwill impairment charge), $1.4 million in 2010, and $4.8 million in 2011.

As a result of these adverse events and unique risks within the vehicle service contract industry, we have made a concerted effort to significantly reduce the size and scope of Mepco's business in the past two years.  Net payment plan receivables have been reduced from $406.3 million (or approximately 13.7% of total assets) at December 31, 2009, to $201.3 million (or approximately 7.9% of total assets) at December 31, 2010, to $115.0 million (or approximately 5.0% of total assets) at December 31, 2011.  This represents a decline of over 71% since 2009. We expect the amount of total payment plan receivables will continue to decline at a more moderate pace during 2012.

This decline in payment plan receivables has had a significant adverse impact on our net interest income and net interest margin.

Even though the size of Mepco's business has been significantly reduced in recent years, it still presents unique market, operational, and internal control challenges and risks.

Mepco faces unique operational and internal control challenges due to the relatively rapid turnover of its portfolio and high volume of new payment plans. Mepco's business is highly specialized, and its results of operation depend largely on the continued services of its executives and other key employees familiar with its business. In addition, because activity in this market is conducted primarily through relationships with unaffiliated vehicle service contract direct marketers and administrators and because the customers are located nationwide, risk management and general supervisory oversight are generally more difficult than in our bank. The risk of third party fraud is also higher as a result of these factors. Acts of fraud are difficult to detect and deter, and we cannot assure investors that the risk management procedures and controls will prevent losses from fraudulent activity. Although we have an internal control system at Mepco, we may be exposed to the risk of material loss in this business.

Our operations may be adversely affected if we are unable to secure adequate funding. Our use of wholesale funding sources exposes us to liquidity risk and potential earnings volatility.

We rely on wholesale funding, including Federal Home Loan Bank borrowings, brokered deposits, and Federal Reserve Bank borrowings, to augment our core deposits to fund our business. As of December 31, 2011, our use of such wholesale funding sources amounted to approximately $75.7 million or 3.6% of total funding. Because wholesale funding sources are affected by general market conditions, the availability of funding from wholesale sources may be dependent on the confidence these parties have in our commercial and consumer banking operations. The continued availability to us of these funding sources is uncertain, and brokered deposits may be difficult for us to retain or replace at attractive rates as they mature. Our liquidity will be constrained if we are unable to renew our wholesale funding sources or if adequate financing is not available in the future at acceptable rates of interest or at all. We may not have sufficient liquidity to continue to fund new loans, and we may need to liquidate loans or other assets unexpectedly, in order to repay obligations as they mature.

The constraint on our liquidity would be exacerbated if we were to experience a reduction in our core deposits, and we cannot be sure we will be able to maintain our current level of core deposits. In particular, those deposits that are currently uninsured or those deposits that were in the FDIC Transaction Account Guarantee Program ("TAGP"), which expired on December 31, 2010, may be particularly susceptible to outflow, although the Dodd-Frank Act extended protection similar to that provided under the TAGP through December 31, 2012 for only non-interest bearing transaction accounts. At December 31, 2011 we had $123.1 million of uninsured deposits and an additional $170.9 million of deposits that were in non-interest bearing transaction accounts and fully insured through December 31, 2012 under the Dodd-Frank Act. A reduction in core deposits would increase our need to rely on wholesale funding sources, at a time when our ability to do so may be more restricted, as described above.

In addition, if we fail to remain "well-capitalized" under federal regulatory standards, we will be prohibited from accepting or renewing brokered deposits without the prior consent of the FDIC. As of December 31, 2011, we had brokered deposits of approximately $42.3 million. Approximately $30.6 million of these brokered deposits mature during the next 12 months. As a result, any such restrictions on our ability to access brokered deposits are likely to have a material adverse impact on our business and financial condition.

29

Moreover, we cannot be sure we will be able to maintain our current level of core deposits. Our deposit customers could move their deposits in reaction to media reports about bank failures in general or, particularly, if our financial condition were to deteriorate further. A reduction in core deposits would increase our need to rely on wholesale funding sources, at a time when our ability to do so may be more restricted, as described above.

Our financial performance will be materially and adversely affected if we are unable to maintain our access to funding or if we are required to rely more heavily on more expensive funding sources. In such case, our net interest income and results of operations would be adversely affected.

Dividends being deferred on our outstanding trust preferred securities and our outstanding preferred stock are accumulating and are expected to continue to increase as we have no current plans to resume such dividend payments at any time in the near future.

We are currently deferring payment of quarterly dividends on our preferred stock held by the Treasury, which pays cumulative dividends quarterly at a rate of 5% per annum through February 14, 2014, and 9% per annum thereafter. In addition, we have exercised our right to defer all quarterly interest payments on the subordinated debentures we issued to our trust subsidiaries. As a result, all quarterly dividends on the related trust preferred securities are also being deferred. We may defer such interest payments for a total of 20 consecutive calendar quarters without causing an event of default under the documents governing these securities. After such period, we must pay all deferred interest and resume quarterly interest payments or we will be in default.  Our right to continue to defer these interest payments without being in default of the related debt instruments will expire in late 2014.

We do not have any current plans to resume dividend payments on our outstanding trust preferred securities or our outstanding preferred stock. If and when either of such payments resume, however, the accrued amounts must be paid and made current. As of December 31, 2011, the amount of these accrued but unpaid dividends on our outstanding trust preferred securities and our outstanding Series B Convertible Preferred Stock was $11.0 million.

We face uncertainty with respect to legislative efforts by the federal government to help stabilize the U.S. financial system, address problems that caused the recent crisis in the U.S. financial markets, or otherwise regulate the financial services industry.

Beginning in the fourth quarter of 2008, the federal government enacted new laws intended to strengthen and restore confidence in the U.S. financial system. See "Business—Regulatory Developments" above for additional information regarding these developments. There can be no assurance, however, as to the actual impact that such programs will have on the financial markets, including the extreme levels of volatility and limited credit availability currently being experienced. The failure of these and other programs to stabilize the financial markets and a continuation or worsening of depressed financial market conditions could materially and adversely affect our business, financial condition, results of operations, access to credit, or the trading price of our common stock.

In addition, additional legislation or regulations may be adopted in the future that could adversely impact us. For example, on July 21, 2010, the President signed the Dodd-Frank Act into law, which includes the creation of the new Consumer Financial Protection Bureau with power to promulgate and, with respect to financial institutions with more than $10 billion in assets, enforce consumer protection laws; the creation of the Financial Stability Oversight Council chaired by the Secretary of the Treasury with authority to identify institutions and practices that might pose a systemic risk; provisions affecting corporate governance and executive compensation of all companies whose securities are registered with the Securities and Exchange Commission; a provision that broadens the base for FDIC insurance assessments and permanently increases FDIC deposit insurance to $250,000; a provision under which interchange fees for debit cards of issuers with at least $10 billion in assets are set by the Federal Reserve under a restrictive "reasonable and proportional cost" per transaction standard; a provision that requires bank regulators to set minimum capital levels for bank holding companies that are as strong as those required for their insured depository subsidiaries, subject to a grandfather clause for financial institutions with less than $15 billion in assets as of December 31, 2009; and new restrictions on how mortgage brokers and loan originators may be compensated.  Although a number of the regulations required by the Dodd-Frank Act have been issued, many of the new requirements have not yet been implemented and will likely be subject to implementing regulations over the course of several years.  As these provisions continue to be implemented, we expect they may impact our business operations and may negatively affect our earnings and financial condition by affecting our ability to offer certain products or earn certain fees and by exposing us to increased compliance and other costs.  At this time, it is difficult to assess the full impact of the Dodd-Frank Act on our business. This legislation as well as other similar federal initiatives could have a material adverse impact on our business.

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We have credit risk inherent in our securities portfolio.

We maintain diversified securities portfolios, which include obligations of the Treasury and government-sponsored agencies as well as securities issued by states and political subdivisions, mortgage-backed securities, and asset-backed securities. We also invest in capital securities, which include preferred stocks and trust preferred securities. We seek to limit credit losses in our securities portfolios by generally purchasing only highly rated securities (rated "AA" or higher by a major debt rating agency) or by conducting significant due diligence on the issuer for unrated securities. However, gross unrealized losses on securities available for sale in our portfolio totaled approximately $5.2 million as of December 31, 2011 (compared to approximately $5.2 million as of December 31, 2010). We believe these unrealized losses are temporary in nature and are expected to be recovered within a reasonable time period as we believe we have the ability to hold the securities to maturity or until such time as the unrealized losses reverse. However, we evaluate securities available for sale for other than temporary impairment (OTTI) at least quarterly and more frequently when economic or market concerns warrant such evaluation. Those evaluations may result in OTTI charges to our earnings. In addition to these impairment charges, we may, in the future, experience additional losses in our securities portfolio which may result in charges that could materially adversely affect our results of operations.

Our mortgage-banking revenues are susceptible to substantial variations dependent largely upon factors that we do not control, such as market interest rates.

A portion of our revenues are derived from gains on the sale of real estate mortgage loans. We realized net gains of $9.3 million on the sale of mortgage loans during 2011 compared to $12.3 million during 2010.  These net gains primarily depend on the volume of loans we sell, which in turn depends on our ability to originate real estate mortgage loans and the demand for fixed-rate obligations and other loans that are outside of our established interest-rate risk parameters. Net gains on real estate mortgage loans are also dependent upon economic and competitive factors as well as our ability to effectively manage exposure to changes in interest rates. Consequently, they can often be a volatile part of our overall revenues.

Fluctuations in interest rates could reduce our profitability.

We realize income primarily from the difference between interest earned on loans and investments and the interest paid on deposits and borrowings. Our interest income and interest expense are affected by general economic conditions and by the policies of regulatory authorities. While we have taken measures intended to manage the risks of operating in a changing interest rate environment, there can be no assurance that these measures will be effective in avoiding undue interest rate risk. We expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to our position, this “gap” will work against us, and our earnings may be negatively affected.

We are unable to predict fluctuations of market interest rates, which are affected by, among other factors, changes in the following:

• inflation or deflation rates;

• levels of business activity;

• recession;

• unemployment levels;

• money supply;

• domestic or foreign events; and

• instability in domestic and foreign financial markets.

We rely heavily on our management team, and the unexpected loss of key managers may adversely affect our operations and the ability to implement our Capital Plan and business strategies.

The continuity of our operations is influenced strongly by our ability to attract and to retain senior management experienced in banking and financial services. Our ability to retain executive officers and the current management teams of each of our lines of business will continue to be important to successful implementation of our Capital Plan and our strategies. We do not have employment or non-compete agreements with any of our executives or other key employees (although we recently entered into a Consulting and Transition Agreement with our Chief Executive Officer in connection with our announced management transition plan announced in 2011). In addition, we face restrictions on our ability to compensate our executives as a result of our participation in the CPP under TARP. Many of our competitors do not face these same restrictions. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have a material adverse effect on our business and financial results.

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Competition with other financial institutions could adversely affect our profitability.

We face vigorous competition from banks and other financial institutions, including savings banks, finance companies, and credit unions. A number of these banks and other financial institutions have substantially greater resources and lending limits, larger branch systems, and a wider array of banking services. To a limited extent, we also compete with other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies, and insurance companies, which are not subject to the same degree of regulation as that imposed on bank holding companies. As a result, these non-bank competitors may have an advantage over us in providing certain services, and this competition may reduce or limit our margins on banking services, reduce our market share, and adversely affect our results of operations and financial condition.

We will face challenges in our ability to achieve future growth in the near term.

Our current capital position has prevented us from pursuing any meaningful growth initiatives, and we have taken actions to shrink our balance sheet. Our current focus, as discussed elsewhere in this Annual Report on Form 10-K and in our annual report to shareholders included as Exhibit 13 to this Annual Report on Form 10-K, is to strengthen our capital base, as opposed to pursuing growth.

We operate in a highly regulated environment and may be adversely affected by changes in federal and local laws and regulations.

We are generally subject to extensive regulation, supervision, and examination by federal and state banking authorities. The burden of regulatory compliance has increased under current legislation and banking regulations and is likely to continue to have a significant impact on the financial services industry. Recent legislative and regulatory changes as well as changes in regulatory enforcement policies and capital adequacy guidelines are likely to increase our cost of doing business. In addition, future legislative or regulatory changes could have a substantial impact on us. Additional legislation and regulations may be enacted or adopted in the future that could significantly affect our powers, authority, and operations; increase our costs of doing business; and, as a result, give an advantage to our competitors who may not be subject to similar legislative and regulatory requirements. Further, regulators have significant discretion and power to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding companies in the performance of their supervisory and enforcement duties. The exercise of regulatory power may have a negative impact on our results of operations and financial condition.

There have been numerous media reports about bank failures, which we expect will continue as additional banks fail. These reports have created concerns among certain of our customers, particularly those with deposit balances in excess of deposit insurance limits.

We have proactively sought to provide appropriate information to our deposit customers about our organization in order to retain our business and deposit relationships. To date, we have not experienced a meaningful loss of core deposits, nor have we had to offer above market interest rates in order to retain our core deposits. However, we cannot be sure we will continue to be successful in maintaining the majority of our core deposit base. The outflow of significant amounts of deposits could have a material adverse impact on our liquidity and results of operations.

Increases in FDIC insurance premiums may have a material adverse effect on our earnings.

As an FDIC-insured institution, we are required to pay deposit insurance premium assessments to the FDIC. Due to higher levels of bank failures beginning in 2008, the FDIC has taken numerous steps to restore reserve ratios of the deposit insurance fund. Our deposit insurance expense increased substantially in 2009 compared to prior periods, reflecting higher rates and a special assessment of $1.4 million in the second quarter of 2009. This industry-wide special assessment was equal to 5 basis points on our total assets less our Tier 1 capital.

Since April 1, 2011, banks have been charged FDIC insurance premiums based on net assets (defined as the quarter to date average daily total assets less the quarter to date average daily Tier 1 capital) rather than based on average domestic deposits.  Initial base assessment rates vary from 0.05% to 0.35% of net assets and may be adjusted between negative 0.025% and positive 0.10% for an unsecured debt adjustment and a brokered deposit adjustment.  This new FDIC assessment system has resulted in a decline in our deposit insurance premiums from $6.8 million in 2010 to $3.5 million in 2011.  However, if our financial condition worsens and our Tier 1 capital deteriorates further, our deposit insurance expense may increase. The amount of deposit insurance that we are required to pay is also subject to factors outside of our control, including bank failures and regulatory initiatives. Such increases may adversely affect our results of operations.

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Initiatives we may take to fully implement our Capital Plan could be highly dilutive to our existing common shareholders.

Our Capital Plan contemplates capital raising initiatives that involve the issuance of a significant number of shares of our common stock, as described under "Business – Recent Developments" above.  While we are currently re-evaluating the best strategy to implement our Capital Plan, any pursuit of these capital raising initiatives is likely to be highly dilutive to our existing common shareholders and their voting power. The market price of our common stock could decline as a result of the dilutive effect of the capital raising transactions we may enter into or the perception that such transactions could occur.

It is possible the Treasury or one or more private investors could end up owning a significant percentage of our stock and have the ability to exert significant influence over our management and operations.

One of the primary capital raising initiatives set forth in our Capital Plan consists of the conversion of the preferred stock held by the Treasury into shares of our common stock. As described under "Business – Recent Developments" above, the Series B Convertible Preferred Stock currently held by the Treasury is convertible into shares of our common stock. Any such conversion is likely to result in the Treasury owning a significant percentage of our outstanding common stock, perhaps over 50%.

Except with respect to certain designated matters, the Treasury has agreed to vote all shares of our common stock acquired upon conversion of the Series B Convertible Preferred Stock or upon exercise of the amended and restated Warrant that are beneficially owned by it and its controlled affiliates in the same proportion (for, against, or abstain) as all other shares of our common stock are voted. The "designated matters" are (i) the election and removal of our directors, (ii) the approval of any merger, consolidation or similar transaction that requires the approval of our shareholders, (iii) the approval of a sale of all or substantially all of our assets or property, (iv) the approval of our dissolution, (v) the approval of any issuance of any of our securities on which our shareholders are entitled to vote, (vi) the approval of any amendment to our organizational documents on which our shareholders are entitled to vote, and (vii) the approval of any other matters reasonably incidental to the foregoing as determined by the Treasury.

It is also possible that one or more investors, other than the Treasury, could end up as the owner of a significant portion of our common stock. This could occur, for example, if the Treasury transfers shares of the Series B Convertible Preferred Stock it holds or, upon conversion of such stock, transfers to a third party the common stock issued upon conversion. It also could occur if one or more large investors make a significant investment in any offering of our capital stock that we undertake.

Subject to the voting limitations applicable to the Treasury and its controlled affiliates described above, any such significant shareholder could exercise significant influence on matters submitted to our shareholders for approval, including the election of directors. In addition, having a significant shareholder could make future transactions more difficult or even impossible to complete without the support of such shareholder, whose interests may not coincide with interests of smaller shareholders. These possibilities could have an adverse effect on the market price of our common stock.

In addition to the foregoing, the Series B Convertible Preferred Stock we issued to the Treasury contains a provision providing that, if dividends on the preferred stock have not been paid for an aggregate of six quarterly dividend periods or more, whether consecutive or not, the holders of the preferred stock have the right to elect two additional directors at our next annual meeting of shareholders or at a special meeting of shareholders called for that purpose. These directors would be elected annually and serve until all accrued and unpaid dividends on the Series B Convertible Preferred Stock have been paid. Because we have deferred dividends on the Series B Convertible Preferred Stock for at least six quarterly dividend periods, the Treasury currently has the right to elect two directors to our board.  At this time, in lieu of electing such directors, the Treasury requested us to allow (and we agreed) an observer to attend our Board of Directors meetings beginning in the third quarter of 2011.  The Treasury continues to retain the right to elect two directors as described above.

An offering of our common stock could trigger an ownership change under federal tax law that will negatively affect our ability to utilize net operating loss carryforwards and other deferred tax assets in the future.

As of December 31, 2011, we had federal loss carryforwards of approximately $75.1 million. Under federal tax law, our ability to utilize this carryforward and other deferred tax assets is limited if we are deemed to experience a change of ownership pursuant to Section 382 of the Internal Revenue Code. This would result in our loss of the benefit of these deferred tax assets. Please see the more detailed discussion of these tax rules under "Results of Operations - Income Tax Benefit" in our annual report to shareholders included as Exhibit 13 to this Annual Report on Form 10-K.

33

The trading price of our common stock may be subject to continued significant fluctuations and volatility.

The market price of our common stock could be subject to significant fluctuations due to, among other things:

· actual or anticipated quarterly fluctuations in our operating and financial results, particularly if such results vary from the expectations of management, securities analysts, and investors, including with respect to further loan losses or vehicle service contract counterparty contingencies expenses we may incur;

· announcements regarding significant transactions in which we may engage, including the initiatives that are part of our Capital Plan;

· market assessments regarding such transactions, including the timing, terms, and likelihood of success of any offering of our common stock;

· developments relating to litigation or other proceedings that involve us;

· changes or perceived changes in our operations or business prospects;

· legislative or regulatory changes affecting our industry generally or our businesses and operations;

· the failure of general market and economic conditions to stabilize and recover, particularly with respect to economic conditions in Michigan, and the pace of any such stabilization and recovery;

· the possible delisting of our common stock from Nasdaq or perceptions regarding the likelihood of such delisting;

· the operating and share price performance of companies that investors consider to be comparable to us;

· future offerings by us of debt, preferred stock, or trust preferred securities, each of which would be senior to our common stock upon liquidation and for purposes of dividend distributions;

· actions of our current shareholders, including future sales of common stock by existing shareholders and our directors and executive officers; and

· other changes in U.S. or global financial markets, economies, and market conditions, such as interest or foreign exchange rates, stock, commodity, credit or asset valuations or volatility.

Stock markets in general, and our common stock in particular, have experienced significant volatility since October 2007 and continue to experience significant price and volume volatility. As a result, the market price of our common stock may continue to be subject to similar market fluctuations that may or may not be related to our operating performance or prospects. Increased volatility could result in a decline in the market price of our common stock.

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ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

ITEM 2.     PROPERTIES

We and our bank operate a total of 112 facilities in Michigan and 1 facility in Chicago, Illinois.  The individual properties are not materially significant to us or our bank's business or to the consolidated financial statements.

With the exception of the potential remodeling of certain facilities to provide for the efficient use of work space or to maintain an appropriate appearance, each property is considered reasonably adequate for current and anticipated needs.

ITEM 3.     LEGAL PROCEEDINGS

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

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

ITEM 4.     [REMOVED AND RESERVED.]

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ADDITIONAL ITEM - EXECUTIVE OFFICERS

Our executive officers are appointed annually by our Board of Directors at the meeting of Directors preceding the Annual Meeting of Shareholders.  There are no family relationships among these officers and/or our Directors nor any arrangement or understanding between any officer and any other person pursuant to which the officer was elected.

The following sets forth certain information with respect to our executive officers at February 27, 2012.

		First elected
		as an executive
Name (Age)	Position	officer
Michael M. Magee, Jr. (56)	Chief Executive Officer and Director (1)	1993
Robert N. Shuster (54)	Executive Vice President and Chief Financial Officer	1999
William B. Kessel  (47)	President (1)	2004
Stefanie M. Kimball (52)	Executive Vice President and Chief Lending Officer (2)	2007
David C. Reglin (52)	Executive Vice President, Retail Banking	1998
Mark L. Collins (54)	Executive Vice President, General Counsel (3)	2009
Richard E. Butler (60)	Senior Vice President, Operations	1998
Peter R. Graves (54)	Senior Vice President, Chief Information Officer	1999
James J. Twarozynski (46)	Senior Vice President, Controller	2002

(1) As previously announced in a Form 8-K filed February 16, 2011, as part of a senior management succession plan, the position of CEO will be transitioned from Mr. Magee to Mr. Kessel on December 31, 2012.

(2) Prior to being named Executive Vice President and Chief Lending Officer in 2007, Ms. Kimball was a Senior Vice President at Comerica Incorporated since 1998.

(3) Prior to being named Executive Vice President, General Counsel in 2009, Mr. Collins was a Partner with Varnum LLP, a Grand Rapids, Michigan based law firm, where he specialized in commercial law.

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PART II.

ITEM 5. MARKET FOR OUR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The information set forth under the caption "Quarterly Summary" in our annual report, to be delivered to shareholders in connection with the April 24, 2012 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), is incorporated herein by reference.

ITEM 6.     SELECTED FINANCIAL DATA

The information set forth under the caption "Selected Consolidated Financial Data" in our annual report, to be delivered to shareholders in connection with the April 24, 2012 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), is incorporated herein by reference.

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report, to be delivered to shareholders in connection with the April 24, 2012 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), is incorporated herein by reference.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the caption "Asset/liability management" in our annual report, to be delivered to shareholders in connection with the April 24, 2012 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), is incorporated herein by reference.

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PART II.

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following consolidated financial statements and the independent auditor's report are set forth in our annual report, to be delivered to shareholders in connection with the April 24, 2012 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), and is incorporated herein by reference.

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Financial Condition at December 31, 2011 and 2010

Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009

Consolidated Statements of Shareholders' Equity for the years ended December 31, 2011, 2010 and 2009

Consolidated Statements of Comprehensive Loss for the years ended December 31, 2011, 2010 and 2009

Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009

Notes to Consolidated Financial Statements

The supplementary data required by this item set forth under the caption "Quarterly Financial Data" in our annual report, to be delivered to shareholders in connection with the April 24, 2012 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), is incorporated herein by reference.

The portions of our annual report, to be delivered to shareholders in connection with the April 24, 2012 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), which are not specifically incorporated by reference as part of this Form 10-K are not deemed to be a part of this report.

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ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES

1. Evaluation of Disclosure Controls and Procedures.  With the participation of management, our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a – 15e and 15d – 15e) as of the year ended December 31, 2011 (the "Evaluation Date"), have concluded that, as of such date, our disclosure controls and procedures were effective.

2. Internal Control Over Financial Reporting.

The management of Independent Bank Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance to us and the board of directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

We assessed the effectiveness of our internal control over financial reporting as of December 31, 2011. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on our assessment, management has concluded that as of December 31, 2011, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

There were no changes in our internal control over financial reporting during the quarter ended December 31, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in our annual report.

/s/Michael M. Magee, Jr.	/s/Robert N. Shuster
Chief Executive Officer	Executive Vice President
	and Chief Financial Officer
March 13, 2012

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PART II.

ITEM 9B.OTHER INFORMATION

None.

PART III.

ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

DIRECTORS - The information with respect to our Directors, set forth under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in our definitive proxy statement, to be delivered to shareholders in connection with the April 24, 2012 Annual Meeting of Shareholders, is incorporated herein by reference.

EXECUTIVE OFFICERS - Reference is made to additional item under Part I of this report on Form 10-K.

CODE OF ETHICS - We have adopted a Code of Ethics for our Chief Executive Officer and Senior Financial Officers.  A copy of our Code of Ethics is posted on our website at www.IndependentBank.com, under Investor Relations, and a printed copy is available upon request by writing to our Chief Financial Officer, Independent Bank Corporation, P.O. Box 491, Ionia, Michigan 48846.

CORPORATE GOVERNANCE – Information relating to certain functions and the composition of our board committees, set forth under the caption "Board Committees and Functions" in our definitive proxy statement, to be delivered to shareholders in connection with the April 24, 2012 Annual Meeting of Shareholders, is incorporated herein by reference.

ITEM 11.   EXECUTIVE COMPENSATION

The information set forth under the captions "Executive Compensation," "Director Compensation," and “Compensation Committee Interlocks and Insider Participation” in our definitive proxy statement, to be delivered to shareholders in connection with the April 24, 2012 Annual Meeting of Shareholders, is incorporated herein by reference.

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PART III.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information set forth under the captions "Voting Securities and Record Date", "Election of Directors" and "Securities Ownership of Management" in our definitive proxy statement, to be delivered to shareholders in connection with the April 24, 2012 Annual Meeting of Shareholders, is incorporated herein by reference.

We maintain certain equity compensation plans under which our common stock is authorized for issuance to employees and directors, including our Non-employee Director Stock Option Plan, Employee Stock Option Plan and Long-Term Incentive Plan.

The following sets forth certain information regarding our equity compensation plans as of December 31, 2011.

					(c)
					Number of securities
	(a)				remaining available for
	Number of securities		(b)		future issuance under
	to be issued upon		Weighted-average		equity compensation
	exercise of outstanding		exercise price of		plans (excluding
	options, warrants		outstanding options,		securities reflected
Plan Category	and rights		warrants and rights		in column (a))
Equity compensation plans  approved by security holders		180,862	$	7.98		510,596
Equity compensation plan  not approved by security holders	None				None

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information set forth under the captions "Transactions Involving Management" and "Determination of Independence of Board Members" in our definitive proxy statement, to be delivered to shareholders in connection with the April 24, 2012 Annual Meeting of Shareholders, is incorporated herein by reference.

ITEM 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES

The information set forth under the caption "Disclosure of Fees Paid to our Independent Auditors" in our definitive proxy statement, to be delivered to shareholders in connection with the April 24, 2012 Annual Meeting of Shareholders, is incorporated herein by reference.

PART IV.

ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)          1.  Financial Statements

All of our financial statements are incorporated herein by reference as set forth in the annual report to be delivered to shareholders in connection with the April 24, 2012 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K.)

2.  Exhibits  (Numbered in accordance with Item 601 of Regulation S-K)

The Exhibit Index is located on the final three pages of this report on Form 10-K.

41

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, dated March 13, 2012.

INDEPENDENT BANK CORPORATION

/s/Robert N. Shuster   Robert N. Shuster, Executive Vice President and Chief Financial Officer (Principal Financial Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.  Each director whose signature appears below hereby appoints Michael M. Magee, Jr. and Robert N. Shuster and each of them severally, as his or her attorney-in-fact, to sign in his or her name and on his or her behalf, as a director, and to file with the Commission any and all amendments to this Report on Form 10-K.

Michael M. Magee, Jr., Chief Executive Officer (Principal Executive Officer)	/s/Michael M. Magee Jr.	March 13, 2012
Robert N. Shuster, Executive Vice President and Chief Financial Officer (Principal Financial Officer)	/s/Robert N. Shuster	March 13, 2012
James J. Twarozynski, Senior Vice President and Controller (Principal Accounting Officer)	/s/James J. Twarozynski	March 13, 2012
Donna J. Banks, Director	/s/Donna J. Banks	March 11, 2012
Jeffrey A. Bratsburg, Director	/s/Jeffrey A. Bratsburg	March 7, 2012
Stephen L. Gulis, Jr., Director	/s/Stephen L. Gulis, Jr.	March 12, 2012
Terry L. Haske, Director	/s/Terry L. Haske	March 8, 2012
Robert L. Hetzler, Director
Michael M. Magee, Jr., Director	/s/Michael M. Magee, Jr.	March 13, 2012
James E. McCarty, Director	/s/James E. McCarty	March 8, 2012
Charles A. Palmer, Director	/s/Charles A. Palmer	March 13, 2012
Charles C. Van Loan, Director	/s/Charles C. Van Loan	March 8, 2012

42

EXHIBIT INDEX

Exhibit number and description

EXHIBITS FILED HEREWITH

10.1*	First Amendment to Amended and Restated Deferred Compensation and Stock Purchase Plan for Nonemployee Directors, effective March 1, 2012.
13	Annual report, relating to the April 24, 2012 Annual Meeting of Shareholders.  This annual report will be delivered to our shareholders in compliance with Rule 14(a)-3 of the Securities Exchange Act of 1934, as amended.
21	List of Subsidiaries.
23	Consent of Independent Registered Public Accounting Firm (Crowe Horwath LLP)
24	Power of Attorney (included on page 42).
31.1	Certificate of the Chief Executive Officer of Independent Bank Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certificate of the Chief Financial Officer of Independent Bank Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certificate of the Chief Executive Officer of Independent Bank Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certificate of the Chief Financial Officer of Independent Bank Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1	Certification of Chief Executive Officer pursuant to Section 111(b)(4) of the Emergency Economic  Stabilization Act of 2008
99.2	Certification of Chief Financial Officer pursuant to Section 111(b)(4) of the Emergency Economic Stabilization Act of 2008
101.INS	Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

EXHIBITS INCORPORATED BY REFERENCE

3.1	Restated Articles of Incorporation, conformed through May 12, 2009 (incorporated herein by reference to Exhibit 3.1 to our Form S-4 Registration Statement dated January 27, 2010, filed under registration No. 333-164546).
3.1(a)	Amendment to Article III of the Articles of Incorporation (incorporated herein by reference to Exhibit 99.1 to our current report on Form 8-K dated February 1, 2010 and filed February 3, 2010).
3.1(b)	Amendment to Article III of the Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to our current report on Form 8-K dated April 9, 2010 and filed April 9, 2010).
3.1(c)	Certificate of Designations for Fixed Rate Cumulative Mandatorily Convertible Preferred Stock, Series B, filed as an amendment to the Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to our current report on Form 8-K dated April 16, 2010 and filed April 21, 2010).
3.1(d)	Amendment to Article III of the Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to our current report on Form 8-K dated August 31, 2010 and filed August 31, 2010).

43

EXHIBIT INDEX (Continued)

3.1(e)	Certificate of Designations for Series C Junior Participating Preferred Stock, filed as an amendment to the Articles of Incorporation (incorporated herein by reference to Exhibit 4.2 to our Registration Statement on Form 8-A dated November 15, 2011 and filed November 15, 2011).
3.2	Amended and Restated Bylaws, conformed through December 8, 2008 (incorporated herein by reference to Exhibit 3.2 to our current report on Form 8-K dated December 8, 2008 and filed on December 12, 2008).
4.1	Certificate of Trust of IBC Capital Finance II dated February 26, 2003 (incorporated herein by reference to Exhibit 4.1 to our report on Form 10-Q for the quarter ended March 31, 2003).
4.2	Amended and Restated Trust Agreement of IBC Capital Finance II dated March 19, 2003 (incorporated herein by reference to Exhibit 4.2 to our report on Form 10-Q for the quarter ended March 31, 2003).
4.3	Preferred Securities Certificate of IBC Capital Finance II dated March 19, 2003 (incorporated herein by reference to Exhibit 4.3 to our report on Form 10-Q for the quarter ended March 31, 2003).
4.4	Preferred Securities Guarantee Agreement dated March 19, 2003  (incorporated herein by reference to Exhibit 4.4 to our report on Form 10-Q for the quarter ended March 31, 2003).
4.5	Agreement as to Expenses and Liabilities dated March 19, 2003 (incorporated herein by reference to Exhibit 4.5 to our report on Form 10-Q for the quarter ended March 31, 2003).
4.6	Indenture dated March 19, 2003 (incorporated herein by reference to Exhibit 4.6 to our report on Form 10-Q for the quarter ended March 31, 2003).
4.7	First Supplemental Indenture of Independent Bank Corporation issued to IBC Capital Finance II dated as of April 1, 2010 (incorporated herein by reference to Exhibit 4.4 to our Form S-4/A Registration Statement dated April 5, 2010, filed under registration No. 333-164546).
4.8	8.25% Junior Subordinated Debenture of Independent Bank Corporation dated March 19, 2003 (incorporated herein by reference to Exhibit 4.6 to our report on Form 10-Q for the quarter ended March 31, 2003).
4.9	Cancellation Direction and Release between Independent Bank Corporation, IBC Capital Finance II and U.S. Bank National Association dated as of June 23, 2010 and related Irrevocable Stock Power (incorporated herein by reference to Exhibit 4.9 to our Form S-1 Registration Statement dated July 8, 2010, filed under registration No. 333-168032).

4.10	Form of Certificate for the Fixed Rate Cumulative Perpetual Preferred Stock, Series A (incorporated herein by reference to Exhibit 4.1 to our current report on Form 8-K dated December 8, 2008 and filed on December 12, 2008).
4.11	Warrant dated December 12, 2008 to purchase shares of Common Stock of Independent Bank Corporation (incorporated herein by reference to Exhibit 4.2 to our current report on Form 8-K dated December 8, 2008 and filed on December 12, 2008).
4.12	Certificate for the Fixed Rate Cumulative Mandatorily Convertible Preferred Stock, Series B (incorporated herein by reference to Exhibit 4.1 to our current report on Form 8-K dated April 16, 2010 and filed April 21, 2010).
4.13	Amended and Restated Warrant dated April 16, 2010 to purchase shares of Common Stock of Independent Bank Corporation (incorporated herein by reference to Exhibit 4.2 to our current report on Form 8-K dated April 16, 2010 and filed April 21, 2010).
10.1*	Deferred Benefit Plan for Directors (incorporated herein by reference to Exhibit 10(C) to our report on Form 10-K for the year ended December 31, 1984).

44

EXHIBIT INDEX (Continued)

10.2	The form of Indemnity Agreement approved by our shareholders at its April 19, 1988 Annual Meeting, as executed with all of the Directors of the Registrant (incorporated herein by reference to Exhibit 10(F) to our report on Form 10-K for the year ended December 31, 1988).
10.3*	Non-Employee Director Stock Option Plan, as amended, approved by our shareholders at its April 15, 1997 Annual Meeting (incorporated herein by reference to Exhibit 4 to our Form S-8 Registration Statement dated July 28, 1997, filed under registration No. 333-32269).
10.4*	Employee Stock Option Plan, as amended, approved by our shareholders at its April 17, 2000 Annual Meeting (incorporated herein by reference to Exhibit 4 to our Form S-8 Registration Statement dated October 8, 2000, filed under registration No. 333-47352).
10.5	The form of Management Continuity Agreement as executed with executive officers and certain senior managers (incorporated herein by reference to Exhibit 10 to our report on Form 10-K for the year ended December 31, 1998).
10.6	Letter Agreement, dated as of December 12, 2008, between Independent Bank Corporation and the United States Department of the Treasury, and the Securities Purchase Agreement—Standard Terms attached thereto (incorporated herein by reference to Exhibit 10.1 to our current report on Form 8-K dated December 8, 2008 and filed on December 12, 2008).
10.7	Form of Letter Agreement executed by each of Michael M. Magee, Jr., Robert N. Shuster, William B. Kessel, Stefanie M. Kimball, and David C. Reglin (incorporated herein by reference to Exhibit 10.2 to our current report on Form 8-K dated December 8, 2008 and filed on December 12, 2008).
10.8	Form of waiver executed by each of Michael M. Magee, Jr., Robert N. Shuster, William B. Kessel, Stefanie M. Kimball, and David C. Reglin (incorporated herein by reference to Exhibit 10.3 to our current report on Form 8-K dated December 8, 2008 and filed on December 12, 2008).
10.9	Exchange Agreement, dated April 2, 2010, between Independent Bank Corporation and the United States Department of the Treasury (incorporated herein by reference to Exhibit 10.1 to our current report on Form 8-K dated April 2, 2010 and filed on April 2, 2010).

10.10	Form of waiver agreement executed by, among other employees, Michael M. Magee (President and Chief Executive Officer), William B. Kessel (Executive Vice President and Chief Operating Officer), Robert N. Shuster (Executive Vice President and Chief Financial Officer), David C. Reglin (Executive Vice President for Retail Banking), Stefanie M. Kimball (Executive Vice President and Chief Lending Officer), and Mark L. Collins (Executive Vice President and General Counsel) (incorporated herein by reference to Exhibit 10.1 to our current report on Form 8-K dated April 16, 2010 and filed on April 21, 2010).
10.11	Technology Outsourcing Renewal Agreement, dated as of April 1, 2006, between Independent Bank Corporation and Metavante Corporation (incorporated herein by reference to Exhibit 10 to our report on Form 10-Q for the quarter ended March 31, 2006).
10.12	Amendment to Technology Outsourcing Renewal Agreement, dated as of July 8, 2010, between Independent Bank Corporation and Metavante Corporation (incorporated herein by reference to Exhibit 10.1 to our current report on Form 8-K dated July 22, 2010 and filed on July 27, 2010).
10.13*	Consulting and Transition Agreement, dated February 16, 2011, by and among Independent Bank Corporation, Independent Bank, and Michael M. Magee, Jr. (incorporated herein by reference to Exhibit 10.1 to our current report on Form 8-K dated February 15, 2011 and filed on February 16, 2011).
10.14*	Long-Term Incentive Plan, as amended through April 26, 2011 (incorporated herein by reference to Appendix A to our proxy statement filed on Schedule 14A on March 17, 2011).
10.15*	Amended and Restated Deferred Compensation and Stock Purchase Plan for Nonemployee Directors, as amended through March 8, 2011 (incorporated herein by reference to Exhibit 10.2 to our annual report on Form 10-K filed on March 10, 2011).

* Represents a compensation plan.

45

EX-10.1

Exhibit 10.1

FIRST AMENDMENT TO THE INDEPENDENT BANK CORPORATION

AMENDED AND RESTATED DEFERRED COMPENSATION

AND STOCK PURCHASE PLAN FOR NONEMPLOYEE DIRECTORS

This First Amendment ("Amendment") to the Independent Bank Corporation Amended and Restated Deferred Compensation and Stock Purchase Plan for Nonemployee Directors (the "Plan") is adopted by Independent Bank Corporation (the "Company") with reference to the following:

A. The Company adopted the Plan as of March 8, 2011.

B. The Company desires to amend the Plan to allocate 350,000 additional shares of IBC Common Stock (as defined in the Plan) for issuance under the Plan and to update the contents of an Election to Participate (as defined in the Plan).

NOW THEREFORE, the Plan is amended as follows effective as of March 1, 2012:

1. The third sentence of Section 4 of the Plan is amended to read as follows:

Subject to adjustment as described below, the maximum number of shares of IBC Common Stock that may be purchased or credited under the Plan is 670,000.

2. Clause (v) of Section 7 of the Plan is deleted such that Section 7 shall read as follows:

Contents of Election to Participate.  An Election to Participate shall be made on a form prescribed by the Plan Administrator.  The Election to Participate shall indicate the following:  (i) the participant's Plan Fees; (ii) one of the following three accounts to which the participant wishes to have his or her Plan Fees credited:  (a) the Current Stock Purchase Account, (b) the Deferred Cash Investment Account, or (c) the Deferred Stock Account; (iii) the name or names of the participant's beneficiary or beneficiaries; and (iv) if the participant elects the Deferred Stock Account or the Deferred Cash Investment Account, whether distributions are to be in a lump sum or in installments.

IN WITNESS WHEREOF, this Amendment is adopted as of the 1st day of March, 2012.

INDEPENDENT BANK CORPORATION

/s/ Robert N. Shuster

By:  Robert N. Shuster

Its:  Executive VP and Chief Financial Officer

EX-13

EXHIBIT 13

CONTENTS

Section	Page number
Selected Consolidated Financial Data	6
Management’s Discussion and Analysis	7
Report of Independent Registered Public Accounting Firm	42
Consolidated Financial Statements	43
Notes to Consolidated Financial Statements	48
Quarterly Data	113

5

SELECTED CONSOLIDATED FINANCIAL DATA

	Year Ended December 31,
	2011			2010			2009			2008			2007
	(Dollars in thousands, except per share amounts)
SUMMARY OF OPERATIONS
Interest income	$	114,762		$	148,851		$	189,056		$	203,736		$	223,254
Interest expense		20,193			37,198			50,533			73,587			102,663
Net interest income		94,569			111,653			138,523			130,149			120,591
Provision for loan losses		27,946			46,765			103,318			71,113			43,105
Net gains (losses) on securities		(511	)		1,177			3,744			(14,961	)		(705	)
Gain on extinguishment of debt		-			18,066			-			-			-
Other non-interest income		47,424			52,570			56,057			45,510			48,944
Non-interest expenses		133,948			155,000			188,443			178,186			116,873
Income (loss) from continuing operations before income tax		(20,412	)		(18,299	)		(93,437	)		(88,601	)		8,852
Income tax expense (benefit)		(212	)		(1,590	)		(3,210	)		3,063			(1,103	)
Income (loss) from continuing operations		(20,200	)		(16,709	)		(90,227	)		(91,664	)		9,955
Discontinued operations, net of tax		-			-			-			-			402
Net income (loss)	$	(20,200	)	$	(16,709	)	$	(90,227	)	$	(91,664	)	$	10,357
Preferred dividends		4,157			4,095			4,301			215			-
Net income (loss) applicable to common stock	$	(24,357	)	$	(20,804	)	$	(94,528	)	$	(91,879	)	$	10,357
PER COMMON SHARE DATA(1)
Income (loss) per common share from continuing operations
Basic	$	(2.94	)	$	(4.09	)	$	(39.60	)	$	(39.98	)	$	4.39
Diluted		(2.94	)		(4.09	)		(39.60	)		(39.98	)		4.35
Net income (loss) per common share
Basic	$	(2.94	)	$	(4.09	)	$	(39.60	)	$	(39.98	)	$	4.57
Diluted		(2.94	)		(4.09	)		(39.60	)		(39.98	)		4.53
Cash dividends declared		0.00			0.00			0.30			1.40			8.40
Book value		2.68			5.52			16.94			54.93			106.19
SELECTED BALANCES
Assets	$	2,307,406		$	2,535,248		$	2,965,364		$	2,956,245		$	3,247,516
Loans		1,576,608			1,813,116			2,299,372			2,459,529			2,518,330
Allowance for loan losses		58,884			67,915			81,717			57,900			45,294
Deposits		2,086,125			2,251,838			2,565,768			2,066,479			2,505,127
Shareholders’ equity		102,627			119,085			109,861			194,877			240,502
Long-term debt - FHLB advances		33,384			71,022			94,382			314,214			261,509
Subordinated debentures		50,175			50,175			92,888			92,888			92,888
SELECTED RATIOS
Net interest income to average interest earning assets (2)		4.42	%		4.36	%		5.00	%		4.48	%		4.26	%
Income (loss) from continuing operations to (3)
Average common equity		(68.44	)		(54.38	)		(90.72	)		(39.01	)		3.96
Average assets		(1.02	)		(0.75	)		(3.17	)		(2.88	)		0.31
Net income (loss) to (3)
Average common equity		(68.44	)		(54.38	)		(90.72	)		(39.01	)		4.12
Average assets		(1.02	)		(0.75	)		(3.17	)		(2.88	)		0.32
Average shareholders’ equity to average assets		4.76			3.92			5.80			7.50			7.72
Tier 1 capital to average assets		6.25			6.35			5.27			8.61			7.44
Non-performing loans to Portfolio Loans		3.80			3.73			4.78			5.09			3.07

(1) Per share data has been adjusted for a 1 for 10 reverse stock split in 2010.

(2) 2007 data is presented on tax equivalent basis because we had taxable income in that year.

(3) These amounts are calculated using income (loss) from continuing operations applicable to common stock and net income.

6

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

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

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

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

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

● further adverse developments in the vehicle service contract industry;

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

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

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

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

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

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

7

The following section presents additional information to assess the financial condition and results of operations of Independent Bank Corporation (“IBC”) and its subsidiaries. This section should be read in conjunction with the consolidated financial statements and the supplemental financial data contained elsewhere in this annual report. We also encourage you to read our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”). That report includes a list of risk factors that you should consider in connection with any decision to buy or sell our securities.

Introduction. Our success depends to a great extent upon the economic conditions in Michigan’s Lower Peninsula. We have in general experienced a difficult economy in Michigan since 2001, although economic conditions in the state began to show signs of improvement during 2010 and generally these improvements continued into 2011, albeit at a slower pace, as evidenced, in part, by an overall decline in the unemployment rate. However, Michigan’s unemployment rate has been consistently above the national average.

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

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

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

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

8

It is against this backdrop that we discuss our results of operations and financial condition in 2011 as compared to earlier periods.

RESULTS OF OPERATIONS

Summary. We incurred a net loss applicable to common stock of $24.4 million, or $2.94 per share, in 2011 compared to $20.8 million, or $4.09 per share, and $94.5 million, or $39.60 per share, in 2010 and 2009, respectively. The increased loss in 2011 as compared to 2010 is primarily because 2010 included an $18.1 million gain on the extinguishment of debt. Excluding this gain on the extinguishment of debt, 2011 results improved as compared to 2010, which primarily reflects decreases in the provision for loan losses and non-interest expenses that were partially offset by a decrease in net interest income and non-interest income. The reduced loss in 2010 as compared to 2009 is due primarily to a decrease in the provision for loan losses, the aforementioned gain on the extinguishment of debt realized in 2010, a decline in vehicle service contract counterparty contingencies expense and an impairment charge on goodwill that was recorded in 2009. Per share data has been adjusted for a 1-for-10 reverse stock split completed in 2010.

KEY PERFORMANCE RATIOS

	Year Ended December 31,
	2011			2010			2009
Net loss to
Average common equity		(68.44	)%		(54.38	)%		(90.72	)%
Average assets		(1.02	)		(0.75	)		(3.17	)
Net loss per share
Basic	$	(2.94	)	$	(4.09	)	$	(39.60	)
Diluted		(2.94	)		(4.09	)		(39.60	)

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

Net interest income totaled $94.6 million during 2011, compared to $111.7 million and $138.5 million during 2010 and 2009, respectively. The decrease in 2011 compared to 2010 reflects a significant decline in our average interest-earning assets that was partially offset by an increase in net interest income as a percent of average interest-earning assets (the “net interest margin”). The net interest margin increased to 4.42% in 2011, as compared to 4.36% in 2010. This increase was primarily due to a reduction in funding costs (due principally to a reduction in higher costing brokered certificates of deposit [“Brokered CDs”]) and an increase in non-interest bearing deposits that was partially offset by a decline in the weighted average yield on average interest-earning assets (due principally to a decline in loans).

9

The decrease in net interest income in 2010 compared to 2009 reflects declines in our net interest margin as well as in our average interest-earning assets. The decline in the net interest margin primarily reflects a decrease in the yield on interest earning assets principally due to a change in the mix of interest-earning assets with a declining level of higher yielding loans and an increasing level of lower yielding short-term investments, as described in more detail below.

The reduction in average interest-earning assets over the past three years reflects our strategy to preserve our regulatory capital levels by reducing loan balances that have higher risk weightings for regulatory capital purposes. In addition, during the past three years, the demand for credit in our markets has been somewhat subdued, reflecting both caution by businesses and consumers and a still relatively weak economy.

Beginning in the last half of 2009 and continuing into 2011, we have maintained (and generally expect to continue to maintain) elevated levels of lower-yielding interest bearing cash balances to augment our liquidity in response to our stressed financial condition (see “Liquidity and capital resources”). In addition, due to the challenges facing Mepco (see “Noninterest expense”), we significantly reduced the balance of payment plan receivables during 2010 and continuing into 2011. These payment plan receivables are the highest yielding segment of our loan portfolio, with an average yield of approximately 13% to 14%. The combination of these two items (an increase in the level of lower-yielding interest bearing cash balances and a decrease in the level of higher-yielding payment plan receivables) has had an adverse impact on our interest income and net interest income over the past two years.

Our net interest income is also impacted by our level of non-accrual loans. Average non-accrual loans totaled $57.0 million, $86.4 million and $120.2 million in 2011, 2010 and 2009, respectively.

10

AVERAGE BALANCES AND RATES

	2011							2010							2009
	Average Balance		Interest		Rate			Average Balance		Interest		Rate			Average Balance		Interest		Rate
	(Dollars in thousands)
ASSETS(1)
Taxable loans	$	1,704,057	$	110,242		6.47	%	$	2,072,586	$	141,876		6.85	%	$	2,461,896	$	177,557		7.21	%
Tax-exempt loans(2)		7,891		332		4.21			9,531		406		4.26			8,672		391		4.51
Taxable securities		62,315		1,422		2.28			82,127		3,052		3.72			111,558		6,333		5.68
Tax-exempt securities(2)		29,615		1,219		4.12			45,223		1,932		4.27			85,954		3,669		4.27
Cash - interest bearing		312,576		792		0.25			324,065		824		0.25			72,606		174		0.24
Other investments		22,084		755		3.42			26,526		761		2.87			28,304		932		3.29
Interest earning assets		2,138,538		114,762		5.36			2,560,058		148,851		5.81			2,768,990		189,056		6.83
Cash and due from banks		53,098							50,739							55,451
Other assets, net		188,583							167,873							157,762
Total assets	$	2,380,219						$	2,778,670						$	2,982,203
LIABILITIES
Savings and interest-bearing checking	$	1,006,305		2,263		0.22		$	1,089,992		2,829		0.26		$	992,529		5,751		0.58
Time deposits		656,944		12,994		1.98			978,098		25,335		2.59			1,019,624		29,654		2.91
Other borrowings		92,879		4,936		5.31			198,030		9,034		4.56			394,975		15,128		3.83
Interest bearing liabilities		1,756,128		20,193		1.15			2,266,120		37,198		1.64			2,407,128		50,533		2.10
Non-interest bearing deposits		467,305							349,376							321,802
Other liabilities		43,378							54,183							80,281
Shareholders’ equity		113,408							108,991							172,992
Total liabilities and shareholders’ equity	$	2,380,219						$	2,778,670						$	2,982,203
Net interest income			$	94,569						$	111,653						$	138,523
Net interest income as a percent of average interest earning assets						4.42	%						4.36	%						5.00	%

(1) All domestic, except for $0.01 million, $0.4 million and $5.1 million for the twelve months ended December 31, 2011, 2010 and 2009, respectively, of average payment plan receivables included in taxable loans for customers domiciled in Canada.

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

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CHANGE IN NET INTEREST INCOME

	2011 compared to 2010									2010 compared to 2009
	Volume			Rate			Net			Volume			Rate			Net
	(In thousands)
Increase (decrease) in interest income(1, 2)
Taxable loans	$	(24,169	)	$	(7,465	)	$	(31,634	)	$	(26,997	)	$	(8,684	)	$	(35,681	)
Tax-exempt loans(3)		(69	)		(5	)		(74	)		37			(22	)		15
Taxable securities		(627	)		(1,003	)		(1,630	)		(1,421	)		(1,860	)		(3,281	)
Tax-exempt securities(3)		(645	)		(68	)		(713	)		(1,740	)		3			(1,737	)
Cash - interest bearing		(32	)		-			(32	)		639			11			650
Other investments		(139	)		133			(6	)		(56	)		(115	)		(171	)
Total interest income		(25,681	)		(8,408	)		(34,089	)		(29,538	)		(10,667	)		(40,205	)
Increase (decrease) in interest expense(1)
Savings and interest bearing checking		(207	)		(359	)		(566	)		518			(3,440	)		(2,922	)
Time deposits		(7,175	)		(5,166	)		(12,341	)		(1,172	)		(3,147	)		(4,319	)
Other borrowings		(5,401	)		1,303			(4,098	)		(8,585	)		2,491			(6,094	)
Total interest expense		(12,783	)		(4,222	)		(17,005	)		(9,239	)		(4,096	)		(13,335	)
Net interest income	$	(12,898	)	$	(4,186	)	$	(17,084	)	$	(20,299	)	$	(6,571	)	$	(26,870	)

(1) The change in interest due to changes in both balance and rate has been allocated to change due to balance and change due to rate in proportion to the relationship of the absolute dollar amounts of change in each.

(2) All domestic, except for $0.1 million and $0.5 million of interest income in 2010 and 2009 on payment plan receivables included in taxable loans from customers domiciled in Canada.

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

COMPOSITION OF AVERAGE INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES

	Year Ended December 31,
	2011			2010			2009
As a percent of average interest earning assets
Loans (1)		80.1	%		81.3	%		89.2	%
Other interest earning assets		19.9			18.7			10.8
Average interest earning assets		100.0	%		100.0	%		100.0	%
Savings and NOW		47.1	%		42.6	%		35.8	%
Time deposits		24.6			21.1			14.1
Brokered CDs		6.1			17.1			22.7
Other borrowings and long-term debt		4.3			7.7			14.3
Average interest bearing liabilities		82.1	%		88.5	%		86.9	%
Earning asset ratio		89.8	%		92.1	%		92.9	%
Free-funds ratio (2)		17.9			11.5			13.1

(1) All domestic, except for 0.2% of payment plan receivables in 2009 from customers domiciled in Canada.

(2) Average interest earning assets less average interest bearing liabilities.

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Provision for loan losses. The provision for loan losses was $27.9 million during 2011 compared to $46.8 million and $103.3 million during 2010 and 2009, respectively. The provision reflects our assessment of the allowance for loan losses taking into consideration factors such as loan mix, levels of non-performing and classified loans and loan net charge-offs. While we use relevant information to recognize losses on loans, additional provisions for related losses may be necessary based on changes in economic conditions, customer circumstances and other credit risk factors. The decrease in the provision for loan losses over the past two years primarily reflects reduced levels of non-performing loans, lower total loan balances and a decline in loan net charge-offs. See “Portfolio Loans and asset quality” for a discussion of the various components of the allowance for loan losses and their impact on the provision for loan losses.

Non-interest income. Non-interest income is a significant element in assessing our results of operations. We regard net gains on mortgage loan sales as a core recurring source of revenue but they are quite cyclical and thus can be volatile. We regard net gains (losses) on securities as a “non-operating” component of non-interest income. In addition, certain categories of non-interest income (namely, non-sufficient funds [“NSF”] or overdraft fees and interchange income) have been or may be adversely impacted by recent legislation, as described in greater detail below.

Non-interest income totaled $46.9 million during 2011 compared to $71.8 million and $59.8 million during 2010 and 2009, respectively. 2010 included an $18.1 million gain on the extinguishment of debt.

NON-INTEREST INCOME

	Year Ended December 31,
	2011			2010			2009
	(In thousands)
Service charges on deposit accounts	$	18,306		$	21,511		$	24,370
Interchange income		9,091			8,257			7,064
Net gains (losses) on assets
Mortgage loans		9,262			12,330			10,860
Securities		249			1,639			3,826
Other than temporary impairment loss on securities:
Total impairment loss		(760	)		(462	)		(4,073	)
Loss recognized in other comprehensive loss		-			-			3,991
Net impairment loss recognized in earnings		(760	)		(462	)		(82	)
Mortgage loan servicing		(2,011	)		(523	)		2,252
Investment and insurance commissions		2,050			1,889			2,017
Bank owned life insurance		1,878			1,917			1,615
Title insurance fees		1,465			2,037			2,272
Decrease in fair value of U.S. Treasury warrant		1,137			393			-
Gain on extinguishment of debt		-			18,066			-
Other		6,246			4,759			5,607
Total non-interest income	$	46,913		$	71,813		$	59,801

Service charges on deposit accounts totaled $18.3 million during 2011, compared to $21.5 million and $24.4 million during 2010 and 2009, respectively. The decrease in such service charges over the past two years principally relates to a decline in NSF occurrences and related NSF fees. We believe the decline in NSF occurrences is due to our customers managing their finances more closely in order to reduce NSF activity and avoid the associated fees because of the current challenging economic conditions as well as the impact of recent legislation on such fees. In late 2009, the Federal Reserve adopted rules that required a written opt-in from customers before a bank can assess overdraft fees on ATM or debit card transactions. These rules were effective for new customers on July 1, 2010 and for existing customers on August 15, 2010. This legislation has had an adverse impact on our level of service charges on deposit accounts.

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Interchange income increased to $9.1 million in 2011 compared to $8.3 million in 2010 and $7.1 million in 2009. The growth in interchange income primarily reflects an increase in debit card transaction volumes and PIN-based interchange fees. As described earlier, the Dodd-Frank Act includes a provision under which interchange fees for debit cards are set by the Federal Reserve under a restrictive “reasonable and proportional cost” per transaction standard. On June 29, 2011 the Federal Reserve issued final rules (that were effective October 1, 2011) on interchange fees for debit cards. Overall, these final rules established price caps for debit card interchange fees that were approximately 50% lower than previous averages. However, debit card issuers with less than $10 billion in assets (like us) are exempt from this rule. On a long-term basis, it is not clear how competitive market factors may impact debit card issuers who are exempt from the rule. As a result, at the present time, we cannot predict if our interchange income will be lower in the future because of such price caps.

We realized net gains of $9.3 million on the sale of mortgage loans during 2011, compared to $12.3 million and $10.9 million during 2010 and 2009 respectively. The volume of loans sold is dependent upon our ability to originate mortgage loans as well as the demand for fixed-rate obligations and other loans that we choose to not put into portfolio because of our established interest-rate risk parameters. (See “Portfolio Loans and asset quality.”) Net gains on mortgage loans are also dependent upon economic and competitive factors as well as our ability to effectively manage exposure to changes in interest rates and thus can often be a volatile part of our overall revenues.

The decrease in net gains in 2011 relates primarily to a decline in mortgage loan sales (and origination) volume. Although mortgage loan interest rates hit record lows during the last half of 2011, refinance activity has been, to date, somewhat moderate as many borrowers already refinanced in earlier periods (and the interest rate differential between the rate at which they refinanced earlier and current interest rates is not that significant). Also, many borrowers are unable to refinance because of negative equity in their homes, more stringent underwriting criteria required by the secondary mortgage market, or other credit-related impediments. Additionally, new tax credits for first-time home buyers during 2009 and early 2010 also spurred home sales and hence mortgage loan origination volume during those periods.

MORTGAGE LOAN ACTIVITY

	Year Ended December 31,
	2011			2010			2009
	(Dollars in thousands)
Mortgage loans originated	$	399,062		$	516,335		$	576,018
Mortgage loans sold		383,493			480,566			540,713
Mortgage loans sold with servicing rights released		81,196			77,080			55,495
Net gains on the sale of mortgage loans		9,262			12,330			10,860
Net gains as a percent of mortgage loans sold (“Loan Sales Margin”)		2.42	%		2.57	%		2.01	%
Fair value adjustments included in the Loan Sales Margin		(0.01	)		0.10			0.07

Net gains as a percentage of mortgage loans sold (our “Loan Sales Margin”) are impacted by several factors including competition and the manner in which the loan is sold (with servicing rights retained or released). Our decision to sell or retain mortgage loan servicing rights is primarily influenced by an evaluation of the price being paid for mortgage loan servicing by outside third parties compared to our calculation of the economic value of retaining such servicing. The sale of mortgage loan servicing rights may result in declines in mortgage loan servicing income in future periods. Gains on the sale of mortgage loans were also impacted by recording fair value accounting adjustments. Excluding the aforementioned accounting adjustments, the Loan Sales Margin would have been 2.43% in 2011, 2.47% in 2010 and 1.94% in 2009. The improved Loan Sales Margins in 2011 and 2010 (as compared to 2009) were generally due to more favorable competitive conditions including wider primary-to-secondary market pricing spreads.

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We generated securities net gains of $0.2 million in 2011 and $1.6 million and $3.8 million in 2010 and 2009, respectively. The 2011 securities net gains were primarily due to the sale of a U.S. Treasury security and residential mortgage-backed securities. The 2010 securities net gains were primarily due to the sale of municipal securities and residential mortgage-backed securities. The 2009 securities net gains were primarily due to increases in the fair value and gains on the sale of our Bank of America preferred stock as well as gains on the sale of municipal securities. We sold all of our Bank of America preferred stock in June 2009.

We also recorded net impairment losses of $0.8 million, $0.5 million and $0.1 million in 2011, 2010 and 2009, respectively, related to other than temporary impairment of securities available for sale. These impairment charges primarily related to private label residential mortgage-backed securities and one trust preferred security.

GAINS AND LOSSES ON SECURITIES

	Year Ended December 31,
	Proceeds		Gains		Losses(1)		Net
	(In thousands)
2011	$	70,322	$	324	$	835	$	(511	)
2010		96,648		1,882		705		1,177
2009		43,525		3,957		213		3,744

(1) Losses in 2011, 2010 and 2009 include $0.8 million, $0.5 million and $0.1 million, respectively of other than temporary impairment charges.

Mortgage loan servicing generated a net expense of $2.0 million and $0.5 million in 2011 and 2010, respectively, compared to net revenue of $2.3 million in 2009. These yearly comparative variances are primarily due to changes in the valuation allowance on capitalized mortgage loan servicing rights and the level of amortization of this asset. The period end valuation allowance is based on the valuation of the mortgage loan servicing portfolio and the amortization is primarily impacted by prepayment activity. In particular, mortgage loan interest rates generally declined during 2011 and 2010 resulting in higher prepayment rates and an increase in the valuation allowance.

CAPITALIZED MORTGAGE LOAN SERVICING RIGHTS

	2011			2010			2009
	(In thousands)
Balance at January 1,	$	14,661		$	15,273		$	11,966
Originated servicing rights capitalized		2,967			4,158			5,213
Amortization		(3,065	)		(3,862	)		(4,255	)
Change in valuation allowance		(3,334	)		(908	)		2,349
Balance at December 31,	$	11,229		$	14,661		$	15,273
Valuation allowance at December 31,	$	6,544		$	3,210		$	2,302

At December 31, 2011, we were servicing approximately $1.77 billion in mortgage loans for others on which servicing rights have been capitalized. This servicing portfolio had a weighted average coupon rate of 5.20% and a weighted average service fee of approximately 25.6 basis points. Remaining capitalized mortgage loan servicing rights at December 31, 2011 totaled $11.2 million, representing approximately 63 basis points on the related amount of mortgage loans serviced for others. The capitalized mortgage loan servicing had an estimated fair market value of $11.5 million at December 31, 2011.

Nearly all of our mortgage loans serviced for others at December 31, 2011 are for either Fannie Mae or Freddie Mac. Because of our current financial condition, if our Bank were to fall below “well capitalized” (as defined by banking regulations) it is possible that Fannie Mae and Freddie Mac could require us to very quickly sell or transfer such servicing rights to a third party or unilaterally strip us of such servicing rights if we cannot complete an approved transfer. Depending on the terms of any such transaction, this forced sale or transfer of such mortgage loan servicing rights could have a material adverse impact on our financial condition and results of operations.

15

Investment and insurance commissions totaled $2.1 million, $1.9 million and $2.0 million in 2011, 2010 and 2009, respectively. The increase in 2011 as compared to 2010 is primarily due to a higher volume of sales of these products. These higher sales principally reflect our efforts to expand this business. The decline in 2010 compared to 2009 is primarily due to the elimination of certain personnel within the wealth management portion of our investment and insurance sales force early in the year.

We earned $1.9 million, $1.9 million and $1.6 million in 2011, 2010 and 2009, respectively, on our separate account bank owned life insurance principally as a result of increases in cash surrender value. Our separate account is primarily invested in agency mortgage-backed securities and managed by PIMCO. The crediting rate (on which the earnings are based) reflects the performance of the separate account. The total cash surrender value of our bank owned life insurance was $49.3 million and $47.9 million at December 31, 2011 and 2010, respectively.

Title insurance fees totaled $1.5 million in 2011, $2.0 million in 2010 and $2.3 million in 2009. The fluctuation in title insurance fees is primarily a function of the level of mortgage loans that we originated.

Changes in the fair value of the amended warrant issued to the U.S. Department of the Treasury (“UST”) in April 2010 are recorded as a component of non-interest income. The fair value of this amended warrant is included in accrued expenses and other liabilities. (See “Liquidity and capital resources.”) Two significant inputs in our valuation model for the amended warrant are our common stock price and the probability percentage of triggering anti-dilution provisions in this instrument related to certain equity transactions. The fair value of the amended warrant declined in 2011 and 2010 due primarily to decreases in these two inputs.

In the second quarter of 2010, we recorded an $18.1 million gain on the extinguishment of debt (net of $1.0 million in expenses and $1.2 million to write off previously capitalized issue costs). On June 23, 2010, we exchanged 5.1 million shares of our common stock (having a fair value of approximately $23.5 million on the date of the exchange) for $41.4 million in liquidation amount of trust preferred securities and $2.3 million of accrued and unpaid interest on such securities.

Other non-interest income totaled $6.2 million, $4.8 million and $5.6 million in 2011, 2010 and 2009, respectively. The overall variations in other non-interest income are primarily due to the impact of our participation in a private mortgage reinsurance captive, changes in rental income and changes in foreign currency transaction gains. We incurred losses of $0.2 million, $0.9 million, and $0.6 million in 2011, 2010 and 2009, respectively related to our private mortgage reinsurance captive participation. These losses reflect mortgage loan defaults and depressed real estate values which led to higher private mortgage insurance claims. Rental income totaled $1.1 million, $0.5 million and $0.1 million in 2011, 2010 and 2009 respectively. The increases in 2011 and 2010 over 2009 primarily reflect rental income generated on ORE properties. Other non-interest income included $0.1 million and $1.0 million in 2010 and 2009, respectively, related to foreign currency transaction gains associated with Canadian dollar denominated payment plan receivables (there were no such gains in 2011). The Canadian dollar appreciated significantly compared to the U.S. dollar during 2009. At December 31, 2011 there were no Canadian dollar denominated payment plan receivables remaining.

Non-interest expense. Non-interest expense is an important component of our results of operations. Historically, we primarily focused on revenue growth, and while we strive to efficiently manage our cost structure, our non-interest expenses generally increased from year to year because we expanded our operations through acquisitions and by opening new branches and loan production offices. Because of the current challenging economic environment, our expansion through acquisitions or by opening new branches is unlikely in the near term. Management is focused on a number of initiatives to reduce and contain non-interest expenses.

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Non-interest expense totaled $133.9 million in 2011, $155.0 million in 2010, and $188.4 million in 2009. In 2009, non-interest expense included a $16.7 million goodwill impairment charge. Changes in vehicle service contract counterparty contingencies also impacted overall non-interest expense as described in more detail below. Loan and collection costs and net losses on ORE have also been elevated reflecting expenses associated with managing non-performing loans and other problem credits and the holding and disposition of ORE.

NON-INTEREST EXPENSE

	Year ended December 31,
	2011			2010			2009
	(In thousands)
Compensation	$	39,835		$	40,827		$	40,053
Performance-based compensation and benefits		1,449			1,803			2,889
Other benefits		9,200			9,081			10,061
Compensation and employee benefits		50,484			51,711			53,003
Loan and collection		12,414			15,323			14,727
Occupancy, net		11,183			11,016			11,092
Vehicle service contract counterparty contingencies		11,048			18,633			31,234
Data processing		9,751			9,554			9,528
Net losses on other real estate and repossessed assets		5,824			9,722			8,554
Furniture, fixtures and equipment		5,535			6,540			7,159
Legal and professional		3,941			4,100			3,222
Credit card and bank service fees		3,656			5,790			6,608
Communications		3,552			4,138			4,424
FDIC deposit insurance		3,507			6,805			7,328
Advertising		2,503			2,712			5,696
Provision for loss reimbursement on sold loans		1,993			215			-
Supplies		1,571			1,630			1,835
Amortization of intangible assets		1,371			1,280			1,930
Goodwill impairment		-			-			16,734
Costs (recoveries) related to unfunded lending commitments		(36	)		(536	)		(286	)
Other		5,651			6,367			5,655
Total non-interest expense	$	133,948		$	155,000		$	188,443

The decline in total compensation and benefits is primarily due to a reduction in staffing levels as well as a decrease in performance based compensation. This decline was partially offset by a reduction in the deferral (as direct loan origination costs) of compensation expense due primarily to a significant reduction in new payment plan receivable origination activity at Mepco. The deferral (as direct loan origination costs) of compensation expense for all loan related origination activity totaled $3.4 million, $3.6 million and $5.5 million in 2011, 2010 and 2009, respectively. Excluding the impact of the changes in the deferral of compensation expense (as direct loan origination costs), salaries declined by $1.2 million, or 2.7%, in 2011 as compared to 2010, and by $1.1 million, or 2.5%, in 2010 as compared to 2009. The decline in salaries reflects our cost reduction initiatives as 2011 average total full time equivalent employee levels fell by 5.8% compared to 2010 and by 8.9% compared to 2009.

The reduction in performance based compensation reflects our near-term financial performance. In each of the past three years, no employee stock ownership contribution was made and no bonuses were paid. In addition, during 2011and 2010, we also eliminated the match of employees’ 401(k) plan contributions.

17

We maintain performance-based compensation plans. In addition to commissions and cash incentive awards, such plans include an employee stock ownership plan and a long-term equity based incentive plan. The amount of expense recognized in 2011, 2010 and 2009 for share-based awards under our long-term equity based incentive plan was $0.9 million, $0.5 million and $0.8 million, respectively. In 2011, there were new grants of restricted stock units, stock options and salary stock. There were not any grants of new awards in 2010. In 2009, there were new grants of stock options.

Loan and collection expenses primarily reflect costs related to the management and collection of non-performing loans and other problem credits. The elevated level of these expenses over the past three years reflects the overall volume of problem credits (although non-performing loans have declined over the past two years) and complexity of managing such credits. 2011 and 2010 also included $1.3 million and $0.8 million, respectively, of collection related costs at Mepco primarily associated with the acquisition and management of collateral securing receivables from vehicle service contract counterparties. Excluding these aforementioned Mepco expenses, loan and collection expenses at the Bank have declined during the past two years primarily due to decreases in non-performing loans, new loan defaults and commercial watch credits.

Occupancy expenses, net, were relatively stable during the past three years and totaled $11.2 million, $11.0 million and $11.1 million in 2011, 2010 and 2009, respectively. The slight increase in 2011 is primarily due to higher snow removal and utilities expenses.

We record estimated incurred losses associated with Mepco’s vehicle service contract payment plans in our provision for loan losses and establish a related allowance for loan losses. (See “Portfolio Loans and asset quality.”) We record estimated incurred losses associated with defaults by Mepco’s counterparties as “vehicle service contract counterparty contingencies expense,” which is included in non-interest expenses in our Consolidated Statements of Operations. Such expenses totaled $11.0 million, $18.6 million and $31.2 million in 2011, 2010 and 2009, respectively.

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

Upon the cancellation of a service contract and the completion of the billing process to the counterparties for amounts due to Mepco, there is a decrease in the amount of “payment plan receivables” and an increase in the amount of “vehicle service contract counterparty receivables” until such time as the amount due from the counterparty is collected. These amounts represent funds actually due to Mepco from its counterparties for cancelled service contracts. At December 31, 2011, the aggregate amount of such obligations owing to Mepco by counterparties, net of write-downs and reserves made through the recognition of vehicle service contract counterparty contingency expense, totaled $29.3 million. This compares to a balance of $37.3 million at December 31, 2010.

In particular, Mepco had purchased a significant amount of payment plans from a single counterparty that declared bankruptcy on March 1, 2010. As of December 31, 2011, there were no remaining payment plan receivable balances related to this counterparty (compared to $29.0 million and $206.1 million at December 31, 2010 and 2009, respectively). However, as of December 31, 2011, this counterparty owed Mepco $47.4 million for previously cancelled payment plans. The bankruptcy and wind down of operations by this counterparty has led to substantial losses as this entity is not in a position to honor all of its obligations on payment plans that Mepco had purchased and which cancelled prior to payment in full. Mepco has been pursuing and will continue to pursue recovery of amounts owed by this counterparty from various co-obligors and guarantors, through the liquidation of certain collateral held by Mepco, and through claims against this counterparty’s bankruptcy estate. The fourth quarter of 2011 included approximately $5.4 million of additional vehicle service contract counterparty contingencies expense and $0.5 million of legal and professional fees principally related to a tentative settlement (reached in December 2011) of the bankruptcy estate of this counterparty. The $5.4 million additional charge primarily represents receivables that we no longer expect to recover from the distribution of the bankruptcy estate assets.

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Previously, Mepco had recorded a receivable (which totaled $3.4 million at December 31, 2010 and peaked at $3.6 million during 2011) for debtor-in-possession financing and associated professional fees related to the above described counterparty. This receivable was included in “Accrued income and other assets” in our Consolidated Statements of Financial Condition. In December 2011, Mepco received $3.1 million from the bankruptcy estate of this counterparty in full satisfaction of our debtor-in-possession financing. The $0.5 million difference between the $3.6 million receivable and $3.1 million actual receipt of funds primarily represents legal and professional fees that Mepco ultimately will not recover in the proposed settlement. The $0.5 million was recorded in legal and professional fees in the fourth quarter of 2011.

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

The above described events have had and may continue to have an adverse impact on Mepco. We face continued risk with respect to certain counterparties defaulting in their contractual obligations to Mepco which could result in additional charges for losses if these counterparties go out of business. Further, Mepco has incurred and will likely continue to incur elevated legal and collection expenses, in general, in dealing with these matters. Net payment plan receivables declined to $115.0 million (or approximately 5.0% of total assets) at December 31, 2011 from $201.3 million (or approximately 7.9% of total assets) at December 31, 2010 due primarily to a planned reduction in such balances. We expect that the amount of total payment plan receivables will decline at a more moderate pace during 2012. This decline in payment plan receivables has adversely impacted our net interest income.

Mepco has had to initiate litigation against certain counterparties to collect amounts owed to Mepco as a result of those parties’ dispute of their contractual obligations to Mepco. In addition, see note #11 to the Consolidated Financial Statements for more information about Mepco’s business, certain risks and difficulties we currently face with respect to that business, and reserves we have established (through vehicle service contract counterparty contingencies expense) for losses related to the business.

Data processing expenses were relatively stable in 2010 and 2009 and increased by $0.2 million, or 2.1%, in 2011. The 2011 increase was due to higher software amortization costs primarily related to a new core processing system that was implemented at Mepco in April 2011.

Net losses on ORE and repossessed assets primarily represent the loss on the sale or additional write downs on these assets subsequent to the transfer of the asset from our loan portfolio. This transfer occurs at the time we acquire the collateral that secured the loan. At the time of acquisition, the other real estate or repossessed asset is valued at fair value, less estimated costs to sell, which becomes the new basis for the asset. Any write-downs at the time of acquisition are charged to the allowance for loan losses. During 2011, net losses on ORE and repossessed assets declined significantly compared to 2010 and 2009. This reduced net loss primarily reflects some stability of real estate prices during 2011, with some markets even experiencing modest price increases. However, foreclosed properties generally continue to have distressed valuations. The elevated levels of net loss on ORE and repossessed assets in 2010 and 2009 were primarily due to declines in the value of these assets subsequent to the acquisition date. These declines in value were accentuated by the high inventory of foreclosed homes and vacant land for sale in many of our markets as well as Michigan’s weaker economic conditions.

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Furniture, fixtures and equipment expense declined by $1.0 million in 2011 and declined by $0.6 million in 2010 from the prior year. These declines are due primarily to our cost reduction initiatives. We have restricted new capital expenditures and certain fixed assets have become fully depreciated and were not replaced leading to the decreases in this expense category.

Legal and professional fees have been elevated over the past two years compared to 2009 levels due primarily to increased legal expenses associated with the issues described above related to Mepco and due to various regulatory matters.

The variations in credit card and bank service fees in each year generally correspond to changes in the number of vehicle service contract payment plans being administered by Mepco (shrinking in 2011 and 2010 as compared to 2009). As described above, we expect payment plans at Mepco to decline moderately in 2012, and would therefore expect these expenses to decline as well.

Communications expense declined by $0.6 million and by $0.3 million in 2011 and 2010, respectively, from each prior year. These declines are primarily due to changes in mailing costs at Mepco that reflect a reduction in the volume of payment plan receivables and a decrease in telephone and data line expenses due to the renegotiation of some supplier contracts in mid-2010.

FDIC deposit insurance expense declined in 2011 and 2010 as compared to 2009, principally reflecting a decrease in deposit balances (primarily Brokered CDs) and (for 2011) a new rate structure implemented by the FDIC and effective beginning in the second quarter of 2011. The new rate structure has a lower assessment rate but is based on total assets as compared to the prior structure that was based primarily on total deposits but had a higher assessment rate. 2009 FDIC deposit insurance expense also included an industry-wide special assessment of $1.4 million in the second quarter of 2009. This special assessment was equal to 5 basis points on total assets less Tier 1 capital.

Total advertising expense was substantially lower (reduced by over 50%) in 2011 and 2010 compared to the 2009 level due primarily to a reduction in outdoor advertising (billboards) and the elimination of our debit card rewards program. These decreases are consistent with our cost reduction initiatives.

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

Supplies expense has declined over the past three years consistent with our cost reduction initiatives.

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The amortization of intangible assets primarily relates to branch acquisitions and the amortization of the deposit customer relationship value, including core deposit value, which was acquired in connection with those acquisitions. We had remaining unamortized intangible assets of $7.6 million and $9.0 million at December 31, 2011 and 2010, respectively. See Note 7 to the Consolidated Financial Statements for a schedule of future amortization of intangible assets.

During 2009, we recorded a $16.7 million goodwill impairment charge at our Mepco segment. In the fourth quarter of 2009, we updated our goodwill impairment testing (interim tests had also been performed in each of the first three quarters of 2009). The results of the year end goodwill impairment testing showed that the estimated fair value of our Mepco reporting unit was now less than the carrying value of equity. The fair value of Mepco is principally based on estimated future earnings utilizing a discounted cash flow methodology. Mepco recorded a substantial loss in the fourth quarter of 2009 (after being profitable during the first nine months of 2009). Further, Mepco’s largest business counterparty, who accounted for nearly one-half of Mepco’s payment plan business at that time, defaulted in its obligations to Mepco and declared bankruptcy in March 2010. These factors adversely impacted the level of Mepco’s expected future earnings and hence its fair value. A step 2 analysis and valuation was performed. Based on the step 2 analysis (which involved determining the fair value of Mepco’s assets, liabilities and identifiable intangibles), we concluded that goodwill was impaired, resulting in this $16.7 million charge.

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

Other non-interest expenses totaled $5.7 million in 2011, compared to $6.4 million in 2010, and $5.7 million in 2009. The higher level of these expenses in 2010 as compared to 2011 and 2009 is due primarily to 2010 including a $0.5 million charge for certain litigation matters.

In July 2007, the State of Michigan replaced its Single Business Tax (“SBT”) with a new Michigan Business Tax (“MBT”) which became effective in 2008. Financial institutions are subject to an industry-specific tax which is based on net capital. The MBT is recorded in other non-interest expenses. Our MBT expense was $0.1 million in each of 2011, 2010 and 2009.

Income tax benefit. We recorded anincome tax benefit of $0.2 million, $1.6 million, and $3.2 million in 2011, 2010 and 2009, respectively. A change in the deferred tax asset valuation allowance of $9.4 million, $5.7 million and $24.0 million in 2011, 2010, and 2009, respectively, largely offset the effect of pre-tax losses. The 2011, 2010 and 2009 valuation allowances are net of $0.6 million, $1.4 million and $4.1 million, respectively, of allocations of deferred taxes on accumulated other comprehensive income (loss).

We assess the need for a valuation allowance against our deferred tax assets periodically. The realization of deferred tax assets is largely dependent upon future taxable income, future reversals of existing taxable temporary differences and the ability to carry-back losses to available tax years. In assessing the need for a valuation allowance, we consider all positive and negative evidence, including anticipated operating results, taxable income in carry-back years, scheduled reversals of deferred tax liabilities and tax planning strategies. In 2008, we established a valuation allowance against the majority of our net deferred tax assets due to a number of factors, including our declining operating performance, overall negative trends in the banking industry and our expectation that our operating results will continue to be negatively affected by the overall economic environment. During 2011, 2010 and 2009, we concluded that we needed to continue to carry a valuation allowance based on similar factors. As a result, we recorded an additional valuation allowance of $9.4 million, $5.7 million and $24.0 million during 2011, 2010 and 2009, respectively. This resulted in a valuation allowance against our entire net deferred tax asset except for, in 2010 and 2009, certain state deferred tax assets at Mepco that were expected to be recovered based on Mepco’s individual earnings. However, at December 31, 2011, due to a second year of losses at Mepco and remaining uncertainty regarding certain vehicle service contract counterparty receivables, we concluded that a valuation allowance against $0.8 million of Mepco’s deferred state tax assets was also needed. The valuation allowance against our deferred tax assets of $75.2 million at December 31, 2011 may be reversed to income in future periods to the extent that the related deferred income tax assets are realized or the valuation allowance is otherwise no longer required. This valuation allowance represents our entire net deferred tax asset.

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Despite the valuation allowance, these deferred tax assets remain available to offset future taxable income. Our deferred tax assets will be analyzed quarterly for changes affecting the valuation allowance, which may be adjusted in future periods accordingly. In making such judgments, significant weight will be given to evidence that can be objectively verified. We will analyze changes in near-term market conditions and consider both positive and negative evidence as well as other factors which may impact future operating results in making any decision to adjust this valuation allowance.

The capital initiatives detailed below under “Liquidity and capital resources” may trigger an ownership change that would negatively affect our ability to utilize our net operating loss carryforwards and other deferred tax assets in the future. If such an ownership change were to occur, we may suffer higher-than-anticipated tax expense, and consequently lower net income and cash flow, in those future years. As of December 31, 2011, we had federal loss carryforwards of approximately $75.1 million (which includes $0.5 million of federal capital loss carryforwards). Companies are subject to a change of ownership test under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), that, if met, would limit the annual utilization of tax losses and credits carrying forward from pre-change of ownership periods, as well as the ability to use certain unrealized built-in losses. Generally, under Section 382, the yearly limitation on our ability to utilize such deductions will be equal to the product of the applicable long-term tax exempt rate (presently 3.55%) and the sum of the values of our common shares and of our outstanding preferred stock, immediately before the ownership change. In addition to limits on the use of net operating loss carryforwards, our ability to utilize deductions related to bad debts and other losses for up to a five-year period following such an ownership change would also be limited under Section 382, to the extent that such deductions reflect a net loss that was “built-in” to our assets immediately prior to the ownership change. At this time, the details (including the timing and size of a stock offering) and the likelihood of success of the capital initiatives are not certain; therefore, we do not know the likelihood of experiencing a change of ownership under these tax rules. However, we are presently seeking to limit the size of any future equity offering in order to avoid triggering any Section 382 limitations.

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

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

Income tax expense (benefit) in the Consolidated Statements of Operations also includes income taxes in a variety of other states due primarily to Mepco’s operations. The amounts of such state income taxes were expense (benefit) of $0.7 million and ($0.1) million in 2011 and 2010, respectively, and zero in 2009.

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

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

BUSINESS SEGMENTS

	Year ended December 31,
	2011			2010			2009
	(In thousands)
Independent Bank	$	(12,768	)	$	(27,049	)	$	(71,095	)
Mepco		(4,849	)		(1,388	)		(11,689	)
Other (1)		(2,488	)		11,823			(7,636	)
Elimination		(95	)		(95	)		193
Net loss	$	(20,200	)	$	(16,709	)	$	(90,227	)

(1) Includes amounts relating to our parent company and certain insignificant operations. 2010 includes parent company’s $18.1 million gain on extinguishment of debt.

The losses recorded by the Bank over the past three years are primarily due to elevated provisions for loan losses, loan and collection costs and net losses on ORE. These credit related costs primarily reflect our levels of non-performing loans, ORE, other problem credits, and loan net charge-offs. The improvement in the results recorded by the Bank in 2011 and 2010 as compared to 2009 is primarily due to a lower provision for loan losses and a decrease in non-interest expenses that were partially offset by a decline in net interest income and non-interest income. (See “Net interest income.” “Provision for loan losses,” “Portfolio Loans and asset quality,” “Non-interest income,” and “Non-interest expense.”) In addition, the Bank results included $9.4 million, $5.7 million and $24.0 million in 2011, 2010 and 2009, respectively, of income tax expense for a change in the valuation allowance against deferred tax assets. (See “Income tax benefit.”)

The changes in Mepco’s net loss are due primarily to changes in the level of vehicle service counterparty contingencies expense as well as changes in its level of net interest income. In addition, 2009 results included a goodwill impairment charge of $16.7 million. (See “Non-interest expense.”) All of Mepco’s funding is provided by its parent company, Independent Bank, through an intercompany loan (that is eliminated in consolidation). The rate on this intercompany loan was increased to the Prime Rate (currently 3.25%) effective January 1, 2010. Prior to 2010, this intercompany loan was priced principally based on Brokered CD rates. Mepco might not be able to obtain such favorable funding costs on its own in the open market.

The significant change in “Other” in the Business Segments table above for 2010 as compared to 2011 and 2009 is due primarily to the $18.1 million gain on the extinguishment of debt that was recorded at the parent company in the second quarter of 2010. In addition, interest expense at the parent company declined in 2011 and in the second half of 2010 due to the exchange of $41.4 million in liquidation amount of trust preferred securities for common stock on June 23, 2010.

FINANCIAL CONDITION

Summary. Our total assets declined to $2.31 billion at December 31, 2011 compared to $2.54 billion at December 31, 2010. The decline in total assets primarily reflects decreases in cash and cash equivalents and loans that were partially offset by an increase in securities available for sale. Loans, excluding loans held for sale (“Portfolio Loans”) decreased $236.5 million, or 13.0%, in 2011 as every category of loans declined. The decline in total assets and, in particular, Portfolio Loans, reflects our efforts to preserve regulatory capital ratios despite the adverse impact on capital of net losses over the past four years. Total deposits decreased by $165.7 million in 2011 due to a planned reduction in Brokered CDs.

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

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Securities available for sale increased during 2011 (compared to a decline in 2010) due primarily to the purchase of U.S. government-sponsored agency residential mortgage-backed securities and U.S. government-sponsored agency term notes. The securities were purchased to utilize some of the funds generated from the continued decline in Portfolio Loans. (See “Liquidity and capital resources.”)

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

We recorded net impairment losses related to other than temporary impairment on securities available for sale of $0.8 million, $0.5 million, and $0.1 million in 2011, 2010, and 2009, respectively. The 2011 and 2010 impairment charges primarily relate to private label residential mortgage-backed securities. The 2009 impairment charge relates to a private label residential mortgage-backed security and trust preferred security issued by a small Michigan-based community bank. In these instances we believe that the decline in value is directly due to matters other than changes in interest rates, are not expected to be recovered within a reasonable timeframe based upon available information and are therefore other than temporary in nature. (See “Non-interest income” and “Asset/liability management.”)

SECURITIES

			Unrealized
	Amortized Cost		Gains		Losses		Fair Value
	(In thousands)
Securities available for sale
December 31, 2011	$	161,023	$	1,575	$	5,154	$	157,444
December 31, 2010		72,312		771		5,219		67,864

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

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

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

LOAN PORTFOLIO COMPOSITION

	December 31,
	2011		2010
	(In thousands)
Real estate (1)
Residential first mortgages	$	530,969	$	601,755
Residential home equity and other junior mortgages		150,127		171,273
Construction and land development		59,136		68,022
Other (2)		446,980		484,019
Payment plan receivables		115,018		201,263
Commercial		150,633		155,322
Consumer		119,106		126,525
Agricultural		4,639		4,937
Total loans	$	1,576,608	$	1,813,116

(1) Includes both residential and non-residential commercial loans secured by real estate.

(2) Includes loans secured by multi-family residential and non-farm, non-residential property.

Future growth of overall Portfolio Loans is dependent upon a number of competitive and economic factors. Although economic conditions have generally improved in Michigan in 2011 and 2010, overall loan demand has remained subdued, reflecting still somewhat weak economic conditions in the State. Further, it is our desire to reduce certain loan categories in order to preserve our regulatory capital ratios or for risk management reasons. For example, construction and land development loans have been declining because we are seeking to shrink this portion of our Portfolio Loans due to a generally poor economic climate for real estate development, particularly residential real estate. In addition, payment plan receivables have declined as we seek to reduce Mepco’s vehicle service contract payment plan business. Further declines in Portfolio Loans may continue to adversely impact our future net interest income.

NON-PERFORMING ASSETS

	December 31,
	2011			2010			2009
	(Dollars in thousands)
Non-accrual loans	$	59,309		$	66,652		$	105,965
Loans 90 days or more past due and still accruing interest		574			928			3,940
Total non-performing loans		59,883			67,580			109,905
Other real estate and repossessed assets		34,042			39,413			31,534
Total non-performing assets	$	93,925		$	106,993		$	141,439
As a percent of Portfolio Loans
Non-performing loans		3.80	%		3.73	%		4.78	%
Allowance for loan losses		3.73			3.75			3.55
Non-performing assets to total assets		4.07			4.22			4.77
Allowance for loan losses as a percent of non-performing loans		98.33			100.50			74.35

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TROUBLED DEBT RESTRUCTURINGS

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

	December 31, 2010
	Commercial		Retail			Total
	(Dollars in thousands)
Performing TDR’s	$	16,957	$	96,855		$	113,812
Non-performing TDR’s(1)		7,814		16,616	(2)		24,430
Total	$	24,771	$	113,471		$	138,242

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

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

Non-performing loans declined by $7.7 million, or 11.4%, in 2011 and by $42.3 million, or 38.5%, in 2010 due principally to declines in non-performing commercial loans and residential mortgage loans. These declines primarily reflect loan net charge-offs, pay-offs, negotiated transactions, and the migration of loans into ORE. Non-performing commercial loans relate largely to delinquencies caused by cash-flow difficulties encountered by owners of income-producing properties (due to higher vacancy rates and/or lower rental rates). Non-performing residential mortgage loans are primarily due to delinquencies reflecting both weak economic conditions and soft real estate values in many parts of Michigan and in certain markets where we have mortgage loans secured by resort properties (see note #4 to the Consolidated Financial Statements). Non-performing loans exclude performing loans that are classified as troubled debt restructurings (“TDRs”). Performing TDRs totaled $116.6 million, or 7.39% of total Portfolio Loans, and $113.8 million, or 6.28% of total Portfolio Loans, at December 31, 2011 and 2010, respectively. The increase in the amount of performing TDRs in 2011 primarily reflects an increase in commercial loan TDR’s.

ORE and repossessed assets totaled $34.0 million at December 31, 2011, compared to $39.4 million at December 31, 2010. This decrease is primarily the result of sales and write-downs of ORE being in excess of the migration of non-performing loans secured by real estate into ORE as the foreclosure process is completed and any redemption period expires. High foreclosure rates are evident nationwide, but Michigan has consistently had one of the highest foreclosure rates in the U.S. during the past few years. We believe that this high foreclosure rate is due to both weak economic conditions and declines in residential real estate values (which has eroded or eliminated the equity that many mortgagors had in their home). Because the redemption period on foreclosures is relatively long in Michigan (six months to one year) and we have many non-performing loans that were in the process of foreclosure at December 31, 2011, we anticipate that our level of ORE and repossessed assets will likely remain at elevated levels for some period of time. An elevated level of non-performing assets adversely impacts our net interest income.

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

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ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

	December 31,
	2011		2010		2009
	(In thousands)
Specific allocations	$	22,299	$	24,925	$	29,593
Other adversely rated loans		4,430		8,168		14,481
Historical loss allocations		20,682		20,543		22,777
Additional allocations based on subjective factors		11,473		14,279		14,866
Total	$	58,884	$	67,915	$	81,717

Some loans will not be repaid in full. Therefore, an allowance for loan losses (“AFLL”) is maintained at a level which represents our best estimate of losses incurred. In determining the allowance and the related provision for loan losses, we consider four principal elements: (i) specific allocations based upon probable losses identified during the review of the loan portfolio, (ii) allocations established for other adversely rated loans, (iii) allocations based principally on historical loan loss experience, and (iv) additional allowances based on subjective factors, including local and general economic business factors and trends, portfolio concentrations and changes in the size and/or the general terms of the loan portfolios.

The first AFLL element (specific allocations) reflects our estimate of probable incurred losses based upon our systematic review of specific loans. These estimates are based upon a number of objective factors, such as payment history, financial condition of the borrower, discounted collateral exposure and discounted cash flow analysis. Impaired commercial and mortgage loans are allocated allowance amounts using this first element. The second AFLL element (other adversely rated loans) reflects the application of our loan rating system. This rating system is similar to those employed by state and federal banking regulators. Loans that are rated below a certain predetermined classification are assigned a loss allocation factor for each loan classification category that is based upon a historical analysis of both the probability of default and the expected loss rate (“loss given default”). The lower the rating assigned to a loan or category, the greater the allocation percentage that is applied. For higher rated loans (“non-watch credit”) we again determine a probability of default and loss given default in order to apply an allocation percentage. Commercial loans not falling under the first AFLL element are allocated allowance amounts using this second AFLL element. The third AFLL element (historical loss allocations) is determined by assigning allocations to homogeneous loan groups based principally upon the five-year average of loss experience for each type of loan. Recent years are weighted more heavily in this average. Average losses may be further adjusted based on an analysis of delinquent loans. Loss analyses are conducted at least annually. Mortgage loans not falling under the first AFLL element as well as installment and payment plan receivables are allocated allowance amounts using this third AFLL element. The fourth AFLL element (additional allocations based on subjective factors) is based on factors that cannot be associated with a specific credit or loan category and reflects our attempt to ensure that the overall allowance for loan losses appropriately reflects a margin for the imprecision necessarily inherent in the estimates of expected credit losses. We consider a number of subjective factors when determining this fourth element, including local and general economic business factors and trends, portfolio concentrations and changes in the size, mix and the general terms of the overall loan portfolio. This fourth AFLL element declined by $2.8 million, or 19.7% during 2011 and is 19.5% of the total AFLL at December 31, 2011 compared to 21.0% at December 31, 2010. The fourth AFLL element was reduced in part to general improvement in local and more broad based economic trends as well as a $236.5 million or 13.0% decline in Portfolio Loans.

Increases in the allowance are recorded by a provision for loan losses charged to expense. Although we periodically allocate portions of the allowance to specific loans and loan portfolios, the entire allowance is available for incurred losses. We generally charge-off commercial, homogenous residential mortgage, and installment loans and payment plan receivables when they are deemed uncollectible or reach a predetermined number of days past due based on product, industry practice and other factors. Collection efforts may continue and recoveries may occur after a loan is charged against the allowance.

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

Mepco’s allowance for losses is determined in a similar manner as discussed above, and primarily takes into account historical loss experience and other subjective factors deemed relevant to Mepco’s payment plan business. Estimated incurred losses associated with Mepco’s outstanding vehicle service contract payment plans are included in the provision for loan losses. Mepco recorded credits of $0.03 million and $0.3 million for its provision for loan losses in 2011 and 2010, respectively, due primarily to significant declines ($86.2 million, or 42.9%, and $205.1 million, or 50.5%, in 2011 and 2010, respectively) in the balance of payment plan receivables. This compares to an expense for its provision for loan losses of $0.3 million in 2009. Mepco’s allowance for loan losses totaled $0.2 million and $0.4 million at December 31, 2011 and 2010, respectively. Mepco has established procedures for vehicle service contract payment plan servicing, administration and collections, including the timely cancellation of the vehicle service contract, in order to protect our position in the event of payment default or voluntary cancellation by the customer. Mepco has also established procedures to attempt to prevent and detect fraud since the payment plan origination activities and initial customer contacts are done entirely through unrelated third parties (vehicle service contract administrators and sellers or automobile dealerships). However, there can be no assurance that the aforementioned risk management policies and procedures will prevent us from the possibility of incurring significant credit or fraud related losses in this business segment. The estimated incurred losses described in this paragraph should be distinguished from the possible losses we may incur from counterparties failing to pay their obligations to Mepco. See note #11 to the Consolidated Financial Statements included within this report.

The allowance for loan losses was $58.9 million, or 3.73% of total Portfolio Loans at December 31, 2011 compared to $67.9 million, or 3.75% of total Portfolio Loans at December 31, 2010. Three of the four components of the allowance for loan losses outlined above declined in 2011 as compared to 2010. The allowance for loan losses related to specific loans decreased $2.6 million in 2011 due primarily to a decline in loss allocations on individual commercial and mortgage credits. There was a $0.5 million increase in loss allocations (which totaled $18.1 million at December 31, 2011, compared to $17.5 million at December 31, 2010) for loans classified as TDR. This increase is due in part to a $5.8 million increase in the balance of TDR loans with an allocated allowance during 2011, which totaled $118.3 million at December 31, 2011, compared to $112.5 million at December 31, 2010. The allowance for loan losses related to other adversely rated loans decreased $3.7 million in 2011 primarily due to a decrease in the balance of such loans included in this component to $83.0 million at December 31, 2011 from $121.8 million at December 31, 2010. The allowance for loan losses related to subjective factors decreased $2.8 million during 2011 primarily due to the improvement of various economic indicators used in computing this portion of the allowance as well as an overall reduction in total Portfolio Loans. The allowance for loan losses related to historical losses increased slightly (by $0.1 million) during 2011 due to an increase in the historical loss rates used in this calculation, which was largely offset by a decline in loan balances, as total Portfolio Loans decreased $236.5 million to $1.58 billion at December 31, 2011 from $1.81 billion at December 31, 2010.

During 2010 all four components of the allowance for loan losses decreased as compared to 2009. The allowance for loan losses related to specific loans decreased due primarily to a decline in loss allocations on individual commercial credits. The allowance for loan losses related to other adversely rated loans decreased due to a decrease in the balance of such loans. The allowance for loan losses related to historical losses decreased due to declines in loan balances. Finally, the allowance for loan losses related to subjective factors decreased slightly primarily due to the improvement in certain economic indicators used in computing this portion of the allowance.

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ALLOWANCE FOR LOSSES ON LOANS AND UNFUNDED COMMITMENTS

	2011						2010						2009
	Loan Losses			Unfunded Commitments			Loan Losses			Unfunded Commitments			Loan Losses			Unfunded Commitments
	(In thousands)
Balance at beginning of year	$	67,915		$	1,322		$	81,717		$	1,858		$	57,900		$	2,144
Additions (deductions)
Provision for loan losses		27,946			-			46,765			-			103,318			-
Recoveries credited to allowance		4,747			-			3,612			-			2,795			-
Loans charged against the allowance		(41,724	)		-			(64,179	)		-			(82,296	)		-
Additions (deductions) included in non-interest expense		-			(36	)		-			(536	)		-			(286	)
Balance at end of year	$	58,884		$	1,286		$	67,915		$	1,322		$	81,717		$	1,858
Net loans charged against the allowance to average Portfolio Loans		2.20	%					2.97	%					3.28	%

The ratio of loan net charge-offs to average loans was 2.20% in 2011 (or $37.0 million) compared to 2.97% in 2010 (or $60.6 million). The decline in loan net charge-offs primarily reflects decreases of $16.5 million for commercial loans and $4.9 million for residential mortgage loans. These decreases in loan net charge-offs primarily reflect reduced levels of non-performing loans and some stabilization in collateral liquidation values.

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

To attract new core deposits, we have implemented a direct mail account acquisition program as well as branch staff sales training. Our new account acquisition initiatives have historically generated increases in customer relationships. Over the past three to four years we have also expanded our treasury management products and services for commercial businesses and municipalities or other governmental units and have also increased our sales calling efforts in order to attract additional deposit relationships from these sectors. We view long-term core deposit growth as an important objective. Core deposits generally provide a more stable and lower cost source of funds than alternative sources such as short-term borrowings. (See “Liquidity and capital resources.”)

During the fourth quarter of 2009 we prepaid our estimated quarterly deposit insurance premium assessments to the FDIC for periods through the fourth quarter of 2012. These estimated quarterly deposit insurance premium assessments were based on projected deposit balances over the assessment periods. The prepaid deposit insurance premium assessments totaled $12.6 million and $15.9 million at December 31, 2011 and December 31, 2010, respectively. The actual expense over the assessment periods may be different from this prepaid amount due to various factors including variances in the estimated compared to the actual assessment base and rates used during each assessment period.

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

ALTERNATE SOURCES OF FUNDS

	December 31,
	2011						2010
	Amount		Average Maturity	Rate			Amount		Average Maturity	Rate
	(Dollars in thousands)
Brokered CDs	$	42,279	1.0 years		1.59	%	$	273,546	2.4 years		2.89	%
Fixed-rate FHLB advances		30,384	3.3 years		3.99			21,022	5.9 years		6.34
Variable-rate FHLB advances(1)		3,000	2.3 years		0.51			50,000	0.8 years		0.41
Total	$	75,663	2.0 years		2.51	%	$	344,568	2.4 years		2.74	%

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

Other borrowings, comprised primarily of advances from the Federal Home Loan Bank (the “FHLB”), totaled $33.4 million at December 31, 2011, compared to $71.0 million at December 31, 2010. The $37.6 million decrease in other borrowed funds reflects reduced borrowings from the FHLB.

As described above, we utilize wholesale funding, including FHLB borrowings and Brokered CDs to augment our core deposits and fund a portion of our assets. At December 31, 2011, our use of such wholesale funding sources amounted to approximately $75.7 million, or 3.6% of total funding (deposits and total borrowings, excluding subordinated debentures). Because wholesale funding sources are affected by general market conditions, the availability of such funding may be dependent on the confidence these sources have in our financial condition and operations. The continued availability to us of these funding sources is uncertain, and Brokered CDs may be difficult for us to retain or replace at attractive rates as they mature. Our liquidity may be constrained if we are unable to renew our wholesale funding sources or if adequate financing is not available in the future at acceptable rates of interest or at all. Additionally, we may not have sufficient liquidity to continue to fund new loans, and we may need to liquidate loans or other assets unexpectedly, in order to repay obligations as they mature.

If we fail to remain “well-capitalized” (under federal regulatory standards) we will be prohibited from accepting or renewing Brokered CDs, without the prior consent of the FDIC. At December 31, 2011, we had Brokered CDs of approximately $42.3 million, or 2.0% of total deposits. Of this amount $30.6 million mature during the next twelve months. We currently have ample liquidity in the form of interest-bearing deposits at the FRB or other short-term investments to retire maturing Brokered CDs. As a result, any potential future restrictions on our ability to access Brokered CDs are not expected to adversely impact our business or financial condition.

We cannot be sure that we will be able to maintain our current level of core deposits. In particular, those deposits that are currently uninsured or those deposits that are in non-interest bearing transaction accounts and have unlimited deposit insurance only through December 31, 2012 (in accordance with provisions in the Dodd-Frank Act), may be particularly susceptible to outflow. At December 31, 2011 we had $123.1 million of uninsured deposits and an additional $170.9 million of deposits that were in non-interest bearing transaction accounts and fully insured only through December 31, 2012 under the Dodd-Frank Act. A reduction in core deposits would increase our need to rely on wholesale funding sources, at a time when our ability to do so may be more restricted, as described above.

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Our financial performance will be materially affected if we are unable to maintain our access to funding sources or if we are required to rely more heavily on more expensive funding sources. In such case, our net interest income and results of operations would be adversely affected.

We historically employed derivative financial instruments to manage our exposure to changes in interest rates. We discontinued the active use of derivative financial instruments during 2008, in part, because we could no longer get unsecured credit from our derivatives counterparties. At December 31, 2011, we had remaining interest-rate swaps with an aggregate notional amount of $20.0 million (of which $10.0 million, or one-half, mature in the first six months of 2012).

Liquidity and capital resources. Liquidity risk is the risk of being unable to timely meet obligations as they come due at a reasonable funding cost or without incurring unacceptable losses. Our liquidity management involves the measurement and monitoring of a variety of sources and uses of funds. Our Consolidated Statements of Cash Flows categorize these sources and uses into operating, investing and financing activities. We primarily focus our liquidity management on maintaining adequate levels of liquid assets (primarily funds on deposit with the FRB and certain investment securities) as well as developing access to a variety of borrowing sources to supplement our deposit gathering activities and provide funds for purchasing investment securities or originating Portfolio Loans as well as to be able to respond to unforeseen liquidity needs.

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

At December 31, 2011 we had $357.4 million of time deposits that mature in the next twelve months. Historically, a majority of these maturing time deposits are renewed by our customers. Additionally $1.517 billion of our deposits at December 31, 2011 were in account types from which the customer could withdraw the funds on demand. Changes in the balances of deposits that can be withdrawn upon demand are usually predictable and the total balances of these accounts have generally grown or have been stable over time as a result of our marketing and promotional activities. However, there can be no assurance that historical patterns of renewing time deposits or overall growth or stability in deposits will continue in the future.

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

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

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As a result of the liquidity risks described above and in “Deposits and borrowings” we have generally maintained elevated levels of overnight cash balances in interest-bearing deposits, which totaled $278.3 million and $336.4 million at December 31, 2011 and 2010, respectively. The decline in such cash balances during 2011 is due primarily to the use of these funds to payoff (through calls and maturities) Brokered CDs. Because of our continued expectation of some future decline in Portfolio Loans, we are comfortable with using a portion of our overnight cash balances to reduce wholesale funding or for the purchase of certain investment securities.

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

In the normal course of business, we enter into certain contractual obligations. Such obligations include requirements to make future payments on debt and lease arrangements, contractual commitments for capital expenditures, and service contracts. The table below summarizes our significant contractual obligations at December 31, 2011.

CONTRACTUAL COMMITMENTS(1)

	1 Year or  Less		1-3 Years		3-5 Years		After 5 Years		Total
	(In thousands)
Time deposit maturities	$	357,403	$	154,337	$	56,283	$	781	$	568,804
Other borrowings		12,357		7,240		2,505		11,285		33,387
Subordinated debentures		-		-		-		50,175		50,175
Operating lease obligations		1,310		2,203		1,876		3,419		8,808
Purchase obligations(2)		3,710		3,272		545		-		7,527
Total	$	374,780	$	167,052	$	61,209	$	65,660	$	668,701

(1) Excludes approximately $1.0 million of accrued tax and interest relative to uncertain tax benefits due to the high degree of uncertainty as to when, or if, those amounts would be paid.

(2) Includes contracts with a minimum annual payment of $1.0 million and are not cancellable within one year.

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

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CAPITALIZATION

	December 31,
	2011			2010
	(In thousands)
Subordinated debentures	$	50,175		$	50,175
Amount not qualifying as regulatory capital		(1,507	)		(1,507	)
Amount qualifying as regulatory capital		48,668			48,668
Shareholders’ equity
Preferred stock		79,857			75,700
Common stock		248,950			246,407
Accumulated deficit		(214,259	)		(189,902	)
Accumulated other comprehensive loss		(11,921	)		(13,120	)
Total shareholders’ equity		102,627			119,085
Total capitalization	$	151,295		$	167,753

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

The Federal Reserve Board has issued rules regarding trust preferred securities as a component of the Tier 1 capital of bank holding companies. The aggregate amount of trust preferred securities (and certain other capital elements) are limited to 25 percent of Tier 1 capital elements, net of goodwill (net of any associated deferred tax liability). The amount of trust preferred securities and certain other elements in excess of the limit can be included in Tier 2 capital, subject to restrictions. At the parent company, $38.2 million of these securities qualified as Tier 1 capital at December 31, 2011. Although the Dodd-Frank Act further limited Tier 1 treatment for trust preferred securities, those new limits will not apply to our outstanding trust preferred securities.

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

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

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Shareholders’ equity applicable to common stock decreased to $22.8 million at December 31, 2011 from $43.4 million at December 31, 2010 due primarily to our 2011 year-to-date net loss. Our tangible common equity (“TCE”) totaled $15.2 million and $34.4 million, respectively, at those same dates. Our ratio of TCE to tangible assets was 0.66% at December 31, 2011 compared to 1.36% at December 31, 2010. Although our Bank’s regulatory capital ratios remain at levels above “well capitalized” standards, because of the losses that we have incurred, our elevated levels of non-performing loans and other real estate, and the ongoing economic stress in Michigan, we have taken the following actions to maintain and improve our regulatory capital ratios and preserve liquidity at our parent company level:

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

· Deferred dividends on our preferred stock: Beginning in December of 2009, we suspended payment of quarterly dividends on the preferred stock held by the UST. The cash dividends payable to the UST on the Series B Preferred Stock amount to approximately $4.1 million per year until December of 2013, at which time they would increase to approximately $7.3 million per year. Accrued and unpaid dividends were $6.6 million at December 31, 2011.

· Deferred payments on our subordinated debentures: Beginning in December of 2009, we exercised our right to defer all quarterly interest payments on the subordinated debentures we issued to our trust subsidiaries. As a result, all quarterly dividends on the related trust preferred securities were also deferred. Based on current dividend rates, the cash dividends on all outstanding trust preferred securities as of December 31, 2011, amount to approximately $2.3 million per year. Accrued and unpaid dividends on trust preferred securities at December 31, 2011 and 2010 were $4.4 million and $2.3 million, respectively.

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

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

These actions have preserved cash at our parent company as we do not expect our Bank to be able to pay any cash dividends in the near term. Dividends from the Bank are restricted by federal and state law and are further restricted by the board resolutions adopted in December 2009 (as subsequently amended) and by the Memorandum of Understanding (“MOU”) described in note #21 to the Consolidated Financial Statements included within this report. In particular, those resolutions and MOU prohibit the Bank from paying any dividends to the parent company without the prior written approval of the FRB and the Michigan Office of Financial and Insurance Regulation (“OFIR”). Also see “Regulatory development.”

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

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

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

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

We do not have any current plans to resume interest payments on our outstanding trust preferred securities or dividend payments on the outstanding shares of any preferred stock or common stock. We do not know if or when any such payments will resume. However, as described in note #21 to the Consolidated Financial Statements included within this report, our Board adopted a Joint Revised Capital Plan (the “Capital Plan”) in November 2011 (as subsequently amended). The primary objective of our Capital Plan is to achieve and thereafter maintain the minimum capital ratios required by the December 2009 board resolutions referenced above (as subsequently amended).

As of December 31, 2011, our Bank continued to meet the requirements to be considered “well-capitalized” under federal regulatory standards. However, the minimum capital ratios established by our Board are higher than the ratios required in order to be considered “well-capitalized” under federal standards. The Board imposed these higher ratios in order to ensure that we have sufficient capital to withstand potential continuing losses based on our elevated level of non-performing assets and given certain other risks and uncertainties we face. Set forth below are the actual capital ratios of our Bank as of December 31, 2011, the minimum capital ratios imposed by the board resolutions, and the minimum ratios necessary to be considered “well-capitalized” under federal regulatory standards. As of December 31, 2011, our Bank’s Total Capital to Risk-Weighted Assets ratio exceeded the target of 11%.

Regulatory Capital Ratios	Independent Bank Actual at December 31, 2011			Minimum Ratios Established by our Board			Required to be Well- Capitalized
Tier 1 capital to average total assets		6.77	%		8.00	%		5.00	%
Total capital to risk-weighted assets		11.41			11.00			10.00

The Capital Plan includes projections that reflect forecasted financial data through 2014. At the present time, based on these forecasts and our expectations, we believe that our Bank can remain above “well-capitalized” for regulatory purposes, even without additional capital, primarily because of some further projected decline in total assets (principally loans). Further, we expect credit costs to abate sufficiently so that we can return to profitability in the last half of 2012 and beyond. These forecasts are susceptible to significant variations, particularly if the Michigan economy were to further deteriorate and credit costs were to be higher than anticipated or if we incur any significant future losses at Mepco related to the collection of vehicle service contract counterparty receivables (see “Non-interest expense”). Because of such uncertainties, it is possible that our Bank may not be able to remain well-capitalized as we work through asset quality issues and seek to return to consistent profitability. Any significant deterioration in or inability to improve our capital position would make it very difficult for us to withstand continued losses that we may incur and that may be increased or made more likely as a result of continued economic difficulties and other factors. Please see page 7 of this report for cautionary information about these forward-looking statements and factors that may cause actual results to differ from our current expectations.

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Our Capital Plan also outlines various contingency plans in case we do not succeed in meeting the required minimum capital ratios. These contingency plans include a possible further reduction in our assets (such as through a sale of branches, loans, and/or operating divisions or subsidiaries), more significant expense reductions than those that have already been implemented, and a sale of the Bank. These contingency plans were considered and included within the Capital Plan in recognition of the possibility that market conditions for these transactions may improve and that such transactions may be necessary or required by our regulators if we are unable to attain the required minimum capital ratios described above through other means. Also see “Regulatory development.”

In addition to the measures outlined in the Capital Plan, on July 7, 2010 we executed an Investment Agreement and Registration Rights Agreement with Dutchess Opportunity Fund, II, LP (“Dutchess”) for the sale of shares of our common stock. These agreements serve to establish an equity line facility as a contingent source of liquidity at the parent company level. Pursuant to the Investment Agreement, Dutchess committed to purchase up to $15.0 million of our common stock over a 36-month period ending November 1, 2013. We have the right, but no obligation, to draw on this equity line facility from time to time during such 36-month period by selling shares of our common stock to Dutchess. The sales price is at a 5% discount to the market price of our common stock at the time of the draw (as such market price is determined pursuant to the terms of the Investment Agreement). To date, we have sold a total of 777,974 shares (345,177 shares in the fourth quarter of 2010, 253,759 shares in the first quarter of 2011 and 179,038 shares in the second quarter of 2011) of our common stock to Dutchess under this equity line for total net proceeds of $1.8 million. At the present time, we have shareholder approval to sell approximately 3.2 million additional shares under this equity line.

Our bank holding company and our bank subsidiary both remain “well capitalized” (as defined by banking regulations) at December 31, 2011.

Bank Capital Ratios

	December 31,						Minimum Ratio for Adequately Capitalized			Minimum Ratio for Well Capitalized
	2011			2010			Institutions			Institutions
Tier 1 capital to average assets		6.77	%		6.58	%		4.00	%		5.00	%
Tier 1 risk-based capital		10.13			9.77			4.00			6.00
Total risk-based capital		11.41			11.06			8.00			10.00

Total shareholders’ equity at December 31, 2011 decreased by $16.5 million from December 31, 2010 due primarily to our net loss of $20.2 million in 2011. Shareholders’ equity totaled $102.6 million, equal to 4.45% of total assets at December 31, 2011. At December 31, 2010, shareholders’ equity was $119.1 million, which was equal to 4.70% of total assets.

36

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

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

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

CHANGES IN MARKET VALUE OF PORTFOLIO EQUITY AND NET INTEREST INCOME

Change in Interest Rates	Market Value of Portfolio Equity(1)		Percent Change			Net Interest Income(2)		Percent Change
	(Dollars in thousands)
December 31, 2011
200 basis point rise	$	277,500		26.08	%	$	91,200		6.17	%
100 basis point rise		252,200		14.58			88,200		2.68
Base-rate scenario		220,100		-			85,900		-
100 basis point decline		181,700		(17.45	)		85,000		(1.05	)
December 31, 2010
200 basis point rise	$	170,700		13.57	%	$	104,400		1.85	%
100 basis point rise		159,000		5.79			102,100		(0.39	)
Base-rate scenario		150,300		-			102,500		-
100 basis point decline		156,200		3.93			101,900		(0.59	)
200 basis point decline		145,100		(3.46	)		99,300		(3.12	)

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

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

Accounting Standards Update. See note 1 in the accompanying notes to Consolidated Financial Statements included elsewhere in this report for details on recently issued accounting pronouncements and their impact on our financial statements.

37

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

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

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

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

● Enhanced interest rate risk modeling practices.

We believe we have met all of the requirements of the MOU.

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

FAIR VALUATION OF FINANCIAL INSTRUMENTS

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

We utilize fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. FASB ASC topic 820 differentiates between those assets and liabilities required to be carried at fair value at every reporting period (“recurring”) and those assets and liabilities that are only required to be adjusted to fair value under certain circumstances (“nonrecurring”). Trading securities, securities available-for-sale, loans held for sale, and derivatives are financial instruments recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other financial assets on a nonrecurring basis, such as loans held for investment, capitalized mortgage loan servicing rights and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets. See Note 22 to the Consolidated Financial Statements for a complete discussion on our use of fair valuation of financial instruments and the related measurement techniques.

38

LITIGATION MATTERS

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

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

CRITICAL ACCOUNTING POLICIES

Our accounting and reporting policies are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. Accounting and reporting policies for other than temporary impairment of investment securities, the allowance for loan losses, originated mortgage loan servicing rights, vehicle service contract payment plan counterparty contingencies, and income taxes are deemed critical since they involve the use of estimates and require significant management judgments. Application of assumptions different than those that we have used could result in material changes in our financial position or results of operations.

We are required to assess our investment securities for “other than temporary impairment” on a periodic basis. The determination of other than temporary impairment for an investment security requires judgment as to the cause of the impairment, the likelihood of recovery and the projected timing of the recovery. The topic of other than temporary impairment was at the forefront of discussions within the accounting profession during 2008 and 2009 because of the dislocation of the credit markets that occurred. On January 12, 2009 the FASB issued ASC 325-40-65-1 (formerly Staff Position No. EITF 99-20-1 — “Amendments to the Impairment Guidance of EITF Issue No. 99-20.”) This standard has been applicable to our financial statements since December 31, 2008. In particular, this standard struck the language that required the use of market participant assumptions about future cash flows from previous guidance. This change now permits the use of reasonable management judgment about whether it is probable that all previously projected cash flows will not be collected in determining other than temporary impairment. Our assessment process resulted in recording net other than temporary impairment charges on securities of $0.8 million, $0.5 million in and $0.1 million in 2011, 2010 and 2009, respectively. We believe that our assumptions and judgments in assessing other than temporary impairment for our investment securities are reasonable and conform to general industry practices. Prices for investment securities are largely provided by a pricing service. These prices consider benchmark yields, reported trades, broker / dealer quotes and issuer spreads. Furthermore, prices for mortgage-backed securities consider: TBA prices, monthly payment information and collateral performance. At December 31, 2011 the cost basis of our investment securities classified as available for sale exceeded their estimated fair value at that same date by $3.6 million (compared to $4.4 million at December 31, 2010). This amount is included in the accumulated other comprehensive loss section of shareholders’ equity.

39

Our methodology for determining the allowance and related provision for loan losses is described above in “Portfolio Loans and asset quality.” In particular, this area of accounting requires a significant amount of judgment because a multitude of factors can influence the ultimate collection of a loan or other type of credit. It is extremely difficult to precisely measure the amount of probable incurred losses in our loan portfolio. We use a rigorous process to attempt to accurately quantify the necessary allowance and related provision for loan losses, but there can be no assurance that our modeling process will successfully identify all of the probable incurred losses in our loan portfolio. As a result, we could record future provisions for loan losses that may be significantly different than the levels that we recorded in prior periods.

At December 31, 2011 and 2010 we had approximately $11.2 million and $14.7 million, respectively, of mortgage loan servicing rights capitalized on our Consolidated Statements of Financial Condition. There are several critical assumptions involved in establishing the value of this asset including estimated future prepayment speeds on the underlying mortgage loans, the interest rate used to discount the net cash flows from the mortgage loan servicing, the estimated amount of ancillary income that will be received in the future (such as late fees) and the estimated cost to service the mortgage loans. We believe the assumptions that we utilize in our valuation are reasonable based upon accepted industry practices for valuing mortgage loan servicing rights and represent neither the most conservative or aggressive assumptions. We recorded increases in the valuation allowance on capitalized mortgage loan servicing rights of $3.3 million and $0.9 million in 2011 and 2010, respectively, compared to a decrease in such valuation allowance of $2.3 million in 2009. Nearly all of our mortgage loans serviced for others are for either Fannie Mae or Freddie Mac. Because of our current financial condition, if our Bank were to fall below “well capitalized” (as defined by banking regulations) it is possible that Fannie Mae and Freddie Mac could require us to very quickly sell or transfer such servicing rights to a third party or unilaterally strip us of such servicing rights if we cannot complete an approved transfer. Depending on the terms of any such transaction, this forced sale or transfer of such mortgage loan servicing rights could have a material adverse impact on our consolidated financial condition and results of operations.

Mepco purchases payment plans from companies (which we refer to as Mepco’s “counterparties”) that provide vehicle service contracts and similar products to consumers. The payment plans (which are classified as payment plan receivables in our Consolidated Statements of Financial Condition) permit a consumer to purchase a service contract by making installment payments, generally for a term of 12 to 24 months, to the sellers of those contracts (one of the “counterparties”). Mepco does not have recourse against the consumer for nonpayment of a payment plan and therefore does not evaluate the creditworthiness of the individual customer. When consumers stop making payments or exercise their right to voluntarily cancel the contract, the remaining unpaid balance of the payment plan is normally recouped by Mepco from the counterparties that sold the contract and provided the coverage. The refund obligations of these counterparties are not fully secured. We record losses in vehicle service contract counterparty contingencies expense, included in non-interest expenses, for estimated defaults by these counterparties in their obligations to Mepco. These losses (which totaled $11.0 million, $18.6 million and $31.2 million in 2011, 2010 and 2009, respectively) are titled “vehicle service contract counterparty contingencies” in our Consolidated Statements of Operations. This area of accounting requires a significant amount of judgment because a number of factors can influence the amount of loss that we may ultimately incur. These factors include our estimate of future cancellations of vehicle service contracts, our evaluation of collateral that may be available to recover funds due from our counterparties, and our assessment of the amount that may ultimately be collected from counterparties in connection with their contractual obligations. We apply a rigorous process, based upon historical payment plan activity and past experience, to estimate probable incurred losses and quantify the necessary reserves for our vehicle service contract counterparty contingencies, but there can be no assurance that our modeling process will successfully identify all such losses. As a result, we could record future losses associated with vehicle service contract counterparty contingencies that may be materially different than the levels that we recorded in prior periods.

40

Our accounting for income taxes involves the valuation of deferred tax assets and liabilities primarily associated with differences in the timing of the recognition of revenues and expenses for financial reporting and tax purposes. At December 31, 2011 we had gross deferred tax assets of $80.3 million, gross deferred tax liabilities of $5.1 million and a valuation allowance of $75.2 million. We are required to assess whether a valuation allowance should be established against our deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. In accordance with this standard, we reviewed our deferred tax assets and determined that based upon a number of factors including our generally declining operating performance since 2005, our net losses, overall negative trends in the banking industry and our expectation that our operating results will continue to be negatively affected by the overall economic environment, we should establish a valuation allowance for our deferred tax assets. In the last quarter of 2008, we recorded a $36.2 million initial valuation allowance, which consisted of $27.6 million recognized as income tax expense and $8.6 million recognized through the accumulated other comprehensive loss component of shareholders’ equity. In 2011, 2010 and 2009, we recorded additional valuation allowances of $9.4 million, $5.7 million and $24.0 million, respectively. We had recorded no valuation allowance on our net deferred tax asset prior to 2008 because we believed that the tax benefits associated with this asset would more likely than not be realized. Changes in tax laws, changes in tax rates and our future level of earnings can impact the ultimate realization of our net deferred tax asset as well as the valuation allowance that we have established.

At December 31, 2011 and 2010 we had no remaining goodwill. Prior to January 1, 2010, we tested our goodwill for impairment and our accounting for goodwill was a critical accounting policy.

41

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Independent Bank Corporation

Ionia, Michigan

We have audited the accompanying consolidated statements of financial condition of Independent Bank Corporation (“the Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations, shareholders’ equity, comprehensive loss and cash flows for each of the three years in the period ended December 31, 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.

Grand Rapids, Michigan

March 13, 2012

42

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	December 31,
	2011			2010
	(In thousands, except share amounts)
ASSETS
Cash and due from banks	$	62,777		$	48,933
Interest bearing deposits		278,331			336,441
Cash and Cash Equivalents		341,108			385,374
Trading securities		77			32
Securities available for sale		157,444			67,864
Federal Home Loan Bank and Federal Reserve Bank stock, at cost		20,828			23,630
Loans held for sale, carried at fair value		44,801			50,098
Loans
Commercial		651,155			707,530
Mortgage		590,876			658,679
Installment		219,559			245,644
Payment plan receivables		115,018			201,263
Total Loans		1,576,608			1,813,116
Allowance for loan losses		(58,884	)		(67,915	)
Net Loans		1,517,724			1,745,201
Other real estate and repossessed assets		34,042			39,413
Property and equipment, net		62,548			68,359
Bank-owned life insurance		49,271			47,922
Other intangibles		7,609			8,980
Capitalized mortgage loan servicing rights		11,229			14,661
Prepaid FDIC deposit insurance assessment		12,609			15,899
Vehicle service contract counterparty receivables, net		29,298			37,270
Accrued income and other assets		18,818			30,545
Total Assets	$	2,307,406		$	2,535,248
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest bearing	$	497,718		$	451,856
Savings and interest-bearing checking		1,019,603			995,662
Retail time		526,525			530,774
Brokered time		42,279			273,546
Total Deposits		2,086,125			2,251,838
Other borrowings		33,387			71,032
Subordinated debentures		50,175			50,175
Vehicle service contract counterparty payables		6,633			11,739
Accrued expenses and other liabilities		28,459			31,379
Total Liabilities		2,204,779			2,416,163
Commitments and contingent liabilities
Shareholders’ Equity
Preferred stock, no par value, 200,000 shares authorized; 74,426 shares issued and outstanding at December 31, 2011 and 2010; liquidation preference: $81,023 at December 31, 2011 and $77,085 at December 31, 2010		79,857			75,700
Common stock, no par value, 500,000,000 shares authorized; issued and outstanding: 8,491,526 shares at December 31, 2011 and 7,860,483 shares at December 31, 2010		248,950			246,407
Accumulated deficit		(214,259	)		(189,902	)
Accumulated other comprehensive loss		(11,921	)		(13,120	)
Total Shareholders’ Equity		102,627			119,085
Total Liabilities and Shareholders’ Equity	$	2,307,406		$	2,535,248

See accompanying notes to consolidated financial statements

43

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended December 31,
	2011			2010			2009
	(In thousands, except per share amounts)
INTEREST INCOME
Interest and fees on loans	$	110,574		$	142,282		$	177,948
Interest on securities
Taxable		1,422			3,052			6,333
Tax-exempt		1,219			1,932			3,669
Other investments		1,547			1,585			1,106
Total Interest Income		114,762			148,851			189,056
INTEREST EXPENSE
Deposits		15,257			28,164			35,405
Other borrowings		4,936			9,034			15,128
Total Interest Expense		20,193			37,198			50,533
Net Interest Income		94,569			111,653			138,523
Provision for loan losses		27,946			46,765			103,318
Net Interest Income After Provision for Loan Losses		66,623			64,888			35,205
NON-INTEREST INCOME
Service charges on deposit accounts		18,306			21,511			24,370
Interchange income		9,091			8,257			7,064
Net gains (losses) on assets
Mortgage loans		9,262			12,330			10,860
Securities		249			1,639			3,826
Other than temporary impairment loss on securities:
Total impairment loss		(760	)		(462	)		(4,073	)
Loss recognized in other comprehensive loss		-			-			3,991
Net impairment loss recognized in earnings		(760	)		(462	)		(82	)
Mortgage loan servicing		(2,011	)		(523	)		2,252
Title insurance fees		1,465			2,037			2,272
Decrease in fair value of U.S. Treasury warrant		1,137			393			-
Gain on extinguishment of debt		-			18,066			-
Other		10,174			8,565			9,239
Total Non-interest Income		46,913			71,813			59,801
NON-INTEREST EXPENSE
Compensation and employee benefits		50,484			51,711			53,003
Loan and collection		12,414			15,323			14,727
Occupancy, net		11,183			11,016			11,092
Vehicle service contract counterparty contingencies		11,048			18,633			31,234
Data processing		9,751			9,554			9,528
Net losses on other real estate and repossessed assets		5,824			9,722			8,554
Furniture, fixtures and equipment		5,535			6,540			7,159
Legal and professional		3,941			4,100			3,222
Credit card and bank service fees		3,656			5,790			6,608
Communications		3,552			4,138			4,424
FDIC deposit insurance		3,507			6,805			7,328
Advertising		2,503			2,712			5,696
Provision for loss reimbursement on sold loans		1,993			215			-
Goodwill impairment		-			-			16,734
Recoveries related to unfunded lending commitments		(36	)		(536	)		(286	)
Other		8,593			9,277			9,420
Total Non-interest Expense		133,948			155,000			188,443
Loss Before Income Tax		(20,412	)		(18,299	)		(93,437	)
Income tax benefit		(212	)		(1,590	)		(3,210	)
Net Loss	$	(20,200	)	$	(16,709	)	$	(90,227	)
Preferred stock dividends and discount accretion		4,157			4,095			4,301
Net Loss Applicable to Common Stock	$	(24,357	)	$	(20,804	)	$	(94,528	)
Net loss per common share
Basic	$	(2.94	)	$	(4.09	)	$	(39.60	)
Diluted	$	(2.94	)	$	(4.09	)	$	(39.60	)
Cash dividends declared per common share	$	-		$	-		$	0.30

See accompanying notes to consolidated financial statements

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

	Preferred Stock			Common Stock			Capital Surplus			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
	(In thousands, except share and per share amounts)
Balances at December 31, 2008	$	68,456		$	2,279		$	221,199		$	(73,849	)	$	(23,208	)	$	194,877
Net loss for 2009		-			-			-			(90,227	)		-			(90,227	)
Cash dividends
Common, declared - $.30 per share		-			-			-			(721	)		-			(721	)
Preferred, 5%		-			-			-			(3,600	)		-			(3,600	)
Issuance of 103,211 shares of common stock		-			103			1,091			-			-			1,194
Share based compensation		-			6			803			-			-			809
Repurchase and retirement of 1,759 shares of common stock		-			(2	)		2			-			-			-
Accretion of preferred stock discount		701			-			-			(701	)		-			-
Net change in accumulated other comprehensive income (loss), net of $4.1 million related tax effect		-			-			-			-			7,529			7,529
Balances at December 31, 2009		69,157			2,386			223,095			(169,098	)		(15,679	)		109,861
Net loss for 2010		-			-			-			(16,709	)		-			(16,709	)
Reclassification upon removal of par value on common stock		-			223,095			(223,095	)		-			-			-
Dividends on Preferred, 5%		2,658			-			-			(3,734	)		-			(1,076	)
Retirement of Series A preferred stock		(69,364	)		-			-			-			-			(69,364	)
Retirement of common stock warrants		-			(3,579	)		-			-			-			(3,579	)
Issuance of Series B preferred stock		72,888			-			-			-			-			72,888
Issuance of 5,454,669 shares of common stock		-			23,963			-			-			-			23,963
Share based compensation		-			542			-			-			-			542
Accretion of preferred stock discount		361			-			-			(361	)		-			-
Net change in accumulated other comprehensive income (loss), net of $1.4 million related tax effect		-			-			-			-			2,559			2,559
Balances at December 31, 2010		75,700			246,407			-			(189,902	)		(13,120	)		119,085
Net loss for 2011		-			-			-			(20,200	)		-			(20,200	)
Dividends on Preferred, 5%		3,939			-			-			(3,939	)		-			-
Issuance of 432,797 shares of common stock		-			1,335			-			-			-			1,335
Share based compensation (issuance of 198,246 shares of common stock)		-			1,208			-			-			-			1,208
Accretion of preferred stock discount		218			-			-			(218	)		-			-
Net change in accumulated other comprehensive income (loss), net of $0.5 million related tax effect		-			-			-			-			1,199			1,199
Balances at December 31, 2011	$	79,857		$	248,950		$	-		$	(214,259	)	$	(11,921	)	$	102,627

See accompanying notes to consolidated financial statements

45

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

	2011			2010			2009
	(In thousands)
Net loss	$	(20,200	)	$	(16,709	)	$	(90,227	)
Other comprehensive income (loss)
Net change in unrealized gain (loss) on securities available for sale, including reclassification adjustments		175			(163	)		8,721
Change in unrealized losses on securities available for sale for which a portion of other than temporary impairment has been recognized in earnings		390			1,755			(2,594	)
Net change in unrealized loss on derivative instruments		206			205			1,402
Reclassification adjustment for accretion on settled derivative instruments		428			762			-
Comprehensive Loss	$	(19,001	)	$	(14,150	)	$	(82,698	)

See accompanying notes to consolidated financial statements

46

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31,
	2011			2010			2009
	(In thousands)
Net Loss	$	(20,200	)	$	(16,709	)	$	(90,227	)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH FROM (USED IN) OPERATING ACTIVITIES
Proceeds from sales of trading securities		-			-			2,827
Proceeds from sales of loans held for sale		391,253			493,272			551,977
Disbursements for loans held for sale		(376,694	)		(496,806	)		(545,548	)
Provision for loan losses		27,946			46,765			103,318
Deferred federal income tax expense (benefit)		201			(1,533	)		2,146
Deferred loan fees		(449	)		420			(439	)
Depreciation, amortization of intangible assets and premiums and accretion of discounts on securities and loans		(11,301	)		(27,720	)		(43,337	)
Net gains on sales of mortgage loans		(9,262	)		(12,330	)		(10,860	)
Net gains on securities		(249	)		(1,639	)		(3,826	)
Securities impairment recognized in earnings		760			462			82
Net losses on other real estate and repossessed assets		5,824			9,722			8,554
Vehicle service contract counterparty contingencies		11,048			18,633			31,234
Share based compensation		1,208			542			809
Gain on extinguishment of debt		-			(18,066	)		-
Goodwill impairment		-			-			16,734
(Increase) decrease in accrued income and other assets		16,874			397			(21,083	)
Increase (decrease) in accrued expenses and other liabilities		(1,551	)		1,928			2,014
Total Adjustments		55,608			14,047			94,602
Net Cash From (Used in) Operating Activities		35,408			(2,662	)		4,375
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from the sale of securities available for sale		70,322			96,648			43,525
Proceeds from the maturity of securities available for sale		3,983			44,170			8,345
Principal payments received on securities available for sale		9,282			14,137			27,326
Purchases of securities available for sale		(173,186	)		(55,150	)		(15,806	)
Redemption of Federal Home Loan Bank Stock		2,397			2,247			-
Redemption of Federal Reserve Bank Stock		405			1,977			209
Net decrease in portfolio loans (loans originated, net of principal payments)		196,558			347,574			76,866
Proceeds from the collection of vehicle service contract counterparty receivables		1,613			15,863			-
Proceeds from the sale of other real estate and repossessed assets		18,638			20,455			15,162
Capital expenditures		(2,557	)		(4,429	)		(7,995	)
Net Cash From Investing Activities		127,455			483,492			147,632
CASH FLOW FROM (USED IN) FINANCING ACTIVITIES
Net increase (decrease) in total deposits		(165,713	)		(313,930	)		499,289
Net decrease in other borrowings and federal funds purchased		(7	)		(36,791	)		(191,722	)
Proceeds from Federal Home Loan Bank advances		31,000			33,000			242,524
Payments of Federal Home Loan Bank advances		(68,638	)		(56,359	)		(462,356	)
Net decrease in vehicle service contract counterparty payables		(5,106	)		(9,570	)		(5,327	)
Proceeds from issuance of common stock		1,335			463			-
Extinguishment of debt, net		-			(1,005	)		-
Dividends paid		-			-			(3,384	)
Net Cash From (Used in) Financing Activities		(207,129	)		(384,192	)		79,024
Net Increase (Decrease) in Cash and Cash Equivalents		(44,266	)		96,638			231,031
Cash and Cash Equivalents at Beginning of Year		385,374			288,736			57,705
Cash and Cash Equivalents at End of Year	$	341,108		$	385,374		$	288,736
Cash paid during the year for
Interest	$	18,729		$	38,095		$	50,420
Income taxes		59			513			335
Transfers to other real estate and repossessed assets		19,091			38,056			35,252
Transfer of payment plan receivables to vehicle service contract counterparty receivables		8,874			77,457			20,831
Issuance of common stock in exchange for subordinated debentures		-			23,502			-
Subordinated debentures exchanged for common stock		-			42,713			-
Retirement of Series A Preferred Stock		-			69,364			-
Retirement of common stock warrants		-			3,579			-
Issuance of Series B Preferred Stock		-			72,888			-
Issuance of common stock warrants		-			1,704			-
Transfer of loans to held for sale		-			-			2,200

See accompanying notes to consolidated financial statements

47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — ACCOUNTING POLICIES

The accounting and reporting policies and practices of Independent Bank Corporation and subsidiaries conform to accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. Our critical accounting policies include the assessment for other than temporary impairment (“OTTI”) on investment securities, the determination of the allowance for loan losses, the determination of vehicle service contract counterparty contingencies, the valuation of originated mortgage loan servicing rights and the valuation of deferred tax assets. We are required to make material estimates and assumptions that are particularly susceptible to changes in the near term as we prepare the consolidated financial statements and report amounts for each of these items. Actual results may vary from these estimates.

Our Bank subsidiary transacts business in the single industry of commercial banking. Our Bank’s activities cover traditional phases of commercial banking, including checking and savings accounts, commercial lending, direct and indirect consumer financing and mortgage lending. Our principal markets are the rural and suburban communities across lower Michigan that are served by our Bank’s branches and loan production offices. We also purchase payment plans from companies (which we refer to as “counterparties”) that provide vehicle service contracts and similar products to consumers, through our wholly owned subsidiary, Mepco Finance Corporation (“Mepco”). At December 31, 2011, 75.3% of our Bank’s loan portfolio was secured by real estate.

PRINCIPLES OF CONSOLIDATION — The consolidated financial statements include the accounts of Independent Bank Corporation and its subsidiaries. The income, expenses, assets and liabilities of the subsidiaries are included in the respective accounts of the consolidated financial statements, after elimination of all material intercompany accounts and transactions.

STATEMENTS OF CASH FLOWS — For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest bearing deposits and federal funds sold. Generally, federal funds are sold for one-day periods. We report net cash flows for customer loan and deposit transactions, for short-term borrowings and for vehicle service contract counterparty payables.

INTEREST BEARING DEPOSITS – Interest bearing deposits consist of overnight deposits with the Federal Reserve Bank (“FRB”).

LOANS HELD FOR SALE — Loans held for sale are carried at fair value at December 31, 2011 and 2010. Fair value adjustments as well as realized gains and losses, are recorded in current earnings.

MORTGAGE LOAN SERVICING RIGHTS — We recognize as separate assets the rights to service mortgage loans for others. The fair value of originated mortgage loan servicing rights has been determined based upon fair value indications for similar servicing. The mortgage loan servicing rights are amortized in proportion to and over the period of estimated net loan servicing income. We assess mortgage loan servicing rights for impairment based on the fair value of those rights. For purposes of measuring impairment, the characteristics used include interest rate, term and type. Amortization of and changes in the impairment reserve on originated mortgage loan servicing rights are included in mortgage loan servicing in the Consolidated Statements of Operations. Mortgage loan servicing income is recorded for fees earned for servicing loans previously sold. The fees are generally based on a contractual percentage of the outstanding principal and are recorded as income when earned. Mortgage loan servicing fees, excluding amortization of and changes in the impairment reserve on originated mortgage loan servicing rights, totaled $4.4 million, $4.2 million and $4.2 million for the years ended December 31, 2011, 2010 and 2009, respectively. Late fees and ancillary fees related to loan servicing are not material.

TRANSFERS OF FINANCIAL ASSETS — Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from us, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and we do not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

48

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

SECURITIES — We classify our securities as trading, held to maturity or available for sale. Trading securities are bought and held principally for the purpose of selling them in the near term and are reported at fair value with realized and unrealized gains and losses included in earnings. Securities held to maturity represent those securities for which we have the positive intent and ability to hold until maturity and are reported at cost, adjusted for amortization of premiums and accretion of discounts computed on the level-yield method. We did not have any securities held to maturity at December 31, 2011 and 2010. Securities available for sale represent those securities not classified as trading or held to maturity and are reported at fair value with unrealized gains and losses, net of applicable income taxes reported in other comprehensive income (loss).

We evaluate securities for OTTI at least on a quarterly basis and more frequently when economic or market conditions warrant such an evaluation. In performing this evaluation management considers (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) the impact of changes in market interest rates on the market value of the security and (4) an assessment of whether we intend to sell, or it is more likely than not that we will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. For securities that do not meet the aforementioned recovery criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income or loss. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.

Gains and losses realized on the sale of securities available for sale are determined using the specific identification method and are recognized on a trade-date basis. Premiums and discounts are recognized in interest income computed on the level-yield method.

LOAN REVENUE RECOGNITION — Interest on loans is accrued based on the principal amounts outstanding. In general the accrual of interest income is discontinued when a loan becomes 90 days past due for commercial loans, installment loans and payment plan receivables and when a loan misses four consecutive payments for mortgage loans and the borrower’s capacity to repay the loan and collateral values appear insufficient for each loan class. However, loans may be placed on non-accrual status regardless of whether or not such loans are considered past due if, in management’s opinion, the borrower is unable to meet payment obligations as they become due or as required by regulatory provisions. All interest accrued but not received for all loans placed on non-accrual is reversed from interest income. Payments on such loans are generally applied to the principal balance until qualifying to be returned to accrual status. A non-accrual loan may be restored to accrual status when interest and principal payments are current and the loan appears otherwise collectible. Delinquency status for all classes in the commercial and installment loan segments is based on the actual number of days past due as required by the contractual terms of the loan agreement while delinquency status for mortgage loan segment classes is based on the number of payments past due.

Certain loan fees and direct loan origination costs are deferred and recognized as an adjustment of yield generally over the contractual life of the related loan. Fees received in connection with loan commitments are deferred until the loan is advanced and are then recognized generally over the contractual life of the loan as an adjustment of yield. Fees on commitments that expire unused are recognized at expiration. Fees received for letters of credit are recognized as revenue over the life of the commitment.

PAYMENT PLAN RECEIVABLE REVENUE RECOGNITION — Payment plan receivables are acquired by our Mepco segment at a discount and reported net of this discount in the Consolidated Statements of Financial Condition. This discount is accreted into interest and fees on loans over the life of the receivable computed on a level-yield method. All classes of payment plan receivables that have canceled and are 90 days or more past due as required by the contractual terms of the payment plan are classified as non-accrual.

ALLOWANCE FOR LOAN LOSSES — Some loans will not be repaid in full. Therefore, an allowance for loan losses (“AFLL”) is maintained at a level which represents our best estimate of losses incurred. In determining the allowance and the related provision for loan losses, we consider four principal elements: (i) specific allocations based upon probable losses identified during the review of the loan portfolio, (ii) allocations established for other adversely rated loans, (iii) allocations based principally on historical loan loss experience, and (iv) additional allocations based on subjective factors, including local and general economic business factors and trends, portfolio concentrations and changes in the size and/or the general terms of the loan portfolios.

49

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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

Increases in the allowance are recorded by a provision for loan losses charged to expense. Although we periodically allocate portions of the allowance to specific loans and loan portfolios, the entire allowance is available for incurred losses. We generally charge-off commercial, homogenous residential mortgage, installment and payment plan receivable loans when they are deemed uncollectible or reach a predetermined number of days past due based on loan product, industry practice and other factors. Collection efforts may continue and recoveries may occur after a loan is charged against the allowance.

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

A loan is impaired when full payment under the loan terms is not expected. Generally, those loans included in each commercial loan class that are rated substandard, classified as non-performing or were classified as non-performing in the preceding quarter are evaluated for impairment. Those loans included in each mortgage loan class whose terms have been modified and considered a troubled debt restructuring are also impaired. Loans which have been modified resulting in a concession, and which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (“TDR”) and classified as impaired. We measure our investment in an impaired loan based on one of three methods: the loan’s observable market price, the fair value of the collateral or the present value of expected future cash flows discounted at the loan’s effective interest rate. Large groups of smaller balance homogeneous loans, such as those loans included in each installment and mortgage loan class and each payment plan receivable class are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures. TDR loans are measured at the present value of estimated future cash flows using the loan’s effective interest rate at inception of the loan. If a TDR is considered to be a collateral dependent loan, the loan is reported net, at the fair value of collateral.

50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

PROPERTY AND EQUIPMENT — Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using both straight-line and accelerated methods over the estimated useful lives of the related assets. Buildings are generally depreciated over a period not exceeding 39 years and equipment is generally depreciated over periods not exceeding 7 years. Leasehold improvements are depreciated over the shorter of their estimated useful life or lease period.

BANK OWNED LIFE INSURANCE — We have purchased a group flexible premium non-participating variable life insurance contract on approximately 270 salaried employees in order to recover the cost of providing certain employee benefits. Bank owned life insurance is recorded at its cash surrender value or the amount that can be currently realized.

OTHER REAL ESTATE AND REPOSSESSED ASSETS — Other real estate at the time of acquisition is recorded at fair value, less estimated costs to sell, which becomes the property’s new basis. Fair value is typically determined by a third party appraisal of the property. Any write-downs at date of acquisition are charged to the allowance for loan losses. Expense incurred in maintaining assets and subsequent write-downs to reflect declines in value and gains or losses on the sale of other real estate are recorded in the Consolidated Statements of Operations. Non-real estate repossessed assets are treated in a similar manner.

OTHER INTANGIBLE ASSETS — Other intangible assets consist of core deposits. They are initially measured at fair value and then are amortized on both straight-line and accelerated methods over their estimated useful lives, which range from 10 to 15 years.

VEHICLE SERVICE CONTRACT COUNTERPARTY RECEIVABLES, NET — These amounts represent funds due to Mepco from its counterparties for cancelled service contracts. Upon the cancellation of a service contract and the completion of the billing process to the counterparties for amounts due to Mepco, there is a decrease in the amount of “payment plan receivables” and an increase in the amount of “vehicle service contract counterparty receivables” until such time as the amount due from the counterparty is collected.

INCOME TAXES — We employ the asset and liability method of accounting for income taxes. This method establishes deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities at tax rates expected to be in effect when such amounts are realized or settled. Under this method, the effect of a change in tax rates is recognized in the period that includes the enactment date. The deferred tax asset is subject to a valuation allowance for that portion of the asset for which it is more likely than not that it will not be realized.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination.

We recognize interest and/or penalties related to income tax matters in income tax expense.

We file a consolidated federal income tax return. Intercompany tax liabilities are settled as if each subsidiary filed a separate return.

VEHICLE SERVICE CONTRACT COUNTERPARTY PAYABLES — Vehicle service contract counterparty payables represent amounts owed to insurance companies or other counterparties for vehicle service contract payment plans purchased by us. The vehicle service contract counterparty payable becomes due in accordance with the terms of the specific contract between Mepco and the counterparty. Typically these terms require payment after Mepco has received one or two payments from the consumer on the payment plan receivable.

51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

COMMITMENTS TO EXTEND CREDIT AND RELATED FINANCIAL INSTRUMENTS — Financial instruments may include commitments to extend credit and standby letters of credit. Financial instruments involve varying degrees of credit and interest-rate risk in excess of amounts reflected in the Consolidated Statements of Financial Condition. Exposure to credit risk in the event of non-performance by the counterparties to the financial instruments for loan commitments to extend credit and letters of credit is represented by the contractual amounts of those instruments. In general, we use a similar methodology to estimate our liability for these off-balance sheet credit exposures as we do for our allowance for loan losses. For commercial related commitments, we estimate liability using our loan rating system and for mortgage and installment commitments we estimate liability principally upon historical loss experience. Our estimated liability for off balance sheet commitments is included in accrued expenses and other liabilities in our Consolidated Statements of Financial Condition and any charge or recovery is recorded in non-interest expenses in our Consolidated Statements of Operations.

DERIVATIVE FINANCIAL INSTRUMENTS — We record derivatives on our Consolidated Statement of Financial Condition as assets and liabilities measured at their fair value. The accounting for increases and decreases in the value of derivatives depends upon the use of derivatives and whether the derivatives qualify for hedge accounting.

We record the fair value of cash-flow hedging instruments (“Cash Flow Hedges”) in accrued income and other assets and accrued expenses and other liabilities. On an ongoing basis, we adjust our Consolidated Statement of Financial Condition to reflect the then current fair value of the Cash Flow Hedges. The related gains or losses are reported in other comprehensive income (loss) and are subsequently reclassified into earnings, as a yield adjustment in the same period in which the related interest on the hedged items (primarily variable-rate debt obligations) affect earnings. To the extent that the Cash Flow Hedges are not effective, the ineffective portion of the Cash Flow Hedges is immediately recognized as interest expense.

We also record fair-value hedging instruments (“Fair Value Hedges”) at fair value in accrued income and other assets and accrued expenses and other liabilities. The hedged items (primarily fixed-rate debt obligations) are also recorded at fair value through the Consolidated Statements of Operations, which offsets the adjustment to the Fair Value Hedges. On an ongoing basis, we adjust our Consolidated Statement of Financial Condition to reflect the then current fair value of both the Fair Value Hedges and the respective hedged items. To the extent that the change in value of the Fair Value Hedges do not offset the change in the value of the hedged items, the ineffective portion is immediately recognized as interest expense.

Certain derivative financial instruments are not designated as hedges. The fair value of these derivative financial instruments has been recorded on our Consolidated Statement of Financial Condition and is adjusted on an ongoing basis to reflect their then current fair value. The changes in the fair value of derivative financial instruments not designated as hedges are recognized currently in earnings.

When hedge accounting is discontinued because it is determined that a derivative financial instrument no longer qualifies as a fair-value hedge, we continue to carry the derivative financial instrument on our Consolidated Statement of Financial Condition at its fair value, and no longer adjust the hedged item for changes in fair value. The adjustment of the carrying amount of the previously hedged item is accounted for in the same manner as other components of similar instruments. When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, we continue to carry the derivative financial instrument on our Consolidated Statement of Financial Condition at its fair value, and gains and losses that were included in accumulated other comprehensive income (loss) are recognized immediately in earnings. In all other situations in which hedge accounting is discontinued, we continue to carry the derivative financial instrument at its fair value on our Consolidated Statement of Financial Condition and recognize any subsequent changes in its fair value in earnings.

When a derivative financial instrument that qualified for hedge accounting is settled and the hedged item remains, the gain or loss on the derivative financial instrument is accreted or amortized over the life that remained on the settled derivative financial instrument.

52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

COMPREHENSIVE LOSS — Comprehensive loss consists of net loss, unrealized gains and losses on securities available for sale and derivative instruments classified as cash flow hedges. The net change in unrealized gain (loss) on securities available for sale reflects net gains (losses) reclassified into earnings of $(0.6) million, $1.2 million and $2.8 million in 2011, 2010 and 2009, respectively. The reclassification of these amounts from accumulated other comprehensive income (loss) resulted in no income tax expense or benefit due to a full valuation allowance against our deferred tax assets.

LOSS PER COMMON SHARE — Basic and diluted loss per common share is computed by dividing net loss applicable to common stock by the weighted average number of common shares outstanding during the period and participating share awards. All outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating securities for this calculation. The assumed conversion of convertible preferred stock, assumed exercise of common stock warrants, assumed exercise of stock options, restricted stock units and stock units for a deferred compensation plan for non-employee directors would have an anti-dilutive impact on the loss per share and thus are ignored in the diluted per share calculation.

SHARE BASED COMPENSATION — Cost is recognized for stock options and non-vested share awards issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of our common stock at the date of grant is used for non-vested share awards. Cost is recognized over the required service period, generally defined as the vesting period. Cost is also recognized for salary stock issued to employees and stock issued to non-employee directors. These shares vest immediately and cost is recognized during the period they are issued.

COMMON STOCK — At December 31, 2011, 0.1 million shares of common stock were reserved for issuance under the dividend reinvestment plan, 0.5 million shares of common stock were reserved for issuance under our long-term incentive plans and 3.2 million shares of common stock were reserved for issuance under an equity line agreement.

RECLASSIFICATION — Certain amounts in the 2010 and 2009 consolidated financial statements have been reclassified to conform to the 2011 presentation.

ADOPTION OF NEW ACCOUNTING STANDARDS — In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring”, an amendment to FASB ASC Topic 310 “Receivables.”. This ASU gives new guidance to improve financial reporting by creating greater consistency in the way GAAP is applied for various types of debt restructurings. This guidance clarifies which loan modifications constitute a TDR. It is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a TDR, both for purposes of recording an impairment loss and for disclosure of TDRs. Although this new guidance does not amend the accounting for TDRs, it is expected that application of the clarifications contained in this guidance will result in more modifications being considered TDRs. In evaluating whether a restructuring constitutes a TDR, a creditor must separately conclude that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. The provisions of this ASU clarify the guidance on a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. With regard to determining whether a concession has been granted, this new guidance clarifies that creditors are precluded from using the effective interest method to determine whether a concession has been granted. In the absence of using the effective interest method, a creditor must now focus on other considerations such as the value of the underlying collateral, evaluation of other collateral or guarantees, the debtor’s ability to access other funds at market rates, interest rate increases and whether the restructuring results in a delay in payment that is insignificant. In addition, the new guidance provides “a not all inclusive” list of six indicators for creditors to consider when determining if a debtor is experiencing financial difficulties which can be found in FASB ASC 310-40-15-20. This new guidance became effective for the quarter ended September 30, 2011, and applies retrospectively to restructurings occurring since January 1, 2011. See note #4 for TDR disclosures in accordance with this ASU.

53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

In June 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05”. This ASU amended guidance on the presentation requirements for comprehensive income. The amended guidance requires an entity to present total comprehensive income, the components of net income and the components of other comprehensive income on the face of the financial statements, either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amended guidance does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This amended guidance will be applied retrospectively and is effective for interim and annual periods beginning after December 15, 2011.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. This ASU amended guidance that will result in common fair value measurement and disclosure requirements between U.S. GAAP and International Financial Reporting Standards (“IFRS”). Under the amended guidance, entities will be required to expand disclosure for fair value instruments categorized within Level 3 of the fair value hierarchy to include (1) the valuation processes used; and (2) a narrative description of the sensitivity of the fair value measurement to changes in unobservable inputs for recurring fair value measurements and the interrelationships between those unobservable inputs, if any. They will also be required to disclose the categorization by level of the fair value hierarchy for items that are not measured at fair value in the Consolidated Statement of Financial Condition but for which the fair value is required to be disclosed (e.g. portfolio loans). The amended guidance will be applied prospectively and is effective for interim and annual periods beginning after December 15, 2011.

NOTE 2 – RESTRICTIONS ON CASH AND DUE FROM BANKS

Our Bank is required to maintain reserve balances in the form of vault cash and non-interest earning balances with the FRB. The average reserve balances to be maintained during 2011 and 2010 were $23.9 million and $22.6 million respectively. We do not maintain compensating balances with correspondent banks. We are also required to maintain reserve balances related to our Visa debit card operations and merchant payment processing operations. These balances are held at unrelated financial institutions and totaled $2.1 million and $1.6 million at December 31, 2011 and 2010, respectively.

NOTE 3 – SECURITIES

Securities available for sale consist of the following at December 31:

	Amortized		Unrealized
	Cost		Gains		Losses		Fair Value
2011	(In thousands)
U.S. agency	$	24,980	$	58	$	21	$	25,017
U.S. agency residential mortgage-backed		93,415		1,007		216		94,206
Private label residential mortgage-backed		11,066		-		2,798		8,268
Obligations of states and political subdivisions		26,865		510		58		27,317
Trust preferred		4,697		-		2,061		2,636
Total	$	161,023	$	1,575	$	5,154	$	157,444
2010
U.S. agency residential mortgage-backed	$	13,103	$	249	$	21	$	13,331
Private label residential mortgage-backed		18,203		31		4,050		14,184
Obligations of states and political subdivisions		31,534		375		650		31,259
Trust preferred		9,472		116		498		9,090
Total	$	72,312	$	771	$	5,219	$	67,864

54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Total OTTI recognized in accumulated other comprehensive loss for securities available for sale was $1.1 million and $1.0 million at December 31, 2011 and 2010, respectively.

Our investments’ gross unrealized losses and fair values aggregated by investment type and length of time that individual securities have been at a continuous unrealized loss position, at December 31 follows:

	Less Than Twelve Months				Twelve Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
2011
U.S. agency	$	9,974	$	21	$	-	$	-	$	9,974	$	21
U.S. agency residential mortgage-backed		42,500		216		-		-		42,500		216
Private label residential mortgage-backed		163		90		8,102		2,708		8,265		2,798
Obligations of states and political subdivisions		-		-		1,729		58		1,729		58
Trust preferred		591		1,218		2,045		843		2,636		2,061
Total	$	53,228	$	1,545	$	11,876	$	3,609	$	65,104	$	5,154
2010
U.S. agency residential mortgage-backed	$	2,733	$	21	$	-	$	-	$	2,733	$	21
Private label residential mortgage-backed		-		-		12,624		4,050		12,624		4,050
Obligations of states and political subdivisions		8,371		428		1,796		222		10,167		650
Trust preferred		-		-		2,384		498		2,384		498
Total	$	11,104	$	449	$	16,804	$	4,770	$	27,908	$	5,219

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

U.S. Agency and U.S. Agency residential mortgage-backed securities — at December 31, 2011 we had two U.S. Agency and 15 U.S. Agency residential mortgage-backed securities whose fair market value is less than amortized cost. The unrealized losses are largely attributed to modest credit spread widening on certain issues. As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Private label residential mortgage backed securities — at December 31, 2011 we had eight securities whose fair value is less than amortized cost.  Two of the issues are rated by a major rating agency as investment grade while four are below investment grade and two are split rated.  All of these bonds have impairment in excess of 10% and only one of these holdings has been impaired for less than 12 months.

The unrealized losses are largely attributable to credit spread widening on these securities since their acquisition. The underlying loans within these securities include Jumbo (78%) and Alt A (22%) at December 31, 2011.

55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

	December 31,
	2011					2010
	Fair Value		Net Unrealized Gain (Loss)			Fair Value		Net Unrealized Gain (Loss)
	(In thousands)
Private label residential mortgage-backed
Jumbo	$	6,454	$	(1,937	)	$	8,429	$	(2,600	)
Alt-A		1,814		(861	)		5,755		(1,419	)

Seven of the private label residential mortgage-backed transactions have geographic concentrations in California, ranging from 22% to 58% of the collateral pool. Typical exposure levels to California (median exposure is 47%) are consistent with overall market collateral characteristics. Three transactions have modest exposure to Florida, ranging from 5% to 7% and one transaction has modest exposure to Nevada (5%). The underlying collateral pools do not have meaningful exposure to Arizona, Michigan or Ohio. None of the issues involve subprime mortgage collateral. Thus the impact of this market segment is only indirect, in that it has impacted liquidity and pricing in general for private label residential mortgage-backed securities. The majority of transactions are backed by fully amortizing loans. However, six transactions have concentrations in interest only loans ranging from 31% to 94% (at origination date). The structure of the residential mortgage securities portfolio provides protection to credit losses. The portfolio primarily consists of senior securities as demonstrated by the following: super senior (19%), senior (48%), senior support (23%) and mezzanine (10%). The mezzanine class is from a seasoned transaction (88 months) with a significant level of subordination (8.2%). Except for the additional discussion below relating to other than temporary impairment, each private label residential mortgage-backed security has sufficient credit enhancement via subordination to reasonably assure full realization of book value. This assertion is based on a transaction level review of the portfolio.

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

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

In addition to the review discussed above, all private label residential mortgage-backed securities are reviewed for OTTI utilizing a cash flow projection. The cash flow analysis forecasted cash flow from the underlying loans in each 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 loss severity. Near term prepayment assumptions were based on recently observed prepayment rates. More weight was given to longer term historic performance (12 months). In some cases, recently observed prepayment rates are lower than historic norms due to the absence of new jumbo loan issuances. This loan market is heavily dependent upon securitization for funding, and new securitization transactions have been minimal. Our model projections anticipate that prepayment rates gradually revert to historical levels. For seasoned ARM transactions, normalized prepayment rates are estimated at 15% to 25% CPR. For fixed rate collateral (one transaction), the prepayment speeds are projected to rise modestly.

56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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

At December 31, 2011 three below investment grade private label residential mortgage-backed securities with fair values of $4.0 million, $1.6 million and $0.2 million, respectively and unrealized losses of $1.1 million, $0.5 million and $0.1 million, respectively (amortized cost of $5.1 million, $2.1 million and $0.2 million, respectively) had losses that were considered other than temporary.

The underlying loans in the first transaction are 30 year fixed rate jumbos with an average FICO of 744 and an average loan-to-value ratio of 72%. The loans backing this transaction were originated in 2007 and this is our only security backed by 2007 vintage loans. We believe that this vintage is a key differentiating factor between this security and the others in our portfolio that do not have unrealized losses that are considered OTTI. The bond is a senior security that is receiving principal and interest payments similar to principal reductions in the underlying collateral. The cash flow analysis described above calculated $0.475 million of credit related OTTI as of December 31, 2011 and was recognized in our Consolidated Statements of Operations ($0.213 million, $0.197 million and $0.065 million during the years ended December 31, 2011, 2010 and 2009, respectively). The remaining unrealized loss was attributed to other factors and is reflected in other comprehensive income (loss) during those same periods.

The underlying loans in the second transaction are 30 year hybrid ARM Alt-A with an average FICO of 717 and an average loan-to-value ratio of 78%. The loans backing this transaction were originated in 2005.  The bond is a super senior security that is receiving principal and interest payments similar to principal reductions in the underlying collateral. The cash flow analysis described above calculated $0.425 million of credit related OTTI as of December 31, 2011 and was recognized in our Consolidated Statements of Operations ($0.425 million during the year ended December 31, 2011). The remaining unrealized loss was attributed to other factors and is reflected in other comprehensive income (loss) during those same periods.

The underlying loans in the third transaction are 30 year hybrid ARM jumbos with an average FICO of 738 and an average loan-to-value ratio of 57%. The loans backing this transaction were originated in 2005. The bond is a senior support security that is receiving principal and interest payments similar to principal reductions in the underlying collateral. The cash flow analysis described above calculated credit related OTTI of $0.320 million as of December 31, 2011 and was recognized in our Consolidated Statements of Operations ($0.122 million and $0.198 million during the years ended December 31, 2011 and 2010, respectively). The remaining unrealized loss was attributed to other factors and is reflected in other comprehensive income (loss) during those same periods.

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

Obligations of states and political subdivisions — at December 31, 2011 we had four municipal securities whose fair value is less than amortized cost. The unrealized losses are largely attributed to a widening of market spreads and continued illiquidity for certain issues.  None of the impaired securities are rated by a major rating agency. Approximately 56% 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 non rated securities have a periodic internal credit review according to established procedures. As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

57

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Trust preferred securities — at December 31, 2011 we had four securities whose fair value is less than amortized cost. All of our trust preferred securities are single issue securities issued by a trust subsidiary of a bank holding company. The pricing of trust preferred securities over the past three to four years has suffered from significant credit spread widening fueled by uncertainty regarding potential losses of financial companies, the absence of a liquid functioning secondary market and potential supply concerns from financial companies issuing new debt to recapitalize themselves.

One of the four securities is rated by two major rating agencies as investment grade, while one is split rated (this security is rated as investment grade by one major rating agency and below investment grade by another) and the other two are non-rated. The non-rated issues are relatively small banks and were never rated. The issuers of these non-rated trust preferred securities, which had a total amortized cost of $2.8 million and total fair value of $1.2 million as of December 31, 2011, continue to have satisfactory credit metrics and one continues to make interest payments.  The other non-rated issue began deferring dividend payments in the third quarter of 2011 apparently due to an increase in non-performing assets.  Nevertheless, this issuer continues to have satisfactory capital measures and interim profitability.

An additional trust preferred security was written down to zero as of December 31, 2010, including a $0.067 million credit related OTTI charge in the first quarter of 2010.

	December 31,
	2011					2010
	Fair Value		Net Unrealized Gain (Loss)			Fair Value		Net Unrealized Gain (Loss)
	(In thousands)
Trust preferred securities
Rated issues	$	1,405	$	(484	)	$	6,290	$	(375	)
Unrated issues - no OTTI		1,231		(1,577	)		2,800		(7	)

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 2011, 2010 and 2009 we recorded in earnings OTTI charges on securities available for sale of $0.8 million, $0.5 million and $0.1 million respectively.

A rollforward of credit losses recognized in earnings on securities available for sale for the years ending December 31, follow:

	2011		2010		2009
	(In thousands)
Balance at beginning of year	$	710	$	248	$	166
Additions to credit losses on securities for which no previous OTTI was recognized		425		198		65
Increases to credit losses on securities for which OTTI was previously recognized		335		264		17
Total	$	1,470	$	710	$	248

58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The amortized cost and fair value of securities available for sale at December 31, 2011, by contractual maturity, follow. The actual maturity may differ from the contractual maturity because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized Cost		Fair Value
	(In thousands)
Maturing within one year	$	1,475	$	1,493
Maturing after one year but within five years		7,157		7,366
Maturing after five years but within ten years		21,574		21,774
Maturing after ten years		26,336		24,337
		56,542		54,970
U.S. agency residential mortgage-backed		93,415		94,206
Private label residential mortgage-backed		11,066		8,268
Total	$	161,023	$	157,444

A summary of proceeds from the sale of securities available for sale and gains and losses follows:

	Proceeds		Realized Gains		Losses(1)
	(In thousands)
2011	$	70,322	$	279	$	75
2010		96,648		1,882		221
2009		43,525		3,003		130

(1) Losses in 2011, 2010 and 2009 exclude $0.8 million, $0.5 million and $0.1 million, respectively of other than temporary impairment.

During 2011, 2010 and 2009 our trading securities consisted of various preferred stocks. During each of those years we recognized gains (losses) on trading securities of $0.04 million, $(0.02) million and $1.0 million, respectively, that are included in net gains (losses) on securities in the Consolidated Statements of Operations. Of these amounts, $0.04 million and $(0.02) million relates to gains (losses) recognized on trading securities still held at December 31, 2011 and 2010, respectively.

Securities with a book value of $12.6 million and $19.6 million at December 31, 2011 and 2010, respectively, were pledged to secure borrowings, public deposits and for other purposes as required by law. There were no investment obligations of state and political subdivisions that were payable from or secured by the same source of revenue or taxing authority that exceeded 10% of consolidated shareholders’ equity at December 31, 2011 or 2010.

59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

NOTE 4 – LOANS

Our loan portfolios at December 31 follow:

	2011		2010
	(In thousands)
Real estate(1)
Residential first mortgages	$	530,969	$	601,755
Residential home equity and other junior mortgages		150,127		171,273
Construction and land development		59,136		68,022
Other(2)		446,980		484,019
Payment plan receivables		115,018		201,263
Commercial		150,633		155,322
Consumer		119,106		126,525
Agricultural		4,639		4,937
Total loans	$	1,576,608	$	1,813,116

(1) Includes both residential and non-residential commercial loans secured by real estate.

(2) Includes loans secured by multi-family residential and non-farm, non-residential property.

Loans are presented net of deferred loan fees of $0.1 million at December 31, 2011 and $0.6 million at December 31, 2010. Payment plan receivables totaling $122.7 million and $213.9 million at December 31, 2011 and 2010, respectively, are presented net of unamortized discount of $7.9 million and $12.9 million at December 31, 2011 and 2010, respectively. These payment plan receivables had effective yields of 15% and 13% at December 31, 2011 and 2010, respectively. These receivables have various due dates through December, 2013.

60

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

An analysis of the allowance for loan losses by portfolio segment for the years ended December 31, follows:

	Commercial			Mortgage			Installment			Payment Plan Receivables			Unallocated			Total
	(In thousands)
2011
Balance at beginning of period	$	23,836		$	22,642		$	6,769		$	389		$	14,279		$	67,915
Additions (deductions)
Provision for loan losses		12,988			14,410			3,365			(11	)		(2,806	)		27,946
Recoveries credited to allowance		1,850			1,441			1,451			5			-			4,747
Loans charged against the allowance		(20,491	)		(15,608	)		(5,439	)		(186	)		-			(41,724	)
Balance at end of period	$	18,183		$	22,885		$	6,146		$	197		$	11,473		$	58,884
2010
Balance at beginning of period	$	41,259		$	18,434		$	6,404		$	754		$	14,866		$	81,717
Additions (deductions)
Provision for loan losses		17,716			23,316			6,616			(296	)		(587	)		46,765
Recoveries credited to allowance		969			1,155			1,475			13			-			3,612
Loans charged against the allowance		(36,108	)		(20,263	)		(7,726	)		(82	)		-			(64,179	)
Balance at end of period	$	23,836		$	22,642		$	6,769		$	389		$	14,279		$	67,915
2009
Balance at beginning of period	$	33,090		$	8,729		$	4,264		$	486		$	11,331		$	57,900
Additions (deductions)
Provision for loan losses		59,278			31,783			8,431			291			3,535			103,318
Recoveries credited to allowance		731			791			1,271			2			-			2,795
Loans charged against the allowance		(51,840	)		(22,869	)		(7,562	)		(25	)		-			(82,296	)
Balance at end of period	$	41,259		$	18,434		$	6,404		$	754		$	14,866		$	81,717

61

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Allowance for loan losses and recorded investment in loans by portfolio segment at December 31 follows:

	Commercial		Mortgage		Installment		Payment Plan Receivables		Unallocated		Total
	(In thousands)
2011
Allowance for loan losses:
Individually evaluated for impairment	$	10,252	$	10,285	$	1,762	$	-	$	-	$	22,299
Collectively evaluated for impairment		7,931		12,600		4,384		197		11,473		36,585
Total ending allowance balance	$	18,183	$	22,885	$	6,146	$	197	$	11,473	$	58,884
Loans
Individually evaluated for impairment	$	58,674	$	93,702	$	7,554	$	-			$	159,930
Collectively evaluated for impairment		594,665		499,919		212,907		115,018				1,422,509
Total loans recorded investment		653,339		593,621		220,461		115,018				1,582,439
Accrued interest included in recorded investment		2,184		2,745		902		-				5,831
Total loans	$	651,155	$	590,876	$	219,559	$	115,018			$	1,576,608
2010
Allowance for loan losses:
Individually evaluated for impairment	$	11,522	$	11,567	$	1,836	$	-	$	-	$	24,925
Collectively evaluated for impairment		12,314		11,075		4,933		389		14,279		42,990
Total ending allowance balance	$	23,836	$	22,642	$	6,769	$	389	$	14,279	$	67,915
Loans
Individually evaluated for impairment	$	53,415	$	107,026	$	6,904	$	-			$	167,345
Collectively evaluated for impairment		656,681		554,534		239,835		201,263				1,652,313
Total loans recorded investment		710,096		661,560		246,739		201,263				1,819,658
Accrued interest included in recorded investment		2,566		2,881		1,095		-				6,542
Total loans	$	707,530	$	658,679	$	245,644	$	201,263			$	1,813,116

62

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Non-performing loans at December 31 follows:

	2011		2010
	(In thousands)
Non-accrual loans	$	59,309	$	66,652
Loans 90 days or more past due and still accruing interest		574		928
Total non-performing loans	$	59,883	$	67,580

Non performing loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. If these loans had continued to accrue interest in accordance with their original terms, approximately $3.2 million, $5.0 million, and $7.3 million of interest income would have been recognized in 2011, 2010 and 2009, respectively. Interest income recorded on these loans was approximately $0.1 million, $0.1 million and $0.2 million in 2011, 2010 and 2009, respectively.

63

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Non performing loans by class as of December 31, follows:

	90+ and Still Accruing		Non- Accrual		Total Non- Performing Loans
	(In thousands)
2011
Commercial
Income producing - real estate	$	490	$	13,788	$	14,278
Land, land development and construction - real estate		43		6,990		7,033
Commercial and industrial		-		7,984		7,984
Mortgage
1-4 family		54		15,929		15,983
Resort lending		-		8,819		8,819
Home equity line of credit - 1st lien		-		523		523
Home equity line of credit - 2nd lien		-		889		889
Installment
Home equity installment - 1st lien		-		1,542		1,542
Home equity installment - 2nd lien		-		1,023		1,023
Loans not secured by real estate		-		880		880
Other		-		4		4
Payment plan receivables
Full refund		-		491		491
Partial refund		-		424		424
Other		-		23		23
Total recorded investment	$	587	$	59,309	$	59,896
Accrued interest included in recorded investment	$	13	$	-	$	13
2010
Commercial
Income producing - real estate	$	276	$	11,925	$	12,201
Land, land development and construction - real estate		-		9,672		9,672
Commercial and industrial		675		7,016		7,691
Mortgage
1-4 family		-		19,428		19,428
Resort lending		-		9,206		9,206
Home equity line of credit - 1st lien		-		1,080		1,080
Home equity line of credit - 2nd lien		-		1,153		1,153
Installment
Home equity installment - 1st lien		-		1,916		1,916
Home equity installment - 2nd lien		-		1,373		1,373
Loans not secured by real estate		-		923		923
Other		-		34		34
Payment plan receivables
Full refund		-		2,470		2,470
Partial refund		-		329		329
Other		-		127		127
Total recorded investment	$	951	$	66,652	$	67,603
Accrued interest included in recorded investment	$	23	$	-	$	23

64

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

An aging analysis of loans by class at December 31 follows:

	Loans Past Due
	30-59 days		60-89 days		90+ days		Total		Loans not Past Due		Total Loans
	(In thousands)
2011
Commercial
Income producing - real estate	$	1,701	$	937	$	6,408	$	9,046	$	264,620	$	273,666
Land, land development and construction - real estate		487		66		2,720		3,273		51,453		54,726
Commercial and industrial		1,861		1,132		3,516		6,509		318,438		324,947
Mortgage
1-4 family		3,507		1,418		15,983		20,908		294,771		315,679
Resort lending		2,129		932		8,819		11,880		184,943		196,823
Home equity line of credit - 1st lien		96		196		523		815		24,705		25,520
Home equity line of credit - 2nd lien		506		159		889		1,554		54,045		55,599
Installment
Home equity installment - 1st lien		757		264		1,542		2,563		41,239		43,802
Home equity installment - 2nd lien		676		365		1,023		2,064		51,224		53,288
Loans not secured by real estate		1,173		463		880		2,516		117,661		120,177
Other		36		10		4		50		3,144		3,194
Payment plan receivables
Full refund		2,943		951		491		4,385		99,284		103,669
Partial refund		380		200		424		1,004		9,918		10,922
Other		23		24		23		70		357		427
Total recorded investment	$	16,275	$	7,117	$	43,245	$	66,637	$	1,515,802	$	1,582,439
Accrued interest included in recorded investment	$	160	$	105	$	13	$	278	$	5,553	$	5,831
2010
Commercial
Income producing - real estate	$	3,269	$	914	$	8,978	$	13,161	$	295,948	$	309,109
Land, land development and construction - real estate		1,923		147		4,919		6,989		55,693		62,682
Commercial and industrial		1,636		2,204		4,665		8,505		329,800		338,305
Mortgage
1-4 family		4,074		2,349		19,428		25,851		319,361		345,212
Resort lending		2,667		1,003		9,206		12,876		215,398		228,274
Home equity line of credit - 1st lien		576		-		1,080		1,656		25,951		27,607
Home equity line of credit - 2nd lien		723		464		1,153		2,340		58,127		60,467
Installment
Home equity installment - 1st lien		472		228		1,916		2,616		50,150		52,766
Home equity installment - 2nd lien		746		529		1,373		2,648		63,345		65,993
Loans not secured by real estate		1,302		348		923		2,573		122,066		124,639
Other		51		16		34		101		3,240		3,341
Payment plan receivables
Full refund		6,475		3,957		2,470		12,902		148,751		161,653
Partial refund		1,134		642		329		2,105		24,170		26,275
Other		583		166		127		876		12,459		13,335
Total recorded investment	$	25,631	$	12,967	$	56,601	$	95,199	$	1,724,459	$	1,819,658
Accrued interest included in recorded investment	$	225	$	133	$	23	$	381	$	6,161	$	6,542

65

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Impaired loans and related allocated allowance at December 31 are as follows:

	2011		2010
	(In thousands)
Impaired loans with no allocated allowance
TDR	$	26,945	$	25,754
Non - TDR		423		4,495
Impaired loans with an allocated allowance
TDR - allowance based on collateral		20,142		19,418
TDR - allowance based on present value cash flow		98,130		93,070
Non - TDR - allowance based on collateral		13,773		21,623
Non - TDR - allowance based on present value cash flow		-		2,351
Total impaired loans	$	159,413	$	166,711
Amount of allowance for loan losses allocated
TDR - allowance based on collateral	$	6,004	$	5,462
TDR - allowance based on present value cash flow		12,048		12,086
Non - TDR - allowance based on collateral		4,247		6,644
Non - TDR - allowance based on present value cash flow		-		733
Total amount of allowance for loan losses allocated	$	22,299	$	24,925

66

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Impaired loans by class as of and for the year ended December 31, 2011 are as follows (1):

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:	(In thousands)
Commercial
Income producing - real estate	$	4,626	$	6,386	$	-	$	3,170	$	170
Land, land development & construction-real estate		219		243		-		613		35
Commercial and industrial		3,593		3,677		-		2,874		70
Mortgage
1-4 family		6,975		9,242		-		8,566		299
Resort lending		7,156		7,680		-		7,751		330
Home equity line of credit - 1st lien		-		-		-		-		-
Home equity line of credit - 2nd lien		134		211		-		118		4
Installment
Home equity installment - 1st lien		2,100		2,196		-		1,955		96
Home equity installment - 2nd lien		1,987		1,987		-		2,014		93
Loans not secured by real estate		637		688		-		598		31
Other		24		24		-		15		2
		27,451		32,334		-		27,674		1,130
With an allowance recorded:
Commercial
Income producing - real estate		22,781		29,400		3,642		18,812		117
Land, land development & construction-real estate		12,362		14,055		3,633		9,828		114
Commercial and industrial		15,093		18,357		2,977		11,501		352
Mortgage
1-4 family		61,214		63,464		7,716		62,811		2,692
Resort lending		18,159		19,351		2,534		21,750		734
Home equity line of credit - 1st lien		64		73		35		32		2
Home equity line of credit - 2nd lien		-		-		-		9		-
Consumer
Home equity installment - 1st lien		1,232		1,293		660		1,408		60
Home equity installment - 2nd lien		1,421		1,458		1,062		1,466		66
Loans not secured by real estate		153		156		40		168		6
Other		-		-		-		-		-
		132,479		147,607		22,299		127,785		4,143
Total
Commercial
Income producing - real estate		27,407		35,786		3,642		21,982		287
Land, land development & construction-real estate		12,581		14,298		3,633		10,441		149
Commercial and industrial		18,686		22,034		2,977		14,375		422
Mortgage
1-4 family		68,189		72,706		7,716		71,377		2,991
Resort lending		25,315		27,031		2,534		29,501		1,064
Home equity line of credit - 1st lien		64		73		35		32		2
Home equity line of credit - 2nd lien		134		211		-		127		4
Consumer
Home equity installment - 1st lien		3,332		3,489		660		3,363		156
Home equity installment - 2nd lien		3,408		3,445		1,062		3,480		159
Loans not secured by real estate		790		844		40		766		37
Other		24		24		-		15		2
Total	$	159,930	$	179,941	$	22,299	$	155,459	$	5,273
Accrued interest included in recorded investment	$	517

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

67

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Impaired loans by class as of December 31, 2010 are as follows (1):

	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:	(In thousands)
Commercial
Income producing - real estate	$	4,545	$	4,763	$	-
Land, land development & construction-real estate		1,600		2,810		-
Commercial and industrial		5,830		5,873		-
Mortgage
1-4 family		8,770		10,551		-
Resort lending		5,666		5,670		-
Home equity line of credit - 1st lien		-		-		-
Home equity line of credit - 2nd lien		93		93		-
Installment
Home equity installment - 1st lien		1,772		1,805		-
Home equity installment - 2nd lien		1,891		1,904		-
Loans not secured by real estate		211		220		-
Other		-		-		-
		30,378		33,689		-
With an allowance recorded:
Commercial
Income producing - real estate		16,206		22,748		4,279
Land, land development & construction-real estate		12,735		21,017		3,922
Commercial and industrial		12,499		13,844		3,321
Mortgage
1-4 family		64,157		66,379		8,223
Resort lending		28,315		28,874		3,319
Home equity line of credit - 1st lien		-		-		-
Home equity line of credit - 2nd lien		25		97		25
Consumer
Home equity installment - 1st lien		1,361		1,374		620
Home equity installment - 2nd lien		1,413		1,429		1,110
Loans not secured by real estate		256		258		106
Other		-		-		-
		136,967		156,020		24,925
Total
Commercial
Income producing - real estate		20,751		27,511		4,279
Land, land development & construction-real estate		14,335		23,827		3,922
Commercial and industrial		18,329		19,717		3,321
Mortgage
1-4 family		72,927		76,930		8,223
Resort lending		33,981		34,544		3,319
Home equity line of credit - 1st lien		-		-		-
Home equity line of credit - 2nd lien		118		190		25
Consumer
Home equity installment - 1st lien		3,133		3,179		620
Home equity installment - 2nd lien		3,304		3,333		1,110
Loans not secured by real estate		467		478		106
Other		-		-		-
Total	$	167,345	$	189,709	$	24,925
Accrued interest included in recorded investment	$	634

(1) There were no impaired payment plan receivables at December 31, 2010.

68

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Our average investment in impaired loans was approximately $155.5 million, $168.0 million and $111.2 million in 2011, 2010 and 2009, respectively. Cash receipts on impaired loans on non-accrual status are generally applied to the principal balance. Interest income recognized on impaired loans was approximately $5.3 million, $5.7 million and $2.2 million in 2011, 2010 and 2009, respectively of which the majority of these amounts were received in cash.

Troubled debt restructurings at December 31 follow:

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

	2010
	Commercial		Retail			Total
	(In thousands)
Performing TDR’s	$	16,957	$	96,855		$	113,812
Non-performing TDR’s(1)		7,814		16,616	(2)		24,430
Total	$	24,771	$	113,471		$	138,242

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

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

We have allocated $18.1 million and $17.5 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2011 and 2010, respectively. We have committed to lend additional amounts totaling up to zero and $0.1 million as of December 31, 2011 and 2010, respectively, to customers with outstanding loans that are classified as troubled debt restructurings.

During the year ending December 31, 2011, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans generally included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

Modifications involving a reduction of the stated interest rate of the loan have generally been for periods ranging from 3 months to 60 months but have extended to as much as 480 months in certain circumstances. Modifications involving an extension of the maturity date have generally been for periods ranging from 1 month to 120 months but have extended to as much as 248 months in certain circumstances.

69

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Loans that have been classified as troubled debt restructurings during the year ended December 31, 2011 follows:

	Number of Contracts		Pre- modification Recorded Balance		Post- modification Recorded Balance
	(Dollars in thousands)
Commercial
Income producing - real estate		42	$	21,061	$	17,679
Land, land development & construction-real estate		20		10,801		7,464
Commercial and industrial		64		11,133		10,649
Mortgage
1-4 family		73		9,933		9,423
Resort lending		33		8,893		8,749
Home equity line of credit - 1st lien		2		69		64
Home equity line of credit - 2nd lien		1		23		18
Installment
Home equity installment - 1st lien		21		678		618
Home equity installment - 2nd lien		16		535		514
Loans not secured by real estate		26		455		442
Other		-		-		-
Total		298	$	63,581	$	55,620

The troubled debt restructurings described above increased the allowance for loan losses by $3.4 million and resulted in charge offs of $4.7 million during the year ending December 31, 2011.

Loans that have been classified as troubled debt restructured during the past twelve months and that have subsequently defaulted during the year ended December 31, 2011 follows:

	Number of Contracts		Recorded Balance
	(Dollars in thousands)
Commercial
Income producing - real estate		7	$	3,604
Land, land development & construction-real estate		4		3,036
Commercial and industrial		2		492
Mortgage
1-4 family		10		1,191
Resort lending		6		1,311
Home equity line of credit - 1st lien		-		-
Home equity line of credit - 2nd lien		-		-
Consumer
Home equity installment - 1st lien		1		19
Home equity installment - 2nd lien		5		301
Loans not secured by real estate		-		-
Other		-		-
		35	$	9,954

A loan is considered to be in payment default generally once it is 90 days contractually past due under the modified terms for commercial loans and installment loans and when four consecutive payments are missed for mortgage loans.

70

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The troubled debt restructurings that subsequently defaulted described above increased the allowance for loan losses by $1.9 million and resulted in charge offs of $1.8 million during the year ending December 31, 2011.

The terms of certain other loans were modified during the year ending December 31, 2011 that did not meet the definition of a troubled debt restructuring. The modification of these loans could have included modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.

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

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

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

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

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

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

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

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

71

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The following table summarizes loan ratings by loan class for our commercial loan segment at December 31:

	Commercial
	Non-watch 1-6		Watch 7-8		Substandard Accrual 9		Non- Accrual 10-11		Total
	(In thousands)
2011
Income producing - real estate	$	201,655	$	52,438	$	5,785	$	13,788	$	273,666
Land, land development and construction - real estate		33,515		9,421		4,800		6,990		54,726
Commercial and industrial		275,245		27,783		13,935		7,984		324,947
Total	$	510,415	$	89,642	$	24,520	$	28,762	$	653,339
Accrued interest included in total	$	1,677	$	381	$	126	$	-	$	2,184
2010
Income producing - real estate	$	225,167	$	57,536	$	14,482	$	11,925	$	309,110
Land, land development and construction - real estate		33,356		14,780		4,873		9,672		62,681
Commercial and industrial		273,138		41,738		16,413		7,016		338,305
Total	$	531,661	$	114,054	$	35,768	$	28,613	$	710,096
Accrued interest included in total	$	1,897	$	469	$	200	$	-	$	2,566

72

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

For each of our mortgage and consumer segment classes we generally monitor credit quality based on the credit scores of the borrowers. These credit scores are generally updated at least annually. The following table summarizes credit scores by loan class for our mortgage and installment loan segments at December 31:

	Mortgage (1)
	1-4 Family		Resort Lending		Home Equity 1st Lien		Home Equity 2nd Lien		Total
	(In thousands)
2011
800 and above	$	26,509	$	17,345	$	4,062	$	6,317	$	54,233
750-799		63,746		76,381		8,058		16,892		165,077
700-749		55,047		53,210		4,280		12,131		124,668
650-699		54,579		21,579		2,854		7,909		86,921
600-649		40,977		12,750		2,485		5,066		61,278
550-599		29,732		10,698		1,547		3,466		45,443
500-549		28,573		3,716		1,615		2,758		36,662
Under 500		12,434		565		539		886		14,424
Unknown		4,082		579		80		174		4,915
Total	$	315,679	$	196,823	$	25,520	$	55,599	$	593,621
Accrued interest included in total	$	1,404	$	928	$	123	$	290	$	2,745
2010
800 and above	$	28,308	$	21,385	$	4,433	$	6,386	$	60,512
750-799		66,812		89,695		8,996		17,995		183,498
700-749		66,749		56,425		4,961		14,688		142,823
650-699		57,026		25,911		3,707		8,856		95,500
600-649		41,559		12,832		1,596		3,768		59,755
550-599		31,879		11,647		1,673		4,303		49,502
500-549		30,723		5,040		1,366		2,497		39,626
Under 500		19,005		2,941		742		1,853		24,541
Unknown		3,151		2,398		133		121		5,803
Total	$	345,212	$	228,274	$	27,607	$	60,467	$	661,560
Accrued interest included in total	$	1,413	$	1,012	$	135	$	321	$	2,881

73

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

	Installment(1)
	Home Equity 1st Lien		Home Equity 2nd Lien		Loans not Secured by Real Estate		Other		Total
	(In thousands)
2011
800 and above	$	5,466	$	5,047	$	18,245	$	70	$	28,828
750-799		11,651		16,475		41,501		572		70,199
700-749		6,899		10,693		23,174		883		41,649
650-699		7,144		8,407		15,646		673		31,870
600-649		4,943		5,412		7,599		434		18,388
550-599		3,435		3,221		4,573		270		11,499
500-549		3,021		3,145		3,011		183		9,360
Under 500		1,160		854		1,391		50		3,455
Unknown		83		34		5,037		59		5,213
Total	$	43,802	$	53,288	$	120,177	$	3,194	$	220,461
Accrued interest included in total	$	176	$	208	$	489	$	29	$	902
2010
800 and above	$	5,626	$	5,618	$	13,078	$	22	$	24,344
750-799		14,654		19,668		46,228		554		81,104
700-749		8,994		15,015		26,714		828		51,551
650-699		8,225		10,029		15,968		779		35,001
600-649		5,878		5,677		8,520		417		20,492
550-599		4,120		4,812		5,479		255		14,666
500-549		3,350		3,248		4,398		260		11,256
Under 500		1,809		1,848		2,087		163		5,907
Unknown		110		78		2,167		63		2,418
Total	$	52,766	$	65,993	$	124,639	$	3,341	$	246,739
Accrued interest included in total	$	218	$	264	$	579	$	34	$	1,095

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

Mepco is a wholly-owned subsidiary of our Bank that operates a vehicle service contract payment plan business throughout the United States. See note #11 for more information about Mepco’s business. As of December 31, 2011, approximately 90.1% of Mepco’s outstanding payment plan receivables relate to programs in which a third party insurer or risk retention group is obligated to pay Mepco the full refund owing upon cancellation of the related service contract (including with respect to both the portion funded to the service contract seller and the portion funded to the administrator). These receivables are shown as “Full Refund” in the table below. Another approximately 9.5% of Mepco’s outstanding payment plan receivables as of December 31, 2011, relate to programs in which a third party insurer or risk retention group is obligated to pay Mepco the refund owing upon cancellation only with respect to the unearned portion previously funded by Mepco to the administrator (but not to the service contract seller). These receivables are shown as “Partial Refund” in the table below. The balance of Mepco’s outstanding payment plan receivables relate to programs in which there is no insurer or risk retention group that has any contractual liability to Mepco for any portion of the refund amount. These receivables are shown as “Other” in the table below. For each class of our payment plan receivables we monitor credit ratings of the counterparties as we evaluate the credit quality of this portfolio.

Although Mepco has contractual recourse against various counterparties for refunds owing upon cancellation of vehicle service contracts, please see note #11 regarding certain risks and difficulties associated with collecting these refunds.

74

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The following table summarizes credit ratings by class of payment plan receivable at December 31:

	Payment Plan Receivables
	Full Refund		Partial Refund		Other		Total
	(In thousands)
2011
AM Best rating
A+	$	-	$	118	$	7	$	125
A		32,461		165		269		32,895
A-		27,056		10,639		-		37,695
B+		1,390		-		-		1,390
B		-		-		-		-
Not rated		42,762		-		151		42,913
Total	$	103,669	$	10,922	$	427	$	115,018
2010
AM Best rating
A+	$	-	$	255	$	-	$	255
A		40,264		497		341		41,102
A-		48,291		25,523		-		73,814
B+		19,694		-		-		19,694
B		-		-		-		-
Not rated		53,404		-		12,994		66,398
Total	$	161,653	$	26,275	$	13,335	$	201,263

Mortgage loans serviced for others are not reported as assets. The principal balances of these loans at year end are as follows:

	2011		2010
	(In thousands)
Mortgage loans serviced for:
Fannie Mae	$	895,510	$	939,963
Freddie Mac		882,401		828,166
Other		154		192
Total	$	1,778,065	$	1,768,321

Custodial escrow balances maintained in connection with mortgage loans serviced for others totaled $26.5 million and $33.3 million, at December 31, 2011 and 2010, respectively.

If we do not remain “Well Capitalized” (see note #21), meet certain minimum capital levels or certain profitability requirements or if we incur a rapid decline in net worth we could lose our ability to sell and/or service loans to these investors. This could impact our ability to generate gains on the sale of loans and generate servicing income. A forced liquidation of our servicing portfolio could also impact the value that could be recovered on this asset. Fannie Mae has the most stringent eligibility requirements covering capital levels, profitability and decline in net worth. Fannie Mae requires seller/servicers to be “Well Capitalized.” For the profitability requirement, we cannot record four or more consecutive quarterly losses and experience a 30% decline in net worth over the same period. Finally, our net worth cannot decline by more than 25% in one quarter or more than 40% over two consecutive quarters. The highest level of capital we are required to maintain is at least $2.5 million plus 0.25% of loans serviced for Freddie Mac.

75

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

An analysis of capitalized mortgage loan servicing rights for the years ended December 31 follows:

	2011			2010			2009
	(In thousands)
Balance at beginning of year	$	14,661		$	15,273		$	11,966
Originated servicing rights capitalized		2,967			4,158			5,213
Amortization		(3,065	)		(3,862	)		(4,255	)
Change in valuation allowance		(3,334	)		(908	)		2,349
Balance at end of year	$	11,229		$	14,661		$	15,273
Valuation allowance	$	6,544		$	3,210		$	2,302
Loans sold and serviced that have had servicing rights capitalized	$	1,774,952		$	1,764,317		$	1,725,278

The fair value of capitalized mortgage loan servicing rights was $11.5 million and $15.7 million at December 31, 2011 and 2010, respectively. Fair value was determined using an average coupon rate of 5.20%, average servicing fee of 0.256%, average discount rate of 10.65% and an average PSA rate of 278 for December 31, 2011; and an average coupon rate of 5.42%, average servicing fee of 0.255%, average discount rate of 10.07% and an average PSA rate of 228 for December 31, 2010.

NOTE 5 – OTHER REAL ESTATE OWNED

During 2011 and 2010 we foreclosed on certain loans secured by real estate and transferred approximately $18.6 million and $38.1 million to other real estate in each of those years, respectively. At the time of acquisition amounts were charged-off against the allowance for loan losses to bring the carrying amount of these properties to their estimated fair values, less estimated costs to sell. During 2011 and 2010 we sold other real estate with book balances of approximately $17.7 million and $22.8 million, respectively. Gains or losses on the sale of other real estate are included in non-interest expense on the Consolidated Statements of Operations.

We periodically review our real estate owned properties and establish valuation allowances on these properties if values have declined since the date of acquisition. An analysis of our valuation allowance for other real estate owned follows:

	2011			2010			2009
	(In thousands)
Balance at beginning of year	$	10,876		$	6,498		$	2,363
Additions charged to expense		6,563			6,883			7,108
Direct write-downs upon sale		(2,784	)		(2,505	)		(2,973	)
Balance at end of year	$	14,655		$	10,876		$	6,498

Other real estate and repossessed assets totaling $34.0 million and $39.4 million at December 31, 2011 and 2010, respectively are presented net of valuation allowance.

76

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

NOTE 6 – PROPERTY AND EQUIPMENT

A summary of property and equipment at December 31 follows:

	2011			2010
	(In thousands)
Land	$	19,250		$	19,367
Buildings		70,168			70,335
Equipment		78,269			76,038
		167,687			165,740
Accumulated depreciation and amortization		(105,139	)		(97,381	)
Property and equipment, net	$	62,548		$	68,359

Depreciation expense was $8.4 million, $8.7 million and $8.7 million in 2011, 2010 and 2009, respectively.

NOTE 7 – INTANGIBLE ASSETS

Intangible assets, net of amortization, at December 31 follows:

	2011				2010
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
	(In thousands)
Amortized intangible assets - core deposits	$	31,326	$	23,717	$	31,326	$	22,346

Intangible amortization expense was $1.4 million, $1.3 million and $1.9 million in 2011, 2010 and 2009, respectively.

A summary of estimated core deposit intangible amortization at December 31, 2011, follows:

	(In thousands)
2012	$	1,088
2013		1,078
2014		801
2015		613
2016		613
2017 and thereafter		3,416
Total	$	7,609

During 2009 we recorded a $16.7 million goodwill impairment charge at our Mepco segment. In the fourth quarter of 2009 we updated our goodwill impairment testing (interim tests had also been performed in the prior quarters of 2009). The results of the year end goodwill impairment testing showed that the estimated fair value of our Mepco reporting unit was less than the carrying value of equity. The fair value of Mepco is principally based on estimated future earnings utilizing a discounted cash flow methodology. Mepco recorded a loss in the fourth quarter of 2009. Further, Mepco’s largest business counterparty, who accounted for nearly one-half of Mepco’s payment plan business, defaulted in its obligations to Mepco and this counterparty was expected to cease operations in 2010 (which it did). These factors adversely impacted the level of Mepco’s expected future earnings and hence its fair value. This necessitated a step 2 analysis and valuation. Based on the step 2 analysis (which involved determining the fair value of Mepco’s assets, liabilities and identifiable intangibles) we concluded that goodwill was impaired, resulting in the $16.7 million charge. As a result of this charge, goodwill had a zero balance at December 31, 2009. In addition, we accelerated the amortization of a customer relationship intangible at Mepco in the amount of $0.1 million. This customer relationship intangible had a zero balance at December 31, 2009.

77

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

NOTE 8 – DEPOSITS

A summary of interest expense on deposits for the years ended December 31 follows:

	2011		2010		2009
	(In thousands)
Savings and interest bearing checking	$	2,263	$	2,829	$	5,751
Time deposits under $100,000		10,349		22,204		25,202
Time deposits of $100,000 or more		2,645		3,131		4,452
Total	$	15,257	$	28,164	$	35,405

Aggregate time deposits in denominations of $100,000 or more amounted to $188.6 million and $166.1 million at December 31, 2011 and 2010, respectively.

A summary of the maturity of time deposits at December 31, 2011, follows:

	(In thousands)
2012	$	357,403
2013		113,918
2014		40,419
2015		28,941
2016		27,342
2017 and thereafter		781
Total	$	568,804

Time deposits acquired through broker relationships totaled $42.3 million and $273.5 million at December 31, 2011 and 2010, respectively.

NOTE 9 – OTHER BORROWINGS

A summary of other borrowings at December 31 follows:

	2011		2010
	(In thousands)
Advances from the Federal Home Loan Bank	$	33,384	$	71,022
Other		3		10
Total	$	33,387	$	71,032

Advances from the Federal Home Loan Bank (“FHLB”) are secured by unencumbered qualifying mortgage and home equity loans with a market value equal to at least 136% to 200%, respectively of outstanding advances, as well as certain agency mortgage backed securities. Advances are also secured by FHLB stock that we own. As of December 31, 2011, we had unused borrowing capacity with the FHLB (subject to the FHLB’s credit requirements and policies) of $149.7 million. Interest expense on advances amounted to $1.4 million, $1.9 million and $4.5 million for the years ended December 31, 2011, 2010 and 2009, respectively. During 2011, 2010 and 2009 FHLB advances totaling $33.0 million, $25.0 million and $151.5 million, respectively were terminated with no realized gain or loss.

As a member of the FHLB, we must own FHLB stock equal to the greater of 1.0% of the unpaid principal balance of residential mortgage loans or 5.0% of our outstanding advances. At December 31, 2011, we were in compliance with the FHLB stock ownership requirements.

78

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The maturity dates and weighted average interest rates of FHLB advances at December 31 follow:

	2011					2010
	Amount		Rate			Amount		Rate
	(Dollars in thousands)
Fixed-rate advances
2011						$	2,250		5.89	%
2012	$	12,354		0.50	%		364		6.90
2013		-					-
2014		4,240		5.73			4,240		5.73
2015		-					-
2016		2,505		6.55			2,590		6.55
2017 and thereafter		11,285		6.59			11,578		6.59
Total fixed-rate advances		30,384		3.99			21,022		6.34
Variable-rate advances
2011		-					42,000		0.33
2013		-					5,000		0.92
2014		3,000		0.51			-
2015		-					3,000		0.66
Total variable-rate advances		3,000		0.51			50,000		0.41
Total advances	$	33,384		3.68	%	$	71,022		2.16	%

A summary of repayments of FHLB Advances at December 31, 2011, follows:

	(In thousands)
2012	$	12,762
2013		441
2014		7,717
2015		515
2016		2,521
2017 and thereafter		9,428
Total	$	33,384

All repurchase agreements outstanding at December 31, 2009 matured during 2010. These securities were being held by the counterparty to the repurchase agreement. Repurchase agreements averaged $30.7 million and $35.0 million during 2010 and 2009 respectively. The maximum amounts outstanding at any month end during 2010 and 2009 were $35.0 million in each year, respectively. Interest expense on repurchase agreements totaled $1.4 million and $1.6 million, for the years ended 2010 and 2009, respectively. No repurchase agreements were prepaid during 2010 or 2009.

We had no borrowings outstanding with the FRB during the years ended or at December 31, 2011 or 2010. We had unused borrowing capacity with the FRB (subject to the FRB’s credit requirements and policies) of $0.5 million at December 31, 2011. Collateral for FRB borrowings are certain securities available for sale. Interest expense on these borrowings amounted to $0.2 million for the year ended December 31, 2009. FRB borrowings averaged $59.8 million during 2009. The maximum amount outstanding at any month end during 2009 was $206.0 million.

79

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Assets, including securities available for sale and loans, pledged to secure other borrowings totaled $391.7 million at December 31, 2011.

NOTE 10 – SUBORDINATED DEBENTURES

We have formed various special purpose entities (the “trusts”) for the purpose of issuing trust preferred securities in either public or pooled offerings or in private placements. Independent Bank Corporation owns all of the common stock of each trust and has issued subordinated debentures to each trust in exchange for all of the proceeds from the issuance of the common stock and the trust preferred securities. Trust preferred securities totaling $38.2 million and $44.1 million at December 31, 2011 and 2010, respectively, qualified as Tier 1 regulatory capital and the remaining amount qualified as Tier 2 regulatory capital.

These trusts are not consolidated with Independent Bank Corporation and accordingly, we report the common securities of the trusts held by us in other assets and the subordinated debentures that we have issued to the trusts in the liability section of our Consolidated Statements of Financial Condition.

Summary information regarding subordinated debentures as of December 31 follows:

		2011
Entity Name	Issue Date	Subordinated Debentures		Trust Preferred Securities Issued		Common Stock Issued
		(In thousands)
IBC Capital Finance II	March 2003	$	9,452	$	9,168	$	284
IBC Capital Finance III	May 2007		12,372		12,000		372
IBC Capital Finance IV	September 2007		20,619		20,000		619
Midwest Guaranty Trust I	November 2002		7,732		7,500		232
		$	50,175	$	48,668	$	1,507

		2010
Entity Name	Issue Date	Subordinated Debentures		Trust Preferred Securities Issued		Common Stock Issued
		(In thousands)
IBC Capital Finance II	March 2003	$	9,452	$	9,168	$	284
IBC Capital Finance III	May 2007		12,372		12,000		372
IBC Capital Finance IV	September 2007		20,619		20,000		619
Midwest Guaranty Trust I	November 2002		7,732		7,500		232
		$	50,175	$	48,668	$	1,507

Other key terms for the subordinated debentures and trust preferred securities that were outstanding at December 31, 2011 follow:

Entity Name	Maturity Date	Interest Rate	First Permitted Redemption Date
IBC Capital Finance II	March 31, 2033	8.25% fixed	March 31, 2008
IBC Capital Finance III	July 30, 2037	3 month LIBOR plus 1.60%	July 30, 2012
IBC Capital Finance IV	September 15, 2037	3 month LIBOR plus 2.85%	September 15, 2012
Midwest Guaranty Trust I	November 7, 2032	3 month LIBOR plus 3.45%	November 7, 2007

80

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

In 2010, we commenced an offer to exchange up to 18.0 million newly issued shares of our common stock for properly tendered and accepted trust preferred securities issued by IBC Capital Finance II, IBC Capital Finance III, IBC Capital Finance IV, and Midwest Guaranty Trust I (the “Exchange Offer”). The Exchange Offer expired on June 22, 2010. We accepted for exchange 1,657,255 shares ($41.4 million aggregate liquidation amount) of the trust preferred securities issued by IBC Capital Finance II, which were validly tendered and not withdrawn as of the expiration date for the Exchange Offer. No shares of the trust preferred securities issued by IBC Capital Finance III, IBC Capital Finance IV, or Midwest Guaranty Trust I were tendered.

We issued 5,109,125 shares of common stock at a price of $4.60 per share in exchange for the validly tendered trust preferred securities issued by IBC Capital Finance II (including $2.3 million of accrued and unpaid interest) and recorded a gain of $18.1 million which is included in our Consolidated Statements of Operations as “Gain on extinguishment of debt”. This gain was net of expenses paid totaling approximately $1.0 million for dealer-manager fees, legal fees, accounting fees and other related costs as well as the pro rata write off of previously capitalized issue costs of $1.2 million.

In the fourth quarter of 2009 we elected to defer distributions (payment of interest) on each of the subordinated debentures and trust preferred securities and continued to defer these distributions through December 31, 2011. The subordinated debentures and trust preferred securities are cumulative and have a feature that permits us to defer distributions (payment of interest) from time to time for a period not to exceed 20 consecutive quarters. While we defer the payment of interest, we will continue to accrue the interest expense owed at the applicable interest rate. Upon the expiration of the deferral, all accrued and unpaid interest is due and payable. At December 31, 2011 and 2010 we had $4.4 million and $2.3 million of accrued and unpaid interest. We have the right to redeem the subordinated debentures and trust preferred securities (at par) in whole or in part from time to time on or after the first permitted redemption date specified above or upon the occurrence of specific events defined within the trust indenture agreements. Issuance costs have been capitalized and are being amortized on a straight-line basis over a period not exceeding 30 years and are included in interest expense in the Consolidated Statements of Operations. Distributions (payment of interest) on the trust preferred securities are also included in interest expense in the Consolidated Statements of Operations.

NOTE 11 – COMMITMENTS AND CONTINGENT LIABILITIES

In the normal course of business, we enter into financial instruments with off-balance sheet risk to meet the financing needs of customers or to reduce exposure to fluctuations in interest rates. These financial instruments may include commitments to extend credit and standby letters of credit. Financial instruments involve varying degrees of credit and interest-rate risk in excess of amounts reflected in the Consolidated Statements of Financial Condition. Exposure to credit risk in the event of non-performance by the counterparties to the financial instruments for loan commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments. We do not, however, anticipate material losses as a result of these financial instruments.

A summary of financial instruments with off-balance sheet risk at December 31 follows:

	2011		2010
	(In thousands)
Financial instruments whose risk is represented by contract amounts
Commitments to extend credit	$	139,183	$	126,356
Standby letters of credit		11,188		11,949

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and generally require payment of a fee. Since commitments may expire without being drawn upon, the commitment amounts do not represent future cash requirements. Commitments are issued subject to similar underwriting standards, including collateral requirements, as are generally involved in the extension of credit facilities.

81

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Standby letters of credit are written conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in such transactions is essentially the same as that involved in extending loan facilities and, accordingly, standby letters of credit are issued subject to similar underwriting standards, including collateral requirements, as are generally involved in the extension of credit facilities. The majority of the standby letters of credit are to corporations, have variable rates that range from 2.5% to 6.5% and mature through 2013.

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

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

Upon the cancellation of a service contract and the completion of the billing process to the counterparties for amounts due to Mepco, there is a decrease in the amount of “payment plan receivables” and an increase in the amount of “vehicle service contract counterparty receivables” until such time as the amount due from the counterparty is collected. These amounts represent funds actually due to Mepco from its counterparties for cancelled service contracts. At December 31, 2011, the aggregate amount of such obligations owing to Mepco by counterparties, net of write-downs and reserves made through the recognition of vehicle service contract counterparty contingencies expense, totaled $29.3 million. This compares to a balance of $37.3 million at December 31, 2010. Mepco is currently in the process of working to recover these receivables, including through liquidation of collateral, claims against the bankruptcy estate of a counterparty that previously represented a significant portion of Mepco’s business, and litigation against counterparties.

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

Payment defaults and voluntary cancellations increased significantly during 2010 and 2009, reflecting both weak economic conditions and adverse publicity impacting the vehicle service contract industry. When counterparties do not honor their contractual obligations to Mepco to repay advanced funds, we recognize estimated losses. Mepco pursues collection (including commencing legal action if necessary) of funds due to it under its various contracts with counterparties. During the third quarter of 2009, we identified a counterparty that was experiencing particularly severe financial difficulties and accrued for estimated potential losses related to that relationship. For 2011, 2010 and 2009 non-interest expenses include $11.0 million, $18.6 million, and $31.2 million, respectively, of charges related to estimated losses for vehicle service contract counterparty contingencies. These charges are being classified in non-interest expense because they are associated with a default or potential default of a contractual obligation under our counterparty contracts as opposed to loss on the administration of the payment plan itself.

82

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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

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

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

An analysis of our vehicle service contract counterparty receivable, net follows:

	2011			2010			2009
	(In thousands)
Balance at beginning of year, net of reserve	$	37,270		$	5,419		$	3,578
Transfers in from payment plan receivables		8,874			77,457			20,831
Reserves established and charge-offs recorded to expense		(11,048	)		(18,633	)		(31,234	)
Transferred to (from) contingency reserves		(1,015	)		(11,110	)		12,244
Cash received		(1,613	)		(15,863	)		-
Collateral received (other real estate and repossessed assets) in partial satisfaction of debt		(3,170	)		-			-
Balance at end of year, net of reserve	$	29,298		$	37,270		$	5,419
Reserve at end of year	$	32,450		$	24,600		$	9,856

83

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

An analysis of our vehicle service contract counterparty reserve follows:

	2011			2010			2009
	(In thousands)
Balance at beginning of year	$	25,735		$	22,100		$	-
Additions charged to expense		11,048			18,633			31,234
Charge-offs		(4,213	)		(14,998	)		(9,134	)
Balance at end of year	$	32,570		$	25,735		$	22,100
Reserves recorded in VSC counterparty receivables, net	$	32,450		$	24,600		$	9,856
Reserves recorded in other liabilities		120			1,135			12,244
Total at end of year	$	32,570		$	25,735		$	22,100

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

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

NOTE 12 – SHAREHOLDERS’ EQUITY AND LOSS PER COMMON SHARE

On January 29, 2010, we held a special shareholders’ meeting at which our shareholders approved an amendment to our Articles of Incorporation to increase the number of shares of common stock we are authorized to issue from 60 million to 500 million. They also approved the issuance of our common stock in exchange for certain of our trust preferred securities and in exchange for the shares of our preferred stock held by the U.S. Department of the Treasury (“UST”).

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

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

84

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

With the exception of being convertible into shares of our common stock, the terms of the Series B Preferred Stock are substantially similar to the terms of the Series A Preferred Stock that was exchanged. The Series B Preferred Stock qualifies as Tier 1 regulatory capital and pays cumulative dividends quarterly at a rate of 5% per annum through February 14, 2014, and at a rate of 9% per annum thereafter. The Series B Preferred Stock is non-voting, other than class voting rights on certain matters that could adversely affect the Series B Preferred Stock. If dividends on the Series B Preferred Stock have not been paid for an aggregate of six quarterly dividend periods or more, whether consecutive or not, the holders of the Series B Preferred Stock, voting together with holders of any then outstanding voting parity stock, have the right to elect two additional directors at our next annual meeting of shareholders or at a special meeting of shareholders called for that purpose. These directors would be elected annually and serve until all accrued and unpaid dividends on the Series B Preferred Stock have been paid. Beginning in December of 2009, we suspended payment of quarterly dividends. The cash dividends payable to the UST amount to approximately $4.0 million per year until December of 2013, at which time they would increase to approximately $7.2 million per year. Accrued and unpaid dividends were $6.6 million at December 31, 2011. Because we have deferred dividends on the Series B Preferred Stock for at least six quarterly dividend periods, the UST currently has the right to elect two directors to our board. At this time, in lieu of electing such directors, the UST requested us to allow (and we have allowed) an observer to attend our Board of Directors meetings beginning in the third quarter of 2011. The UST continues to retain the right to elect two directors as described above.

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

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

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

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

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

If converted by the holder or by us pursuant to either of the above-described conversion rights, each share of Series B Preferred Stock (liquidation amount of $1,000 per share) will convert into a number of shares of our common stock equal to a fraction, the numerator of which is $750 and the denominator of which is $7.234, which was the market price of our common stock at the time the exchange agreement was signed (as such market price was determined pursuant to the terms of the Series B Preferred Stock), referred to as the “conversion rate.” This conversion rate is subject to certain anti-dilution adjustments that may result in a greater number of shares being issued to the holder of the Series B Preferred Stock. If converted by the holder or by us pursuant to either of the above-described conversion rights, as of December 31, 2011, the Series B Preferred Stock and accrued and unpaid dividends would have been convertible into approximately 12.7 million shares of our common stock.

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

85

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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

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

The Series B Preferred Stock may be redeemed by us, subject to the approval of the Board of Governors of the Federal Reserve System, at any time, in an amount up to the cash proceeds (minimum of approximately $18.6 million) from qualifying equity offerings of common stock (plus any net increase to our retained earnings after the original issue date). If the Series B Preferred Stock is redeemed prior to the first dividend payment date falling on or after the second anniversary of the original issue date, the redemption price will be equal to the $1,000 liquidation amount per share plus any accrued and unpaid dividends. If the Series B Preferred Stock is redeemed on or after such date, the redemption price will be the greater of (a) the $1,000 liquidation amount per share plus any accrued and unpaid dividends and (b) the product of the applicable Conversion Rate (as described above) and the average of the market prices per share of our common stock (as such market price is determined pursuant to the terms of the Series B Preferred Stock) over a 20 trading day period beginning on the trading day immediately after we give notice of redemption to the holder (plus any accrued and unpaid dividends). In any redemption, we must redeem at least 25% of the number of Series B Preferred Stock shares originally issued to the UST, unless fewer of such shares are then outstanding (in which case all of the Series B Preferred Stock must be redeemed).

Effective as of April 9, 2010, we amended our articles of incorporation to delete any reference to par value with respect to our common stock, which previously had a par value of $1.00 per share. The amendment was approved by our Board on April 6, 2010, pursuant to the authority granted it under Sections 301a and 611(2) of the Michigan Business Corporation Act. As a result, we reclassified all amounts in capital surplus to common stock on our Consolidated Statements of Financial Condition.

On July 7, 2010 we executed an Investment Agreement and Registration Rights Agreement with Dutchess Opportunity Fund, II, LP (“Dutchess”) for the sale of up to 1.50 million shares of our common stock. These agreements serve to establish an equity line facility as a contingent source of liquidity at the parent company level. Pursuant to the Investment Agreement, Dutchess committed to purchase up to $15.0 million of our common stock over a 36-month period ending November 1, 2013. We have the right, but no obligation, to draw on this equity line facility from time to time during such 36-month period by selling shares of our common stock to Dutchess. The sales price would be at a 5% discount to the market price of our common stock at the time of the draw; as such market price is determined pursuant to the terms of the Investment Agreement. Through December 31, 2011, 0.78 million shares of our common stock were sold to Dutchess pursuant to the Investment Agreement (0.43 million shares during 2011 and 0.35 million shares during the fourth quarter of 2010) for an aggregate purchase price of $1.8 million. In order to comply with Nasdaq rules, we needed shareholder approval to sell more than approximately 0.7 million more shares to Dutchess pursuant to the Investment Agreement. In April 2011, our shareholders approved a resolution at our Annual Meeting to authorize us to sell up to 2.5 million additional shares under this equity line, so we now have additional flexibility to take advantage of this contingent source of liquidity. Remaining shares approved to sell pursuant to the Investment Agreement totaled 3.2 million shares at December 31, 2011. Based on our closing stock price on December 31, 2011, additional funds available under the Investment Agreement totaled approximately $4.1 million at December 31, 2011.

86

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

On April 27, 2010, at our annual meeting of shareholders, our shareholders approved an amendment to our Articles of Incorporation that allowed us to affect a 1-for-10 reverse stock split. We affected this reverse stock split on August 31, 2010. All common share and per share amounts have been adjusted to reflect the reverse stock split.

A reconciliation of basic and diluted earnings (loss) per share for the years ended December 31 follows:

	2011			2010			2009
	(In thousands, except per share amounts)
Net loss	$	(20,200	)	$	(16,709	)	$	(90,227	)
Preferred dividends		4,157			4,095			4,301
Net loss applicable to common stock	$	(24,357	)	$	(20,804	)	$	(94,528	)
Weighted average shares outstanding for calculation of basic loss per share		8,277			5,090			2,387
Effect of convertible preferred stock		61,281			36,371			-
Restricted stock units		122			-			-
Stock units for deferred compensation plan for non-employee directors		7			7			7
Effect of stock options		-			-			-
Weighted average shares outstanding for calculation of diluted loss per share		69,687			41,468			2,394
Net loss per common share
Basic	$	(2.94	)	$	(4.09	)	$	(39.60	)
Diluted (1)	$	(2.94	)	$	(4.09	)	$	(39.60	)

(1) For any period in which a loss is recorded, the assumed conversion of convertible preferred stock, assumed exercise of common stock warrants, assumed exercise of stock options, restricted stock units and stock units for a deferred compensation plan for non-employee directors would have an anti-dilutive impact on the loss per share and thus are ignored in the diluted per share calculation.

Weighted average stock options outstanding that were not considered in computing diluted earnings (loss) per share because they were anti-dilutive totaled 0.1 million, 0.1 million and 0.1 million for 2011, 2010 and 2009, respectively. The warrant to purchase 346,154 shares of our common stock was also not considered in computing the diluted loss per share in 2011, 2010 and 2009 as it was anti-dilutive.

NOTE 13 – INCOME TAX

The composition of income tax expense (benefit) for the years ended December 31 follows:

	2011			2010			2009
	(In thousands)
Current	$	(413	)	$	(57	)	$	(5,356	)
Deferred		(646	)		(1,533	)		(4,504	)
Establishment of valuation allowance		847			-			6,650
Income tax benefit	$	(212	)	$	(1,590	)	$	(3,210	)

The deferred income tax benefit of $0.6 million, $1.5 million and $4.5 million during 2011, 2010 and 2009 is primarily attributed to the affects of pretax other comprehensive income (loss).

87

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

A reconciliation of income tax benefit to the amount computed by applying the statutory federal income tax rate of 35% in each year presented to loss before income tax for the years ended December 31 follows:

	2011			2010			2009
	(In thousands)
Statutory rate applied to loss before income tax	$	(7,144	)	$	(6,405	)	$	(32,703	)
Net change in valuation allowance		9,369			5,672			23,999
Bank owned life insurance		(657	)		(671	)		(565	)
Tax-exempt income		(521	)		(800	)		(1,455	)
U.S. Treasury warrant		(398	)		(138	)		-
Non-deductible meals, entertainment and memberships		50			36			86
Trust preferred securities exchange costs		-			352			-
Goodwill impairment		-			-			5,857
Dividends paid to Employee Stock Ownership Plan		-			-			(28	)
Other, net		(911	)		364			1,599
Income tax benefit	$	(212	)	$	(1,590	)	$	(3,210	)

Generally, the amount of income tax expense or benefit allocated to operations is determined without regard to the tax effects of other categories of income or loss, such as other comprehensive income (loss). However, an exception to the general rule is provided when, in the presence of a valuation allowance against deferred tax assets, there is a pretax loss from operations and pretax income from other categories in the current year. In such instances, income from other categories must offset the current loss from operations, the tax benefit of such offset being reflected in operations. In 2011, 2010 and 2009, pretax other comprehensive income of $1.8 million, $3.9 million and $11.6 million, respectively, reduced our valuation allowance and resulted in a benefit of $0.6 million, $1.4 million and $4.1 million being allocated to the loss from operations.

We assess the need for a valuation allowance against our deferred tax assets periodically. The realization of deferred tax assets is largely dependent upon future taxable income, future reversals of existing taxable temporary differences and ability to carry-back losses to available tax years. In assessing the need for a valuation allowance, we consider all positive and negative evidence, including anticipated operating results, taxable income in carry-back years, scheduled reversals of deferred tax liabilities and tax planning strategies. In 2008, we established a valuation allowance against the majority of our net deferred tax assets due to a number of factors, including our declining operating performance, overall negative trends in the banking industry and our expectation that our operating results would continue to be negatively affected by the overall economic environment. During 2011, 2010 and 2009, we concluded that we needed to continue to carry a valuation allowance based on similar factors. As a result we recorded an additional valuation allowance of $9.4 million, $5.7 million and $24.0 million during 2011, 2010 and 2009, respectively. This resulted in a valuation allowance against our entire net deferred tax asset except for, in 2010 and 2009, certain state deferred tax assets at Mepco that were expected to be recovered based on Mepco’s individual earnings. However, at December 31, 2011, due to a second year of losses at Mepco and remaining uncertainty regarding certain vehicle service contract counterparty receivables, we concluded that a valuation allowance against $0.8 million of Mepco’s deferred state tax assets was also needed. The valuation allowance against our deferred tax assets of $75.2 million at December 31, 2011 may be reversed to income in future periods to the extent that the related deferred income tax assets are realized or the valuation allowance is otherwise no longer required. This valuation allowance represents our entire net deferred tax assets.

88

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31 follow:

	2011			2010
	(In thousands)
Deferred tax assets
Loss carryforwards	$	25,686		$	19,049
Allowance for loan losses		20,616			23,783
Vehicle service contract counterparty contingency reserve		12,377			9,779
Valuation allowance on other real estate owned		5,129			3,814
Purchase premiums, net		4,416			4,847
Fixed assets		3,109			2,774
Alternative minimum tax credit carry forward		2,577			2,577
Unrealized loss on securities available for sale		1,252			1,584
Share based payments		1,006			674
Unrealized loss on trading securities		603			619
Mepco claims expense		546			546
Unrealized loss on derivative financial instruments		539			853
Loss reimbursement on sold loans reserve		524			-
Deferred compensation		482			709
Reserve for unfunded lending commitments		450			463
Non accrual loan interest income		443			524
Other than temporary impairment charge on securities available for sale		427			249
Other		112			-
Gross deferred tax assets		80,294			72,844
Valuation allowance		(75,199	)		(65,830	)
Total net deferred tax assets		5,095			7,014
Deferred tax liabilities
Mortgage servicing rights		3,930			5,131
Unrealized gain on loans held for sale		491			-
Deferred loan fees		356			283
Federal Home Loan Bank stock		318			401
Other		-			352
Gross deferred tax liabilities		5,095			6,167
Net deferred tax assets	$	-		$	847

At December 31, 2011, we had $0.5 million federal capital loss carryfowards that expire in 2014 and federal net operating loss (“NOL”) carryforwards of approximately $74.6 million which, if not used against taxable income, will expire as follows:

	(In thousands)
2017	$	3,437
2018		189
2022		194
2023		359
2029		25,467
2030		26,254
2031		18,656
Total	$	74,556

The use of $4.2 million NOL carryforward in the total above, which was acquired through the acquisitions of two financial institutions is limited to $3.3 million per year as the result of a change in control as defined in the Internal Revenue Code.

89

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Changes in unrecognized tax benefits for the year ended December 31, follows:

	2011			2010			2009
	(In thousands)
Balance at beginning of year	$	2,393		$	1,981		$	1,736
Additions based on tax positions related to the current year		23			445			443
Reductions due to the statute of limitations		(277	)		(33	)		(198	)
Balance at end of year	$	2,139		$	2,393		$	1,981

If recognized, the entire amount of unrecognized tax benefits, net of $0.5 million federal tax on state benefits, would affect our effective tax rate. We do not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. No amounts were expensed for interest and penalties for the years ended December 31, 2011, 2010 and 2009. No amounts were accrued for interest and penalties at December 31, 2011, 2010 or 2009. At December 31, 2011, U.S. Federal tax years 2008 through the present remain open to examination. Federal examinations of our 2008 and 2009 tax years were settled resulting in no material impact to our consolidated financial statements.

NOTE 14 — SHARE BASED COMPENSATION

We maintain share based payment plans that include a non-employee director stock purchase plan and a performance-based long-term incentive plan that permits the issuance of share based compensation, including stock options and non-vested share awards. The long-term incentive plan, which is shareholder approved, permits the grant of additional share based awards for up to 0.5 million shares of common stock as of December 31, 2011. The non-employee director stock purchase plan permits the grant of additional share based payments for up to 0.2 million shares of common stock as of December 31, 2011. Share based awards and payments are measured at fair value at the date of grant and are expensed over the requisite service period. Common shares issued upon exercise of stock options come from currently authorized but unissued shares.

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

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

Beginning in the second quarter of 2011 our directors elected to receive their quarterly cash retainer fees in the form of common stock for the balance of 2011 and 2012. Shares equal in value to each director’s quarterly cash retainer are issued each quarter and vest immediately. As a result, we issued 0.14 million shares to directors during 2011 and expensed their value during that same period.

During the second quarter of 2011, pursuant to our performance-based compensation plans, we granted 0.1 million stock options to certain officers (none of whom is a “named executive officer,” as defined under SEC rules). The stock options have an exercise price equal to the market value on the date of grant, vest ratably over a three year period and expire 10 years from date of grant.

90

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

During the first quarter of 2010, we completed a stock option exchange program under which eligible employees were able to exchange certain stock options for a lesser amount of new stock options. Pursuant to this stock option exchange program, 0.05 million stock options were exchanged for 0.01 million new stock options. The new stock options granted have an exercise price equal to the market value on the date of grant, generally vest over a one year period and have the same expiration dates as the options exchanged which ranged from 1.2 years to 7.2 years. The new options had a value substantially equal to the value of the options exchanged.

We also granted, pursuant to our performance-based compensation plans, 0.03 million stock options to our officers in 2009. The stock options have an exercise price equal to the market value of the common stock on the date of grant, vest ratably over a three year period and expire 10 years from date of grant.

We use the Black-Scholes option pricing model to measure compensation cost for stock options and use the market value of the common stock on the date of grant to measure compensation cost for non-vested share awards. We also estimate expected forfeitures over the vesting period.

Total compensation expense recognized for stock option grants, non-vested common stock grants, restricted stock unit grants and salary stock was $0.9 million, $0.5 million and $0.8 million in 2011, 2010 and 2009, respectively. The corresponding tax benefit relating to this expense was zero for each period. Total expense recognized for non-employee director share based payments was $0.3 million in 2011. The corresponding tax benefit relating to this expense was zero for each period. No expense was incurred for non-employee director share based payments in 2010 and 2009.

A summary of outstanding stock option grants and transactions follows:

	Number of Shares			Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)		Aggregated Intrinsic Value
								(In thousands)
Outstanding at January 1, 2011		56,252		$	42.76
Granted		138,600			1.92
Exercised		-			-
Forfeited		(730	)		10.55
Expired		(13,260	)		92.05
Outstanding at December 31, 2011		180,862		$	7.98		8.58	$	-
Vested and expected to vest at December 31, 2011		165,953		$	8.52		8.50	$	-
Exercisable at December 31, 2011		32,553		$	31.41		5.11	$	-

A summary of non-vested stock and transactions follows:

	Number of Shares			Weighted- Average Grant Date Fair Value
Outstanding at January 1, 2011		26,251		$	92.69
Granted		139,625			4.29
Vested		-			-
Forfeited		(831	)		93.20
Outstanding at December 31, 2011		165,045		$	17.90

91

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

A summary of the weighted-average assumptions used in the Black-Scholes option pricing model for grants of stock options during 2011 follows:

	2011
Expected dividend yield		1.04	%
Risk-free interest rate		1.91
Expected life (in years)		6.00
Expected volatility		94.72	%
Per share weighted-average fair value	$	1.37

The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life was obtained using a simplified method that, in general, averaged the vesting term and original contractual term of the stock option. This method was used as relevant historical data of actual exercise activity was not available. The expected volatility was based on historical volatility of our common stock.

At December 31, 2011, the total expected compensation cost related to non vested stock options, restricted stock and restricted stock units not yet recognized was $1.1 million. The weighted-average period over which this amount will be recognized is 2.6 years.

There were no stock option exercises during the 2011, 2010 and 2009.

NOTE 15 — BENEFIT PLANS

We maintain 401(k) and employee stock ownership plans covering substantially all of our full-time employees. We have historically matched employee contributions to the 401(k) plan up to a maximum of 3% of participating employees’ eligible wages. The match of employee contributions was zero in 2011 and 2010 and 3% in 2009. Contributions to the employee stock ownership plan are determined annually and require approval of our Board of Directors. The maximum contribution is 6% of employees’ eligible wages. There were no contributions to the employee stock ownership plan in 2011, 2010 and 2009. Amounts expensed for these retirement plans was zero in 2011 and 2010 and $1.0 million 2009.

Our officers participate in various performance-based compensation plans. Amounts expensed for all incentive plans totaled $1.1 million, $0.6 million and $1.1 million, in 2011, 2010 and 2009, respectively.

We also provide certain health care and life insurance programs to substantially all full-time employees. Amounts expensed for these programs totaled $5.0 million, $4.7 million and $4.6 million in 2011, 2010 and 2009 respectively. These insurance programs are also available to retired employees at their own expense.

NOTE 16 – DERIVATIVE FINANCIAL INSTRUMENTS

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

92

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Our derivative financial instruments according to the type of hedge in which they are designated at December 31 follow:

	2011
	Notional Amount		Average Maturity (Years)		Fair Value
	(Dollars in thousands)
Cash flow hedge - pay-fixed interest-rate swap agreements	$	20,000		1.7	$	(1,103	)
No hedge designation
Rate-lock mortgage loan commitments	$	32,689		0.1	$	857
Mandatory commitments to sell mortgage loans		75,960		0.1		(606	)
Amended Warrant		2,504		7.0		(174	)
Total	$	111,153		0.3	$	77

	2010
	Notional Amount		Average Maturity (Years)		Fair Value
	(Dollars in thousands)
Cash Flow Hedge
Pay-fixed interest-rate swap agreements	$	20,000		2.7	$	(1,405	)
Interest-rate cap agreements		5,000		0.5		-
	$	25,000		2.3	$	(1,405	)
No hedge designation
Rate-lock mortgage loan commitments	$	40,119		0.1	$	400
Mandatory commitments to sell mortgage loans		90,400		0.1		1,375
Amended Warrant		2,504		8.0		(1,311	)
Total	$	133,023		0.2	$	464

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.

Through certain special purposes entities (see note #10) we issued 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. During the fourth quarter of 2009 we elected to defer payment of interest on this variable rate trust preferred security. As a result, this pay-fixed interest rate swap was transferred to a no hedge designation and the $1.6 million unrealized loss which was included as a component of accumulated other comprehensive loss at the time of the transfer will be reclassified into earnings over the remaining life of this pay-fixed swap. During the second quarter of 2010 we terminated this pay-fixed swap and the unrealized loss will continue to be reclassified into earnings over the remaining original life of the pay-fixed swap.

93

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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 were zero and $0.02 million at December 31, 2011 and 2010 respectively. Our last interest rate cap expired in July, 2011.

It is anticipated that $0.5 million of unrealized losses on Cash Flow Hedges at December 31, 2011, will be reclassified into earnings over the next twelve months. The maximum term of any Cash Flow Hedge at December 31, 2011 is 3.0 years.

Certain financial derivative instruments have not been designated as hedges. The fair value of these derivative financial instruments has been recorded on our Consolidated Statements of Financial Condition and are adjusted on an ongoing basis to reflect their then current fair value. The changes in fair value of derivative financial instruments not designated as hedges, are recognized in earnings.

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

During 2010, we entered into an amended and restated warrant with the UST that would allow them to purchase our common stock at a fixed price (see note #12). Because of certain anti-dilution features included in the Amended Warrant, it is not considered to be indexed to our common stock and is therefore accounted for as a derivative instrument and recorded as a liability. Any change in value of the Amended Warrant is recorded in other income in our Consolidated Statements of Operations.

The following tables illustrate 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:

94

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Fair Values of Derivative Instruments

	Asset Derivatives						Liability Derivatives
	December 31,						December 31,
	2011			2010			2011			2010
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
	(in thousands)
Derivatives designated as hedging instruments
Pay-fixed interest rate swap agreements		$	-		$	-	Other liabilities	$	1,103	Other liabilities	$	1,405
Total			-			-			1,103			1,405
Derivatives not designated as hedging instruments
Rate-lock mortgage loan commitments	Other assets		857	Other assets		400			-			-
Mandatory commitments to sell mortgage loans			-	Other assets		1,375	Other liabilities		606			-
Amended Warrant			-			-	Other liabilities		174	Other liabilities		1,311
Total			857			1,775			780			1,311
Total derivatives		$	857		$	1,775		$	1,883		$	2,716

95

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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

	Year Ended December 31,
	Gain (Loss) Recognized in Other Comprehensive Income (Loss) (Effective Portion)						Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income (Effective Portion)	Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)									Location of Gain (Loss) Recognized in Income (1)	Gain (Loss) Recognized in Income(1)
	2011		2010		2009			2011			2010			2009				2011			2010		2009
								(in thousands)
Cash Flow Hedges
Pay-fixed interest rate swap agreements	$	2,404	$	4,024	$	4,834	Interest expense	$	(1,443	)	$	(2,627	)	$	(3,110	)	Interest expense	$	-		$	-	$	-
Interest-rate cap agreements		30		180		871	Interest expense		(15	)		(90	)		(437	)	Interest expense		-			2		8
Total	$	2,434	$	4,204	$	5,705		$	(1,458	)	$	(2,717	)	$	(3,547	)		$	-		$	2	$	8
No hedge designation
Pay-fixed interest rate swap agreements																	Interest expense	$	-		$	409	$	(120	)
Interest-rate cap agreements																	Interest expense		-			-		5
Rate-lock mortgage loan commitments																	Mortgage loan gains		457			183		(622	)
Mandatory commitments to sell mortgage loans																	Mortgage loan gains		(1,981	)		660		1,378
Amended Warrant																	Decrease in fair value of U.S. Treasury warrant		1,137			393		-
Total																		$	(387	)	$	1,645	$	641

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

Accumulated other comprehensive loss included derivative losses of $1.5 million, $2.5 million and $4.0 million at December 31, 2011, 2010 and 2009, respectively.

96

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

NOTE 17 — RELATED PARTY TRANSACTIONS

Certain of our directors and executive officers, including companies in which they are officers or have significant ownership, were loan and deposit customers during 2011 and 2010.

A summary of loans to directors and executive officers whose borrowing relationship exceeds $60,000, and to entities in which they own a 10% or more voting interest for the years ended December 31 follows:

	2011			2010
	(In thousands)
Balance at beginning of year	$	271		$	599
New loans and advances		203			41
Repayments		(260	)		(369	)
Balance at end of year	$	214		$	271

Deposits held by us for directors and executive officers totaled $1.0 million at both December 31, 2011 and 2010.

NOTE 18 – OTHER NON-INTEREST EXPENSES

Other non-interest expenses for the years ended December 31 follow:

	2011		2010		2009
	(In thousands)
Supplies	$	1,571	$	1,630	$	1,835
Amortization of intangible assets		1,371		1,280		1,930
Other		5,651		6,367		5,655
Total other non-interest expense	$	8,593	$	9,277	$	9,420

NOTE 19 – LEASES

We have non-cancelable operating leases for certain office facilities, some of which include renewal options and escalation clauses.

A summary of future minimum lease payments under non-cancelable operating leases at December 31, 2011, follows:

	(In thousands)
2012	$	1,310
2013		1,185
2014		1,018
2015		953
2016		923
2017 and thereafter		3,419
Total	$	8,808

Rental expense on operating leases totaled $1.4 million, $1.3 million and $1.2 million in 2011, 2010 and 2009, respectively.

97

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

NOTE 20 — CONCENTRATIONS OF CREDIT RISK

Credit risk is the risk to earnings and capital arising from an obligor’s failure to meet the terms of any contract with our organization, or otherwise fail to perform as agreed. Credit risk can occur outside of our traditional lending activities and can exist in any activity where success depends on counterparty, issuer or borrower performance. Concentrations of credit risk (whether on- or off-balance sheet) arising from financial instruments can exist in relation to individual borrowers or groups of borrowers, certain types of collateral, certain types of industries or certain geographic regions. Credit risk associated with these concentrations could arise when a significant amount of loans or other financial instruments, related by similar characteristics, are simultaneously impacted by changes in economic or other conditions that cause their probability of repayment or other type of settlement to be adversely affected. Our major concentrations of credit risk arise by collateral type and by industry. The significant concentrations by collateral type at December 31, 2011 include $681.1 million of loans secured by residential real estate and $59.1 million of construction and development loans. In addition, we have a concentration of credit within the vehicle service contract industry. At December 31, 2011, we had $115.0 million of payment plan receivables. Our recourse for nonpayment of these payment plan receivables is against our counterparties operating within the vehicle service contract industry.

Additionally, within our commercial real estate and commercial loan portfolio we had significant standard industry classification concentrations in the following categories as of December 31, 2011: Lessors of Nonresidential Real Estate ($194.3 million); Lessors of Residential Real Estate ($78.9 million); Construction General Contractors and Land Development ($59.3 million); and Health Care and Social Assistance ($46.6 million). A geographic concentration arises because we primarily conduct our lending activities in the State of Michigan.

Our concentration of credit within the vehicle service contract industry relates to the business operated by our subsidiary, Mepco. This business and certain risks associated with this business are described in note #11 above. In addition, see note #4 above for a breakdown of Mepco’s payment plan receivables by the level of recourse Mepco has against various counterparties. Mepco monitors counterparty concentrations in order to attempt to manage our exposure for contractual obligations from its counterparties. In addition, even where an insurance company or risk retention group does not have a guarantee obligation to Mepco, the failure of the insurance company or risk retention group could result in a mass cancellation of the vehicle service contracts (and the related payment plans) insured by such entity. Such a mass cancellation would trigger and accelerate the contractual obligations of the counterparties that did have such obligations to Mepco. The counterparty concentration levels are managed based on the AM Best rating and statutory surplus level for an insurance company and on other factors including financial evaluation, collateral, funding holdbacks, guarantees, and distribution of concentrations for vehicle service contract administrators and vehicle service contract sellers/dealers.

The five largest concentrations by insurance company, risk retention group or other party backing the service contract represents approximately 28.2%, 19.1%, 17.6%, 10.0% and 5.9%, respectively, of Mepco’s payment plan receivables at December 31, 2011. These companies have provided the insurance coverage for the vehicle service contracts underlying the payment plan receivables; however, these companies are not all obligated to Mepco for the repayment of the payment plan receivables upon cancellation of the underlying vehicle service contracts and payment plans. Mepco has varying levels of recourse against such companies.

The top five vehicle service contract sellers from which Mepco purchases payment plans represent approximately 16.6%, 15.0%, 9.2%, 8.1% and 6.8%, respectively of Mepco’s payment plan receivables at December 31, 2011. See note #11 for additional information on Mepco counterparties.

NOTE 21 — REGULATORY MATTERS

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

98

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

● Enhanced interest rate risk modeling practices.

We believe we have met all of the requirements of the MOU.

99

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

We are also subject to various regulatory capital requirements. The prompt corrective action regulations establish quantitative measures to ensure capital adequacy and require minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and Tier 1 capital to average assets. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that could have a material effect on our consolidated financial statements. Under capital adequacy guidelines, we must meet specific capital requirements that involve quantitative measures as well as qualitative judgments by the regulators. The most recent regulatory filings as of December 31, 2011 and 2010 categorized our Bank as well capitalized. Management is not aware of any conditions or events that would have changed the most recent FDIC categorization.

Our actual capital amounts and ratios at December 31, follow:

	Actual					Minimum for Adequately Capitalized Institutions					Minimum for Well-Capitalized Institutions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
		(Dollars in thousands)
2011
Total capital to risk-weighted assets
Consolidated	$	174,547		11.31	%	$	123,470		8.00	%		NA		NA
Independent Bank		175,868		11.41			123,254		8.00		$	154,068		10.00	%
Tier 1 capital to risk-weighted assets
Consolidated	$	144,265		9.35	%	$	61,735		4.00	%		NA		NA
Independent Bank		156,104		10.13			61,627		4.00		$	92,441		6.00	%
Tier 1 capital to average assets
Consolidated	$	144,265		6.25	%	$	92,338		4.00	%		NA		NA
Independent Bank		156,104		6.77			92,268		4.00		$	115,335		5.00	%
2010
Total capital to risk-weighted assets
Consolidated	$	193,199		10.99	%	$	140,692		8.00	%		NA		NA
Independent Bank		194,524		11.06			140,760		8.00		$	175,950		10.00	%
Tier 1 capital to risk-weighted assets
Consolidated	$	166,048		9.44	%	$	70,346		4.00	%		NA		NA
Independent Bank		171,947		9.77			70,380		4.00		$	105,570		6.00	%
Tier 1 capital to average assets
Consolidated	$	166,048		6.35	%	$	104,550		4.00	%		NA		NA
Independent Bank		171,947		6.58			104,567		4.00		$	130,709		5.00	%

NA - Not applicable

100

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The components of our regulatory capital are as follows:

	Consolidated						Independent Bank
	December 31,						December 31,
	2011			2010			2011			2010
	(In thousands)
Total shareholders’ equity	$	102,627		$	119,085		$	152,987		$	169,986
Add (deduct)
Qualifying trust preferred securities		38,183			44,084			-			-
Accumulated other comprehensive loss		11,921			13,120			11,583			12,201
Intangible assets		(7,609	)		(8,980	)		(7,609	)		(8,979	)
Disallowed capitalized mortgage loan servicing rights		(857	)		(527	)		(857	)		(527	)
Disallowed deferred tax assets		-			(780	)		-			(780	)
Other		-			46			-			46
Tier 1 capital		144,265			166,048			156,104			171,947
Qualifying trust preferred securities		10,485			4,584			-			-
Allowance for loan losses and allowance for unfunded lending commitments limited to 1.25% of total risk-weighted assets		19,797			22,567			19,764			22,577
Total risk-based capital	$	174,547		$	193,199		$	175,868		$	194,524

In November, 2011, our Board adopted a Joint Revised Capital Plan (the “Capital Plan”), and submitted such Capital Plan to the FRB and the OFIR. The Capital Plan has not yet been approved by either the FRB or OFIR and an update was submitted in February, 2012.

The primary objective of our Capital Plan is to achieve and thereafter maintain the minimum capital ratios required by the Board resolutions adopted in December 2009 (as subsequently amended). The minimum capital ratios established by our Board are higher than the ratios required in order to be considered “well-capitalized” under federal standards. The Board imposed these higher ratios in order to ensure that we have sufficient capital to withstand potential continuing losses based on our elevated level of non-performing assets and given certain other risks and uncertainties we face. As of December 31, 2011, our Bank continued to meet the requirements to be considered “well-capitalized” under federal regulatory standards and met one of the minimum capital ratio goals established by our Board.

Set forth below are the actual capital ratios of our Bank as of December 31, 2011, the minimum capital ratios imposed by the Board resolutions, and the minimum ratios necessary to be considered “well-capitalized” under federal regulatory standards:

	Independent Bank Actual as of December 31, 2011			Minimum Ratios Established by our Board			Minimum Ratio Required to be Well- Capitalized
Total Capital to Risk-Weighted Assets		11.41	%		11.00	%		10.00	%
Tier 1 Capital to Average Total Assets		6.77			8.00			5.00

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

101

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

NOTE 22 — FAIR VALUE DISCLOSURES

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

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

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

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

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

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

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

Loans held for sale: The fair value of mortgage loans held for sale is based on mortgage backed security pricing for comparable assets (recurring Level 2).

Impaired loans with specific loss allocations based on collateral value: From time to time, certain loans are considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. We measure our investment in an impaired loan based on one of three methods: the loan’s observable market price, the fair value of the collateral or the present value of expected future cash flows discounted at the loan’s effective interest rate. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At December 31, 2011 and 2010, all of our impaired loans were evaluated based on either the fair value of the collateral or the present value of expected future cash flows discounted at the loan’s effective interest rate. When the fair value of the collateral is based on an appraised value or when an appraised value is not available we record the impaired loan as nonrecurring Level 3.

102

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Other real estate: At the time of acquisition, other real estate is recorded at fair value, less estimated costs to sell, which becomes the property’s new basis. Subsequent write-downs to reflect declines in value since the time of acquisition may occur from time to time and are recorded in other expense in the Consolidated Statements of Operations. The fair value of the property used at and subsequent to the time of acquisition is typically determined by a third party appraisal of the property (nonrecurring Level 3).

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. Since the secondary servicing market has not been active since the later part of 2009, model assumptions are generally unobservable and are based upon the best information available including data relating to our own servicing portfolio, reviews of mortgage servicing assumption and valuation surveys and input from various mortgage servicers and, therefore, are recorded as nonrecurring Level 3.

Derivatives – The fair value of interest rate swap agreements and interest rate cap agreements, in general, is determined using a discounted cash flow model whose significant fair value inputs can generally be verified and do not typically involve judgment by management (recurring Level 2). The fair value of the Amended Warrant is determined using a simulation analysis which considers potential outcomes for a large number of independent scenarios regarding the future prices of our common stock and incorporates several unobservable inputs (recurring Level 3). These unobservable inputs include probability of a non-permitted capital raise (1% and 40% at December 31, 2011 and 2010, respectively), expected discount to stock price in an equity raise (10%), dollar amount of expected capital raise ($100 million) and expected time of equity raise (April, 2013 and May, 2011 at December 31, 2011 and 2010, respectively).

103

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

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

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

(1) Included in accrued income and other assets.

(2) Included in accrued expenses and other liabilities.

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

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

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

104

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

			Fair Value Measurements Using
	Fair Value Measure- ments		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Un- observable Inputs (Level 3)
	(In thousands)
December 31, 2010:
Measured at Fair Value on a Recurring Basis:
Assets
Trading securities	$	32	$	32	$	-	$	-
Securities available for sale
U.S. agency residential mortgage-backed		13,331		-		13,331		-
Private label residential mortgage-backed		14,184		-		14,184		-
Obligations of states and political subdivisions		31,259		-		31,259		-
Trust preferred		9,090		-		9,090		-
Loans held for sale		50,098		-		50,098		-
Derivatives (1)		1,775		-		1,775		-
Liabilities
Derivatives (2)		2,716		-		1,405		1,311
Measured at Fair Value on a Non-recurring basis:
Assets
Capitalized mortgage loan servicing rights (3)		9,019		-		-		9,019
Impaired loans (4)
Commercial
Income producing - real estate		9,541		-		-		9,541
Land, land development & construction-real estate		8,885		-		-		8,885
Commercial and industrial		4,456		-		-		4,456
Mortgage
1-4 Family		4,377		-		-		4,377
Resort Lending		1,676		-		-		1,676
Other real estate (5)
Commercial
Income producing - real estate		1,352		-		-		1,352
Land, land development & construction-real estate		5,165		-		-		5,165
Mortgage
1-4 Family		1,888		-		-		1,888
Resort Lending		4,600		-		-		4,600
Installment
Home equity installment - 1st lien		90		-		-		90

(1) Included in accrued income and other assets.

(2) Included in accrued expenses and other liabilities.

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

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

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

105

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Changes in fair values for financial assets which we have elected the fair value option for the years ended December 31 are as follows:

	Net Gains (Losses) on Assets						Total Change in Fair Values Included in Current Period
	Securities			Loans			Earnings
	(In thousands)
2011
Trading securities	$	45		$	-		$	45
Loans held for sale		-			1,503			1,503
2010
Trading securities	$	(22	)	$	-		$	(22	)
Loans held for sale		-			(378	)		(378	)
2009
Trading securities	$	954		$	-		$	954
Loans held for sale		-			(404	)		(404	)

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

The following represent impairment charges recognized during the years ended December 31, 2011, 2010 and 2009 relating to assets measured at fair value on a non-recurring basis:

● Capitalized mortgage loan servicing rights, whose individual strata are measured at fair value had a carrying amount of $11.0 million which is net of a valuation allowance of $6.5 million at December 31, 2011 and had a carrying amount of $9.0 million which is net of a valuation allowance of $3.2 million at December 31, 2010. A recovery (charge) of $(3.3) million, $(0.9) million and $2.3 million was included in our results of operations for the years ending December 31, 2011, 2010 and 2009, respectively.

● Loans which are measured for impairment using the fair value of collateral for collateral dependent loans, had a carrying amount of $33.9 million, with a valuation allowance of $10.3 million at December 31, 2011 and had a carrying amount of $41.0 million, with a valuation allowance of $12.1 million at December 31, 2010. An additional provision for loan losses relating to impaired loans of $8.9 million, $12.0 million and $34.3 million was included in our results of operations for the years ending December 31, 2011, 2010 and 2009, respectively.

● Other real estate, which is measured using the fair value of the property, had a carrying amount of $16.9 million which is net of a valuation allowance of $14.7 million at December 31, 2011 and a carrying amount of $13.1 million which is net of a valuation allowance of $10.9 million at December 31, 2010. An additional charge relating to ORE measured at fair value of $5.4 million, $6.2 million and $5.6 million was included in our results of operations during the years ended December 31, 2011, 2010 and 2009, respectively.

106

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

A reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, follows:

	Asset					(Liability)
	Securities Available for Sale					Amended Warrant
	2011		2010			2011			2010
	(In thousands)
Beginning balance	$	-	$	36,480		$	(1,311	)	$	-
Total gains (losses) realized and unrealized:
Included in results of operations		-		132			1,137			393
Included in other comprehensive income		-		1,713			-			-
Purchases, issuances, settlements, maturities and calls		-		(16,940	)		-			(1,704	)
Transfers in and/or out of Level 3		-		(21,385	)		-			-
Ending balance	$	-	$	-		$	(174	)	$	(1,311	)
Amount of total gains (losses) for the year included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at December 31	$	-	$	-		$	1,137		$	393

During the first quarter of 2010, we transferred certain private label residential mortgage- and other asset-backed securities, totaling $21.4 million, to a Level 2 valuation technique. In the first quarter of 2010, while this market was still “closed” to new issuance, secondary market trading activity increased and appeared to be more orderly than compared to 2009. In addition, many bonds were trading at levels near their economic value with fewer distressed valuations relative to 2009. Prices for many securities had been rising, due in part to negative new supply. This improvement in trading activity was supported by sales of 11 securities with a par value of $14.2 million at a $0.2 million gain during the first quarter of 2010 (none of these securities were originally purchased at a discount). The Level 2 valuation technique has also been supported through bids received from dealers on certain private label securities that approximated Level 2 pricing.

During 2010, we entered into an amended and restated warrant with the UST that would allow them to purchase our common stock at a fixed price (see note #12). Because of certain anti-dilution features included in the Amended Warrant, it is not considered to be indexed to our common stock and is therefore accounted for as a derivative instrument (see note #16). Any change in value of this warrant is recorded in other income in our Consolidated Statements of Operations. We determined the fair value of the Amended Warrant using a simulation analysis which considers potential outcomes for a large number of independent scenarios regarding the future prices of our common stock. The simulation analysis relies on a binomial lattice model, a standard technique usually applied to the valuation of stock options. The binomial lattice maps out possible price paths of our common stock, the underlying asset of the Amended Warrant. The simulation is based on a 500-step lattice covering the term of the Amended Warrant. The binomial lattice requires specification of 14 variables, of which several are unobservable in the market. As a result of these unobservable inputs, the resulting fair value of the Amended Warrant was classified as Level 3 pricing.

107

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The following table reflects the difference between the aggregate fair value and the aggregate remaining contractual principal balance outstanding for loans held for sale for which the fair value option has been elected at December 31.

	Aggregate Fair Value		Difference			Contractual Principal
	(In thousands)
Loans held for sale
2011	$	44,801	$	1,403		$	43,398
2010		50,098		(100	)		50,198
2009		34,234		278			33,956

NOTE 23 — FAIR VALUES OF FINANCIAL INSTRUMENTS

Most of our assets and liabilities are considered financial instruments. Many of these financial instruments lack an available trading market and it is our general practice and intent to hold the majority of our financial instruments to maturity. Significant estimates and assumptions were used to determine the fair value of financial instruments. These estimates are subjective in nature, involving uncertainties and matters of judgment, and therefore, fair values cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Estimated fair values have been determined using available data and methodologies that are considered suitable for each category of financial instrument. For instruments with adjustable-interest rates which reprice frequently and without significant credit risk, it is presumed that estimated fair values approximate the recorded book balances.

Financial instrument assets actively traded in a secondary market, such as securities, have been valued using quoted market prices while recorded book balances have been used for cash and due from banks, interest bearing deposits and accrued interest.

It is not practicable to determine the fair value of FHLB and FRB Stock due to restrictions placed on transferability.

The fair value of loans is calculated by discounting estimated future cash flows using estimated market discount rates that reflect credit and interest-rate risk inherent in the loans.

Financial instrument liabilities with a stated maturity, such as certificates of deposit and other borrowings, have been valued based on the discounted value of contractual cash flows using a discount rate approximating current market rates for liabilities with a similar maturity.

Subordinated debentures have generally been valued based on a quoted market price of the specific or similar instruments.

Derivative financial instruments have principally been valued based on discounted value of contractual cash flows using a discount rate approximating current market rates.

Financial instrument liabilities without a stated maturity, such as demand deposits, savings, interest-bearing checking and money market accounts, have a fair value equal to the amount payable on demand.

108

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The estimated fair values and recorded book balances at December 31 follow:

	2011				2010
	Recorded Book Balance		Estimated Fair Value		Recorded Book Balance		Estimated Fair Value
	(In thousands)
Assets
Cash and due from banks	$	62,800	$	62,800	$	48,900	$	48,900
Interest bearing deposits		278,300		278,300		336,400		336,400
Trading securities		80		80		30		30
Securities available for sale		157,400		157,400		67,900		67,900
Federal Home Loan Bank and Federal
Reserve Bank Stock		20,800	NA			23,600	NA
Net loans and loans held for sale		1,562,500		1,475,700		1,795,300		1,736,600
Accrued interest receivable		6,200		6,200		7,100		7,100
Derivative financial instruments		900		900		1,800		1,800
Liabilities
Deposits with no stated maturity	$	1,517,300	$	1,517,300	$	1,447,500	$	1,447,500
Deposits with stated maturity		568,800		571,600		804,300		814,900
Other borrowings		33,400		37,900		71,000		75,000
Subordinated debentures		50,200		16,100		50,200		19,300
Accrued interest payable		5,100		5,100		3,600		3,600
Derivative financial instruments		1,900		1,900		2,700		2,700

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

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

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

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

NOTE 24 — OPERATING SEGMENTS

Our reportable segments are based upon legal entities. We have two reportable segments: Independent Bank (“IB”) and Mepco. The accounting policies of the segments are the same as those described in Note 1 to the consolidated financial statements. We evaluate performance based principally on net income (loss) of the respective reportable segments.

In the normal course of business, our IB segment provides funding to our Mepco segment through an intercompany line of credit priced at Prime beginning on January 1, 2010 and priced principally based on Brokered CD rates prior to that time. 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.

109

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

A summary of selected financial information for our reportable segments follows:

	IB			Mepco(1)			Other(2)			Elimination(3)			Total
	(In thousands)
2011
Total assets	$	2,132,736		$	172,007		$	157,251		$	(154,588	)	$	2,307,406
Interest income		93,310			21,452			-			-			114,762
Net interest income		81,224			16,074			(2,729	)		-			94,569
Provision for loan losses		27,972			(26	)		-			-			27,946
Loss before income tax		(11,137	)		(6,694	)		(2,486	)		(95	)		(20,412	)
Net loss		(12,768	)		(4,849	)		(2,488	)		(95	)		(20,200	)
2010
Total assets	$	2,270,881		$	265,201		$	176,740		$	(177,574	)	$	2,535,248
Interest income		111,470			37,381			-			-			148,851
Net interest income		87,521			28,602			(4,470	)		-			111,653
Provision for loan losses		47,093			(328	)		-			-			46,765
Income (loss) before income tax		(27,763	)		(2,264	)		11,823			(95	)		(18,299	)
Net income (loss)		(27,049	)		(1,388	)		11,823			(95	)		(16,709	)
2009
Total assets	$	2,539,315		$	424,094		$	210,634		$	(208,679	)	$	2,965,364
Interest income		136,051			53,005			-			-			189,056
Net interest income		95,190			49,953			(6,620	)		-			138,523
Provision for loan losses		103,007			311			-			-			103,318
Loss before income tax		(76,888	)		(9,106	)		(7,349	)		(94	)		(93,437	)
Net income (loss)		(71,095	)		(11,689	)		(7,636	)		193			(90,227	)

(1) Total assets include gross payment plan receivables of $0.0 million, $0.1 million and $1.6 million at December 31, 2011, 2010 and 2009 from customers domiciled in Canada. This amount represents less than 1% of total payment plan receivables outstanding.

(2) Includes amounts relating to our parent company and certain insignificant operations. Net income in 2010 includes parent company’s $18.1 million gain on extinguishment of debt.

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

110

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

NOTE 25 — INDEPENDENT BANK CORPORATION (PARENT COMPANY ONLY) FINANCIAL INFORMATION

Presented below are condensed financial statements for our parent company.

CONDENSED STATEMENTS OF FINANCIAL CONDITION

	December 31,
	2011		2010
	(In thousands)
ASSETS
Cash and due from banks	$	2,138	$	4,719
Investment in subsidiaries		154,494		171,493
Other assets		619		528
Total Assets	$	157,251	$	176,740
LIABILITIES AND SHAREHOLDERS’ EQUITY
Subordinated debentures	$	50,175	$	50,175
Other liabilities		4,986		8,112
Shareholders’ equity		102,090		118,453
Total Liabilities and Shareholders’ Equity	$	157,251	$	176,740

CONDENSED STATEMENTS OF OPERATIONS

	Year Ended December 31,
	2011			2010			2009
	(In thousands)
OPERATING INCOME
Decrease in fair value of U.S. Treasury warrant	$	1,137		$	393		$	-
Gain on extinguishment of debt		-			18,066			-
Other income		64			107			175
Total Operating Income		1,201			18,566			175
OPERATING EXPENSES
Interest expense		2,729			4,470			6,620
Administrative and other expenses		958			2,273			904
Total Operating Expenses		3,687			6,743			7,524
Income (Loss) Before Income Tax and Equity in Undistributed Net Loss of Subsidiaries		(2,486	)		11,823			(7,349	)
Income tax expense		(2	)		-			(287	)
Income (Loss) Before Equity in Undistributed Net Loss of Subsidiaries		(2,488	)		11,823			(7,636	)
Equity in undistributed net loss of subsidiaries		(17,712	)		(28,532	)		(82,591	)
Net Loss	$	(20,200	)	$	(16,709	)	$	(90,227	)

111

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

CONDENSED STATEMENTS OF CASH FLOWS

	Year Ended December 31,
	2011			2010			2009
	(In thousands)
Net Loss	$	(20,200	)	$	(16,709	)	$	(90,227	)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES
Share based compensation		157			-			-
Gain on extinguishment of debt		-			(18,066	)		-
Depreciation, amortization of intangible assets and premiums, and accretion of discounts on securities and loans		1			2			2
Increase in other assets		(92	)		(618	)		(411	)
Increase (decrease) in other liabilities		(2,404	)		1,977			4,531
Equity in undistributed net loss of subsidiaries’ operations		17,712			28,532			82,591
Total Adjustments		15,374			11,827			86,713
Net Cash Used in Operating Activities		(4,826	)		(4,882	)		(3,514	)
CASH FLOW USED IN INVESTING ACTIVITIES
Investment in subsidiaries		-			-			(13,000	)
CASH FLOW FROM (USED IN) FINANCING ACTIVITIES
Proceeds from issuance of common stock		2,245			1,118			1,852
Extinguishment of debt, net		-			(1,005	)		-
Dividends paid		-			-			(3,384	)
Net Cash From (Used in) Financing Activities		2,245			113			(1,532	)
Net Decrease in Cash and Cash Equivalents		(2,581	)		(4,769	)		(18,046	)
Cash and Cash Equivalents at Beginning of Year		4,719			9,488			27,534
Cash and Cash Equivalents at End of Year	$	2,138		$	4,719		$	9,488

NOTE 26 – MANAGEMENT PLANS

Elevated credit costs, including our provision for loan losses, loan and collection costs, net losses on ORE, and losses related to vehicle service contract counterparty contingencies, have resulted in substantial losses over the past four years and reduced our capital. Management continues to focus on reducing non-performing assets and returning the organization to consistent profitability as soon as possible. Management believes meaningful progress was made on these objectives in 2011 and 2010. Further, as discussed in note 21, we have adopted a Capital Plan, which includes a series of actions designed to increase our regulatory capital ratios, decrease our expenses and enable us to withstand and better respond to current market conditions and the potential for worsening market conditions. At the present time, based on our current forecasts and expectations, we believe that our Bank can remain above “well-capitalized” for regulatory purposes for the foreseeable future, even without additional capital, primarily because of some projected further decline in total assets (principally loans) and anticipated improved performance in 2012. As a result of these expectations with respect to the Bank’s regulatory capital ratios, and in light of our improvements in asset quality and other positive indicators, we continue to evaluate our alternatives in connection with the timing and size of any common stock offering. This evaluation will take into account our ongoing operating results, as well as input from our financial advisors and the UST.

112

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

A summary of selected quarterly results of operations for the years ended December 31 follows:

	Three Months Ended
	March 31,			June 30,			September 30,			December 31,
	(In thousands, except per share amounts)
2011
Interest income	$	30,718		$	29,127		$	28,187		$	26,730
Net interest income		24,450			23,384			23,774			22,961
Provision for loan losses		10,702			4,156			6,171			6,917
Loss before income tax		(7,409	)		(221	)		(4,604	)		(8,178	)
Net income (loss)		(7,401	)		37			(4,122	)		(8,714	)
Net loss applicable to common stock		(8,409	)		(1,014	)		(5,165	)		(9,769	)
Loss per common share
Basic		(1.06	)		(0.12	)		(0.61	)		(1.15	)
Diluted		(1.06	)		(0.12	)		(0.61	)		(1.15	)
2010
Interest income	$	41,244		$	38,492		$	35,687		$	33,428
Net interest income		30,031			28,571			26,985			26,066
Provision for loan losses		17,014			12,680			9,543			7,528
Income (loss) before income tax		(14,101	)		8,040			(7,588	)		(4,650	)
Net income (loss)		(13,837	)		7,884			(6,610	)		(4,146	)
Net income (loss) applicable to common stock		(14,914	)		6,771			(7,719	)		(4,942	)
Income (loss) per common share
Basic		(6.21	)		2.37			(1.03	)		(0.65	)
Diluted		(6.21	)		0.44			(1.03	)		(0.65	)

During the fourth quarter of 2011, we recognized a $6.0 million expense for vehicle service contract counterparty contingencies expense (see notes #11 and #20). During the second quarter of 2010, we recognized a gain on extinguishment of debt of $18.1 million (see note #10). During the fourth quarter of 2010, we recognized losses on other real estate of $4.8 million (see note #5) and recognized a recovery on our capitalized mortgage loan servicing rights of $2.7 million (see note #4).

QUARTERLY SUMMARY

	Reported Sale Prices of Common Shares
	2011						2010						Cash Dividends Declared
	High		Low		Close		High		Low		Close		2011		2010
First quarter	$	4.75	$	1.28	$	3.20	$	12.00	$	6.43	$	7.00	$	-	$	-
Second quarter		3.84		1.69		2.03		20.80		3.40		3.79		-		-
Third quarter		2.87		1.75		1.92		4.20		1.38		1.39		-		-
Fourth quarter		1.98		1.25		1.33		2.06		1.00		1.30		-		-

We have approximately 2,300 holders of record of our common stock. Our common stock trades on the Nasdaq Global Select Market System under the symbol “IBCP.” The prices shown above are supplied by Nasdaq and reflect the inter-dealer prices and may not include retail markups, markdowns or commissions. There may have been transactions or quotations at higher or lower prices of which we are not aware.

In addition to the provisions of the Michigan Business Corporation Act, our ability to pay dividends is limited by our ability to obtain funds from our Bank and by regulatory capital guidelines applicable to us (see note #21).

113

EX-21

EXHIBIT 21

INDEPENDENT BANK CORPORATION

Subsidiaries of the Registrant

	State of Incorporation
IBC Capital Finance II
Ionia, Michigan	Delaware
IBC Capital Finance III
Ionia, Michigan	Delaware
IBC Capital Finance IV
Ionia, Michigan	Delaware
Midwest Guaranty Trust I
Ionia, Michigan	Delaware
Independent Bank
Ionia, Michigan	Michigan
IBC Financial Services, Inc., Grand Rapids, Michigan
(a subsidiary of Independent Bank)	Michigan
Independent Title Services, Inc., Grand Rapids, Michigan
(a subsidiary of Independent Bank)	Michigan
Mepco Finance Corporation ("Mepco"), Chicago, Illinois
(a subsidiary of Independent Bank)	Michigan
Mepco Acceptance Corp., Chicago, Illinois
(a subsidiary of Mepco)	California
Jarco Investments, LLC, Ionia, Michigan
(a subsidiary of Independent Bank)	Michigan
Eaton Investments, LLC, Ionia, Michigan
(a subsidiary of Independent Bank)	Michigan
IBC Property Management, LLC, Ionia, Michigan
(a subsidiary of Independent Bank)	Michigan
Land Holdings, LLC, Ionia, Michigan
(a subsidiary of Independent Bank)	Michigan
Cal Land Investments, LLC, Ionia, MI
(a subsidiary of Independent Bank)	Michigan
Shelby REO Holdings, LLC, Ionia, Michigan
(a subsidiary of Independent Bank)	Michigan
Independent Life Insurance Trust, Ionia, Michigan
(a subsidiary of Independent Bank)	Michigan

EX-23

EXHIBIT 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements (Nos. 333-47352, 333-32269, 333-32267, 333-89072 and 333-125484) on Forms S-8 of Independent Bank Corporation of our report dated March 13, 2012 with respect to the consolidated financial statements of Independent Bank Corporation, which report appears in this Annual Report on Form 10-K of Independent Bank Corporation for the year ended December 31, 2011.

	/s/ Crowe Horwath LLP
Grand Rapids, Michigan
March 13, 2012

EX-31.1

EXHIBIT 31.1

CERTIFICATION

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

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

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

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

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15.15(f)) for the registrant and have:

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

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

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

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

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

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

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

Date:  March 13, 2012	/s/ Michael M. Magee, Jr.
	Michael M. Magee, Jr.
	Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Robert N. Shuster, certify that:

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

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

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

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15.15(f)) for the registrant and have:

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

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

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

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

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

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

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

Date:  March 13, 2012	/s/ Robert N. Shuster
	Robert N. Shuster
	Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATE OF THE

CHIEF EXECUTIVE OFFICER OF

INDEPENDENT BANK CORPORATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002:

I, Michael M. Magee, Jr., Chief Executive Officer of Independent Bank Corporation, certify pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:

(1) The annual report on Form 10-K for the annual period ended December 31, 2011, which this statement accompanies, fully complies with requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and;

(2) The information contained in this annual report on Form 10-K for the annual period ended December 31, 2011, fairly presents, in all material respects, the financial condition and results of operations of Independent Bank Corporation.

Date:  March 13, 2012	/s/ Michael M. Magee, Jr.
	Michael M. Magee, Jr.
	Chief Executive Officer

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

EX-32.2

EXHIBIT 32.2

CERTIFICATE OF THE

CHIEF FINANCIAL OFFICER OF

INDEPENDENT BANK CORPORATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002:

I, Robert N. Shuster, Chief Financial Officer of Independent Bank Corporation, certify pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:

(1)  The annual report on Form 10-K for the annual period ended December 31, 2011, which this statement accompanies, fully complies with requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and;

(2) The information contained in this annual report on Form 10-K for the annual period ended December 31, 2011, fairly presents, in all material respects, the financial condition and results of operations of Independent Bank Corporation.

Date:  March 13, 2012	/s/ Robert N. Shuster
	Robert N. Shuster
	Chief Financial Officer

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

EX-99.1

EXHIBIT 99.1

INDEPENDENT BANK CORPORATION

Certification of Chief Executive Officer

Pursuant to Section 111(b)(4) of the

Emergency Economic Stabilization Act of 2008

I, Michael M. Magee Jr., certify, based on my knowledge, that:

(i) The compensation committee of Independent Bank Corporation has discussed, reviewed, and evaluated with senior risk officers at least every six months during any part of the most recently completed fiscal year that was a TARP period, senior executive officer (SEO) compensation plans and employee compensation plans and the risks these plans pose to Independent Bank Corporation;

(ii) The compensation committee of Independent Bank Corporation has identified and limited during any part of the most recently completed fiscal year that was a TARP period any features of the SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Independent Bank Corporation and has identified any features of the employee compensation plans that pose risks to Independent Bank Corporation and has limited those features to ensure that Independent Bank Corporation is not unnecessarily exposed to risks;

(iii)  The compensation committee has reviewed, at least every six months during any part of the most recently completed fiscal year that was a TARP period, the terms of each employee compensation plan and identified any features of the plan that could encourage the manipulation of reported earnings of Independent Bank Corporation to enhance the compensation of an employee, and has limited any such features;

(iv)  The compensation committee of Independent Bank Corporation will certify to the reviews of the SEO compensation plans and employee compensation plans required under (i) and (iii) above;

(v)  The compensation committee of Independent Bank Corporation will provide a narrative description of how it limited during any part of the most recently completed fiscal year that was a TARP period the features in:

(A)  SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Independent Bank Corporation;

(B)  Employee compensation plans that unnecessarily expose Independent Bank Corporation to risks; and

(C)  Employee compensation plans that could encourage the manipulation of reported earnings of Independent Bank Corporation to enhance the compensation of an employee;

(vi)  Independent Bank Corporation has required that bonus payments to SEOs or any of the next twenty most highly compensated employees, as defined in the regulations and guidance established under section 111 of EESA (bonus payments), be subject to a recovery or “clawback” provision during any part of the most recently completed fiscal year that was a TARP period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria;

(vii) Independent Bank Corporation has prohibited any golden parachute payment, as defined in the regulations and guidance established under section 111 of EESA, to a SEO or any of the next five most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period;

(viii) Independent Bank Corporation has limited bonus payments to its applicable employees in accordance with section 111 of EESA and the regulations and guidance established thereunder during any part of the most recently completed fiscal year that was a TARP period;

(ix) Independent Bank Corporation and its employees have complied with the excessive or luxury expenditures policy, as defined in the regulations and guidance established under section 111 of EESA, during any part of the most recently completed fiscal year that was a TARP period; and any expenses that, pursuant to the policy, required approval of the board of directors, a committee of the board of directors, an SEO, or an executive officer with a similar level of responsibility were properly approved;

(x) Independent Bank Corporation will permit a non-binding shareholder resolution in compliance with any applicable Federal securities rules and regulations on the disclosures provided under the Federal securities laws related to SEO compensation paid or accrued during any part of the most recently completed fiscal year that was a TARP period;

(xi)  Independent Bank Corporation will disclose the amount, nature, and justification for the offering, during any part of the most recently completed fiscal year that was a TARP period, of any perquisites, as defined in the regulations and guidance established under section 111 of EESA, whose total value exceeds $25,000 for any employee who is subject to the bonus payment limitations identified in paragraph (viii);

(xii)  Independent Bank Corporation will disclose whether Independent Bank Corporation, the board of directors of Independent Bank Corporation, or the compensation committee of Independent Bank Corporation has engaged during any part of the most recently completed fiscal year that was a TARP period a compensation consultant; and the services the compensation consultant or any affiliate of the compensation consultant provided during this period;

(xiii)  Independent Bank Corporation has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under section 111 of EESA, to the SEOs and the next twenty most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period;

(xiv)  Independent Bank Corporation has substantially complied with all other requirements related to employee compensation that are provided in the agreement between Independent Bank Corporation and Treasury, including any amendments;

(xv)  Independent Bank Corporation has submitted to Treasury a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal year, with the non-SEOs ranked in descending order of level of annual compensation, and with the name, title, and employer of each SEO and most highly compensated employee identified; and

(xvi) I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both. (See, for example 18 U.S.C. 1001.)

Date:  March 13, 2012	/s/ Michael M. Magee, Jr.
	Michael M. Magee, Jr.
	Chief Executive Officer

EX-99.2

EXHIBIT 99.2

INDEPENDENT BANK CORPORATION

Certification of Chief Financial Officer

Pursuant to Section 111(b)(4) of the

Emergency Economic Stabilization Act of 2008

I, Robert N. Shuster, certify, based on my knowledge, that:

(i) The compensation committee of Independent Bank Corporation has discussed, reviewed, and evaluated with senior risk officers at least every six months during any part of the most recently completed fiscal year that was a TARP period, senior executive officer (SEO) compensation plans and employee compensation plans and the risks these plans pose to Independent Bank Corporation;

(ii)  The compensation committee of Independent Bank Corporation has identified and limited during any part of the most recently completed fiscal year that was a TARP period any features of the SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Independent Bank Corporation and has identified any features of the employee compensation plans that pose risks to Independent Bank Corporation and has limited those features to ensure that Independent Bank Corporation is not unnecessarily exposed to risks;

(iii)  The compensation committee has reviewed, at least every six months during any part of the most recently completed fiscal year that was a TARP period, the terms of each employee compensation plan and identified any features of the plan that could encourage the manipulation of reported earnings of Independent Bank Corporation to enhance the compensation of an employee, and has limited any such features;

(iv)  The compensation committee of Independent Bank Corporation will certify to the reviews of the SEO compensation plans and employee compensation plans required under (i) and (iii) above;

(v)  The compensation committee of Independent Bank Corporation will provide a narrative description of how it limited during any part of the most recently completed fiscal year that was a TARP period the features in:

(A)  SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Independent Bank Corporation;

(B)  Employee compensation plans that unnecessarily expose Independent Bank Corporation to risks; and

(C)  Employee compensation plans that could encourage the manipulation of reported earnings of Independent Bank Corporation to enhance the compensation of an employee;

(vi)  Independent Bank Corporation has required that bonus payments to SEOs or any of the next twenty most highly compensated employees, as defined in the regulations and guidance established under section 111 of EESA (bonus payments), be subject to a recovery or “clawback” provision during any part of the most recently completed fiscal year that was a TARP period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria;

(vii) Independent Bank Corporation has prohibited any golden parachute payment, as defined in the regulations and guidance established under section 111 of EESA, to a SEO or any of the next five most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period;

(viii) Independent Bank Corporation has limited bonus payments to its applicable employees in accordance with section 111 of EESA and the regulations and guidance established thereunder during any part of the most recently completed fiscal year that was a TARP period;

(ix) Independent Bank Corporation and its employees have complied with the excessive or luxury expenditures policy, as defined in the regulations and guidance established under section 111 of EESA, during any part of the most recently completed fiscal year that was a TARP period; and any expenses that, pursuant to the policy, required approval of the board of directors, a committee of the board of directors, an SEO, or an executive officer with a similar level of responsibility were properly approved;

(x) Independent Bank Corporation will permit a non-binding shareholder resolution in compliance with any applicable Federal securities rules and regulations on the disclosures provided under the Federal securities laws related to SEO compensation paid or accrued during any part of the most recently completed fiscal year that was a TARP period;

(xi)  Independent Bank Corporation will disclose the amount, nature, and justification for the offering, during any part of the most recently completed fiscal year that was a TARP period, of any perquisites, as defined in the regulations and guidance established under section 111 of EESA, whose total value exceeds $25,000 for any employee who is subject to the bonus payment limitations identified in paragraph (viii);

(xii)  Independent Bank Corporation will disclose whether Independent Bank Corporation, the board of directors of Independent Bank Corporation, or the compensation committee of Independent Bank Corporation has engaged during any part of the most recently completed fiscal year that was a TARP period a compensation consultant; and the services the compensation consultant or any affiliate of the compensation consultant provided during this period;

(xiii)  Independent Bank Corporation has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under section 111 of EESA, to the SEOs and the next twenty most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period;

(xiv)  Independent Bank Corporation has substantially complied with all other requirements related to employee compensation that are provided in the agreement between Independent Bank Corporation and Treasury, including any amendments;

(xv)  Independent Bank Corporation has submitted to Treasury a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal year, with the non-SEOs ranked in descending order of level of annual compensation, and with the name, title, and employer of each SEO and most highly compensated employee identified; and

(xvi)  I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both. (See, for example 18 U.S.C. 1001.)

Date:  March 13, 2012	/s/ Robert N. Shuster
	Robert N. Shuster
	Chief Financial Officer

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INDEPENDENT BANK CORPORATION (PARENT COMPANY ONLY) FINANCIAL INFORMATION

12 Months Ended

Dec. 31, 2011

INDEPENDENT BANK CORPORATION (PARENT COMPANY ONLY) FINANCIAL INFORMATION [Abstract]

INDEPENDENT BANK CORPORATION (PARENT COMPANY ONLY) FINANCIAL INFORMATION

NOTE 25 - INDEPENDENT BANK CORPORATION (PARENT COMPANY ONLY) FINANCIAL INFORMATION

Presented below are condensed financial statements for our parent company.

CONDENSED STATEMENTS OF FINANCIAL CONDITION

	December 31,
	2011		2010
	(In thousands)
ASSETS
Cash and due from banks	$	2,138	$	4,719
Investment in subsidiaries		154,494		171,493
Other assets		619		528
Total Assets	$	157,251	$	176,740
LIABILITIES AND SHAREHOLDERS' EQUITY
Subordinated debentures	$	50,175	$	50,175
Other liabilities		4,986		8,112
Shareholders' equity		102,090		118,453
Total Liabilities and Shareholders' Equity	$	157,251	$	176,740

CONDENSED STATEMENTS OF OPERATIONS

	Year Ended December 31,
	2011			2010			2009
	(In thousands)
OPERATING INCOME
Decrease in fair value of U.S. Treasury warrant	$	1,137		$	393		$	-
Gain on extinguishment of debt		-			18,066			-
Other income		64			107			175
Total Operating Income		1,201			18,566			175
OPERATING EXPENSES
Interest expense		2,729			4,470			6,620
Administrative and other expenses		958			2,273			904
Total Operating Expenses		3,687			6,743			7,524
Income (Loss) Before Income Tax and Equity in Undistributed Net Loss of Subsidiaries		(2,486	)		11,823			(7,349	)
Income tax expense		(2	)		-			(287	)
Income (Loss) Before Equity in Undistributed Net Loss of Subsidiaries		(2,488	)		11,823			(7,636	)
Equity in undistributed net loss of subsidiaries		(17,712	)		(28,532	)		(82,591	)
Net Loss	$	(20,200	)	$	(16,709	)	$	(90,227	)

CONDENSED STATEMENTS OF CASH FLOWS

	Year Ended December 31,
	2011			2010			2009
	(In thousands)
Net Loss	$	(20,200	)	$	(16,709	)	$	(90,227	)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES
Share based compensation		157			-			-
Gain on extinguishment of debt		-			(18,066	)		-
Depreciation, amortization of intangible assets and premiums, and accretion of discounts on securities and loans		1			2			2
Increase in other assets		(92	)		(618	)		(411	)
Increase (decrease) in other liabilities		(2,404	)		1,977			4,531
Equity in undistributed net loss of subsidiaries' operations		17,712			28,532			82,591
Total Adjustments		15,374			11,827			86,713
Net Cash Used in Operating Activities		(4,826	)		(4,882	)		(3,514	)
CASH FLOW USED IN INVESTING ACTIVITIES
Investment in subsidiaries		-			-			(13,000	)
CASH FLOW FROM (USED IN) FINANCING ACTIVITIES
Proceeds from issuance of common stock		2,245			1,118			1,852
Extinguishment of debt, net		-			(1,005	)		-
Dividends paid		-			-			(3,384	)
Net Cash From (Used in) Financing Activities		2,245			113			(1,532	)
Net Decrease in Cash and Cash Equivalents		(2,581	)		(4,769	)		(18,046	)
Cash and Cash Equivalents at Beginning of Year		4,719			9,488			27,534
Cash and Cash Equivalents at End of Year	$	2,138		$	4,719		$	9,488

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RELATED PARTY TRANSACTIONS

12 Months Ended

Dec. 31, 2011

RELATED PARTY TRANSACTIONS [Abstract]

RELATED PARTY TRANSACTIONS

NOTE 17 - RELATED PARTY TRANSACTIONS

Certain of our directors and executive officers, including companies in which they are officers or have significant ownership, were loan and deposit customers during 2011 and 2010.

A summary of loans to directors and executive officers whose borrowing relationship exceeds $60,000, and to entities in which they own a 10% or more voting interest for the years ended December 31 follows:

	2011			2010
	(In thousands)
Balance at beginning of year	$	271		$	599
New loans and advances		203			41
Repayments		(260	)		(369	)
Balance at end of year	$	214		$	271

Deposits held by us for directors and executive officers totaled $1.0 million at both December 31, 2011 and 2010.

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ACCOUNTING POLICIES

12 Months Ended

Dec. 31, 2011

ACCOUNTING POLICIES [Abstract]

ACCOUNTING POLICIES

NOTE 1 - ACCOUNTING POLICIES

The accounting and reporting policies and practices of Independent Bank Corporation and subsidiaries conform to accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. Our critical accounting policies include the assessment for other than temporary impairment (“OTTI”) on investment securities, the determination of the allowance for loan losses, the determination of vehicle service contract counterparty contingencies, the valuation of originated mortgage loan servicing rights and the valuation of deferred tax assets. We are required to make material estimates and assumptions that are particularly susceptible to changes in the near term as we prepare the consolidated financial statements and report amounts for each of these items. Actual results may vary from these estimates.

Our Bank subsidiary transacts business in the single industry of commercial banking. Our Bank's activities cover traditional phases of commercial banking, including checking and savings accounts, commercial lending, direct and indirect consumer financing and mortgage lending. Our principal markets are the rural and suburban communities across lower Michigan that are served by our Bank's branches and loan production offices. We also purchase payment plans from companies (which we refer to as “counterparties”) that provide vehicle service contracts and similar products to consumers, through our wholly owned subsidiary, Mepco Finance Corporation (“Mepco”). At December 31, 2011, 75.3% of our Bank's loan portfolio was secured by real estate.

PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of Independent Bank Corporation and its subsidiaries. The income, expenses, assets and liabilities of the subsidiaries are included in the respective accounts of the consolidated financial statements, after elimination of all material intercompany accounts and transactions.

STATEMENTS OF CASH FLOWS - For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest bearing deposits and federal funds sold. Generally, federal funds are sold for one-day periods. We report net cash flows for customer loan and deposit transactions, for short-term borrowings and for vehicle service contract counterparty payables.

INTEREST BEARING DEPOSITS – Interest bearing deposits consist of overnight deposits with the Federal Reserve Bank (“FRB”).

LOANS HELD FOR SALE - Loans held for sale are carried at fair value at December 31, 2011 and 2010. Fair value adjustments as well as realized gains and losses, are recorded in current earnings.

MORTGAGE LOAN SERVICING RIGHTS- We recognize as separate assets the rights to service mortgage loans for others. The fair value of originated mortgage loan servicing rights has been determined based upon fair value indications for similar servicing. The mortgage loan servicing rights are amortized in proportion to and over the period of estimated net loan servicing income. We assess mortgage loan servicing rights for impairment based on the fair value of those rights. For purposes of measuring impairment, the characteristics used include interest rate, term and type. Amortization of and changes in the impairment reserve on originated mortgage loan servicing rights are included in mortgage loan servicing in the Consolidated Statements of Operations. Mortgage loan servicing income is recorded for fees earned for servicing loans previously sold. The fees are generally based on a contractual percentage of the outstanding principal and are recorded as income when earned. Mortgage loan servicing fees, excluding amortization of and changes in the impairment reserve on originated mortgage loan servicing rights, totaled $4.4 million, $4.2 million and $4.2 million for the years ended December 31, 2011, 2010 and 2009, respectively. Late fees and ancillary fees related to loan servicing are not material.

TRANSFERS OF FINANCIAL ASSETS - Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from us, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and we do not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

SECURITIES - We classify our securities as trading, held to maturity or available for sale. Trading securities are bought and held principally for the purpose of selling them in the near term and are reported at fair value with realized and unrealized gains and losses included in earnings. Securities held to maturity represent those securities for which we have the positive intent and ability to hold until maturity and are reported at cost, adjusted for amortization of premiums and accretion of discounts computed on the level-yield method. We did not have any securities held to maturity at December 31, 2011 and 2010. Securities available for sale represent those securities not classified as trading or held to maturity and are reported at fair value with unrealized gains and losses, net of applicable income taxes reported in other comprehensive income (loss).

We evaluate securities for OTTI at least on a quarterly basis and more frequently when economic or market conditions warrant such an evaluation. In performing this evaluation management considers (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) the impact of changes in market interest rates on the market value of the security and (4) an assessment of whether we intend to sell, or it is more likely than not that we will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. For securities that do not meet the aforementioned recovery criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income or loss. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.

Gains and losses realized on the sale of securities available for sale are determined using the specific identification method and are recognized on a trade-date basis. Premiums and discounts are recognized in interest income computed on the level-yield method.

LOAN REVENUE RECOGNITION - Interest on loans is accrued based on the principal amounts outstanding. In general the accrual of interest income is discontinued when a loan becomes 90 days past due for commercial loans, installment loans and payment plan receivables and when a loan misses four consecutive payments for mortgage loans and the borrower's capacity to repay the loan and collateral values appear insufficient for each loan class. However, loans may be placed on non-accrual status regardless of whether or not such loans are considered past due if, in management's opinion, the borrower is unable to meet payment obligations as they become due or as required by regulatory provisions. All interest accrued but not received for all loans placed on non-accrual is reversed from interest income. Payments on such loans are generally applied to the principal balance until qualifying to be returned to accrual status. A non-accrual loan may be restored to accrual status when interest and principal payments are current and the loan appears otherwise collectible. Delinquency status for all classes in the commercial and installment loan segments is based on the actual number of days past due as required by the contractual terms of the loan agreement while delinquency status for mortgage loan segment classes is based on the number of payments past due.

Certain loan fees and direct loan origination costs are deferred and recognized as an adjustment of yield generally over the contractual life of the related loan. Fees received in connection with loan commitments are deferred until the loan is advanced and are then recognized generally over the contractual life of the loan as an adjustment of yield. Fees on commitments that expire unused are recognized at expiration. Fees received for letters of credit are recognized as revenue over the life of the commitment.

PAYMENT PLAN RECEIVABLE REVENUE RECOGNITION - Payment plan receivables are acquired by our Mepco segment at a discount and reported net of this discount in the Consolidated Statements of Financial Condition. This discount is accreted into interest and fees on loans over the life of the receivable computed on a level-yield method. All classes of payment plan receivables that have canceled and are 90 days or more past due as required by the contractual terms of the payment plan are classified as non-accrual.

ALLOWANCE FOR LOAN LOSSES - Some loans will not be repaid in full. Therefore, an allowance for loan losses (“AFLL”) is maintained at a level which represents our best estimate of losses incurred. In determining the allowance and the related provision for loan losses, we consider four principal elements: (i) specific allocations based upon probable losses identified during the review of the loan portfolio, (ii) allocations established for other adversely rated loans, (iii) allocations based principally on historical loan loss experience, and (iv) additional allocations based on subjective factors, including local and general economic business factors and trends, portfolio concentrations and changes in the size and/or the general terms of the loan portfolios.

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

Increases in the allowance are recorded by a provision for loan losses charged to expense. Although we periodically allocate portions of the allowance to specific loans and loan portfolios, the entire allowance is available for incurred losses. We generally charge-off commercial, homogenous residential mortgage, installment and payment plan receivable loans when they are deemed uncollectible or reach a predetermined number of days past due based on loan product, industry practice and other factors. Collection efforts may continue and recoveries may occur after a loan is charged against the allowance.

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

A loan is impaired when full payment under the loan terms is not expected. Generally, those loans included in each commercial loan class that are rated substandard, classified as non-performing or were classified as non-performing in the preceding quarter are evaluated for impairment. Those loans included in each mortgage loan class whose terms have been modified and considered a troubled debt restructuring are also impaired. Loans which have been modified resulting in a concession, and which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (“TDR”) and classified as impaired. We measure our investment in an impaired loan based on one of three methods: the loan's observable market price, the fair value of the collateral or the present value of expected future cash flows discounted at the loan's effective interest rate. Large groups of smaller balance homogeneous loans, such as those loans included in each installment and mortgage loan class and each payment plan receivable class are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures. TDR loans are measured at the present value of estimated future cash flows using the loan's effective interest rate at inception of the loan. If a TDR is considered to be a collateral dependent loan, the loan is reported net, at the fair value of collateral.

PROPERTY AND EQUIPMENT - Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using both straight-line and accelerated methods over the estimated useful lives of the related assets. Buildings are generally depreciated over a period not exceeding 39 years and equipment is generally depreciated over periods not exceeding 7 years. Leasehold improvements are depreciated over the shorter of their estimated useful life or lease period.

BANK OWNED LIFE INSURANCE - We have purchased a group flexible premium non-participating variable life insurance contract on approximately 270 salaried employees in order to recover the cost of providing certain employee benefits. Bank owned life insurance is recorded at its cash surrender value or the amount that can be currently realized.

OTHER REAL ESTATE AND REPOSSESSED ASSETS - Other real estate at the time of acquisition is recorded at fair value, less estimated costs to sell, which becomes the property's new basis. Fair value is typically determined by a third party appraisal of the property. Any write-downs at date of acquisition are charged to the allowance for loan losses. Expense incurred in maintaining assets and subsequent write-downs to reflect declines in value and gains or losses on the sale of other real estate are recorded in the Consolidated Statements of Operations. Non-real estate repossessed assets are treated in a similar manner.

OTHER INTANGIBLE ASSETS - Other intangible assets consist of core deposits. They are initially measured at fair value and then are amortized on both straight-line and accelerated methods over their estimated useful lives, which range from 10 to 15 years.

VEHICLE SERVICE CONTRACT COUNTERPARTY RECEIVABLES, NET - These amounts represent funds due to Mepco from its counterparties for cancelled service contracts. Upon the cancellation of a service contract and the completion of the billing process to the counterparties for amounts due to Mepco, there is a decrease in the amount of “payment plan receivables” and an increase in the amount of “vehicle service contract counterparty receivables” until such time as the amount due from the counterparty is collected.

INCOME TAXES - We employ the asset and liability method of accounting for income taxes. This method establishes deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities at tax rates expected to be in effect when such amounts are realized or settled. Under this method, the effect of a change in tax rates is recognized in the period that includes the enactment date. The deferred tax asset is subject to a valuation allowance for that portion of the asset for which it is more likely than not that it will not be realized.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination.

We recognize interest and/or penalties related to income tax matters in income tax expense.

We file a consolidated federal income tax return. Intercompany tax liabilities are settled as if each subsidiary filed a separate return.

VEHICLE SERVICE CONTRACT COUNTERPARTY PAYABLES - Vehicle service contract counterparty payables represent amounts owed to insurance companies or other counterparties for vehicle service contract payment plans purchased by us. The vehicle service contract counterparty payable becomes due in accordance with the terms of the specific contract between Mepco and the counterparty. Typically these terms require payment after Mepco has received one or two payments from the consumer on the payment plan receivable.

COMMITMENTS TO EXTEND CREDIT AND RELATED FINANCIAL INSTRUMENTS- Financial instruments may include commitments to extend credit and standby letters of credit. Financial instruments involve varying degrees of credit and interest-rate risk in excess of amounts reflected in the Consolidated Statements of Financial Condition. Exposure to credit risk in the event of non-performance by the counterparties to the financial instruments for loan commitments to extend credit and letters of credit is represented by the contractual amounts of those instruments. In general, we use a similar methodology to estimate our liability for these off-balance sheet credit exposures as we do for our allowance for loan losses. For commercial related commitments, we estimate liability using our loan rating system and for mortgage and installment commitments we estimate liability principally upon historical loss experience. Our estimated liability for off balance sheet commitments is included in accrued expenses and other liabilities in our Consolidated Statements of Financial Condition and any charge or recovery is recorded in non-interest expenses in our Consolidated Statements of Operations.

DERIVATIVE FINANCIAL INSTRUMENTS - We record derivatives on our Consolidated Statement of Financial Condition as assets and liabilities measured at their fair value. The accounting for increases and decreases in the value of derivatives depends upon the use of derivatives and whether the derivatives qualify for hedge accounting.

We record the fair value of cash-flow hedging instruments (“Cash Flow Hedges”) in accrued income and other assets and accrued expenses and other liabilities. On an ongoing basis, we adjust our Consolidated Statement of Financial Condition to reflect the then current fair value of the Cash Flow Hedges. The related gains or losses are reported in other comprehensive income (loss) and are subsequently reclassified into earnings, as a yield adjustment in the same period in which the related interest on the hedged items (primarily variable-rate debt obligations) affect earnings. To the extent that the Cash Flow Hedges are not effective, the ineffective portion of the Cash Flow Hedges is immediately recognized as interest expense.

We also record fair-value hedging instruments (“Fair Value Hedges”) at fair value in accrued income and other assets and accrued expenses and other liabilities. The hedged items (primarily fixed-rate debt obligations) are also recorded at fair value through the Consolidated Statements of Operations, which offsets the adjustment to the Fair Value Hedges. On an ongoing basis, we adjust our Consolidated Statement of Financial Condition to reflect the then current fair value of both the Fair Value Hedges and the respective hedged items. To the extent that the change in value of the Fair Value Hedges do not offset the change in the value of the hedged items, the ineffective portion is immediately recognized as interest expense.

Certain derivative financial instruments are not designated as hedges. The fair value of these derivative financial instruments has been recorded on our Consolidated Statement of Financial Condition and is adjusted on an ongoing basis to reflect their then current fair value. The changes in the fair value of derivative financial instruments not designated as hedges are recognized currently in earnings.

When hedge accounting is discontinued because it is determined that a derivative financial instrument no longer qualifies as a fair-value hedge, we continue to carry the derivative financial instrument on our Consolidated Statement of Financial Condition at its fair value, and no longer adjust the hedged item for changes in fair value. The adjustment of the carrying amount of the previously hedged item is accounted for in the same manner as other components of similar instruments. When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, we continue to carry the derivative financial instrument on our Consolidated Statement of Financial Condition at its fair value, and gains and losses that were included in accumulated other comprehensive income (loss) are recognized immediately in earnings. In all other situations in which hedge accounting is discontinued, we continue to carry the derivative financial instrument at its fair value on our Consolidated Statement of Financial Condition and recognize any subsequent changes in its fair value in earnings.

When a derivative financial instrument that qualified for hedge accounting is settled and the hedged item remains, the gain or loss on the derivative financial instrument is accreted or amortized over the life that remained on the settled derivative financial instrument.

COMPREHENSIVE LOSS - Comprehensive loss consists of net loss, unrealized gains and losses on securities available for sale and derivative instruments classified as cash flow hedges. The net change in unrealized gain (loss) on securities available for sale reflects net gains (losses) reclassified into earnings of $(0.6) million, $1.2 million and $2.8 million in 2011, 2010 and 2009, respectively. The reclassification of these amounts from accumulated other comprehensive income (loss) resulted in no income tax expense or benefit due to a full valuation allowance against our deferred tax assets.

LOSS PER COMMON SHARE - Basic and diluted loss per common share is computed by dividing net loss applicable to common stock by the weighted average number of common shares outstanding during the period and participating share awards. All outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating securities for this calculation. The assumed conversion of convertible preferred stock, assumed exercise of common stock warrants, assumed exercise of stock options, restricted stock units and stock units for a deferred compensation plan for non-employee directors would have an anti-dilutive impact on the loss per share and thus are ignored in the diluted per share calculation.

SHARE BASED COMPENSATION - Cost is recognized for stock options and non-vested share awards issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of our common stock at the date of grant is used for non-vested share awards. Cost is recognized over the required service period, generally defined as the vesting period. Cost is also recognized for salary stock issued to employees and stock issued to non-employee directors. These shares vest immediately and cost is recognized during the period they are issued.

COMMON STOCK - At December 31, 2011, 0.1 million shares of common stock were reserved for issuance under the dividend reinvestment plan, 0.5 million shares of common stock were reserved for issuance under our long-term incentive plans and 3.2 million shares of common stock were reserved for issuance under an equity line agreement.

RECLASSIFICATION - Certain amounts in the 2010 and 2009 consolidated financial statements have been reclassified to conform to the 2011 presentation.

ADOPTION OF NEW ACCOUNTING STANDARDS - In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-02, “A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring”, an amendment to FASB ASC Topic 310 “Receivables.”. This ASU gives new guidance to improve financial reporting by creating greater consistency in the way GAAP is applied for various types of debt restructurings. This guidance clarifies which loan modifications constitute a TDR. It is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a TDR, both for purposes of recording an impairment loss and for disclosure of TDRs. Although this new guidance does not amend the accounting for TDRs, it is expected that application of the clarifications contained in this guidance will result in more modifications being considered TDRs. In evaluating whether a restructuring constitutes a TDR, a creditor must separately conclude that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. The provisions of this ASU clarify the guidance on a creditor's evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. With regard to determining whether a concession has been granted, this new guidance clarifies that creditors are precluded from using the effective interest method to determine whether a concession has been granted. In the absence of using the effective interest method, a creditor must now focus on other considerations such as the value of the underlying collateral, evaluation of other collateral or guarantees, the debtor's ability to access other funds at market rates, interest rate increases and whether the restructuring results in a delay in payment that is insignificant. In addition, the new guidance provides “a not all inclusive” list of six indicators for creditors to consider when determining if a debtor is experiencing financial difficulties which can be found in FASB ASC 310-40-15-20. This new guidance became effective for the quarter ended September 30, 2011, and applies retrospectively to restructurings occurring since January 1, 2011. See note #4 for TDR disclosures in accordance with this ASU.

In June 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05”. This ASU amended guidance on the presentation requirements for comprehensive income. The amended guidance requires an entity to present total comprehensive income, the components of net income and the components of other comprehensive income on the face of the financial statements, either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amended guidance does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This amended guidance will be applied retrospectively and is effective for interim and annual periods beginning after December 15, 2011.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. This ASU amended guidance that will result in common fair value measurement and disclosure requirements between U.S. GAAP and International Financial Reporting Standards (“IFRS”). Under the amended guidance, entities will be required to expand disclosure for fair value instruments categorized within Level 3 of the fair value hierarchy to include (1) the valuation processes used; and (2) a narrative description of the sensitivity of the fair value measurement to changes in unobservable inputs for recurring fair value measurements and the interrelationships between those unobservable inputs, if any. They will also be required to disclose the categorization by level of the fair value hierarchy for items that are not measured at fair value in the Consolidated Statement of Financial Condition but for which the fair value is required to be disclosed (e.g. portfolio loans). The amended guidance will be applied prospectively and is effective for interim and annual periods beginning after December 15, 2011.

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REGULATORY MATTERS

12 Months Ended

Dec. 31, 2011

REGULATORY MATTERS [Abstract]

REGULATORY MATTERS

NOTE 21 - REGULATORY MATTERS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

● Enhanced interest rate risk modeling practices.

We believe we have met all of the requirements of the MOU.

We are also subject to various regulatory capital requirements. The prompt corrective action regulations establish quantitative measures to ensure capital adequacy and require minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and Tier 1 capital to average assets. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that could have a material effect on our consolidated financial statements. Under capital adequacy guidelines, we must meet specific capital requirements that involve quantitative measures as well as qualitative judgments by the regulators. The most recent regulatory filings as of December 31, 2011 and 2010 categorized our Bank as well capitalized. Management is not aware of any conditions or events that would have changed the most recent FDIC categorization.

Our actual capital amounts and ratios at December 31, follow:

	Actual					Minimum for Adequately Capitalized Institutions					Minimum for Well-Capitalized Institutions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
		(Dollars in thousands)
2011
Total capital to risk-weighted assets
Consolidated	$	174,547		11.31	%	$	123,470		8.00	%		NA		NA
Independent Bank		175,868		11.41			123,254		8.00		$	154,068		10.00	%
Tier 1 capital to risk-weighted assets
Consolidated	$	144,265		9.35	%	$	61,735		4.00	%		NA		NA
Independent Bank		156,104		10.13			61,627		4.00		$	92,441		6.00	%
Tier 1 capital to average assets
Consolidated	$	144,265		6.25	%	$	92,338		4.00	%		NA		NA
Independent Bank		156,104		6.77			92,268		4.00		$	115,335		5.00	%
2010
Total capital to risk-weighted assets
Consolidated	$	193,199		10.99	%	$	140,692		8.00	%		NA		NA
Independent Bank		194,524		11.06			140,760		8.00		$	175,950		10.00	%
Tier 1 capital to risk-weighted assets
Consolidated	$	166,048		9.44	%	$	70,346		4.00	%		NA		NA
Independent Bank		171,947		9.77			70,380		4.00		$	105,570		6.00	%
Tier 1 capital to average assets
Consolidated	$	166,048		6.35	%	$	104,550		4.00	%		NA		NA
Independent Bank		171,947		6.58			104,567		4.00		$	130,709		5.00	%

NA - Not applicable

The components of our regulatory capital are as follows:

	Consolidated						Independent Bank
	December 31,						December 31,
	2011			2010			2011			2010
	(In thousands)
Total shareholders' equity	$	102,627		$	119,085		$	152,987		$	169,986
Add (deduct)
Qualifying trust preferred securities		38,183			44,084			-			-
Accumulated other comprehensive loss		11,921			13,120			11,583			12,201
Intangible assets		(7,609	)		(8,980	)		(7,609	)		(8,979	)
Disallowed capitalized mortgage loan servicing rights		(857	)		(527	)		(857	)		(527	)
Disallowed deferred tax assets		-			(780	)		-			(780	)
Other		-			46			-			46
Tier 1 capital		144,265			166,048			156,104			171,947
Qualifying trust preferred securities		10,485			4,584			-			-
Allowance for loan losses and allowance for unfunded lending commitments limited to 1.25% of total risk-weighted assets		19,797			22,567			19,764			22,577
Total risk-based capital	$	174,547		$	193,199		$	175,868		$	194,524

In November, 2011, our Board adopted a Joint Revised Capital Plan (the “Capital Plan”), and submitted such Capital Plan to the FRB and the OFIR. The Capital Plan has not yet been approved by either the FRB or OFIR and an update was submitted in February, 2012.

The primary objective of our Capital Plan is to achieve and thereafter maintain the minimum capital ratios required by the Board resolutions adopted in December 2009 (as subsequently amended). The minimum capital ratios established by our Board are higher than the ratios required in order to be considered “well-capitalized” under federal standards. The Board imposed these higher ratios in order to ensure that we have sufficient capital to withstand potential continuing losses based on our elevated level of non-performing assets and given certain other risks and uncertainties we face. As of December 31, 2011, our Bank continued to meet the requirements to be considered “well-capitalized” under federal regulatory standards and met one of the minimum capital ratio goals established by our Board.

Set forth below are the actual capital ratios of our Bank as of December 31, 2011, the minimum capital ratios imposed by the Board resolutions, and the minimum ratios necessary to be considered “well-capitalized” under federal regulatory standards:

	Independent Bank Actual as of December 31, 2011			Minimum Ratios Established by our Board			Minimum Ratio Required to be Well- Capitalized
Total Capital to Risk-Weighted Assets		11.41	%		11.00	%		10.00	%
Tier 1 Capital to Average Total Assets		6.77			8.00			5.00

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

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CONCENTRATIONS OF CREDIT RISK

12 Months Ended

Dec. 31, 2011

CONCENTRATIONS OF CREDIT RISK [Abstract]

CONCENTRATIONS OF CREDIT RISK

NOTE 20 - CONCENTRATIONS OF CREDIT RISK

Credit risk is the risk to earnings and capital arising from an obligor's failure to meet the terms of any contract with our organization, or otherwise fail to perform as agreed. Credit risk can occur outside of our traditional lending activities and can exist in any activity where success depends on counterparty, issuer or borrower performance. Concentrations of credit risk (whether on- or off-balance sheet) arising from financial instruments can exist in relation to individual borrowers or groups of borrowers, certain types of collateral, certain types of industries or certain geographic regions. Credit risk associated with these concentrations could arise when a significant amount of loans or other financial instruments, related by similar characteristics, are simultaneously impacted by changes in economic or other conditions that cause their probability of repayment or other type of settlement to be adversely affected. Our major concentrations of credit risk arise by collateral type and by industry. The significant concentrations by collateral type at December 31, 2011 include $681.1 million of loans secured by residential real estate and $59.1 million of construction and development loans. In addition, we have a concentration of credit within the vehicle service contract industry. At December 31, 2011, we had $115.0 million of payment plan receivables. Our recourse for nonpayment of these payment plan receivables is against our counterparties operating within the vehicle service contract industry.

Additionally, within our commercial real estate and commercial loan portfolio we had significant standard industry classification concentrations in the following categories as of December 31, 2011: Lessors of Nonresidential Real Estate ($194.3 million); Lessors of Residential Real Estate ($78.9 million); Construction General Contractors and Land Development ($59.3 million); and Health Care and Social Assistance ($46.6 million). A geographic concentration arises because we primarily conduct our lending activities in the State of Michigan.

Our concentration of credit within the vehicle service contract industry relates to the business operated by our subsidiary, Mepco. This business and certain risks associated with this business are described in note #11 above. In addition, see note #4 above for a breakdown of Mepco's payment plan receivables by the level of recourse Mepco has against various counterparties. Mepco monitors counterparty concentrations in order to attempt to manage our exposure for contractual obligations from its counterparties. In addition, even where an insurance company or risk retention group does not have a guarantee obligation to Mepco, the failure of the insurance company or risk retention group could result in a mass cancellation of the vehicle service contracts (and the related payment plans) insured by such entity. Such a mass cancellation would trigger and accelerate the contractual obligations of the counterparties that did have such obligations to Mepco. The counterparty concentration levels are managed based on the AM Best rating and statutory surplus level for an insurance company and on other factors including financial evaluation, collateral, funding holdbacks, guarantees, and distribution of concentrations for vehicle service contract administrators and vehicle service contract sellers/dealers.

The five largest concentrations by insurance company, risk retention group or other party backing the service contract represents approximately 28.2%, 19.1%, 17.6%, 10.0% and 5.9%, respectively, of Mepco's payment plan receivables at December 31, 2011. These companies have provided the insurance coverage for the vehicle service contracts underlying the payment plan receivables; however, these companies are not all obligated to Mepco for the repayment of the payment plan receivables upon cancellation of the underlying vehicle service contracts and payment plans. Mepco has varying levels of recourse against such companies.

The top five vehicle service contract sellers from which Mepco purchases payment plans represent approximately 16.6%, 15.0%, 9.2%, 8.1% and 6.8%, respectively of Mepco's payment plan receivables at December 31, 2011. See note #11 for additional information on Mepco counterparties.

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FAIR VALUE DISCLOSURES

12 Months Ended

Dec. 31, 2011

FAIR VALUE DISCLOSURES [Abstract]

FAIR VALUE DISCLOSURES

NOTE 22 - FAIR VALUE DISCLOSURES

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

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

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

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

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

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

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

Loans held for sale: The fair value of mortgage loans held for sale is based on mortgage backed security pricing for comparable assets (recurring Level 2).

Impaired loans with specific loss allocations based on collateral value: From time to time, certain loans are considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. We measure our investment in an impaired loan based on one of three methods: the loan's observable market price, the fair value of the collateral or the present value of expected future cash flows discounted at the loan's effective interest rate. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At December 31, 2011 and 2010, all of our impaired loans were evaluated based on either the fair value of the collateral or the present value of expected future cash flows discounted at the loan's effective interest rate. When the fair value of the collateral is based on an appraised value or when an appraised value is not available we record the impaired loan as nonrecurring Level 3.

Other real estate: At the time of acquisition, other real estate is recorded at fair value, less estimated costs to sell, which becomes the property's new basis. Subsequent write-downs to reflect declines in value since the time of acquisition may occur from time to time and are recorded in other expense in the Consolidated Statements of Operations. The fair value of the property used at and subsequent to the time of acquisition is typically determined by a third party appraisal of the property (nonrecurring Level 3).

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. Since the secondary servicing market has not been active since the later part of 2009, model assumptions are generally unobservable and are based upon the best information available including data relating to our own servicing portfolio, reviews of mortgage servicing assumption and valuation surveys and input from various mortgage servicers and, therefore, are recorded as nonrecurring Level 3.

Derivatives – The fair value of interest rate swap agreements and interest rate cap agreements, in general, is determined using a discounted cash flow model whose significant fair value inputs can generally be verified and do not typically involve judgment by management (recurring Level 2). The fair value of the Amended Warrant is determined using a simulation analysis which considers potential outcomes for a large number of independent scenarios regarding the future prices of our common stock and incorporates several unobservable inputs (recurring Level 3). These unobservable inputs include probability of a non-permitted capital raise (1% and 40% at December 31, 2011 and 2010, respectively), expected discount to stock price in an equity raise (10%), dollar amount of expected capital raise ($100 million) and expected time of equity raise (April, 2013 and May, 2011 at December 31, 2011 and 2010, respectively).

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

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

(1) Included in accrued income and other assets.

(2) Included in accrued expenses and other liabilities.

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

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

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

			Fair Value Measurements Using
	Fair Value Measure- ments		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Un- observable Inputs (Level 3)
	(In thousands)
December 31, 2010:
Measured at Fair Value on a Recurring Basis:
Assets
Trading securities	$	32	$	32	$	-	$	-
Securities available for sale
U.S. agency residential mortgage-backed		13,331		-		13,331		-
Private label residential mortgage-backed		14,184		-		14,184		-
Obligations of states and political subdivisions		31,259		-		31,259		-
Trust preferred		9,090		-		9,090		-
Loans held for sale		50,098		-		50,098		-
Derivatives (1)		1,775		-		1,775		-
Liabilities
Derivatives (2)		2,716		-		1,405		1,311
Measured at Fair Value on a Non-recurring basis:
Assets
Capitalized mortgage loan servicing rights (3)		9,019		-		-		9,019
Impaired loans (4)
Commercial
Income producing - real estate		9,541		-		-		9,541
Land, land development & construction-real estate		8,885		-		-		8,885
Commercial and industrial		4,456		-		-		4,456
Mortgage
1-4 Family		4,377		-		-		4,377
Resort Lending		1,676		-		-		1,676
Other real estate (5)
Commercial
Income producing - real estate		1,352		-		-		1,352
Land, land development & construction-real estate		5,165		-		-		5,165
Mortgage
1-4 Family		1,888		-		-		1,888
Resort Lending		4,600		-		-		4,600
Installment
Home equity installment - 1st lien		90		-		-		90

(1) Included in accrued income and other assets.

(2) Included in accrued expenses and other liabilities.

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

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

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

Changes in fair values for financial assets which we have elected the fair value option for the years ended December 31 are as follows:

	Net Gains (Losses) on Assets						Total Change in Fair Values Included in Current Period
	Securities			Loans			Earnings
	(In thousands)
2011
Trading securities	$	45		$	-		$	45
Loans held for sale		-			1,503			1,503
2010
Trading securities	$	(22	)	$	-		$	(22	)
Loans held for sale		-			(378	)		(378	)
2009
Trading securities	$	954		$	-		$	954
Loans held for sale		-			(404	)		(404	)

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

The following represent impairment charges recognized during the years ended December 31, 2011, 2010 and 2009 relating to assets measured at fair value on a non-recurring basis:

● Capitalized mortgage loan servicing rights, whose individual strata are measured at fair value had a carrying amount of $11.0 million which is net of a valuation allowance of $6.5 million at December 31, 2011 and had a carrying amount of $9.0 million which is net of a valuation allowance of $3.2 million at December 31, 2010. A recovery (charge) of $(3.3) million, $(0.9) million and $2.3 million was included in our results of operations for the years ending December 31, 2011, 2010 and 2009, respectively.

● Loans which are measured for impairment using the fair value of collateral for collateral dependent loans, had a carrying amount of $33.9 million, with a valuation allowance of $10.3 million at December 31, 2011 and had a carrying amount of $41.0 million, with a valuation allowance of $12.1 million at December 31, 2010. An additional provision for loan losses relating to impaired loans of $8.9 million, $12.0 million and $34.3 million was included in our results of operations for the years ending December 31, 2011, 2010 and 2009, respectively.

● Other real estate, which is measured using the fair value of the property, had a carrying amount of $16.9 million which is net of a valuation allowance of $14.7 million at December 31, 2011 and a carrying amount of $13.1 million which is net of a valuation allowance of $10.9 million at December 31, 2010. An additional charge relating to ORE measured at fair value of $5.4 million, $6.2 million and $5.6 million was included in our results of operations during the years ended December 31, 2011, 2010 and 2009, respectively.

A reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, follows:

	Asset					(Liability)
	Securities Available for Sale					Amended Warrant
	2011		2010			2011			2010
	(In thousands)
Beginning balance	$	-	$	36,480		$	(1,311	)	$	-
Total gains (losses) realized and unrealized:
Included in results of operations		-		132			1,137			393
Included in other comprehensive income		-		1,713			-			-
Purchases, issuances, settlements, maturities and calls		-		(16,940	)		-			(1,704	)
Transfers in and/or out of Level 3		-		(21,385	)		-			-
Ending balance	$	-	$	-		$	(174	)	$	(1,311	)
Amount of total gains (losses) for the year included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at December 31	$	-	$	-		$	1,137		$	393

During the first quarter of 2010, we transferred certain private label residential mortgage- and other asset-backed securities, totaling $21.4 million, to a Level 2 valuation technique. In the first quarter of 2010, while this market was still “closed” to new issuance, secondary market trading activity increased and appeared to be more orderly than compared to 2009. In addition, many bonds were trading at levels near their economic value with fewer distressed valuations relative to 2009. Prices for many securities had been rising, due in part to negative new supply. This improvement in trading activity was supported by sales of 11 securities with a par value of $14.2 million at a $0.2 million gain during the first quarter of 2010 (none of these securities were originally purchased at a discount). The Level 2 valuation technique has also been supported through bids received from dealers on certain private label securities that approximated Level 2 pricing.

During 2010, we entered into an amended and restated warrant with the UST that would allow them to purchase our common stock at a fixed price (see note #12). Because of certain anti-dilution features included in the Amended Warrant, it is not considered to be indexed to our common stock and is therefore accounted for as a derivative instrument (see note #16). Any change in value of this warrant is recorded in other income in our Consolidated Statements of Operations. We determined the fair value of the Amended Warrant using a simulation analysis which considers potential outcomes for a large number of independent scenarios regarding the future prices of our common stock. The simulation analysis relies on a binomial lattice model, a standard technique usually applied to the valuation of stock options. The binomial lattice maps out possible price paths of our common stock, the underlying asset of the Amended Warrant. The simulation is based on a 500-step lattice covering the term of the Amended Warrant. The binomial lattice requires specification of 14 variables, of which several are unobservable in the market. As a result of these unobservable inputs, the resulting fair value of the Amended Warrant was classified as Level 3 pricing.

The following table reflects the difference between the aggregate fair value and the aggregate remaining contractual principal balance outstanding for loans held for sale for which the fair value option has been elected at December 31.

	Aggregate Fair Value		Difference			Contractual Principal
	(In thousands)
Loans held for sale
2011	$	44,801	$	1,403		$	43,398
2010		50,098		(100	)		50,198
2009		34,234		278			33,956

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FAIR VALUES OF FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2011

FAIR VALUES OF FINANCIAL INSTRUMENTS [Abstract]

FAIR VALUES OF FINANCIAL INSTRUMENTS

NOTE 23 - FAIR VALUES OF FINANCIAL INSTRUMENTS

Most of our assets and liabilities are considered financial instruments. Many of these financial instruments lack an available trading market and it is our general practice and intent to hold the majority of our financial instruments to maturity. Significant estimates and assumptions were used to determine the fair value of financial instruments. These estimates are subjective in nature, involving uncertainties and matters of judgment, and therefore, fair values cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Estimated fair values have been determined using available data and methodologies that are considered suitable for each category of financial instrument. For instruments with adjustable-interest rates which reprice frequently and without significant credit risk, it is presumed that estimated fair values approximate the recorded book balances.

Financial instrument assets actively traded in a secondary market, such as securities, have been valued using quoted market prices while recorded book balances have been used for cash and due from banks, interest bearing deposits and accrued interest.

It is not practicable to determine the fair value of FHLB and FRB Stock due to restrictions placed on transferability.

The fair value of loans is calculated by discounting estimated future cash flows using estimated market discount rates that reflect credit and interest-rate risk inherent in the loans.

Financial instrument liabilities with a stated maturity, such as certificates of deposit and other borrowings, have been valued based on the discounted value of contractual cash flows using a discount rate approximating current market rates for liabilities with a similar maturity.

Subordinated debentures have generally been valued based on a quoted market price of the specific or similar instruments.

Derivative financial instruments have principally been valued based on discounted value of contractual cash flows using a discount rate approximating current market rates.

Financial instrument liabilities without a stated maturity, such as demand deposits, savings, interest-bearing checking and money market accounts, have a fair value equal to the amount payable on demand.

The estimated fair values and recorded book balances at December 31 follow:

	2011				2010
	Recorded Book Balance		Estimated Fair Value		Recorded Book Balance		Estimated Fair Value
	(In thousands)
Assets
Cash and due from banks	$	62,800	$	62,800	$	48,900	$	48,900
Interest bearing deposits		278,300		278,300		336,400		336,400
Trading securities		80		80		30		30
Securities available for sale		157,400		157,400		67,900		67,900
Federal Home Loan Bank and Federal
Reserve Bank Stock		20,800	NA			23,600	NA
Net loans and loans held for sale		1,562,500		1,475,700		1,795,300		1,736,600
Accrued interest receivable		6,200		6,200		7,100		7,100
Derivative financial instruments		900		900		1,800		1,800
Liabilities
Deposits with no stated maturity	$	1,517,300	$	1,517,300	$	1,447,500	$	1,447,500
Deposits with stated maturity		568,800		571,600		804,300		814,900
Other borrowings		33,400		37,900		71,000		75,000
Subordinated debentures		50,200		16,100		50,200		19,300
Accrued interest payable		5,100		5,100		3,600		3,600
Derivative financial instruments		1,900		1,900		2,700		2,700

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

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

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

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

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
CONSOLIDATED STATEMENTS OF CASH FLOWS [Abstract]
Net Loss	$ (20,200)	$ (16,709)	$ (90,227)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH FROM (USED IN) OPERATING ACTIVITIES
Proceeds from sales of trading securities	0	0	2,827
Proceeds from sales of loans held for sale	391,253	493,272	551,977
Disbursements for loans held for sale	(376,694)	(496,806)	(545,548)
Provision for loan losses	27,946	46,765	103,318
Deferred federal income tax expense (benefit)	201	(1,533)	2,146
Deferred loan fees	(449)	420	(439)
Depreciation, amortization of intangible assets and premiums and accretion of discounts on securities and loans	(11,301)	(27,720)	(43,337)
Net gains on sales of mortgage loans	(9,262)	(12,330)	(10,860)
Net gains on securities	(249)	(1,639)	(3,826)
Securities impairment recognized in earnings	760	462	82
Net losses on other real estate and repossessed assets	5,824	9,722	8,554
Vehicle service contract counterparty contingencies	11,048	18,633	31,234
Share based compensation	1,208	542	809
Gain on extinguishment of debt	0	(18,066)	0
Goodwill impairment	0	0	16,734
(Increase) decrease in accrued income and other assets	16,874	397	(21,083)
Increase (decrease) in accrued expenses and other liabilities	(1,551)	1,928	2,014
Total Adjustments	55,608	14,047	94,602
Net Cash From (Used in) Operating Activities	35,408	(2,662)	4,375
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from the sale of securities available for sale	70,322	96,648	43,525
Proceeds from the maturity of securities available for sale	3,983	44,170	8,345
Principal payments received on securities available for sale	9,282	14,137	27,326
Purchases of securities available for sale	(173,186)	(55,150)	(15,806)
Redemption of Federal Home Loan Bank Stock	2,397	2,247	0
Redemption of Federal Reserve Bank Stock	405	1,977	209
Net decrease in portfolio loans (loans originated, net of principal payments)	196,558	347,574	76,866
Proceeds from the collection of vehicle service contract counterparty receivables	1,613	15,863	0
Proceeds from the sale of other real estate and repossessed assets	18,638	20,455	15,162
Capital expenditures	(2,557)	(4,429)	(7,995)
Net Cash From Investing Activities	127,455	483,492	147,632
CASH FLOW FROM (USED IN) FINANCING ACTIVITIES
Net increase (decrease) in total deposits	(165,713)	(313,930)	499,289
Net decrease in other borrowings and federal funds purchased	(7)	(36,791)	(191,722)
Proceeds from Federal Home Loan Bank advances	31,000	33,000	242,524
Payments of Federal Home Loan Bank advances	(68,638)	(56,359)	(462,356)
Net decrease in vehicle service contract counterparty payables	(5,106)	(9,570)	(5,327)
Proceeds from issuance of common stock	1,335	463	0
Extinguishment of debt, net	0	(1,005)	0
Dividends paid	0	0	(3,384)
Net Cash From (Used in) Financing Activities	(207,129)	(384,192)	79,024
Net Increase (Decrease) in Cash and Cash Equivalents	(44,266)	96,638	231,031
Cash and Cash Equivalents at Beginning of Year	385,374	288,736	57,705
Cash and Cash Equivalents at End of Year	341,108	385,374	288,736
Cash paid during the year for
Interest	18,729	38,095	50,420
Income taxes	59	513	335
Transfers to other real estate and repossessed assets	19,091	38,056	35,252
Transfer of payment plan receivables to vehicle service contract counterparty receivables	8,874	77,457	20,831
Issuance of common stock in exchange for subordinated debentures	0	23,502	0
Subordinated debentures exchanged for common stock	0	42,713	0
Retirement of Series A Preferred Stock	0	69,364	0
Retirement of common stock warrants	0	3,579
Issuance of Series B Preferred Stock	0	72,888	0
Issuance of common stock warrants	0	1,704
Transfer of loans to held for sale	$ 0	$ 0	$ 2,200

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OPERATING SEGMENTS

12 Months Ended

Dec. 31, 2011

OPERATING SEGMENTS [Abstract]

OPERATING SEGMENTS

NOTE 24 - OPERATING SEGMENTS

Our reportable segments are based upon legal entities. We have two reportable segments: Independent Bank (“IB”) and Mepco. The accounting policies of the segments are the same as those described in Note 1 to the consolidated financial statements. We evaluate performance based principally on net income (loss) of the respective reportable segments.

In the normal course of business, our IB segment provides funding to our Mepco segment through an intercompany line of credit priced at Prime beginning on January 1, 2010 and priced principally based on Brokered CD rates prior to that time. Our IB segment also provides certain administrative services to our Mepco segment which reimburses at an agreed upon rate. These intercompany transactions are eliminated upon consolidation. The only other material intersegment balances and transactions are investments in subsidiaries at the parent entities and cash balances on deposit at our IB segment.

A summary of selected financial information for our reportable segments follows:

	IB			Mepco(1)			Other(2)			Elimination(3)			Total
	(In thousands)
2011
Total assets	$	2,132,736		$	172,007		$	157,251		$	(154,588	)	$	2,307,406
Interest income		93,310			21,452			-			-			114,762
Net interest income		81,224			16,074			(2,729	)		-			94,569
Provision for loan losses		27,972			(26	)		-			-			27,946
Loss before income tax		(11,137	)		(6,694	)		(2,486	)		(95	)		(20,412	)
Net loss		(12,768	)		(4,849	)		(2,488	)		(95	)		(20,200	)
2010
Total assets	$	2,270,881		$	265,201		$	176,740		$	(177,574	)	$	2,535,248
Interest income		111,470			37,381			-			-			148,851
Net interest income		87,521			28,602			(4,470	)		-			111,653
Provision for loan losses		47,093			(328	)		-			-			46,765
Income (loss) before income tax		(27,763	)		(2,264	)		11,823			(95	)		(18,299	)
Net income (loss)		(27,049	)		(1,388	)		11,823			(95	)		(16,709	)
2009
Total assets	$	2,539,315		$	424,094		$	210,634		$	(208,679	)	$	2,965,364
Interest income		136,051			53,005			-			-			189,056
Net interest income		95,190			49,953			(6,620	)		-			138,523
Provision for loan losses		103,007			311			-			-			103,318
Loss before income tax		(76,888	)		(9,106	)		(7,349	)		(94	)		(93,437	)
Net income (loss)		(71,095	)		(11,689	)		(7,636	)		193			(90,227	)

(1) Total assets include gross payment plan receivables of $0.0 million, $0.1 million and $1.6 million at December 31, 2011, 2010 and 2009 from customers domiciled in Canada. This amount represents less than 1% of total payment plan receivables outstanding.

(2) Includes amounts relating to our parent company and certain insignificant operations. Net income in 2010 includes parent company's $18.1 million gain on extinguishment of debt.

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

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CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (USD $) In Thousands, unless otherwise specified	Dec. 31, 2011	Dec. 31, 2010
ASSETS
Cash and due from banks	$ 62,777	$ 48,933
Interest bearing deposits	278,331	336,441
Cash and Cash Equivalents	341,108	385,374
Trading securities	77	32
Securities available for sale	157,444	67,864
Federal Home Loan Bank and Federal Reserve Bank stock, at cost	20,828	23,630
Loans held for sale, carried at fair value	44,801	50,098
Loans
Commercial	651,155	707,530
Mortgage	590,876	658,679
Installment	219,559	245,644
Payment plan receivables	115,018	201,263
Total Loans	1,576,608	1,813,116
Allowance for loan losses	(58,884)	(67,915)
Net Loans	1,517,724	1,745,201
Other real estate and repossessed assets	34,042	39,413
Property and equipment, net	62,548	68,359
Bank-owned life insurance	49,271	47,922
Other intangibles	7,609	8,980
Capitalized mortgage loan servicing rights	11,229	14,661
Prepaid FDIC deposit insurance assessment	12,609	15,899
Vehicle service contract counterparty receivables, net	29,298	37,270
Accrued income and other assets	18,818	30,545
Total Assets	2,307,406	2,535,248
Deposits
Non-interest bearing	497,718	451,856
Savings and interest-bearing checking	1,019,603	995,662
Retail time	526,525	530,774
Brokered time	42,279	273,546
Total Deposits	2,086,125	2,251,838
Other borrowings	33,387	71,032
Subordinated debentures	50,175	50,175
Vehicle service contract counterparty payables	6,633	11,739
Accrued expenses and other liabilities	28,459	31,379
Total Liabilities	2,204,779	2,416,163
Commitments and contingent liabilities
Shareholders' Equity
Preferred stock, no par value, 200,000 shares authorized; 74,426 shares issued and outstanding at December 31, 2011 and 2010; liquidation preference: $81,023 at December 31, 2011 and $77,085 at December 31, 2010	79,857	75,700
Common stock, no par value, 500,000,000 shares authorized; issued and outstanding: 8,491,526 shares at December 31, 2011 and 7,860,483 shares at December 31, 2010	248,950	246,407
Accumulated deficit	(214,259)	(189,902)
Accumulated other comprehensive loss	(11,921)	(13,120)
Total Shareholders' Equity	102,627	119,085
Total Liabilities and Shareholders' Equity	$ 2,307,406	$ 2,535,248

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Parenthetical) (USD $) In Millions, except Share data in Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Cash dividends
Common Stock, dividend declared (in dollars per share)	$ 0	$ 0	$ 0.30
Preferred stock stated dividend rate (in hundredths)	5.00%	5.00%	5.00%
Issuance of shares of common stock (in shares)	432,797	5,454,669	103,211
Repurchase and retirement of common stock (in shares)			1,759
Net change in accumulated other comprehensive income	$ 0.5	$ 1.4	$ 4.1
Share based compensation, common stock (in Shares)	198,246

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SHARE BASED COMPENSATION

12 Months Ended

Dec. 31, 2011

SHARE BASED COMPENSATION [Abstract]

SHARE BASED COMPENSATION

NOTE 14 - SHARE BASED COMPENSATION

We maintain share based payment plans that include a non-employee director stock purchase plan and a performance-based long-term incentive plan that permits the issuance of share based compensation, including stock options and non-vested share awards. The long-term incentive plan, which is shareholder approved, permits the grant of additional share based awards for up to 0.5 million shares of common stock as of December 31, 2011. The non-employee director stock purchase plan permits the grant of additional share based payments for up to 0.2 million shares of common stock as of December 31, 2011. Share based awards and payments are measured at fair value at the date of grant and are expensed over the requisite service period. Common shares issued upon exercise of stock options come from currently authorized but unissued shares.

During the first quarter of 2011, pursuant to a management transition plan, our chief executive officer's annual salary was increased by $0.2 million effective January 1, 2011. This increase is paid entirely in the form of common stock (also referred to as “salary stock”). The shares issued each pay period vest immediately.

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

Beginning in the second quarter of 2011 our directors elected to receive their quarterly cash retainer fees in the form of common stock for the balance of 2011 and 2012. Shares equal in value to each director's quarterly cash retainer are issued each quarter and vest immediately. As a result, we issued 0.14 million shares to directors during 2011 and expensed their value during that same period.

During the second quarter of 2011, pursuant to our performance-based compensation plans, we granted 0.1 million stock options to certain officers (none of whom is a “named executive officer,” as defined under SEC rules). The stock options have an exercise price equal to the market value on the date of grant, vest ratably over a three year period and expire 10 years from date of grant.

During the first quarter of 2010, we completed a stock option exchange program under which eligible employees were able to exchange certain stock options for a lesser amount of new stock options. Pursuant to this stock option exchange program, 0.05 million stock options were exchanged for 0.01 million new stock options. The new stock options granted have an exercise price equal to the market value on the date of grant, generally vest over a one year period and have the same expiration dates as the options exchanged which ranged from 1.2 years to 7.2 years. The new options had a value substantially equal to the value of the options exchanged.

We also granted, pursuant to our performance-based compensation plans, 0.03 million stock options to our officers in 2009. The stock options have an exercise price equal to the market value of the common stock on the date of grant, vest ratably over a three year period and expire 10 years from date of grant.

We use the Black-Scholes option pricing model to measure compensation cost for stock options and use the market value of the common stock on the date of grant to measure compensation cost for non-vested share awards. We also estimate expected forfeitures over the vesting period.

Total compensation expense recognized for stock option grants, non-vested common stock grants, restricted stock unit grants and salary stock was $0.9 million, $0.5 million and $0.8 million in 2011, 2010 and 2009, respectively. The corresponding tax benefit relating to this expense was zero for each period. Total expense recognized for non-employee director share based payments was $0.3 million in 2011. The corresponding tax benefit relating to this expense was zero for each period. No expense was incurred for non-employee director share based payments in 2010 and 2009.

A summary of outstanding stock option grants and transactions follows:

	Number of Shares			Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)		Aggregated Intrinsic Value
								(In thousands)
Outstanding at January 1, 2011		56,252		$	42.76
Granted		138,600			1.92
Exercised		-			-
Forfeited		(730	)		10.55
Expired		(13,260	)		92.05
Outstanding at December 31, 2011		180,862		$	7.98		8.58	$	-
Vested and expected to vest at December 31, 2011		165,953		$	8.52		8.50	$	-
Exercisable at December 31, 2011		32,553		$	31.41		5.11	$	-

A summary of non-vested stock and transactions follows:

	Number of Shares			Weighted- Average Grant Date Fair Value
Outstanding at January 1, 2011		26,251		$	92.69
Granted		139,625			4.29
Vested		-			-
Forfeited		(831	)		93.20
Outstanding at December 31, 2011		165,045		$	17.90

A summary of the weighted-average assumptions used in the Black-Scholes option pricing model for grants of stock options during 2011 follows:

	2011
Expected dividend yield		1.04	%
Risk-free interest rate		1.91
Expected life (in years)		6.00
Expected volatility		94.72	%
Per share weighted-average fair value	$	1.37

The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life was obtained using a simplified method that, in general, averaged the vesting term and original contractual term of the stock option. This method was used as relevant historical data of actual exercise activity was not available. The expected volatility was based on historical volatility of our common stock.

At December 31, 2011, the total expected compensation cost related to non vested stock options, restricted stock and restricted stock units not yet recognized was $1.1 million. The weighted-average period over which this amount will be recognized is 2.6 years.

There were no stock option exercises during the 2011, 2010 and 2009.

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DERIVATIVE FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2011

DERIVATIVE FINANCIAL INSTRUMENTS [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS

NOTE 16 – DERIVATIVE FINANCIAL INSTRUMENTS

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

Our derivative financial instruments according to the type of hedge in which they are designated at December 31 follow:

	2011
	Notional Amount		Average Maturity (Years)		Fair Value
	(Dollars in thousands)
Cash flow hedge - pay-fixed interest-rate swap agreements	$	20,000		1.7	$	(1,103	)
No hedge designation
Rate-lock mortgage loan commitments	$	32,689		0.1	$	857
Mandatory commitments to sell mortgage loans		75,960		0.1		(606	)
Amended Warrant		2,504		7.0		(174	)
Total	$	111,153		0.3	$	77

	2010
	Notional Amount		Average Maturity (Years)		Fair Value
	(Dollars in thousands)
Cash Flow Hedge
Pay-fixed interest-rate swap agreements	$	20,000		2.7	$	(1,405	)
Interest-rate cap agreements		5,000		0.5		-
	$	25,000		2.3	$	(1,405	)
No hedge designation
Rate-lock mortgage loan commitments	$	40,119		0.1	$	400
Mandatory commitments to sell mortgage loans		90,400		0.1		1,375
Amended Warrant		2,504		8.0		(1,311	)
Total	$	133,023		0.2	$	464

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.

Through certain special purposes entities (see note #10) we issued 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. During the fourth quarter of 2009 we elected to defer payment of interest on this variable rate trust preferred security. As a result, this pay-fixed interest rate swap was transferred to a no hedge designation and the $1.6 million unrealized loss which was included as a component of accumulated other comprehensive loss at the time of the transfer will be reclassified into earnings over the remaining life of this pay-fixed swap. During the second quarter of 2010 we terminated this pay-fixed swap and the unrealized loss will continue to be reclassified into earnings over the remaining original life of the pay-fixed swap.

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 were zero and $0.02 million at December 31, 2011 and 2010 respectively. Our last interest rate cap expired in July, 2011.

It is anticipated that $0.5 million of unrealized losses on Cash Flow Hedges at December 31, 2011, will be reclassified into earnings over the next twelve months. The maximum term of any Cash Flow Hedge at December 31, 2011 is 3.0 years.

Certain financial derivative instruments have not been designated as hedges. The fair value of these derivative financial instruments has been recorded on our Consolidated Statements of Financial Condition and are adjusted on an ongoing basis to reflect their then current fair value. The changes in fair value of derivative financial instruments not designated as hedges, are recognized in earnings.

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

During 2010, we entered into an amended and restated warrant with the UST that would allow them to purchase our common stock at a fixed price (see note #12). Because of certain anti-dilution features included in the Amended Warrant, it is not considered to be indexed to our common stock and is therefore accounted for as a derivative instrument and recorded as a liability. Any change in value of the Amended Warrant is recorded in other income in our Consolidated Statements of Operations.

The following tables illustrate 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
	December 31,						December 31,
	2011			2010			2011			2010
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
	(in thousands)
Derivatives designated as hedging instruments
Pay-fixed interest rate swap agreements		$	-		$	-	Other liabilities	$	1,103	Other liabilities	$	1,405
Total			-			-			1,103			1,405
Derivatives not designated as hedging instruments
Rate-lock mortgage loan commitments	Other assets		857	Other assets		400			-			-
Mandatory commitments to sell mortgage loans			-	Other assets		1,375	Other liabilities		606			-
Amended Warrant			-			-	Other liabilities		174	Other liabilities		1,311
Total			857			1,775			780			1,311
Total derivatives		$	857		$	1,775		$	1,883		$	2,716

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

	Year Ended December 31,
	Gain (Loss) Recognized in Other Comprehensive Income (Loss) (Effective Portion)						Location ofGain (Loss)ReclassifiedfromAccumulatedOtherComprehensiveIncome (Loss)into Income(EffectivePortion)	Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)									Location of Gain (Loss) Recognized in Income (1)	Gain (Loss) Recognized in Income(1)
	2011		2010		2009			2011			2010			2009				2011			2010		2009
								(in thousands)
Cash Flow Hedges
Pay-fixed interest rate swap agreements	$	2,404	$	4,024	$	4,834	Interest expense	$	(1,443	)	$	(2,627	)	$	(3,110	)	Interest expense	$	-		$	-	$	-
Interest-rate cap agreements		30		180		871	Interest expense		(15	)		(90	)		(437	)	Interest expense		-			2		8
Total	$	2,434	$	4,204	$	5,705		$	(1,458	)	$	(2,717	)	$	(3,547	)		$	-		$	2	$	8
No hedge designation
Pay-fixed interest rate swap agreements																	Interest expense	$	-		$	409	$	(120	)
Interest-rate cap agreements																	Interest expense		-			-		5
Rate-lock mortgage loan commitments																	Mortgage loan gains		457			183		(622	)
Mandatory commitments to sell mortgage loans																	Mortgage loan gains		(1,981	)		660		1,378
Amended Warrant																	Decrease in fair value of U.S. Treasury warrant		1,137			393		-
Total																		$	(387	)	$	1,645	$	641

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

Accumulated other comprehensive loss included derivative losses of $1.5 million, $2.5 million and $4.0 million at December 31, 2011, 2010 and 2009, respectively.

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME [Abstract]
Net loss	$ (20,200)	$ (16,709)	$ (90,227)
Other comprehensive income (loss)
Net change in unrealized gain (loss) on securities available for sale, including reclassification adjustments	175	(163)	8,721
Change in unrealized losses on securities available for sale for which a portion of other than temporary impairment has been recognized in earnings	390	1,755	(2,594)
Net change in unrealized gain on derivative instruments	206	205	1,402
Reclassification adjustment for accretion on settled derivative instruments	428	762	0
Comprehensive Loss	$ (19,001)	$ (14,150)	$ (82,698)

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CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Dec. 31, 2011	Dec. 31, 2010
Shareholders' Equity
Preferred stock, par value (in dollars per share)	$ 0	$ 0
Preferred stock, shares authorized (in shares)	200,000	200,000
Preferred stock, shares issued (in shares)	74,426	74,426
Preferred stock, shares outstanding (in shares)	74,426	74,426
Preferred stock, liquidation preference	$ 81,023	$ 77,085
Common stock, par value (in dollars per share)	$ 0	$ 0
Common stock, shares authorized (in shares)	500,000,000	500,000,000
Common stock, shares issued (in shares)	8,491,526	7,860,483
Common stock, shares outstanding (in shares)	8,491,526	7,860,483

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OTHER BORROWINGS

12 Months Ended

Dec. 31, 2011

OTHER BORROWINGS [Abstract]

OTHER BORROWINGS

NOTE 9 – OTHER BORROWINGS

A summary of other borrowings at December 31 follows:

	2011		2010
	(In thousands)
Advances from the Federal Home Loan Bank	$	33,384	$	71,022
Other		3		10
Total	$	33,387	$	71,032

Advances from the Federal Home Loan Bank (“FHLB”) are secured by unencumbered qualifying mortgage and home equity loans with a market value equal to at least 136% to 200%, respectively of outstanding advances, as well as certain agency mortgage backed securities. Advances are also secured by FHLB stock that we own. As of December 31, 2011, we had unused borrowing capacity with the FHLB (subject to the FHLB's credit requirements and policies) of $149.7 million. Interest expense on advances amounted to $1.4 million, $1.9 million and $4.5 million for the years ended December 31, 2011, 2010 and 2009, respectively. During 2011, 2010 and 2009 FHLB advances totaling $33.0 million, $25.0 million and $151.5 million, respectively were terminated with no realized gain or loss.

As a member of the FHLB, we must own FHLB stock equal to the greater of 1.0% of the unpaid principal balance of residential mortgage loans or 5.0% of our outstanding advances. At December 31, 2011, we were in compliance with the FHLB stock ownership requirements.

The maturity dates and weighted average interest rates of FHLB advances at December 31 follow:

	2011					2010
	Amount		Rate			Amount		Rate
	(Dollars in thousands)
Fixed-rate advances
2011						$	2,250		5.89	%
2012	$	12,354		0.50	%		364		6.90
2013		-					-
2014		4,240		5.73			4,240		5.73
2015		-					-
2016		2,505		6.55			2,590		6.55
2017 and thereafter		11,285		6.59			11,578		6.59
Total fixed-rate advances		30,384		3.99			21,022		6.34
Variable-rate advances
2011		-					42,000		0.33
2013		-					5,000		0.92
2014		3,000		0.51			-
2015		-					3,000		0.66
Total variable-rate advances		3,000		0.51			50,000		0.41
Total advances	$	33,384		3.68	%	$	71,022		2.16	%

A summary of repayments of FHLB Advances at December 31, 2011, follows:

	(In thousands)
2012	$	12,762
2013		441
2014		7,717
2015		515
2016		2,521
2017 and thereafter		9,428
Total	$	33,384

All repurchase agreements outstanding at December 31, 2009 matured during 2010. These securities were being held by the counterparty to the repurchase agreement. Repurchase agreements averaged $30.7 million and $35.0 million during 2010 and 2009 respectively. The maximum amounts outstanding at any month end during 2010 and 2009 were $35.0 million in each year, respectively. Interest expense on repurchase agreements totaled $1.4 million and $1.6 million, for the years ended 2010 and 2009, respectively. No repurchase agreements were prepaid during 2010 or 2009.

We had no borrowings outstanding with the FRB during the years ended or at December 31, 2011 or 2010. We had unused borrowing capacity with the FRB (subject to the FRB's credit requirements and policies) of $0.5 million at December 31, 2011. Collateral for FRB borrowings are certain securities available for sale. Interest expense on these borrowings amounted to $0.2 million for the year ended December 31, 2009. FRB borrowings averaged $59.8 million during 2009. The maximum amount outstanding at any month end during 2009 was $206.0 million.

Assets, including securities available for sale and loans, pledged to secure other borrowings totaled $391.7 million at December 31, 2011.

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Document And Entity Information (USD $)	12 Months Ended
	Dec. 31, 2011	Mar. 12, 2012	Jun. 30, 2011
Entity Registrant Name	INDEPENDENT BANK CORP /MI/
Entity Central Index Key	0000039311
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Smaller Reporting Company
Entity Public Float			$ 16,550,000
Entity Common Stock, Shares Outstanding		8,543,725
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	FY
Document Type	10-K
Amendment Flag	false
Document Period End Date	Dec. 31, 2011

XML

SUBORDINATED DEBENTURES

12 Months Ended

Dec. 31, 2011

SUBORDINATED DEBENTURES [Abstract]

SUBORDINATED DEBENTURES

NOTE 10 – SUBORDINATED DEBENTURES

We have formed various special purpose entities (the “trusts”) for the purpose of issuing trust preferred securities in either public or pooled offerings or in private placements. Independent Bank Corporation owns all of the common stock of each trust and has issued subordinated debentures to each trust in exchange for all of the proceeds from the issuance of the common stock and the trust preferred securities. Trust preferred securities totaling $38.2 million and $44.1 million at December 31, 2011 and 2010, respectively, qualified as Tier 1 regulatory capital and the remaining amount qualified as Tier 2 regulatory capital.

These trusts are not consolidated with Independent Bank Corporation and accordingly, we report the common securities of the trusts held by us in other assets and the subordinated debentures that we have issued to the trusts in the liability section of our Consolidated Statements of Financial Condition.

Summary information regarding subordinated debentures as of December 31 follows:

		2011
Entity Name	Issue Date	Subordinated Debentures		Trust Preferred Securities Issued		Common Stock Issued
		(In thousands)
IBC Capital Finance II	March 2003	$	9,452	$	9,168	$	284
IBC Capital Finance III	May 2007		12,372		12,000		372
IBC Capital Finance IV	September 2007		20,619		20,000		619
Midwest Guaranty Trust I	November 2002		7,732		7,500		232
		$	50,175	$	48,668	$	1,507

		2010
Entity Name	Issue Date	Subordinated Debentures		Trust Preferred Securities Issued		Common Stock Issued
		(In thousands)
IBC Capital Finance II	March 2003	$	9,452	$	9,168	$	284
IBC Capital Finance III	May 2007		12,372		12,000		372
IBC Capital Finance IV	September 2007		20,619		20,000		619
Midwest Guaranty Trust I	November 2002		7,732		7,500		232
		$	50,175	$	48,668	$	1,507

Other key terms for the subordinated debentures and trust preferred securities that were outstanding at December 31, 2011 follow:

Entity Name	Maturity Date	Interest Rate	First Permitted Redemption Date
IBC Capital Finance II	March 31, 2033	8.25% fixed	March 31, 2008
IBC Capital Finance III	July 30, 2037	3 month LIBOR plus 1.60%	July 30, 2012
IBC Capital Finance IV	September 15, 2037	3 month LIBOR plus 2.85%	September 15, 2012
Midwest Guaranty Trust I	November 7, 2032	3 month LIBOR plus 3.45%	November 7, 2007

In 2010, we commenced an offer to exchange up to 18.0 million newly issued shares of our common stock for properly tendered and accepted trust preferred securities issued by IBC Capital Finance II, IBC Capital Finance III, IBC Capital Finance IV, and Midwest Guaranty Trust I (the “Exchange Offer”). The Exchange Offer expired on June 22, 2010. We accepted for exchange 1,657,255 shares ($41.4 million aggregate liquidation amount) of the trust preferred securities issued by IBC Capital Finance II, which were validly tendered and not withdrawn as of the expiration date for the Exchange Offer. No shares of the trust preferred securities issued by IBC Capital Finance III, IBC Capital Finance IV, or Midwest Guaranty Trust I were tendered.

We issued 5,109,125 shares of common stock at a price of $4.60 per share in exchange for the validly tendered trust preferred securities issued by IBC Capital Finance II (including $2.3 million of accrued and unpaid interest) and recorded a gain of $18.1 million which is included in our Consolidated Statements of Operations as “Gain on extinguishment of debt”. This gain was net of expenses paid totaling approximately $1.0 million for dealer-manager fees, legal fees, accounting fees and other related costs as well as the pro rata write off of previously capitalized issue costs of $1.2 million.

In the fourth quarter of 2009 we elected to defer distributions (payment of interest) on each of the subordinated debentures and trust preferred securities and continued to defer these distributions through December 31, 2011. The subordinated debentures and trust preferred securities are cumulative and have a feature that permits us to defer distributions (payment of interest) from time to time for a period not to exceed 20 consecutive quarters. While we defer the payment of interest, we will continue to accrue the interest expense owed at the applicable interest rate. Upon the expiration of the deferral, all accrued and unpaid interest is due and payable. At December 31, 2011 and 2010 we had $4.4 million and $2.3 million of accrued and unpaid interest. We have the right to redeem the subordinated debentures and trust preferred securities (at par) in whole or in part from time to time on or after the first permitted redemption date specified above or upon the occurrence of specific events defined within the trust indenture agreements. Issuance costs have been capitalized and are being amortized on a straight-line basis over a period not exceeding 30 years and are included in interest expense in the Consolidated Statements of Operations. Distributions (payment of interest) on the trust preferred securities are also included in interest expense in the Consolidated Statements of Operations.

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CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
INTEREST INCOME
Interest and fees on loans	$ 110,574	$ 142,282	$ 177,948
Interest on securities
Taxable	1,422	3,052	6,333
Tax-exempt	1,219	1,932	3,669
Other investments	1,547	1,585	1,106
Total Interest Income	114,762	148,851	189,056
INTEREST EXPENSE
Deposits	15,257	28,164	35,405
Other borrowings	4,936	9,034	15,128
Total Interest Expense	20,193	37,198	50,533
Net Interest Income	94,569	111,653	138,523
Provision for loan losses	27,946	46,765	103,318
Net Interest Income After Provision for Loan Losses	66,623	64,888	35,205
NON-INTEREST INCOME
Service charges on deposit accounts	18,306	21,511	24,370
Interchange income	9,091	8,257	7,064
Net gains (losses) on assets
Mortgage loans	9,262	12,330	10,860
Securities	249	1,639	3,826
Other than temporary impairment loss on securities:
Total impairment loss	(760)	(462)	(4,073)
Loss recognized in other comprehensive loss	0	0	3,991
Net impairment loss recognized in earnings	(760)	(462)	(82)
Mortgage loan servicing	(2,011)	(523)	2,252
Title insurance fees	1,465	2,037	2,272
Decrease in fair value of U.S. Treasury warrant	1,137	393	0
Gain on extinguishment of debt	0	18,066	0
Other	10,174	8,565	9,239
Total Non-interest Income	46,913	71,813	59,801
NON-INTEREST EXPENSE
Compensation and employee benefits	50,484	51,711	53,003
Loan and collection	12,414	15,323	14,727
Occupancy, net	11,183	11,016	11,092
Vehicle service contract counterparty contingencies	11,048	18,633	31,234
Data processing	9,751	9,554	9,528
Net losses on other real estate and repossessed assets	5,824	9,722	8,554
Furniture, fixtures and equipment	5,535	6,540	7,159
Legal and professional	3,941	4,100	3,222
Credit card and bank service fees	3,656	5,790	6,608
Communications	3,552	4,138	4,424
FDIC deposit insurance	3,507	6,805	7,328
Advertising	2,503	2,712	5,696
Provision for loss reimbursement on sold loans	1,993	215	0
Goodwill impairment	0	0	16,734
Recoveries related to unfunded lending commitments	(36)	(536)	(286)
Other	8,593	9,277	9,420
Total Non-interest Expense	133,948	155,000	188,443
Loss Before Income Tax	(20,412)	(18,299)	(93,437)
Income tax benefit	(212)	(1,590)	(3,210)
Net Loss	(20,200)	(16,709)	(90,227)
Preferred stock dividends and discount accretion	4,157	4,095	4,301
Net Loss Applicable to Common Stock	$ (24,357)	$ (20,804)	$ (94,528)
Net loss per common share
Basic (in dollars per share)	$ (2.94)	$ (4.09)	$ (39.60)
Diluted (in dollars per share)	$ (2.94)	$ (4.09)	$ (39.60)
Cash dividends declared per common share	$ 0	$ 0	$ 0.30

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LOANS

12 Months Ended

Dec. 31, 2011

LOANS [Abstract]

LOANS

NOTE 4 – LOANS

Our loan portfolios at December 31 follow:

	2011		2010
	(In thousands)
Real estate(1)
Residential first mortgages	$	530,969	$	601,755
Residential home equity and other junior mortgages		150,127		171,273
Construction and land development		59,136		68,022
Other(2)		446,980		484,019
Payment plan receivables		115,018		201,263
Commercial		150,633		155,322
Consumer		119,106		126,525
Agricultural		4,639		4,937
Total loans	$	1,576,608	$	1,813,116

(1) Includes both residential and non-residential commercial loans secured by real estate.

(2) Includes loans secured by multi-family residential and non-farm, non-residential property.

Loans are presented net of deferred loan fees of $0.1 million at December 31, 2011 and $0.6 million at December 31, 2010. Payment plan receivables totaling $122.7 million and $213.9 million at December 31, 2011 and 2010, respectively, are presented net of unamortized discount of $7.9 million and $12.9 million at December 31, 2011 and 2010, respectively. These payment plan receivables had effective yields of 15% and 13% at December 31, 2011 and 2010, respectively. These receivables have various due dates through December, 2013.

An analysis of the allowance for loan losses by portfolio segment for the years ended December 31, follows:

	Commercial			Mortgage			Installment			Payment Plan Receivables			Unallocated			Total
	(In thousands)
2011
Balance at beginning of period	$	23,836		$	22,642		$	6,769		$	389		$	14,279		$	67,915
Additions (deductions)
Provision for loan losses		12,988			14,410			3,365			(11	)		(2,806	)		27,946
Recoveries credited to allowance		1,850			1,441			1,451			5			-			4,747
Loans charged against the allowance		(20,491	)		(15,608	)		(5,439	)		(186	)		-			(41,724	)
Balance at end of period	$	18,183		$	22,885		$	6,146		$	197		$	11,473		$	58,884
2010
Balance at beginning of period	$	41,259		$	18,434		$	6,404		$	754		$	14,866		$	81,717
Additions (deductions)
Provision for loan losses		17,716			23,316			6,616			(296	)		(587	)		46,765
Recoveries credited to allowance		969			1,155			1,475			13			-			3,612
Loans charged against the allowance		(36,108	)		(20,263	)		(7,726	)		(82	)		-			(64,179	)
Balance at end of period	$	23,836		$	22,642		$	6,769		$	389		$	14,279		$	67,915
2009
Balance at beginning of period	$	33,090		$	8,729		$	4,264		$	486		$	11,331		$	57,900
Additions (deductions)
Provision for loan losses		59,278			31,783			8,431			291			3,535			103,318
Recoveries credited to allowance		731			791			1,271			2			-			2,795
Loans charged against the allowance		(51,840	)		(22,869	)		(7,562	)		(25	)		-			(82,296	)
Balance at end of period	$	41,259		$	18,434		$	6,404		$	754		$	14,866		$	81,717

Allowance for loan losses and recorded investment in loans by portfolio segment at December 31 follows:

	Commercial		Mortgage		Installment		Payment Plan Receivables		Unallocated		Total
	(In thousands)
2011
Allowance for loan losses:
Individually evaluated for impairment	$	10,252	$	10,285	$	1,762	$	-	$	-	$	22,299
Collectively evaluated for impairment		7,931		12,600		4,384		197		11,473		36,585
Total ending allowance balance	$	18,183	$	22,885	$	6,146	$	197	$	11,473	$	58,884
Loans
Individually evaluated for impairment	$	58,674	$	93,702	$	7,554	$	-			$	159,930
Collectively evaluated for impairment		594,665		499,919		212,907		115,018				1,422,509
Total loans recorded investment		653,339		593,621		220,461		115,018				1,582,439
Accrued interest included in recorded investment		2,184		2,745		902		-				5,831
Total loans	$	651,155	$	590,876	$	219,559	$	115,018			$	1,576,608
2010
Allowance for loan losses:
Individually evaluated for impairment	$	11,522	$	11,567	$	1,836	$	-	$	-	$	24,925
Collectively evaluated for impairment		12,314		11,075		4,933		389		14,279		42,990
Total ending allowance balance	$	23,836	$	22,642	$	6,769	$	389	$	14,279	$	67,915
Loans
Individually evaluated for impairment	$	53,415	$	107,026	$	6,904	$	-			$	167,345
Collectively evaluated for impairment		656,681		554,534		239,835		201,263				1,652,313
Total loans recorded investment		710,096		661,560		246,739		201,263				1,819,658
Accrued interest included in recorded investment		2,566		2,881		1,095		-				6,542
Total loans	$	707,530	$	658,679	$	245,644	$	201,263			$	1,813,116

Non-performing loans at December 31 follows:

	2011		2010
	(In thousands)
Non-accrual loans	$	59,309	$	66,652
Loans 90 days or more past due and still accruing interest		574		928
Total non-performing loans	$	59,883	$	67,580

Non performing loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. If these loans had continued to accrue interest in accordance with their original terms, approximately $3.2 million, $5.0 million, and $7.3 million of interest income would have been recognized in 2011, 2010 and 2009, respectively. Interest income recorded on these loans was approximately $0.1 million, $0.1 million and $0.2 million in 2011, 2010 and 2009, respectively.

Non performing loans by class as of December 31, follows:

	90+ and Still Accruing		Non- Accrual		Total Non- Performing Loans
	(In thousands)
2011
Commercial
Income producing - real estate	$	490	$	13,788	$	14,278
Land, land development and construction - real estate		43		6,990		7,033
Commercial and industrial		-		7,984		7,984
Mortgage
1-4 family		54		15,929		15,983
Resort lending		-		8,819		8,819
Home equity line of credit - 1st lien		-		523		523
Home equity line of credit - 2nd lien		-		889		889
Installment
Home equity installment - 1st lien		-		1,542		1,542
Home equity installment - 2nd lien		-		1,023		1,023
Loans not secured by real estate		-		880		880
Other		-		4		4
Payment plan receivables
Full refund		-		491		491
Partial refund		-		424		424
Other		-		23		23
Total recorded investment	$	587	$	59,309	$	59,896
Accrued interest included in recorded investment	$	13	$	-	$	13
2010
Commercial
Income producing - real estate	$	276	$	11,925	$	12,201
Land, land development and construction - real estate		-		9,672		9,672
Commercial and industrial		675		7,016		7,691
Mortgage
1-4 family		-		19,428		19,428
Resort lending		-		9,206		9,206
Home equity line of credit - 1st lien		-		1,080		1,080
Home equity line of credit - 2nd lien		-		1,153		1,153
Installment
Home equity installment - 1st lien		-		1,916		1,916
Home equity installment - 2nd lien		-		1,373		1,373
Loans not secured by real estate		-		923		923
Other		-		34		34
Payment plan receivables
Full refund		-		2,470		2,470
Partial refund		-		329		329
Other		-		127		127
Total recorded investment	$	951	$	66,652	$	67,603
Accrued interest included in recorded investment	$	23	$	-	$	23

An aging analysis of loans by class at December 31 follows:

	Loans Past Due
	30-59 days		60-89 days		90+ days		Total		Loans not Past Due		Total Loans
	(In thousands)
2011
Commercial
Income producing - real estate	$	1,701	$	937	$	6,408	$	9,046	$	264,620	$	273,666
Land, land development and construction - real estate		487		66		2,720		3,273		51,453		54,726
Commercial and industrial		1,861		1,132		3,516		6,509		318,438		324,947
Mortgage
1-4 family		3,507		1,418		15,983		20,908		294,771		315,679
Resort lending		2,129		932		8,819		11,880		184,943		196,823
Home equity line of credit - 1st lien		96		196		523		815		24,705		25,520
Home equity line of credit - 2nd lien		506		159		889		1,554		54,045		55,599
Installment
Home equity installment - 1st lien		757		264		1,542		2,563		41,239		43,802
Home equity installment - 2nd lien		676		365		1,023		2,064		51,224		53,288
Loans not secured by real estate		1,173		463		880		2,516		117,661		120,177
Other		36		10		4		50		3,144		3,194
Payment plan receivables
Full refund		2,943		951		491		4,385		99,284		103,669
Partial refund		380		200		424		1,004		9,918		10,922
Other		23		24		23		70		357		427
Total recorded investment	$	16,275	$	7,117	$	43,245	$	66,637	$	1,515,802	$	1,582,439
Accrued interest included in recorded investment	$	160	$	105	$	13	$	278	$	5,553	$	5,831
2010
Commercial
Income producing - real estate	$	3,269	$	914	$	8,978	$	13,161	$	295,948	$	309,109
Land, land development and construction - real estate		1,923		147		4,919		6,989		55,693		62,682
Commercial and industrial		1,636		2,204		4,665		8,505		329,800		338,305
Mortgage
1-4 family		4,074		2,349		19,428		25,851		319,361		345,212
Resort lending		2,667		1,003		9,206		12,876		215,398		228,274
Home equity line of credit - 1st lien		576		-		1,080		1,656		25,951		27,607
Home equity line of credit - 2nd lien		723		464		1,153		2,340		58,127		60,467
Installment
Home equity installment - 1st lien		472		228		1,916		2,616		50,150		52,766
Home equity installment - 2nd lien		746		529		1,373		2,648		63,345		65,993
Loans not secured by real estate		1,302		348		923		2,573		122,066		124,639
Other		51		16		34		101		3,240		3,341
Payment plan receivables
Full refund		6,475		3,957		2,470		12,902		148,751		161,653
Partial refund		1,134		642		329		2,105		24,170		26,275
Other		583		166		127		876		12,459		13,335
Total recorded investment	$	25,631	$	12,967	$	56,601	$	95,199	$	1,724,459	$	1,819,658
Accrued interest included in recorded investment	$	225	$	133	$	23	$	381	$	6,161	$	6,542

Impaired loans and related allocated allowance at December 31 are as follows:

	2011		2010
	(In thousands)
Impaired loans with no allocated allowance
TDR	$	26,945	$	25,754
Non - TDR		423		4,495
Impaired loans with an allocated allowance
TDR - allowance based on collateral		20,142		19,418
TDR - allowance based on present value cash flow		98,130		93,070
Non - TDR - allowance based on collateral		13,773		21,623
Non - TDR - allowance based on present value cash flow		-		2,351
Total impaired loans	$	159,413	$	166,711
Amount of allowance for loan losses allocated
TDR - allowance based on collateral	$	6,004	$	5,462
TDR - allowance based on present value cash flow		12,048		12,086
Non - TDR - allowance based on collateral		4,247		6,644
Non - TDR - allowance based on present value cash flow		-		733
Total amount of allowance for loan losses allocated	$	22,299	$	24,925

Impaired loans by class as of and for the year ended December 31, 2011 are as follows (1):

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:	(In thousands)
Commercial
Income producing - real estate	$	4,626	$	6,386	$	-	$	3,170	$	170
Land, land development & construction-real estate		219		243		-		613		35
Commercial and industrial		3,593		3,677		-		2,874		70
Mortgage
1-4 family		6,975		9,242		-		8,566		299
Resort lending		7,156		7,680		-		7,751		330
Home equity line of credit - 1st lien		-		-		-		-		-
Home equity line of credit - 2nd lien		134		211		-		118		4
Installment
Home equity installment - 1st lien		2,100		2,196		-		1,955		96
Home equity installment - 2nd lien		1,987		1,987		-		2,014		93
Loans not secured by real estate		637		688		-		598		31
Other		24		24		-		15		2
		27,451		32,334		-		27,674		1,130
With an allowance recorded:
Commercial
Income producing - real estate		22,781		29,400		3,642		18,812		117
Land, land development & construction-real estate		12,362		14,055		3,633		9,828		114
Commercial and industrial		15,093		18,357		2,977		11,501		352
Mortgage
1-4 family		61,214		63,464		7,716		62,811		2,692
Resort lending		18,159		19,351		2,534		21,750		734
Home equity line of credit - 1st lien		64		73		35		32		2
Home equity line of credit - 2nd lien		-		-		-		9		-
Consumer
Home equity installment - 1st lien		1,232		1,293		660		1,408		60
Home equity installment - 2nd lien		1,421		1,458		1,062		1,466		66
Loans not secured by real estate		153		156		40		168		6
Other		-		-		-		-		-
		132,479		147,607		22,299		127,785		4,143
Total
Commercial
Income producing - real estate		27,407		35,786		3,642		21,982		287
Land, land development & construction-real estate		12,581		14,298		3,633		10,441		149
Commercial and industrial		18,686		22,034		2,977		14,375		422
Mortgage
1-4 family		68,189		72,706		7,716		71,377		2,991
Resort lending		25,315		27,031		2,534		29,501		1,064
Home equity line of credit - 1st lien		64		73		35		32		2
Home equity line of credit - 2nd lien		134		211		-		127		4
Consumer
Home equity installment - 1st lien		3,332		3,489		660		3,363		156
Home equity installment - 2nd lien		3,408		3,445		1,062		3,480		159
Loans not secured by real estate		790		844		40		766		37
Other		24		24		-		15		2
Total	$	159,930	$	179,941	$	22,299	$	155,459	$	5,273
Accrued interest included in recorded investment	$	517

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

Impaired loans by class as of December 31, 2010 are as follows (1):

	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:	(In thousands)
Commercial
Income producing - real estate	$	4,545	$	4,763	$	-
Land, land development & construction-real estate		1,600		2,810		-
Commercial and industrial		5,830		5,873		-
Mortgage
1-4 family		8,770		10,551		-
Resort lending		5,666		5,670		-
Home equity line of credit - 1st lien		-		-		-
Home equity line of credit - 2nd lien		93		93		-
Installment
Home equity installment - 1st lien		1,772		1,805		-
Home equity installment - 2nd lien		1,891		1,904		-
Loans not secured by real estate		211		220		-
Other		-		-		-
		30,378		33,689		-
With an allowance recorded:
Commercial
Income producing - real estate		16,206		22,748		4,279
Land, land development & construction-real estate		12,735		21,017		3,922
Commercial and industrial		12,499		13,844		3,321
Mortgage
1-4 family		64,157		66,379		8,223
Resort lending		28,315		28,874		3,319
Home equity line of credit - 1st lien		-		-		-
Home equity line of credit - 2nd lien		25		97		25
Consumer
Home equity installment - 1st lien		1,361		1,374		620
Home equity installment - 2nd lien		1,413		1,429		1,110
Loans not secured by real estate		256		258		106
Other		-		-		-
		136,967		156,020		24,925
Total
Commercial
Income producing - real estate		20,751		27,511		4,279
Land, land development & construction-real estate		14,335		23,827		3,922
Commercial and industrial		18,329		19,717		3,321
Mortgage
1-4 family		72,927		76,930		8,223
Resort lending		33,981		34,544		3,319
Home equity line of credit - 1st lien		-		-		-
Home equity line of credit - 2nd lien		118		190		25
Consumer
Home equity installment - 1st lien		3,133		3,179		620
Home equity installment - 2nd lien		3,304		3,333		1,110
Loans not secured by real estate		467		478		106
Other		-		-		-
Total	$	167,345	$	189,709	$	24,925
Accrued interest included in recorded investment	$	634

(1) There were no impaired payment plan receivables at December 31, 2010.

Our average investment in impaired loans was approximately $155.5 million, $168.0 million and $111.2 million in 2011, 2010 and 2009, respectively. Cash receipts on impaired loans on non-accrual status are generally applied to the principal balance. Interest income recognized on impaired loans was approximately $5.3 million, $5.7 million and $2.2 million in 2011, 2010 and 2009, respectively of which the majority of these amounts were received in cash.

Troubled debt restructurings at December 31 follow:

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

	2010
	Commercial		Retail			Total
	(In thousands)
Performing TDR's	$	16,957	$	96,855		$	113,812
Non-performing TDR's(1)		7,814		16,616	(2)		24,430
Total	$	24,771	$	113,471		$	138,242

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

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

We have allocated $18.1 million and $17.5 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2011 and 2010, respectively. We have committed to lend additional amounts totaling up to zero and $0.1 million as of December 31, 2011 and 2010, respectively, to customers with outstanding loans that are classified as troubled debt restructurings.

During the year ending December 31, 2011, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans generally included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

Modifications involving a reduction of the stated interest rate of the loan have generally been for periods ranging from 3 months to 60 months but have extended to as much as 480 months in certain circumstances. Modifications involving an extension of the maturity date have generally been for periods ranging from 1 month to 120 months but have extended to as much as 248 months in certain circumstances.

Loans that have been classified as troubled debt restructurings during the year ended December 31, 2011 follows:

	Number of Contracts		Pre- modification Recorded Balance		Post- modification Recorded Balance
	(Dollars in thousands)
Commercial
Income producing - real estate		42	$	21,061	$	17,679
Land, land development & construction-real estate		20		10,801		7,464
Commercial and industrial		64		11,133		10,649
Mortgage
1-4 family		73		9,933		9,423
Resort lending		33		8,893		8,749
Home equity line of credit - 1st lien		2		69		64
Home equity line of credit - 2nd lien		1		23		18
Installment
Home equity installment - 1st lien		21		678		618
Home equity installment - 2nd lien		16		535		514
Loans not secured by real estate		26		455		442
Other		-		-		-
Total		298	$	63,581	$	55,620

The troubled debt restructurings described above increased the allowance for loan losses by $3.4 million and resulted in charge offs of $4.7 million during the year ending December 31, 2011.

Loans that have been classified as troubled debt restructured during the past twelve months and that have subsequently defaulted during the year ended December 31, 2011 follows:

	Number of Contracts		Recorded Balance
	(Dollars in thousands)
Commercial
Income producing - real estate		7	$	3,604
Land, land development & construction-real estate		4		3,036
Commercial and industrial		2		492
Mortgage
1-4 family		10		1,191
Resort lending		6		1,311
Home equity line of credit - 1st lien		-		-
Home equity line of credit - 2nd lien		-		-
Consumer
Home equity installment - 1st lien		1		19
Home equity installment - 2nd lien		5		301
Loans not secured by real estate		-		-
Other		-		-
		35	$	9,954

A loan is considered to be in payment default generally once it is 90 days contractually past due under the modified terms for commercial loans and installment loans and when four consecutive payments are missed for mortgage loans.

The troubled debt restructurings that subsequently defaulted described above increased the allowance for loan losses by $1.9 million and resulted in charge offs of $1.8 million during the year ending December 31, 2011.

The terms of certain other loans were modified during the year ending December 31, 2011 that did not meet the definition of a troubled debt restructuring. The modification of these loans could have included modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.

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

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

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

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

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

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

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

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

The following table summarizes loan ratings by loan class for our commercial loan segment at December 31:

	Commercial
	Non-watch 1-6		Watch 7-8		Substandard Accrual 9		Non- Accrual 10-11		Total
	(In thousands)
2011
Income producing - real estate	$	201,655	$	52,438	$	5,785	$	13,788	$	273,666
Land, land development and construction - real estate		33,515		9,421		4,800		6,990		54,726
Commercial and industrial		275,245		27,783		13,935		7,984		324,947
Total	$	510,415	$	89,642	$	24,520	$	28,762	$	653,339
Accrued interest included in total	$	1,677	$	381	$	126	$	-	$	2,184
2010
Income producing - real estate	$	225,167	$	57,536	$	14,482	$	11,925	$	309,110
Land, land development and construction - real estate		33,356		14,780		4,873		9,672		62,681
Commercial and industrial		273,138		41,738		16,413		7,016		338,305
Total	$	531,661	$	114,054	$	35,768	$	28,613	$	710,096
Accrued interest included in total	$	1,897	$	469	$	200	$	-	$	2,566

For each of our mortgage and consumer segment classes we generally monitor credit quality based on the credit scores of the borrowers. These credit scores are generally updated at least annually. The following table summarizes credit scores by loan class for our mortgage and installment loan segments at December 31:

	Mortgage (1)
	1-4 Family		Resort Lending		Home Equity 1st Lien		Home Equity 2nd Lien		Total
	(In thousands)
2011
800 and above	$	26,509	$	17,345	$	4,062	$	6,317	$	54,233
750-799		63,746		76,381		8,058		16,892		165,077
700-749		55,047		53,210		4,280		12,131		124,668
650-699		54,579		21,579		2,854		7,909		86,921
600-649		40,977		12,750		2,485		5,066		61,278
550-599		29,732		10,698		1,547		3,466		45,443
500-549		28,573		3,716		1,615		2,758		36,662
Under 500		12,434		565		539		886		14,424
Unknown		4,082		579		80		174		4,915
Total	$	315,679	$	196,823	$	25,520	$	55,599	$	593,621
Accrued interest included in total	$	1,404	$	928	$	123	$	290	$	2,745
2010
800 and above	$	28,308	$	21,385	$	4,433	$	6,386	$	60,512
750-799		66,812		89,695		8,996		17,995		183,498
700-749		66,749		56,425		4,961		14,688		142,823
650-699		57,026		25,911		3,707		8,856		95,500
600-649		41,559		12,832		1,596		3,768		59,755
550-599		31,879		11,647		1,673		4,303		49,502
500-549		30,723		5,040		1,366		2,497		39,626
Under 500		19,005		2,941		742		1,853		24,541
Unknown		3,151		2,398		133		121		5,803
Total	$	345,212	$	228,274	$	27,607	$	60,467	$	661,560
Accrued interest included in total	$	1,413	$	1,012	$	135	$	321	$	2,881

	Installment(1)
	Home Equity 1st Lien		Home Equity 2nd Lien		Loans not Secured by Real Estate		Other		Total
	(In thousands)
2011
800 and above	$	5,466	$	5,047	$	18,245	$	70	$	28,828
750-799		11,651		16,475		41,501		572		70,199
700-749		6,899		10,693		23,174		883		41,649
650-699		7,144		8,407		15,646		673		31,870
600-649		4,943		5,412		7,599		434		18,388
550-599		3,435		3,221		4,573		270		11,499
500-549		3,021		3,145		3,011		183		9,360
Under 500		1,160		854		1,391		50		3,455
Unknown		83		34		5,037		59		5,213
Total	$	43,802	$	53,288	$	120,177	$	3,194	$	220,461
Accrued interest included in total	$	176	$	208	$	489	$	29	$	902
2010
800 and above	$	5,626	$	5,618	$	13,078	$	22	$	24,344
750-799		14,654		19,668		46,228		554		81,104
700-749		8,994		15,015		26,714		828		51,551
650-699		8,225		10,029		15,968		779		35,001
600-649		5,878		5,677		8,520		417		20,492
550-599		4,120		4,812		5,479		255		14,666
500-549		3,350		3,248		4,398		260		11,256
Under 500		1,809		1,848		2,087		163		5,907
Unknown		110		78		2,167		63		2,418
Total	$	52,766	$	65,993	$	124,639	$	3,341	$	246,739
Accrued interest included in total	$	218	$	264	$	579	$	34	$	1,095

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

Mepco is a wholly-owned subsidiary of our Bank that operates a vehicle service contract payment plan business throughout the United States. See note #11 for more information about Mepco's business. As of December 31, 2011, approximately 90.1% of Mepco's outstanding payment plan receivables relate to programs in which a third party insurer or risk retention group is obligated to pay Mepco the full refund owing upon cancellation of the related service contract (including with respect to both the portion funded to the service contract seller and the portion funded to the administrator). These receivables are shown as “Full Refund” in the table below. Another approximately 9.5% of Mepco's outstanding payment plan receivables as of December 31, 2011, relate to programs in which a third party insurer or risk retention group is obligated to pay Mepco the refund owing upon cancellation only with respect to the unearned portion previously funded by Mepco to the administrator (but not to the service contract seller). These receivables are shown as “Partial Refund” in the table below. The balance of Mepco's outstanding payment plan receivables relate to programs in which there is no insurer or risk retention group that has any contractual liability to Mepco for any portion of the refund amount. These receivables are shown as “Other” in the table below. For each class of our payment plan receivables we monitor credit ratings of the counterparties as we evaluate the credit quality of this portfolio.

Although Mepco has contractual recourse against various counterparties for refunds owing upon cancellation of vehicle service contracts, please see note #11 regarding certain risks and difficulties associated with collecting these refunds.

The following table summarizes credit ratings by class of payment plan receivable at December 31:

	Payment Plan Receivables
	Full Refund		Partial Refund		Other		Total
	(In thousands)
2011
AM Best rating
A+	$	-	$	118	$	7	$	125
A		32,461		165		269		32,895
A-		27,056		10,639		-		37,695
B+		1,390		-		-		1,390
B		-		-		-		-
Not rated		42,762		-		151		42,913
Total	$	103,669	$	10,922	$	427	$	115,018
2010
AM Best rating
A+	$	-	$	255	$	-	$	255
A		40,264		497		341		41,102
A-		48,291		25,523		-		73,814
B+		19,694		-		-		19,694
B		-		-		-		-
Not rated		53,404		-		12,994		66,398
Total	$	161,653	$	26,275	$	13,335	$	201,263

Mortgage loans serviced for others are not reported as assets. The principal balances of these loans at year end are as follows:

	2011		2010
	(In thousands)
Mortgage loans serviced for:
Fannie Mae	$	895,510	$	939,963
Freddie Mac		882,401		828,166
Other		154		192
Total	$	1,778,065	$	1,768,321

Custodial escrow balances maintained in connection with mortgage loans serviced for others totaled $26.5 million and $33.3 million, at December 31, 2011 and 2010, respectively.

If we do not remain “Well Capitalized” (see note #21), meet certain minimum capital levels or certain profitability requirements or if we incur a rapid decline in net worth we could lose our ability to sell and/or service loans to these investors. This could impact our ability to generate gains on the sale of loans and generate servicing income. A forced liquidation of our servicing portfolio could also impact the value that could be recovered on this asset. Fannie Mae has the most stringent eligibility requirements covering capital levels, profitability and decline in net worth. Fannie Mae requires seller/servicers to be “Well Capitalized.” For the profitability requirement, we cannot record four or more consecutive quarterly losses and experience a 30% decline in net worth over the same period. Finally, our net worth cannot decline by more than 25% in one quarter or more than 40% over two consecutive quarters. The highest level of capital we are required to maintain is at least $2.5 million plus 0.25% of loans serviced for Freddie Mac.

An analysis of capitalized mortgage loan servicing rights for the years ended December 31 follows:

	2011			2010			2009
	(In thousands)
Balance at beginning of year	$	14,661		$	15,273		$	11,966
Originated servicing rights capitalized		2,967			4,158			5,213
Amortization		(3,065	)		(3,862	)		(4,255	)
Change in valuation allowance		(3,334	)		(908	)		2,349
Balance at end of year	$	11,229		$	14,661		$	15,273
Valuation allowance	$	6,544		$	3,210		$	2,302
Loans sold and serviced that have had servicing rights capitalized	$	1,774,952		$	1,764,317		$	1,725,278

The fair value of capitalized mortgage loan servicing rights was $11.5 million and $15.7 million at December 31, 2011 and 2010, respectively. Fair value was determined using an average coupon rate of 5.20%, average servicing fee of 0.256%, average discount rate of 10.65% and an average PSA rate of 278 for December 31, 2011; and an average coupon rate of 5.42%, average servicing fee of 0.255%, average discount rate of 10.07% and an average PSA rate of 228 for December 31, 2010.

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SECURITIES

12 Months Ended

Dec. 31, 2011

SECURITIES [Abstract]

SECURITIES

NOTE 3 – SECURITIES

Securities available for sale consist of the following at December 31:

	Amortized		Unrealized
	Cost		Gains		Losses		Fair Value
2011	(In thousands)
U.S. agency	$	24,980	$	58	$	21	$	25,017
U.S. agency residential mortgage-backed		93,415		1,007		216		94,206
Private label residential mortgage-backed		11,066		-		2,798		8,268
Obligations of states and political subdivisions		26,865		510		58		27,317
Trust preferred		4,697		-		2,061		2,636
Total	$	161,023	$	1,575	$	5,154	$	157,444
2010
U.S. agency residential mortgage-backed	$	13,103	$	249	$	21	$	13,331
Private label residential mortgage-backed		18,203		31		4,050		14,184
Obligations of states and political subdivisions		31,534		375		650		31,259
Trust preferred		9,472		116		498		9,090
Total	$	72,312	$	771	$	5,219	$	67,864

Total OTTI recognized in accumulated other comprehensive loss for securities available for sale was $1.1 million and $1.0 million at December 31, 2011 and 2010, respectively.

Our investments' gross unrealized losses and fair values aggregated by investment type and length of time that individual securities have been at a continuous unrealized loss position, at December 31 follows:

	Less Than Twelve Months				Twelve Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
2011
U.S. agency	$	9,974	$	21	$	-	$	-	$	9,974	$	21
U.S. agency residential mortgage-backed		42,500		216		-		-		42,500		216
Private label residential mortgage-backed		163		90		8,102		2,708		8,265		2,798
Obligations of states and political subdivisions		-		-		1,729		58		1,729		58
Trust preferred		591		1,218		2,045		843		2,636		2,061
Total	$	53,228	$	1,545	$	11,876	$	3,609	$	65,104	$	5,154
2010
U.S. agency residential mortgage-backed	$	2,733	$	21	$	-	$	-	$	2,733	$	21
Private label residential mortgage-backed		-		-		12,624		4,050		12,624		4,050
Obligations of states and political subdivisions		8,371		428		1,796		222		10,167		650
Trust preferred		-		-		2,384		498		2,384		498
Total	$	11,104	$	449	$	16,804	$	4,770	$	27,908	$	5,219

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

U.S. Agency and U.S. Agency residential mortgage-backed securities - at December 31, 2011 we had two U.S. Agency and 15 U.S. Agency residential mortgage-backed securities whose fair market value is less than amortized cost. The unrealized losses are largely attributed to modest credit spread widening on certain issues. As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Private label residential mortgage backed securities - at December 31, 2011 we had eight securities whose fair value is less than amortized cost.  Two of the issues are rated by a major rating agency as investment grade while four are below investment grade and two are split rated.  All of these bonds have impairment in excess of 10% and only one of these holdings has been impaired for less than 12 months.

The unrealized losses are largely attributable to credit spread widening on these securities since their acquisition. The underlying loans within these securities include Jumbo (78%) and Alt A (22%) at December 31, 2011.

	December 31,
	2011					2010
	Fair Value		Net Unrealized Gain (Loss)			Fair Value		Net Unrealized Gain (Loss)
	(In thousands)
Private label residential mortgage-backed
Jumbo	$	6,454	$	(1,937	)	$	8,429	$	(2,600	)
Alt-A		1,814		(861	)		5,755		(1,419	)

Seven of the private label residential mortgage-backed transactions have geographic concentrations in California, ranging from 22% to 58% of the collateral pool. Typical exposure levels to California (median exposure is 47%) are consistent with overall market collateral characteristics. Three transactions have modest exposure to Florida, ranging from 5% to 7% and one transaction has modest exposure to Nevada (5%). The underlying collateral pools do not have meaningful exposure to Arizona, Michigan or Ohio. None of the issues involve subprime mortgage collateral. Thus the impact of this market segment is only indirect, in that it has impacted liquidity and pricing in general for private label residential mortgage-backed securities. The majority of transactions are backed by fully amortizing loans. However, six transactions have concentrations in interest only loans ranging from 31% to 94% (at origination date). The structure of the residential mortgage securities portfolio provides protection to credit losses. The portfolio primarily consists of senior securities as demonstrated by the following: super senior (19%), senior (48%), senior support (23%) and mezzanine (10%). The mezzanine class is from a seasoned transaction (88 months) with a significant level of subordination (8.2%). Except for the additional discussion below relating to other than temporary impairment, each private label residential mortgage-backed security has sufficient credit enhancement via subordination to reasonably assure full realization of book value. This assertion is based on a transaction level review of the portfolio.

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

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

In addition to the review discussed above, all private label residential mortgage-backed securities are reviewed for OTTI utilizing a cash flow projection. The cash flow analysis forecasted cash flow from the underlying loans in each 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 loss severity. Near term prepayment assumptions were based on recently observed prepayment rates. More weight was given to longer term historic performance (12 months). In some cases, recently observed prepayment rates are lower than historic norms due to the absence of new jumbo loan issuances. This loan market is heavily dependent upon securitization for funding, and new securitization transactions have been minimal. Our model projections anticipate that prepayment rates gradually revert to historical levels. For seasoned ARM transactions, normalized prepayment rates are estimated at 15% to 25% CPR. For fixed rate collateral (one transaction), the prepayment speeds are projected to rise modestly.

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

At December 31, 2011 three below investment grade private label residential mortgage-backed securities with fair values of $4.0 million, $1.6 million and $0.2 million, respectively and unrealized losses of $1.1 million, $0.5 million and $0.1 million, respectively (amortized cost of $5.1 million, $2.1 million and $0.2 million, respectively) had losses that were considered other than temporary.

The underlying loans in the first transaction are 30 year fixed rate jumbos with an average FICO of 744 and an average loan-to-value ratio of 72%. The loans backing this transaction were originated in 2007 and this is our only security backed by 2007 vintage loans. We believe that this vintage is a key differentiating factor between this security and the others in our portfolio that do not have unrealized losses that are considered OTTI. The bond is a senior security that is receiving principal and interest payments similar to principal reductions in the underlying collateral. The cash flow analysis described above calculated $0.475 million of credit related OTTI as of December 31, 2011 and was recognized in our Consolidated Statements of Operations ($0.213 million, $0.197 million and $0.065 million during the years ended December 31, 2011, 2010 and 2009, respectively). The remaining unrealized loss was attributed to other factors and is reflected in other comprehensive income (loss) during those same periods.

The underlying loans in the second transaction are 30 year hybrid ARM Alt-A with an average FICO of 717 and an average loan-to-value ratio of 78%. The loans backing this transaction were originated in 2005.  The bond is a super senior security that is receiving principal and interest payments similar to principal reductions in the underlying collateral. The cash flow analysis described above calculated $0.425 million of credit related OTTI as of December 31, 2011 and was recognized in our Consolidated Statements of Operations ($0.425 million during the year ended December 31, 2011). The remaining unrealized loss was attributed to other factors and is reflected in other comprehensive income (loss) during those same periods.

The underlying loans in the third transaction are 30 year hybrid ARM jumbos with an average FICO of 738 and an average loan-to-value ratio of 57%. The loans backing this transaction were originated in 2005. The bond is a senior support security that is receiving principal and interest payments similar to principal reductions in the underlying collateral. The cash flow analysis described above calculated credit related OTTI of $0.320 million as of December 31, 2011 and was recognized in our Consolidated Statements of Operations ($0.122 million and $0.198 million during the years ended December 31, 2011 and 2010, respectively). The remaining unrealized loss was attributed to other factors and is reflected in other comprehensive income (loss) during those same periods.

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

Obligations of states and political subdivisions - at December 31, 2011 we had four municipal securities whose fair value is less than amortized cost. The unrealized losses are largely attributed to a widening of market spreads and continued illiquidity for certain issues.  None of the impaired securities are rated by a major rating agency. Approximately 56% 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 non rated securities have a periodic internal credit review according to established procedures. As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Trust preferred securities - at December 31, 2011 we had four securities whose fair value is less than amortized cost. All of our trust preferred securities are single issue securities issued by a trust subsidiary of a bank holding company. The pricing of trust preferred securities over the past three to four years has suffered from significant credit spread widening fueled by uncertainty regarding potential losses of financial companies, the absence of a liquid functioning secondary market and potential supply concerns from financial companies issuing new debt to recapitalize themselves.

One of the four securities is rated by two major rating agencies as investment grade, while one is split rated (this security is rated as investment grade by one major rating agency and below investment grade by another) and the other two are non-rated. The non-rated issues are relatively small banks and were never rated. The issuers of these non-rated trust preferred securities, which had a total amortized cost of $2.8 million and total fair value of $1.2 million as of December 31, 2011, continue to have satisfactory credit metrics and one continues to make interest payments.  The other non-rated issue began deferring dividend payments in the third quarter of 2011 apparently due to an increase in non-performing assets.  Nevertheless, this issuer continues to have satisfactory capital measures and interim profitability.

An additional trust preferred security was written down to zero as of December 31, 2010, including a $0.067 million credit related OTTI charge in the first quarter of 2010.

	December 31,
	2011					2010
	Fair Value		Net Unrealized Gain (Loss)			Fair Value		Net Unrealized Gain (Loss)
	(In thousands)
Trust preferred securities
Rated issues	$	1,405	$	(484	)	$	6,290	$	(375	)
Unrated issues - no OTTI		1,231		(1,577	)		2,800		(7	)

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 2011, 2010 and 2009 we recorded in earnings OTTI charges on securities available for sale of $0.8 million, $0.5 million and $0.1 million respectively.

A rollforward of credit losses recognized in earnings on securities available for sale for the years ending December 31, follow:

	2011		2010		2009
	(In thousands)
Balance at beginning of year	$	710	$	248	$	166
Additions to credit losses on securities for which no previous OTTI was recognized		425		198		65
Increases to credit losses on securities for which OTTI was previously recognized		335		264		17
Total	$	1,470	$	710	$	248

The amortized cost and fair value of securities available for sale at December 31, 2011, by contractual maturity, follow. The actual maturity may differ from the contractual maturity because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized Cost		Fair Value
	(In thousands)
Maturing within one year	$	1,475	$	1,493
Maturing after one year but within five years		7,157		7,366
Maturing after five years but within ten years		21,574		21,774
Maturing after ten years		26,336		24,337
		56,542		54,970
U.S. agency residential mortgage-backed		93,415		94,206
Private label residential mortgage-backed		11,066		8,268
Total	$	161,023	$	157,444

A summary of proceeds from the sale of securities available for sale and gains and losses follows:

	Proceeds		Realized Gains		Losses(1)
	(In thousands)
2011	$	70,322	$	279	$	75
2010		96,648		1,882		221
2009		43,525		3,003		130

(1) Losses in 2011, 2010 and 2009 exclude $0.8 million, $0.5 million and $0.1 million, respectively of other than temporary impairment.

During 2011, 2010 and 2009 our trading securities consisted of various preferred stocks. During each of those years we recognized gains (losses) on trading securities of $0.04 million, $(0.02) million and $1.0 million, respectively, that are included in net gains (losses) on securities in the Consolidated Statements of Operations. Of these amounts, $0.04 million and $(0.02) million relates to gains (losses) recognized on trading securities still held at December 31, 2011 and 2010, respectively.

Securities with a book value of $12.6 million and $19.6 million at December 31, 2011 and 2010, respectively, were pledged to secure borrowings, public deposits and for other purposes as required by law. There were no investment obligations of state and political subdivisions that were payable from or secured by the same source of revenue or taxing authority that exceeded 10% of consolidated shareholders' equity at December 31, 2011 or 2010.

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BENEFIT PLANS

12 Months Ended

Dec. 31, 2011

BENEFIT PLANS [Abstract]

BENEFIT PLANS

NOTE 15 - BENEFIT PLANS

We maintain 401(k) and employee stock ownership plans covering substantially all of our full-time employees. We have historically matched employee contributions to the 401(k) plan up to a maximum of 3% of participating employees' eligible wages. The match of employee contributions was zero in 2011 and 2010 and 3% in 2009. Contributions to the employee stock ownership plan are determined annually and require approval of our Board of Directors. The maximum contribution is 6% of employees' eligible wages. There were no contributions to the employee stock ownership plan in 2011, 2010 and 2009. Amounts expensed for these retirement plans was zero in 2011 and 2010 and $1.0 million 2009.

Our officers participate in various performance-based compensation plans. Amounts expensed for all incentive plans totaled $1.1 million, $0.6 million and $1.1 million, in 2011, 2010 and 2009, respectively.

We also provide certain health care and life insurance programs to substantially all full-time employees. Amounts expensed for these programs totaled $5.0 million, $4.7 million and $4.6 million in 2011, 2010 and 2009 respectively. These insurance programs are also available to retired employees at their own expense.

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COMMITMENTS AND CONTINGENT LIABILITIES

12 Months Ended

Dec. 31, 2011

COMMITMENTS AND CONTINGENT LIABILITIES [Abstract]

COMMITMENTS AND CONTINGENT LIABILITIES

NOTE 11 – COMMITMENTS AND CONTINGENT LIABILITIES

In the normal course of business, we enter into financial instruments with off-balance sheet risk to meet the financing needs of customers or to reduce exposure to fluctuations in interest rates. These financial instruments may include commitments to extend credit and standby letters of credit. Financial instruments involve varying degrees of credit and interest-rate risk in excess of amounts reflected in the Consolidated Statements of Financial Condition. Exposure to credit risk in the event of non-performance by the counterparties to the financial instruments for loan commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments. We do not, however, anticipate material losses as a result of these financial instruments.

A summary of financial instruments with off-balance sheet risk at December 31 follows:

	2011		2010
	(In thousands)
Financial instruments whose risk is represented by contract amounts
Commitments to extend credit	$	139,183	$	126,356
Standby letters of credit		11,188		11,949

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and generally require payment of a fee. Since commitments may expire without being drawn upon, the commitment amounts do not represent future cash requirements. Commitments are issued subject to similar underwriting standards, including collateral requirements, as are generally involved in the extension of credit facilities.

Standby letters of credit are written conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in such transactions is essentially the same as that involved in extending loan facilities and, accordingly, standby letters of credit are issued subject to similar underwriting standards, including collateral requirements, as are generally involved in the extension of credit facilities. The majority of the standby letters of credit are to corporations, have variable rates that range from 2.5% to 6.5% and mature through 2013.

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

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

Upon the cancellation of a service contract and the completion of the billing process to the counterparties for amounts due to Mepco, there is a decrease in the amount of “payment plan receivables” and an increase in the amount of “vehicle service contract counterparty receivables” until such time as the amount due from the counterparty is collected. These amounts represent funds actually due to Mepco from its counterparties for cancelled service contracts. At December 31, 2011, the aggregate amount of such obligations owing to Mepco by counterparties, net of write-downs and reserves made through the recognition of vehicle service contract counterparty contingencies expense, totaled $29.3 million. This compares to a balance of $37.3 million at December 31, 2010. Mepco is currently in the process of working to recover these receivables, including through liquidation of collateral, claims against the bankruptcy estate of a counterparty that previously represented a significant portion of Mepco's business, and litigation against counterparties.

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

Payment defaults and voluntary cancellations increased significantly during 2010 and 2009, reflecting both weak economic conditions and adverse publicity impacting the vehicle service contract industry. When counterparties do not honor their contractual obligations to Mepco to repay advanced funds, we recognize estimated losses. Mepco pursues collection (including commencing legal action if necessary) of funds due to it under its various contracts with counterparties. During the third quarter of 2009, we identified a counterparty that was experiencing particularly severe financial difficulties and accrued for estimated potential losses related to that relationship. For 2011, 2010 and 2009 non-interest expenses include $11.0 million, $18.6 million, and $31.2 million, respectively, of charges related to estimated losses for vehicle service contract counterparty contingencies. These charges are being classified in non-interest expense because they are associated with a default or potential default of a contractual obligation under our counterparty contracts as opposed to loss on the administration of the payment plan itself.

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

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

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

An analysis of our vehicle service contract counterparty receivable, net follows:

	2011			2010			2009
	(In thousands)
Balance at beginning of year, net of reserve	$	37,270		$	5,419		$	3,578
Transfers in from payment plan receivables		8,874			77,457			20,831
Reserves established and charge-offs recorded to expense		(11,048	)		(18,633	)		(31,234	)
Transferred to (from) contingency reserves		(1,015	)		(11,110	)		12,244
Cash received		(1,613	)		(15,863	)		-
Collateral received (other real estate and repossessed assets) in partial satisfaction of debt		(3,170	)		-			-
Balance at end of year, net of reserve	$	29,298		$	37,270		$	5,419
Reserve at end of year	$	32,450		$	24,600		$	9,856

An analysis of our vehicle service contract counterparty reserve follows:

	2011			2010			2009
	(In thousands)
Balance at beginning of year	$	25,735		$	22,100		$	-
Additions charged to expense		11,048			18,633			31,234
Charge-offs		(4,213	)		(14,998	)		(9,134	)
Balance at end of year	$	32,570		$	25,735		$	22,100
Reserves recorded in VSC counterparty receivables, net	$	32,450		$	24,600		$	9,856
Reserves recorded in other liabilities		120			1,135			12,244
Total at end of year	$	32,570		$	25,735		$	22,100

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

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

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INTANGIBLE ASSETS

12 Months Ended

Dec. 31, 2011

INTANGIBLE ASSETS [Abstract]

INTANGIBLE ASSETS

NOTE 7 – INTANGIBLE ASSETS

Intangible assets, net of amortization, at December 31 follows:

	2011				2010
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
	(In thousands)
Amortized intangible assets - core deposits	$	31,326	$	23,717	$	31,326	$	22,346

Intangible amortization expense was $1.4 million, $1.3 million and $1.9 million in 2011, 2010 and 2009, respectively.

A summary of estimated core deposit intangible amortization at December 31, 2011, follows:

	(In thousands)
2012	$	1,088
2013		1,078
2014		801
2015		613
2016		613
2017 and thereafter		3,416
Total	$	7,609

During 2009 we recorded a $16.7 million goodwill impairment charge at our Mepco segment. In the fourth quarter of 2009 we updated our goodwill impairment testing (interim tests had also been performed in the prior quarters of 2009). The results of the year end goodwill impairment testing showed that the estimated fair value of our Mepco reporting unit was less than the carrying value of equity. The fair value of Mepco is principally based on estimated future earnings utilizing a discounted cash flow methodology. Mepco recorded a loss in the fourth quarter of 2009. Further, Mepco's largest business counterparty, who accounted for nearly one-half of Mepco's payment plan business, defaulted in its obligations to Mepco and this counterparty was expected to cease operations in 2010 (which it did). These factors adversely impacted the level of Mepco's expected future earnings and hence its fair value. This necessitated a step 2 analysis and valuation. Based on the step 2 analysis (which involved determining the fair value of Mepco's assets, liabilities and identifiable intangibles) we concluded that goodwill was impaired, resulting in the $16.7 million charge. As a result of this charge, goodwill had a zero balance at December 31, 2009. In addition, we accelerated the amortization of a customer relationship intangible at Mepco in the amount of $0.1 million. This customer relationship intangible had a zero balance at December 31, 2009.

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OTHER REAL ESTATE OWNED

12 Months Ended

Dec. 31, 2011

OTHER REAL ESTATE OWNED [Abstract]

OTHER REAL ESTATE OWNED

NOTE 5 – OTHER REAL ESTATE OWNED

During 2011 and 2010 we foreclosed on certain loans secured by real estate and transferred approximately $18.6 million and $38.1 million to other real estate in each of those years, respectively. At the time of acquisition amounts were charged-off against the allowance for loan losses to bring the carrying amount of these properties to their estimated fair values, less estimated costs to sell. During 2011 and 2010 we sold other real estate with book balances of approximately $17.7 million and $22.8 million, respectively. Gains or losses on the sale of other real estate are included in non-interest expense on the Consolidated Statements of Operations.

We periodically review our real estate owned properties and establish valuation allowances on these properties if values have declined since the date of acquisition. An analysis of our valuation allowance for other real estate owned follows:

	2011			2010			2009
	(In thousands)
Balance at beginning of year	$	10,876		$	6,498		$	2,363
Additions charged to expense		6,563			6,883			7,108
Direct write-downs upon sale		(2,784	)		(2,505	)		(2,973	)
Balance at end of year	$	14,655		$	10,876		$	6,498

Other real estate and repossessed assets totaling $34.0 million and $39.4 million at December 31, 2011 and 2010, respectively are presented net of valuation allowance.

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PROPERTY AND EQUIPMENT

12 Months Ended

Dec. 31, 2011

PROPERTY AND EQUIPMENT [Abstract]

PROPERTY AND EQUIPMENT

NOTE 6 – PROPERTY AND EQUIPMENT

A summary of property and equipment at December 31 follows:

	2011			2010
	(In thousands)
Land	$	19,250		$	19,367
Buildings		70,168			70,335
Equipment		78,269			76,038
		167,687			165,740
Accumulated depreciation and amortization		(105,139	)		(97,381	)
Property and equipment, net	$	62,548		$	68,359

Depreciation expense was $8.4 million, $8.7 million and $8.7 million in 2011, 2010 and 2009, respectively.

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DEPOSITS

12 Months Ended

Dec. 31, 2011

DEPOSITS [Abstract]

DEPOSITS

NOTE 8 – DEPOSITS

A summary of interest expense on deposits for the years ended December 31 follows:

	2011		2010		2009
	(In thousands)
Savings and interest bearing checking	$	2,263	$	2,829	$	5,751
Time deposits under $100,000		10,349		22,204		25,202
Time deposits of $100,000 or more		2,645		3,131		4,452
Total	$	15,257	$	28,164	$	35,405

Aggregate time deposits in denominations of $100,000 or more amounted to $188.6 million and $166.1 million at December 31, 2011 and 2010, respectively.

A summary of the maturity of time deposits at December 31, 2011, follows:

	(In thousands)
2012	$	357,403
2013		113,918
2014		40,419
2015		28,941
2016		27,342
2017 and thereafter		781
Total	$	568,804

Time deposits acquired through broker relationships totaled $42.3 million and $273.5 million at December 31, 2011 and 2010, respectively.

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MANAGEMENT PLANS

12 Months Ended

Dec. 31, 2011

MANAGEMENT PLANS [Abstract]

MANAGEMENT PLANS

NOTE 26 – MANAGEMENT PLANS

Elevated credit costs, including our provision for loan losses, loan and collection costs, net losses on ORE, and losses related to vehicle service contract counterparty contingencies, have resulted in substantial losses over the past four years and reduced our capital. Management continues to focus on reducing non-performing assets and returning the organization to consistent profitability as soon as possible. Management believes meaningful progress was made on these objectives in 2011 and 2010. Further, as discussed in note 21, we have adopted a Capital Plan, which includes a series of actions designed to increase our regulatory capital ratios, decrease our expenses and enable us to withstand and better respond to current market conditions and the potential for worsening market conditions. At the present time, based on our current forecasts and expectations, we believe that our Bank can remain above “well-capitalized” for regulatory purposes for the foreseeable future, even without additional capital, primarily because of some projected further decline in total assets (principally loans) and anticipated improved performance in 2012. As a result of these expectations with respect to the Bank's regulatory capital ratios, and in light of our improvements in asset quality and other positive indicators, we continue to evaluate our alternatives in connection with the timing and size of any common stock offering. This evaluation will take into account our ongoing operating results, as well as input from our financial advisors and the UST.

A summary of selected quarterly results of operations for the years ended December 31 follows:

	Three Months Ended
	March 31,			June 30,			September 30,			December 31,
	(In thousands, except per share amounts)
2011
Interest income	$	30,718		$	29,127		$	28,187		$	26,730
Net interest income		24,450			23,384			23,774			22,961
Provision for loan losses		10,702			4,156			6,171			6,917
Loss before income tax		(7,409	)		(221	)		(4,604	)		(8,178	)
Net income (loss)		(7,401	)		37			(4,122	)		(8,714	)
Net loss applicable to common stock		(8,409	)		(1,014	)		(5,165	)		(9,769	)
Loss per common share
Basic		(1.06	)		(0.12	)		(0.61	)		(1.15	)
Diluted		(1.06	)		(0.12	)		(0.61	)		(1.15	)
2010
Interest income	$	41,244		$	38,492		$	35,687		$	33,428
Net interest income		30,031			28,571			26,985			26,066
Provision for loan losses		17,014			12,680			9,543			7,528
Income (loss) before income tax		(14,101	)		8,040			(7,588	)		(4,650	)
Net income (loss)		(13,837	)		7,884			(6,610	)		(4,146	)
Net income (loss) applicable to common stock		(14,914	)		6,771			(7,719	)		(4,942	)
Income (loss) per common share
Basic		(6.21	)		2.37			(1.03	)		(0.65	)
Diluted		(6.21	)		0.44			(1.03	)		(0.65	)

During the fourth quarter of 2011, we recognized a $6.0 million expense for vehicle service contract counterparty contingencies expense (see notes #11 and #20). During the second quarter of 2010, we recognized a gain on extinguishment of debt of $18.1 million (see note #10). During the fourth quarter of 2010, we recognized losses on other real estate of $4.8 million (see note #5) and recognized a recovery on our capitalized mortgage loan servicing rights of $2.7 million (see note #4).

QUARTERLY SUMMARY

	Reported Sale Prices of Common Shares
	2011						2010						Cash Dividends Declared
	High		Low		Close		High		Low		Close		2011		2010
First quarter	$	4.75	$	1.28	$	3.20	$	12.00	$	6.43	$	7.00	$	-	$	-
Second quarter		3.84		1.69		2.03		20.80		3.40		3.79		-		-
Third quarter		2.87		1.75		1.92		4.20		1.38		1.39		-		-
Fourth quarter		1.98		1.25		1.33		2.06		1.00		1.30		-		-

We have approximately 2,300 holders of record of our common stock. Our common stock trades on the Nasdaq Global Select Market System under the symbol “IBCP.” The prices shown above are supplied by Nasdaq and reflect the inter-dealer prices and may not include retail markups, markdowns or commissions. There may have been transactions or quotations at higher or lower prices of which we are not aware.

In addition to the provisions of the Michigan Business Corporation Act, our ability to pay dividends is limited by our ability to obtain funds from our Bank and by regulatory capital guidelines applicable to us (see note #21).

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INCOME TAX

12 Months Ended

Dec. 31, 2011

INCOME TAX [Abstract]

INCOME TAX

NOTE 13 – INCOME TAX

The composition of income tax expense (benefit) for the years ended December 31 follows:

	2011			2010			2009
	(In thousands)
Current	$	(413	)	$	(57	)	$	(5,356	)
Deferred		(646	)		(1,533	)		(4,504	)
Establishment of valuation allowance		847			-			6,650
Income tax benefit	$	(212	)	$	(1,590	)	$	(3,210	)

The deferred income tax benefit of $0.6 million, $1.5 million and $4.5 million during 2011, 2010 and 2009 is primarily attributed to the affects of pretax other comprehensive income (loss).

A reconciliation of income tax benefit to the amount computed by applying the statutory federal income tax rate of 35% in each year presented to loss before income tax for the years ended December 31 follows:

	2011			2010			2009
	(In thousands)
Statutory rate applied to loss before income tax	$	(7,144	)	$	(6,405	)	$	(32,703	)
Net change in valuation allowance		9,369			5,672			23,999
Bank owned life insurance		(657	)		(671	)		(565	)
Tax-exempt income		(521	)		(800	)		(1,455	)
U.S. Treasury warrant		(398	)		(138	)		-
Non-deductible meals, entertainment and memberships		50			36			86
Trust preferred securities exchange costs		-			352			-
Goodwill impairment		-			-			5,857
Dividends paid to Employee Stock Ownership Plan		-			-			(28	)
Other, net		(911	)		364			1,599
Income tax benefit	$	(212	)	$	(1,590	)	$	(3,210	)

Generally, the amount of income tax expense or benefit allocated to operations is determined without regard to the tax effects of other categories of income or loss, such as other comprehensive income (loss). However, an exception to the general rule is provided when, in the presence of a valuation allowance against deferred tax assets, there is a pretax loss from operations and pretax income from other categories in the current year. In such instances, income from other categories must offset the current loss from operations, the tax benefit of such offset being reflected in operations. In 2011, 2010 and 2009, pretax other comprehensive income of $1.8 million, $3.9 million and $11.6 million, respectively, reduced our valuation allowance and resulted in a benefit of $0.6 million, $1.4 million and $4.1 million being allocated to the loss from operations.

We assess the need for a valuation allowance against our deferred tax assets periodically. The realization of deferred tax assets is largely dependent upon future taxable income, future reversals of existing taxable temporary differences and ability to carry-back losses to available tax years. In assessing the need for a valuation allowance, we consider all positive and negative evidence, including anticipated operating results, taxable income in carry-back years, scheduled reversals of deferred tax liabilities and tax planning strategies. In 2008, we established a valuation allowance against the majority of our net deferred tax assets due to a number of factors, including our declining operating performance, overall negative trends in the banking industry and our expectation that our operating results would continue to be negatively affected by the overall economic environment. During 2011, 2010 and 2009, we concluded that we needed to continue to carry a valuation allowance based on similar factors. As a result we recorded an additional valuation allowance of $9.4 million, $5.7 million and $24.0 million during 2011, 2010 and 2009, respectively. This resulted in a valuation allowance against our entire net deferred tax asset except for, in 2010 and 2009, certain state deferred tax assets at Mepco that were expected to be recovered based on Mepco's individual earnings. However, at December 31, 2011, due to a second year of losses at Mepco and remaining uncertainty regarding certain vehicle service contract counterparty receivables, we concluded that a valuation allowance against $0.8 million of Mepco's deferred state tax assets was also needed. The valuation allowance against our deferred tax assets of $75.2 million at December 31, 2011 may be reversed to income in future periods to the extent that the related deferred income tax assets are realized or the valuation allowance is otherwise no longer required. This valuation allowance represents our entire net deferred tax assets.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31 follow:

	2011			2010
	(In thousands)
Deferred tax assets
Loss carryforwards	$	25,686		$	19,049
Allowance for loan losses		20,616			23,783
Vehicle service contract counterparty contingency reserve		12,377			9,779
Valuation allowance on other real estate owned		5,129			3,814
Purchase premiums, net		4,416			4,847
Fixed assets		3,109			2,774
Alternative minimum tax credit carry forward		2,577			2,577
Unrealized loss on securities available for sale		1,252			1,584
Share based payments		1,006			674
Unrealized loss on trading securities		603			619
Mepco claims expense		546			546
Unrealized loss on derivative financial instruments		539			853
Loss reimbursement on sold loans reserve		524			-
Deferred compensation		482			709
Reserve for unfunded lending commitments		450			463
Non accrual loan interest income		443			524
Other than temporary impairment charge on securities available for sale		427			249
Other		112			-
Gross deferred tax assets		80,294			72,844
Valuation allowance		(75,199	)		(65,830	)
Total net deferred tax assets		5,095			7,014
Deferred tax liabilities
Mortgage servicing rights		3,930			5,131
Unrealized gain on loans held for sale		491			-
Deferred loan fees		356			283
Federal Home Loan Bank stock		318			401
Other		-			352
Gross deferred tax liabilities		5,095			6,167
Net deferred tax assets	$	-		$	847

At December 31, 2011, we had $0.5 million federal capital loss carryfowards that expire in 2014 and federal net operating loss (“NOL”) carryforwards of approximately $74.6 million which, if not used against taxable income, will expire as follows:

	(In thousands)
2017	$	3,437
2018		189
2022		194
2023		359
2029		25,467
2030		26,254
2031		18,656
Total	$	74,556

The use of $4.2 million NOL carryforward in the total above, which was acquired through the acquisitions of two financial institutions is limited to $3.3 million per year as the result of a change in control as defined in the Internal Revenue Code.

Changes in unrecognized tax benefits for the year ended December 31, follows:

	2011			2010			2009
	(In thousands)
Balance at beginning of year	$	2,393		$	1,981		$	1,736
Additions based on tax positions related to the current year		23			445			443
Reductions due to the statute of limitations		(277	)		(33	)		(198	)
Balance at end of year	$	2,139		$	2,393		$	1,981

If recognized, the entire amount of unrecognized tax benefits, net of $0.5 million federal tax on state benefits, would affect our effective tax rate. We do not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. No amounts were expensed for interest and penalties for the years ended December 31, 2011, 2010 and 2009. No amounts were accrued for interest and penalties at December 31, 2011, 2010 or 2009. At December 31, 2011, U.S. Federal tax years 2008 through the present remain open to examination. Federal examinations of our 2008 and 2009 tax years were settled resulting in no material impact to our consolidated financial statements.

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OTHER NON-INTEREST EXPENSES

12 Months Ended

Dec. 31, 2011

OTHER NON-INTEREST EXPENSES [Abstract]

OTHER NON-INTEREST EXPENSES

NOTE 18 – OTHER NON-INTEREST EXPENSES

Other non-interest expenses for the years ended December 31 follow:

	2011		2010		2009
	(In thousands)
Supplies	$	1,571	$	1,630	$	1,835
Amortization of intangible assets		1,371		1,280		1,930
Other		5,651		6,367		5,655
Total other non-interest expense	$	8,593	$	9,277	$	9,420

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (USD $) In Thousands, unless otherwise specified	Preferred Stock [Member]	Common Stock [Member]	Capital Surplus [Member]	Accumulated Deficit [Member]	Accumulated Other Comprehensive Loss [Member]	Total
Balances at Dec. 31, 2008	$ 68,456	$ 2,279	$ 221,199	$ (73,849)	$ (23,208)	$ 194,877
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net loss	0	0	0	(90,227)	0	(90,227)
Retirement of Series A preferred stock						0
Common, declared	0	0	0	(721)	0	(721)
Dividends on Preferred	0	0	0	(3,600)	0	(3,600)
Issuance of common stock	0	103	1,091	0	0	1,194
Share based compensation	0	6	803	0	0	809
Repurchase and retirement of common stock	0	(2)	2	0	0	0
Accretion of preferred stock discount	701	0	0	(701)	0	0
Net change in accumulated other comprehensive income (loss), net of related tax effect	0	0	0	0	7,529	7,529
Balances at Dec. 31, 2009	69,157	2,386	223,095	(169,098)	(15,679)	109,861
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net loss	0	0	0	(16,709)	0	(16,709)
Reclassification upon removal of par value on common stock	0	223,095	(223,095)	0	0	0
Dividends on Preferred	2,658	0	0	(3,734)	0	(1,076)
Retirement of Series A preferred stock	(69,364)	0	0	0	0	(69,364)
Retirement of common stock warrants	0	(3,579)	0	0	0	(3,579)
Issuance of Series B preferred stock	72,888	0	0	0	0	72,888
Issuance of common stock	0	23,963	0	0	0	23,963
Share based compensation	0	542	0	0	0	542
Accretion of preferred stock discount	361	0	0	(361)	0	0
Net change in accumulated other comprehensive income (loss), net of related tax effect	0	0	0	0	2,559	2,559
Balances at Dec. 31, 2010	75,700	246,407	0	(189,902)	(13,120)	119,085
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net loss	0	0	0	(20,200)	0	(20,200)
Dividends on Preferred	3,939	0	0	(3,939)	0	0
Retirement of Series A preferred stock						0
Retirement of common stock warrants						0
Issuance of common stock	0	1,335	0	0	0	1,335
Share based compensation	0	1,208	0	0	0	1,208
Accretion of preferred stock discount	218	0	0	(218)	0	0
Net change in accumulated other comprehensive income (loss), net of related tax effect	0	0	0	0	1,199	1,199
Balances at Dec. 31, 2011	$ 79,857	$ 248,950	$ 0	$ (214,259)	$ (11,921)	$ 102,627

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RESTRICTIONS ON CASH AND DUE FROM BANKS

12 Months Ended

Dec. 31, 2011

RESTRICTIONS ON CASH AND DUE FROM BANKS [Abstract]

RESTRICTIONS ON CASH AND DUE FROM BANKS

NOTE 2 – RESTRICTIONS ON CASH AND DUE FROM BANKS

Our Bank is required to maintain reserve balances in the form of vault cash and non-interest earning balances with the FRB. The average reserve balances to be maintained during 2011 and 2010 were $23.9 million and $22.6 million respectively. We do not maintain compensating balances with correspondent banks. We are also required to maintain reserve balances related to our Visa debit card operations and merchant payment processing operations. These balances are held at unrelated financial institutions and totaled $2.1 million and $1.6 million at December 31, 2011 and 2010, respectively.

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LEASES

12 Months Ended

Dec. 31, 2011

LEASES [Abstract]

LEASES

NOTE 19 – LEASES

We have non-cancelable operating leases for certain office facilities, some of which include renewal options and escalation clauses.

A summary of future minimum lease payments under non-cancelable operating leases at December 31, 2011, follows:

	(In thousands)
2012	$	1,310
2013		1,185
2014		1,018
2015		953
2016		923
2017 and thereafter		3,419
Total	$	8,808

Rental expense on operating leases totaled $1.4 million, $1.3 million and $1.2 million in 2011, 2010 and 2009, respectively.

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SHAREHOLDERS' EQUITY AND EARNINGS PER COMMON SHARE

12 Months Ended

Dec. 31, 2011

SHAREHOLDERS' EQUITY AND EARNINGS PER COMMON SHARE [Abstract]

SHAREHOLDERS' EQUITY AND EARNINGS PER COMMON SHARE

NOTE 12 – SHAREHOLDERS' EQUITY AND LOSS PER COMMON SHARE

On January 29, 2010, we held a special shareholders' meeting at which our shareholders approved an amendment to our Articles of Incorporation to increase the number of shares of common stock we are authorized to issue from 60 million to 500 million. They also approved the issuance of our common stock in exchange for certain of our trust preferred securities and in exchange for the shares of our preferred stock held by the U.S. Department of the Treasury (“UST”).

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

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

With the exception of being convertible into shares of our common stock, the terms of the Series B Preferred Stock are substantially similar to the terms of the Series A Preferred Stock that was exchanged. The Series B Preferred Stock qualifies as Tier 1 regulatory capital and pays cumulative dividends quarterly at a rate of 5% per annum through February 14, 2014, and at a rate of 9% per annum thereafter. The Series B Preferred Stock is non-voting, other than class voting rights on certain matters that could adversely affect the Series B Preferred Stock. If dividends on the Series B Preferred Stock have not been paid for an aggregate of six quarterly dividend periods or more, whether consecutive or not, the holders of the Series B Preferred Stock, voting together with holders of any then outstanding voting parity stock, have the right to elect two additional directors at our next annual meeting of shareholders or at a special meeting of shareholders called for that purpose. These directors would be elected annually and serve until all accrued and unpaid dividends on the Series B Preferred Stock have been paid. Beginning in December of 2009, we suspended payment of quarterly dividends. The cash dividends payable to the UST amount to approximately $4.0 million per year until December of 2013, at which time they would increase to approximately $7.2 million per year. Accrued and unpaid dividends were $6.6 million at December 31, 2011. Because we have deferred dividends on the Series B Preferred Stock for at least six quarterly dividend periods, the UST currently has the right to elect two directors to our board. At this time, in lieu of electing such directors, the UST requested us to allow (and we have allowed) an observer to attend our Board of Directors meetings beginning in the third quarter of 2011. The UST continues to retain the right to elect two directors as described above.

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

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

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

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

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

If converted by the holder or by us pursuant to either of the above-described conversion rights, each share of Series B Preferred Stock (liquidation amount of $1,000 per share) will convert into a number of shares of our common stock equal to a fraction, the numerator of which is $750 and the denominator of which is $7.234, which was the market price of our common stock at the time the exchange agreement was signed (as such market price was determined pursuant to the terms of the Series B Preferred Stock), referred to as the “conversion rate.” This conversion rate is subject to certain anti-dilution adjustments that may result in a greater number of shares being issued to the holder of the Series B Preferred Stock. If converted by the holder or by us pursuant to either of the above-described conversion rights, as of December 31, 2011, the Series B Preferred Stock and accrued and unpaid dividends would have been convertible into approximately 12.7 million shares of our common stock.

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

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

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

The Series B Preferred Stock may be redeemed by us, subject to the approval of the Board of Governors of the Federal Reserve System, at any time, in an amount up to the cash proceeds (minimum of approximately $18.6 million) from qualifying equity offerings of common stock (plus any net increase to our retained earnings after the original issue date). If the Series B Preferred Stock is redeemed prior to the first dividend payment date falling on or after the second anniversary of the original issue date, the redemption price will be equal to the $1,000 liquidation amount per share plus any accrued and unpaid dividends. If the Series B Preferred Stock is redeemed on or after such date, the redemption price will be the greater of (a) the $1,000 liquidation amount per share plus any accrued and unpaid dividends and (b) the product of the applicable Conversion Rate (as described above) and the average of the market prices per share of our common stock (as such market price is determined pursuant to the terms of the Series B Preferred Stock) over a 20 trading day period beginning on the trading day immediately after we give notice of redemption to the holder (plus any accrued and unpaid dividends). In any redemption, we must redeem at least 25% of the number of Series B Preferred Stock shares originally issued to the UST, unless fewer of such shares are then outstanding (in which case all of the Series B Preferred Stock must be redeemed).

Effective as of April 9, 2010, we amended our articles of incorporation to delete any reference to par value with respect to our common stock, which previously had a par value of $1.00 per share. The amendment was approved by our Board on April 6, 2010, pursuant to the authority granted it under Sections 301a and 611(2) of the Michigan Business Corporation Act. As a result, we reclassified all amounts in capital surplus to common stock on our Consolidated Statements of Financial Condition.

On July 7, 2010 we executed an Investment Agreement and Registration Rights Agreement with Dutchess Opportunity Fund, II, LP (“Dutchess”) for the sale of up to 1.50 million shares of our common stock. These agreements serve to establish an equity line facility as a contingent source of liquidity at the parent company level. Pursuant to the Investment Agreement, Dutchess committed to purchase up to $15.0 million of our common stock over a 36-month period ending November 1, 2013. We have the right, but no obligation, to draw on this equity line facility from time to time during such 36-month period by selling shares of our common stock to Dutchess. The sales price would be at a 5% discount to the market price of our common stock at the time of the draw; as such market price is determined pursuant to the terms of the Investment Agreement. Through December 31, 2011, 0.78 million shares of our common stock were sold to Dutchess pursuant to the Investment Agreement (0.43 million shares during 2011 and 0.35 million shares during the fourth quarter of 2010) for an aggregate purchase price of $1.8 million. In order to comply with Nasdaq rules, we needed shareholder approval to sell more than approximately 0.7 million more shares to Dutchess pursuant to the Investment Agreement. In April 2011, our shareholders approved a resolution at our Annual Meeting to authorize us to sell up to 2.5 million additional shares under this equity line, so we now have additional flexibility to take advantage of this contingent source of liquidity. Remaining shares approved to sell pursuant to the Investment Agreement totaled 3.2 million shares at December 31, 2011. Based on our closing stock price on December 31, 2011, additional funds available under the Investment Agreement totaled approximately $4.1 million at December 31, 2011.

On April 27, 2010, at our annual meeting of shareholders, our shareholders approved an amendment to our Articles of Incorporation that allowed us to affect a 1-for-10 reverse stock split. We affected this reverse stock split on August 31, 2010. All common share and per share amounts have been adjusted to reflect the reverse stock split.

A reconciliation of basic and diluted earnings (loss) per share for the years ended December 31 follows:

	2011			2010			2009
	(In thousands, except per share amounts)
Net loss	$	(20,200	)	$	(16,709	)	$	(90,227	)
Preferred dividends		4,157			4,095			4,301
Net loss applicable to common stock	$	(24,357	)	$	(20,804	)	$	(94,528	)
Weighted average shares outstanding for calculation of basic loss per share		8,277			5,090			2,387
Effect of convertible preferred stock		61,281			36,371			-
Restricted stock units		122			-			-
Stock units for deferred compensation plan for non-employee directors		7			7			7
Effect of stock options		-			-			-
Weighted average shares outstanding for calculation of diluted loss per share		69,687			41,468			2,394
Net loss per common share
Basic	$	(2.94	)	$	(4.09	)	$	(39.60	)
Diluted (1)	$	(2.94	)	$	(4.09	)	$	(39.60	)

(1) For any period in which a loss is recorded, the assumed conversion of convertible preferred stock, assumed exercise of common stock warrants, assumed exercise of stock options, restricted stock units and stock units for a deferred compensation plan for non-employee directors would have an anti-dilutive impact on the loss per share and thus are ignored in the diluted per share calculation.

Weighted average stock options outstanding that were not considered in computing diluted earnings (loss) per share because they were anti-dilutive totaled 0.1 million, 0.1 million and 0.1 million for 2011, 2010 and 2009, respectively. The warrant to purchase 346,154 shares of our common stock was also not considered in computing the diluted loss per share in 2011, 2010 and 2009 as it was anti-dilutive.