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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2004

Commission file number 0-7818

INDEPENDENT BANK CORPORATION
(Exact name of registrant as specified in its charter)

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

(616) 527-9450
(Registrant’s telephone number, including area code)

NONE
Former name, address and fiscal year, if changed since last report.

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

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes X No___

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

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES

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

Part I
Item 1.

INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition

See notes to interim consolidated financial statements

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INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations

See notes to interim consolidated financial statements

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INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows

See notes to interim consolidated financial statements

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INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity

See notes to interim consolidated financial statements.

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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.     In our opinion, the accompanying unaudited consolidated financial statements contain all the adjustments necessary to present fairly our consolidated financial condition as of March 31, 2004 and December 31, 2003, and the results of operations for the three-month periods ended March 31, 2004 and 2003. Certain reclassifications have been made in the prior year financial statements to conform to the current year presentation. Our critical accounting policies include accounting for the allowance for loan losses, the valuation of derivative financial instruments, the valuation of originated mortgage servicing rights, the valuation of deferred tax assets and the valuation of goodwill. Refer to our 2003 Annual Report on Form 10-K for a disclosure of our accounting policies.

2.     Our assessment of the allowance for loan losses is based on an evaluation of the loan portfolio, recent loss experience, current economic conditions and other pertinent factors. Loans on non-accrual status, past due more than 90 days, or restructured amounted to $10.7 million at March 31, 2004, and $12.7 million at December 31, 2003. (See Management’s Discussion and Analysis of Financial Condition and Results of Operations).

3.     The provision for income taxes represents federal and state income tax expense calculated using annualized rates on taxable income generated during the respective periods.

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

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

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

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

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

As of or for the three months ended March 31,

(1)     Includes items relating to the Registrant and certain insignificant operations.

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

    ⁽¹⁾        Shares outstanding have been adjusted for a 10% stock dividend in 2003.

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

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

We have established management objectives and strategies that include interest-rate risk parameters for maximum fluctuations in net interest income and market value of portfolio equity. We monitor our interest rate risk position via simulation modeling reports (See “Asset/liability management”). The goal of our asset/liability management efforts is to maintain profitable financial leverage within established risk parameters.

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

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

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

We record the fair value of Cash Flow Hedges in accrued expenses and other liabilities. On an ongoing basis, we adjust our balance sheet to reflect the then current fair value of Cash Flow Hedges. The related gains or losses are reported in other comprehensive income and are subsequently reclassified into earnings, as a yield adjustment in the same period in which the related interest on the hedged items (primarily variable-rate debt obligations) affect earnings. It is anticipated that approximately $2.1 million, net of tax, of unrealized losses on Cash Flow Hedges at March 31, 2004 will be reclassified to earnings over the next twelve months. To the extent that the Cash Flow Hedges are not effective, the ineffective portion of the Cash Flow Hedges are immediately recognized as interest expense. The maximum term of any Cash Flow Hedge at March 31, 2004 is 5.3 years.

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

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

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

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

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

The impact of SFAS #133 on net income and other comprehensive income for the three-month periods ended March 31, 2004 and 2003 is as follows:

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

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

Intangible assets, net of amortization, were comprised of the following at March 31, 2004 and December 31, 2003:

Based on our review of goodwill recorded on the Statement of Financial Condition, no impairment existed as of March 31, 2004.

Amortization of intangibles, primarily amortization of core deposit intangibles, has been estimated through 2009 and thereafter in the following table, and does not take into consideration any potential future acquisitions or branch purchases.

Changes in the carrying amount of goodwill by reporting segment for the three months ended March 31, 2004 were as follows:

⁽¹⁾Includes items relating to the Registrant and certain insignificant operations.

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

9.     We maintain stock option plans for our non-employee directors as well as certain of our officers and those of our Banks and their subsidiaries. Options that were granted under these plans are exercisable not earlier than six months after the date of grant, at a price equal to the fair market value of the common stock on the date of grant, and expire not more than ten years after the date of grant.

The following table summarizes the impact on our net income had compensation cost included the fair value of options at the grant date:

10.   On April 15, 2003, we completed the acquisition of Mepco Insurance Premium Financing, Inc. with the purpose of adding a high margin business with good growth prospects and to take advantage of our relatively lower cost of funds and greater access to capital. Mepco is a 40-year old Chicago-based company that specializes in financing insurance premiums for businesses and extended automobile warranties for consumers. As a result of the closing of this transaction we issued 272,439 shares of common stock and paid out $5.0 million in cash on April 15, 2003as the initial consideration. Under the terms of the agreement and plan of merger additional consideration may be paid in the future primarily pursuant to a five-year earn out. During the first quarter of 2004, Mepco recorded approximately $4.3 million in interest income and fees on loans, $0.5 million in interest expense, a $0.2 million provision for credit losses, $0.1 million in non-interest income, $2.0 million in non-interest expense, $1.7 million in income before income taxes and $1.0 million in net income. At March 31, 2004 Mepco had total assets of $193.7 million, including finance receivables of $175.8 million. We recorded purchase accounting adjustments related to the Mepco acquisition including recording goodwill of $9.4 million, establishing a customer relationship intangible of $2.6 million, a covenant not to compete of $0.2 million and writing down fixed assets (software in the process of development) by $2.3 million. The customer relationship intangible is being amortized on an accelerated basis over ten years and the covenant not to compete on a straight-line basis over five years. Included in the first quarter of 2004 was $0.2 million for amortization of the customer relationship intangible and the covenant not to compete.

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

The following is a condensed balance sheet of Mepco at our date of acquisition adjusted for updated information related to the fair value of assets acquired and liabilities assumed:

11.     In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” (“FIN #46”) which addresses consolidation by business enterprises of variable interest entities. This Interpretation applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. For enterprises with variable interest entities created before February 1, 2003, this Interpretation applies no later than the beginning of the first interim or annual reporting period ending after December 15, 2003. However, certain disclosure requirements were effective for all financial statements issued after January 31, 2003. The adoption of this Interpretation did not have a material impact on our financial condition or results of operations.

In December 2003, the FASB issued Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” (“FIN 46R”), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FIN 46 discussed in the previous paragraph. Under the general transition provisions of FIN 46R all public entities are required to fully implement FIN 46R no later than the end of the first reporting period ending after March 15, 2004. The adoption of FIN 46R during the quarter ended March 31, 2004 did not have a material impact on our financial condition or results of operations.

In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” (“SFAS #149”) which amends SFAS #133 to clarify the definition of a derivative and expand the nature of exemptions from SFAS #133. SFAS #149 also clarifies the application of hedge accounting when using certain instruments and the application of SFAS #133 to embedded derivative instruments. SFAS #149 also modifies the cash flow presentation of derivative instruments that contain financing elements. This Statement is effective for contracts entered into or modified after June 30, 2003, with early adoption encouraged. Adoption of this Statement did not have a material impact on our financial condition or results of operations.

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

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” (“SFAS #150”) which requires issuers of financial instruments to classify as liabilities certain freestanding financial instruments that embody obligations for the issuer. SFAS #150 was effective for all freestanding financial instruments entered into or modified after May 31, 2003 and was otherwise effective at the beginning of the first interim period beginning after June 15, 2003. On October 29, 2003, the FASB voted to defer for an indefinite period the application of the guidance in SFAS #150, to non-controlling interests that are classified as equity in the financial statements of a subsidiary but would be classified as a liability on the parent’s financial statements. The adoption of the sections of this Statement that have not been deferred did not have a significant impact on our financial condition or results of operations. The section noted above that has been deferred indefinitely is not expected to have a material impact on our financial condition or results of operations.

In March 2004, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments,” (“SAB #105”) which provides guidance about the measurement of loan commitments required to be accounted for as derivative instruments and recognized at fair value under SFAS #133. SAB #105 also requires companies to disclose their accounting policy for those loan commitments including methods and assumptions used to estimate fair value and associated hedging strategies. SAB #105 is effective for all loan commitments accounted for as derivatives that are entered into after March 31, 2004. Our current policies are consistent with the guidance issued in SAB #105.

In December 2003, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) 03-03, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer”. This SOP addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. It includes loans acquired in purchase business combinations. This SOP does not apply to loans originated by us and is effective for loans acquired in fiscal years beginning after December 15, 2004. This SOP is not expected to have a material impact on our financial condition or results of operations.

12.     The results of operations for the three-periods ended March 31, 2004, are not necessarily indicative of the results to be expected for the full year.

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following section presents additional information that may be necessary to assess our financial condition and results of operations. This section should be read in conjunction with our consolidated financial statements contained elsewhere in this report as well as our 2003 Annual Report on Form 10-K.

FINANCIAL CONDITION

Summary Our total assets increased by $54.1 million during the first three months of 2004. Loans, excluding loans held for sale (“Portfolio Loans”), totaled $1.704 billion at March 31, 2004, an increase of $36.6 million from December 31, 2003. This was primarily due to an increase in commercial loans, real estate mortgage loans and finance receivables that was partially offset by a decline in installment loans. (See “Portfolio loans and asset quality.”) Loans held for sale increased by $21.1 million, as the volume of new originations of such loans exceeded loan sales in the first quarter of 2004.

Deposits totaled $1.712 billion at March 31, 2004, compared to $1.703 billion at December 31, 2003. The $9.4 million increase in total deposits during the period principally reflects an increase in non-interest bearing, savings and NOW deposit accounts partially offset by a decline in time deposits. Other borrowings totaled $358.1 million at March 31, 2004, an increase of $26.2 million from December 31, 2003. This was primarily attributable to funding growth in loans held for sale.

Securities We maintain diversified securities portfolios, which may include obligations of the U.S. Treasury and government-sponsored agencies as well as securities issued by states and political subdivisions, corporate securities, mortgage-backed securities and asset-backed securities. We also invest in capital securities, which include preferred stocks and trust preferred securities. We regularly evaluate asset/liability management needs and attempt to maintain a portfolio structure that provides sufficient liquidity and cash flow. We believe that the unrealized losses on securities available for sale are temporary in nature and due primarily to changes in interest rates and not a result of credit related issues. We also believe that we have the ability to hold securities with unrealized losses to maturity or until such time as the unrealized losses reverse. (See “Asset/liability management.”)

Securities

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Securities available for sale remained relatively unchanged during the first quarter of 2004 as a decline in amortized cost associated with the sale of some corporate securities was offset by an increase in net unrealized gains. Generally we cannot earn the same interest-rate spread on securities as we can on loans. As a result, offsetting slow loan growth with purchases of securities will tend to erode some of our profitability measures including our return on assets.

At March 31, 2004 and December 31, 2003 we had $27.9 million and $33.1 million, respectively, of asset-backed securities included in securities available for sale. Approximately 83% of our asset-backed securities at March 31, 2004 are backed by mobile home loans (compared to 86% at December 31, 2003). All of our asset-backed securities are rated as investment grade (by the major rating agencies) except for one mobile home loan asset-backed security with a balance of $3.1 million at March 31, 2004. With respect to this particular security, it had a split rating at March 31, 2004 (an above investment grade rating by one rating agency and a below investment grade rating by a different rating agency). We do not foresee, at the present time, any risk of loss (related to credit issues) on our asset-backed securities.

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

Portfolio Loans and asset quality We believe that our decentralized loan origination structure provides important advantages in serving the credit needs of our principal lending markets. In addition to the communities served by our bank branch networks, principal lending markets include nearby communities and metropolitan areas. Subject to established underwriting criteria, we also participate in commercial lending transactions with certain non-affiliated banks and may also purchase real estate mortgage loans from third-party originators.

Our April 2003 acquisition of Mepco added the financing of insurance premiums and extended automobile warranties to our lending activities. These are new lines of business for us and expose us to new risks. Mepco conducts its lending activities across the United States although its insurance premium financing business is presently concentrated in California and Illinois. Mepco generally does not evaluate the creditworthiness of the individual borrower but instead primarily relies on the loan collateral (the unearned insurance premium or automobile warranty contract) in the event of default. As a result, we have established and monitor insurance carrier concentration limits in order to manage our collateral exposure. The insurance carrier concentration limits are primarily based on the insurance company’s AM Best rating and statutory surplus level. Mepco also has established procedures for loan servicing and collections, including the timely cancellation of the insurance policy or automobile warranty contract in order to protect our collateral position in the event of default. Mepco also has established procedures to attempt to prevent and detect fraud since the loan origination activities and initial borrower

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contact is entirely done through unrelated third parties (primarily insurance agents and automobile warranty administrators or automobile dealerships). There can be no assurance that the aforementioned risk management policies and procedures will prevent us from the possibility of incurring significant credit or fraud related losses in this business segment.

Although the management and board of directors of each of our banks retain authority and responsibility for credit decisions, we have adopted uniform underwriting standards. Further, our loan committee structure as well as the centralization of commercial loan credit services and the loan review process, provides requisite controls and promotes compliance with such established underwriting standards. Such centralized functions also facilitate compliance with consumer protection laws and regulations.

We generally retain loans that may be profitably funded within established risk parameters. (See “Asset/liability management.”) As a result, we may hold adjustable-rate and balloon real estate mortgage loans as Portfolio Loans, while 15- and 30-year, fixed-rate obligations are generally sold to mitigate exposure to changes in interest rates. (See “Non-interest income.”) During the first three months of 2004 our balance of real estate mortgage loans increased by $5.1 million. Because of the relatively low interest rate environment over the past few years, borrowers have more often sought longer-term fixed rate mortgage loans. If borrowers continue to prefer longer-term fixed rate mortgage loans (which we generally sell as described above), we believe it may be difficult to appreciably grow our real estate mortgage loan portfolio in the foreseeable future.

The $6.1 million increase in commercial loans during the three months ended March 31, 2004, principally reflects our emphasis on lending opportunities within this category of loans and an increase in commercial lending staff. Loans secured by real estate comprise the majority of new commercial loans.

The $175.8 million of finance receivables at March 31, 2004 are comprised principally of loans to businesses to finance insurance premiums and loans to individuals to finance extended automobile warranties. The finance receivables are a result of our acquisition of Mepco. The growth in this category of loans is primarily due to the geographic expansion of Mepco’s lending activities, particularly in the northeastern United States and the addition of sales staff to call on insurance agencies.

Future growth of overall Portfolio Loans is dependent upon a number of competitive and economic factors. Declines in Portfolio Loans or competition leading to lower relative pricing on new Portfolio Loans could adversely impact our future operating results. We continue to view loan growth consistent with prevailing quality standards as a major short and long-term challenge.

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Non-performing assets

The decrease in the overall level of non-performing loans in the first quarter of 2004 is primarily due to the receipt of a $1.5 million initial claim on a commercial real estate loan that is presently in foreclosure and that is guaranteed under a federal program through the United States Department of Agriculture (this reduced the balance on this credit from $2.3 million at December 31, 2003 to approximately $0.9 million at March 31, 2004). The balance of the decrease in non-performing loans was principally due to declines in real estate mortgage loans and finance receivables due primarily to the collection of or return to performing status of these loans and to a lesser degree (for real estate mortgage loans) due to charge-offs and transfers to other real estate and repossessed assets. Other real estate and repossessed assets totaled $3.7 million and $3.3 million at March 31, 2004 and December 31, 2003, respectively. This increase is primarily a result of a rise in the level of residential homes acquired through foreclosure.

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. The decrease in the level of loans 90 days or more past due and still accruing interest at March 31, 2004 compared to December 31, 2003 is primarily due to the aforementioned decline in the federally guaranteed commercial real estate loan. We believe the collection of the accrued but unpaid interest on non-performing loans categorized as 90 days or more past due and still accruing interest is probable.

The ratio of net charge-offs to average loans was 0.19% on an annualized basis in the first quarter of 2004 compared to 0.17% in the first quarter of 2003. The increase in net charge-offs is primarily due to increased charge-offs in the installment (consumer) and real estate mortgage loan portfolios.

Impaired loans totaled approximately $14.6 million and $7.9 million at March 31, 2004 and 2003, respectively. At those same dates, certain impaired loans with balances of approximately $7.7 million and $5.9 million, respectively had specific allocations of the allowance for loan losses, which totaled approximately $1.5 million and $1.7 million, respectively. Our average investment in impaired loans was approximately $14.0 million and $6.6 million for the three-month periods ended March 31, 2004 and 2003, respectively. Cash receipts on impaired loans on

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non-accrual status are generally applied to the principal balance. Interest recognized on impaired loans during the first quarter of 2004 was approximately $0.14 million compared to $0.06 million in the first quarter of 2003.

Allowance for loan losses

In determining the allowance and the related provision for loan losses, we consider four principal elements: (i) specific allocations based upon probable losses identified during the review of the loan portfolio, (ii) allocations established for other adversely rated loans, (iii) allocations based principally on historical loan loss experience, and (iv) additional allowances based on subjective factors, including local and general economic business factors and trends, portfolio concentrations and changes in the size, mix and/or the general terms of the loan portfolios.

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

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

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

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

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

Allocation of the Allowance for Loan Losses

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

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

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

Other borrowed funds, principally advances from the Federal Home Loan Bank (the “FHLB”) and securities sold under agreements to repurchase (“Repurchase Agreements”), totaled $358.1 million at March 31, 2004, compared to $331.8 million at December 31, 2003. The $26.3 million increase in other borrowed funds principally reflects increases in variable rate FHLB advances and in Repurchase Agreements. These additional borrowings were principally used to fund the growth in loans held for sale.

Derivative financial instruments are employed to manage our exposure to changes in interest rates. (See “Asset/liability management”.) At March 31, 2004, we employed interest-rate swaps

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with an aggregate notional amount of $465.2 million. (See note #7 to interim consolidated financial statements.)

Liquidity and capital resources 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 on developing access to a variety of borrowing sources to supplement our deposit gathering activities and provide funds for growing our investment and loan portfolios.

At March 31, 2004 we had $410.7 million of time deposits that mature in one year or less. Historically, a majority of these maturing time deposits are renewed by our customers. Additionally, $932.7 million of our deposits at March 31, 2004 were in account types from which the customer could withdraw the funds on demand. Changes in the balances of deposits that can be withdrawn upon demand are usually predictable and the total balances of these accounts have generally grown over time as a result of our marketing and promotional activities. However, there can be no assurance that historical patterns of renewing time deposits or overall growth in deposits will continue in the future.

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

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

In March 2003 a special purpose entity, IBC Capital Finance II (the “trust”) issued $1.6 million of common securities to Independent Bank Corporation and $50.6 million of trust preferred securities to the public. Independent Bank Corporation issued $52.2 million of subordinated debentures to the trust in exchange for the proceeds from the public offering. These subordinated debentures represent the sole asset of the trust.

Prior to the first quarter of 2004 the trust was consolidated in our financial statements and the common securities and subordinated debentures were eliminated in consolidation. Under new accounting guidance, FASB Interpretation No. 46, as revised in December 2003 (“FIN 46R”), the trust is no longer consolidated with Independent Bank Corporation. Accordingly, we no longer report the $50.6 million of trust preferred securities issued by the trust as liabilities, but instead report the common securities of $1.6 million held by Independent Bank Corporation in other assets and the $52.2 million of subordinated debentures issued by Independent Bank Corporation in the liability section of our Consolidated Statements of Financial Condition. Amounts reported at December 31, 2003 were reclassified to conform to the current presentation. The effect of no longer consolidating the trust had no impact on our operating results.

In July 2003, the Federal Reserve issued a supervisory letter instructing bank holding companies to continue to include trust preferred securities in Tier 1 capital until notice is given to the contrary. As a result, at March 31, 2004 and December 31, 2003 our outstanding trust preferred securities continued to qualify as Tier 1 capital for regulatory purposes, subject to certain limitations. The Federal Reserve intends to review the regulatory implications of FIN 46R and,

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if warranted, provide further appropriate guidance. There can be no assurance that the Federal Reserve will continue to allow us to include trust preferred securities in Tier 1 capital.

To supplement our balance sheet and capital management activities, we periodically repurchase our common stock. During the first quarter of 2004 we did not purchase any shares of our common stock compared to the purchase of 16,500 shares at an average price of $18.64 per share in the first quarter of 2003. As of March 31, 2004 we had 750,000 shares remaining to be purchased under share repurchase plans previously authorized by our Board of Directors. The reduced level of repurchase activity in the first quarter of 2004 is primarily due to the pending acquisitions of two bank holding companies (See “Acquisitions.”) and our desire to increase our tangible capital ratio prior to the consummation of these acquisitions.

Capitalization

Total shareholders’ equity at March 31, 2004 was up $10.3 million from December 31, 2003, due primarily to the retention of earnings, an increase in accumulated other comprehensive income and the issuance of common stock pursuant to certain compensation plans, partially offset by cash dividends that we declared. Shareholders’ equity totaled $172.5 million, equal to 7.15% of total assets at March 31, 2004. At December 31, 2003, shareholders’ equity totaled $162.2 million, which was equal to 6.87% of assets.

Capital ratios

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.

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

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

RESULTS OF OPERATIONS

Summary Net income totaled $8.4 million during the three months ended March 31, 2004, compared to $8.8 million during the comparable period in 2003. The decline in net income is primarily a result of lower net gains on real estate mortgage loan sales, title insurance fees and real estate mortgage loan servicing fees (due to an increase in the impairment reserve on capitalized mortgage loan servicing rights) as well as an increase in non-interest expenses. Partially offsetting these items were increases in net interest income and service charges on deposit accounts and declines in the provision for loan losses and income tax expense.

Key performance ratios

Net interest income Tax equivalent net interest income totaled $26.7 million during the first quarter of 2004, which represents a $4.7 million or 21.4% increase from the comparable quarter one year earlier. We review yields on certain asset categories and our net interest margin on a fully taxable equivalent basis. This presentation is not in accordance with generally accepted accounting principles (“GAAP”) but is customary in the banking industry. In this non-GAAP presentation, net interest income is adjusted to reflect tax-exempt interest income on an

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equivalent before-tax basis. This measure ensures comparability of net interest income arising from both taxable and tax-exempt sources. The adjustments to determine tax equivalent net interest income were $1.3 million and $1.2 million for the first quarters of 2004 and 2003, respectively, and were computed using a 35% tax rate.

The increase in tax equivalent net interest income primarily reflects a $326.3 million increase in average interest-earning assets as well as a 14 basis point increase in the Company’s tax equivalent net interest income as a percent of average interest-earning assets (the “net interest margin”). The increase in average interest-earning assets is due to the Mepco acquisition, which added $165.3 million in the Company’s average loan balances in the first quarter of 2004, as well as growth in commercial loans, real estate mortgage loans and investment securities. The net interest margin was 4.89% for the first three months of 2004 compared to 4.75% for the same period in 2003. Declining interest rates (through the first half of 2003) and increased levels of lower cost core deposits resulted in a 47 basis point decline in the Company’s interest expense as a percentage of average interest-earning assets during the first quarter of 2004 compared to the first quarter of 2003. This decline was partially offset by a 33 basis point decline in the tax equivalent yield on average interest-earning assets to 6.77% in the first quarter of 2004 from 7.10% in the first quarter of 2003. The decline in tax equivalent yield is primarily due to both the amortization and prepayment of higher yielding loans and investment securities and the addition of new loans and new investment securities at lower interest rates. Without the Mepco acquisition, the decline in the tax equivalent yield on average interest-earning assets would have been greater (63 basis points instead of 33 basis points), as Mepco added $165.3 million in average loans at a weighted average yield of 10.46% during the first quarter of 2004.

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Average Balances and Tax Equivalent Rates