Critical Accounting Policies

Certain of the Corporation’s accounting policies are important to the portrayal of the Corporation’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, without limitation, changes in interest rates, in local and national economic conditions, or the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses, determining the fair value of securities and other financial instruments, the valuation of mortgage servicing rights, determination of purchase accounting adjustments, and estimating state and federal contingent tax liabilities. The Corporation’s significant accounting policies are discussed in detail in Managements Discussion and Analysis on pages 15 through 16 in the Corporation’s annual report to shareholders for the year ended December 31, 2008.

CRITICAL ACCOUNTING POLICIES

Certain of our accounting policies are important to the portrayal of our financial condition since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, without limitation, changes in interest rates, in local and national economic conditions or the financial condition of borrowers. Our significant accounting policies are discussed in detail in Note 1 of the Notes to the Consolidated Financial Statements.

We view critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. We believe that our critical accounting policies include determining the allowance for loan losses, determining the fair value of securities and other financial instruments, including possible impairment of goodwill and other assets, the valuation of mortgage servicing rights, determination of purchase accounting adjustments, and estimating state and federal tax liabilities.

Allowance for Loan Losses The allowance for loan losses is a valuation allowance for probable incurred credit losses. We use a quantitative and qualitative methodology for analyzing factors which impact the allowance for loan losses consistently across our six banking subsidiaries. The process applies risk factors for historical charge-offs and delinquency experience, portfolio segment weightings and industry and regional factors and trends as they affect the banks’ portfolios. The consideration of exposures to industries potentially most affected by current risks in the economic and political environment, and the review of potential risks in certain credits that either are, or are not, considered part of the non-performing loan category contributed to the establishment of the allowance levels at each bank. Loan losses are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed.

15

Loans are reviewed on an ongoing basis for impairment. A loan is impaired when it is probable that we will be unable to collect all amounts due substantially in accordance with the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected cash flows discounted at the loan’s effective interest rate or, as a practical expedient, the fair value of collateral if the loan is collateral dependent. Loans considered to be impaired are reduced to the present value of expected future cash flow or to the fair value of collateral by allocating a portion of the allowance for loan losses to such loans. If these allocations cause an increase in the calculated allowance for loan losses, such increase is reported as provision for loan loss expense. Increases or decreases in carrying value due to changes in estimates of future payments or the passage of time are reported as reductions or increases in the provision for loan losses.

Smaller balance homogeneous loans such as residential first mortgage loans secured by one to four family residences, residential construction, automobile, home equity and second mortgage loans, are collectively evaluated for impairment. Commercial loans and first mortgage loans secured by other properties are evaluated individually for impairment. When credit analysis of the borrower’s operating results and financial condition indicates the underlying ability of the borrower’s business activity is not sufficient to generate adequate cash flow to service the business’ cash needs, including our loans to the borrower, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 90 days or less. Commercial loans are rated on a scale of 1 to 9, with grades 1 to 4 being satisfactory grades, 5 and 6 being special attention or watch, 7 being substandard, 8 being doubtful, and 9 loss. Loans graded 6 through 9 are considered for impairment. Loans are generally moved to nonaccrual status when 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Fair Value of Securities and Other Financial Instruments Securities available for sale consist of bonds and notes which might be sold prior to maturity due to changes in interest rate, prepayment risks, yield and availability of alternative investments, liquidity needs or other factors. Securities classified as available for sale are reported at their fair value. Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers: (1) the length of time and extent that fair value has been less than carrying value; (2) the financial condition and near term prospects of the issuer; and (3) our ability and intent to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.

Market values for securities available for sale are obtained from outside sources and applied to individual securities within the portfolio. The difference between the amortized cost and the current market value of securities is recorded as a valuation adjustment and reported in other comprehensive income.

Valuation of Mortgage Servicing Rights Mortgage servicing rights are recognized as assets for the allocated value of retained servicing rights on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues.

We utilize a discounted cash flow model to determine the value of our servicing rights. The valuation model utilizes mortgage prepayment speeds, the remaining life of the mortgage pool, delinquency rates, our cost to service loans, and other factors to determine the cash flow that we will receive from serving each grouping of loans. These cash flows are then discounted based on current interest rate assumptions to arrive at the fair value of the right to service those loans. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans classified by interest rates. Any impairment of a grouping is reported as a valuation allowance.

Acquisition Intangibles Generally accepted accounting principles require us to determine the fair value of all of the assets and liabilities of an acquired entity, and record their fair value on the date of acquisition. We employ a variety of means in determination of the fair value, including the use of discounted cash flow analysis, market comparisons, and projected future revenue streams. For certain items that we believe we have the appropriate expertise to determine the fair value, we may choose to use our own calculation of the value. In other cases, where the value is not easily determined, we consult with outside parties to determine the fair value of the asset or liability. Once valuations have been adjusted, the net difference between the price paid for the acquired company and the value of its balance sheet is recorded as goodwill.

16

Contingent Tax Liabilities Contingent tax liabilities, primarily Michigan business tax liabilities, are estimated based on our exposures to interpretation of the applicable tax codes. We estimate our contingent tax liabilities by determining the amount of income that may be at risk of an adverse interpretation by taxing authorities on specific issues, multiplied by our effective tax rate, to determine our gross exposure. Once this exposure is determined, an estimate of the probability of an adverse adjustment being required is determined and applied to the gross liability to determine the contingent tax reserve.

CRITICAL ACCOUNTING POLICIES

Certain of our accounting policies are important to the portrayal of our financial condition since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, without limitation, changes in interest rates, in local and national economic conditions or the financial condition of borrowers. Our significant accounting policies are discussed in detail in Note 1 of the Notes to the Consolidated Financial Statements.

We view critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. We believe that our critical accounting policies include determining the allowance for loan losses, determining the fair value of securities and other financial instruments, including possible impairment of goodwill and other assets, the valuation of mortgage servicing rights, determination of purchase accounting adjustments, and estimating state and federal tax liabilities.

Allowance for Loan Losses The allowance for loan losses is a valuation allowance for probable incurred credit losses. We use a quantitative and qualitative methodology for analyzing factors which impact the allowance for loan losses consistently across our six banking subsidiaries. The process applies risk factors for historical charge-offs and delinquency experience, portfolio segment weightings and industry and regional factors and trends as they affect the banks’ portfolios. The consideration of exposures to industries potentially most affected by current risks in the economic and political environment, and the review of potential risks in certain credits that either are, or are not, considered part of the non-performing loan category contributed to the establishment of the allowance levels at each bank. Loan losses are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed.

15

Loans are reviewed on an ongoing basis for impairment. A loan is impaired when it is probable that we will be unable to collect all amounts due substantially in accordance with the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected cash flows discounted at the loan’s effective interest rate or, as a practical expedient, the fair value of collateral if the loan is collateral dependent. Loans considered to be impaired are reduced to the present value of expected future cash flow or to the fair value of collateral by allocating a portion of the allowance for loan losses to such loans. If these allocations cause an increase in the calculated allowance for loan losses, such increase is reported as provision for loan loss expense. Increases or decreases in carrying value due to changes in estimates of future payments or the passage of time are reported as reductions or increases in the provision for loan losses.

Smaller balance homogeneous loans such as residential first mortgage loans secured by one to four family residences, residential construction, automobile, home equity and second mortgage loans, are collectively evaluated for impairment. Commercial loans and first mortgage loans secured by other properties are evaluated individually for impairment. When credit analysis of the borrower’s operating results and financial condition indicates the underlying ability of the borrower’s business activity is not sufficient to generate adequate cash flow to service the business’ cash needs, including our loans to the borrower, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 90 days or less. Commercial loans are rated on a scale of 1 to 9, with grades 1 to 4 being satisfactory grades, 5 and 6 being special attention or watch, 7 being substandard, 8 being doubtful, and 9 loss. Loans graded 6 through 9 are considered for impairment. Loans are generally moved to nonaccrual status when 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Fair Value of Securities and Other Financial Instruments Securities available for sale consist of bonds and notes which might be sold prior to maturity due to changes in interest rate, prepayment risks, yield and availability of alternative investments, liquidity needs or other factors. Securities classified as available for sale are reported at their fair value. Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers: (1) the length of time and extent that fair value has been less than carrying value; (2) the financial condition and near term prospects of the issuer; and (3) our ability and intent to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.

Market values for securities available for sale are obtained from outside sources and applied to individual securities within the portfolio. The difference between the amortized cost and the current market value of securities is recorded as a valuation adjustment and reported in other comprehensive income.

Valuation of Mortgage Servicing Rights Mortgage servicing rights are recognized as assets for the allocated value of retained servicing rights on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues.

We utilize a discounted cash flow model to determine the value of our servicing rights. The valuation model utilizes mortgage prepayment speeds, the remaining life of the mortgage pool, delinquency rates, our cost to service loans, and other factors to determine the cash flow that we will receive from serving each grouping of loans. These cash flows are then discounted based on current interest rate assumptions to arrive at the fair value of the right to service those loans. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans classified by interest rates. Any impairment of a grouping is reported as a valuation allowance.

Acquisition Intangibles Generally accepted accounting principles require us to determine the fair value of all of the assets and liabilities of an acquired entity, and record their fair value on the date of acquisition. We employ a variety of means in determination of the fair value, including the use of discounted cash flow analysis, market comparisons, and projected future revenue streams. For certain items that we believe we have the appropriate expertise to determine the fair value, we may choose to use our own calculation of the value. In other cases, where the value is not easily determined, we consult with outside parties to determine the fair value of the asset or liability. Once valuations have been adjusted, the net difference between the price paid for the acquired company and the value of its balance sheet is recorded as goodwill.

16

Contingent Tax Liabilities Contingent tax liabilities, primarily Michigan business tax liabilities, are estimated based on our exposures to interpretation of the applicable tax codes. We estimate our contingent tax liabilities by determining the amount of income that may be at risk of an adverse interpretation by taxing authorities on specific issues, multiplied by our effective tax rate, to determine our gross exposure. Once this exposure is determined, an estimate of the probability of an adverse adjustment being required is determined and applied to the gross liability to determine the contingent tax reserve.

CRITICAL ACCOUNTING
POLICIES

Certain of our accounting policies
are important to the portrayal of our financial condition since they require management to
make difficult, complex or subjective judgments, some of which may relate to matters that
are inherently uncertain. Estimates associated with these policies are susceptible to
material changes as a result of changes in facts and circumstances. Facts and
circumstances which could affect these judgments include, without limitation, changes in
interest rates, in local and national economic conditions or the financial condition of
borrowers. Our significant accounting policies are discussed in detail in Note 1 of the
Notes to the Consolidated Financial Statements.

We view critical accounting policies
to be those which are highly dependent on subjective or complex judgments, estimates and
assumptions, and where changes in those estimates and assumptions could have a significant
impact on the financial statements. We believe that our critical accounting policies
include determining the allowance for loan losses, determining the fair value of
securities and other financial instruments, including possible impairment of goodwill and
other assets, the valuation of mortgage servicing rights, determination of purchase
accounting adjustments, and estimating state and federal tax liabilities.

Allowance for Loan Losses The
allowance for loan losses is a valuation allowance for probable incurred credit losses. We
use a quantitative and qualitative methodology for analyzing factors which impact the
allowance for loan losses consistently across our six banking subsidiaries. The process
applies risk factors for historical charge-offs and delinquency experience, portfolio
segment weightings and industry and regional factors and trends as they affect the
banks’ portfolios. The consideration of exposures to industries potentially most
affected by current risks in the economic and political environment, and the review of
potential risks in certain credits that either are, or are not, considered part of the
non-performing loan category contributed to the establishment of the allowance levels at
each bank. Loan losses are charged off against the allowance when management believes the
uncollectibility of a loan balance is confirmed.

15

Loans are reviewed on an ongoing
basis for impairment. A loan is impaired when it is probable that we will be unable to
collect all amounts due substantially in accordance with the contractual terms of the loan
agreement. Impaired loans are measured based on the present value of expected cash flows
discounted at the loan’s effective interest rate or, as a practical expedient, the
fair value of collateral if the loan is collateral dependent. Loans considered to be
impaired are reduced to the present value of expected future cash flow or to the fair
value of collateral by allocating a portion of the allowance for loan losses to such
loans. If these allocations cause an increase in the calculated allowance for loan losses,
such increase is reported as provision for loan loss expense. Increases or decreases in
carrying value due to changes in estimates of future payments or the passage of time are
reported as reductions or increases in the provision for loan losses.

Smaller balance homogeneous loans
such as residential first mortgage loans secured by one to four family residences,
residential construction, automobile, home equity and second mortgage loans, are
collectively evaluated for impairment. Commercial loans and first mortgage loans secured
by other properties are evaluated individually for impairment. When credit analysis of the
borrower’s operating results and financial condition indicates the underlying ability
of the borrower’s business activity is not sufficient to generate adequate cash flow
to service the business’ cash needs, including our loans to the borrower, the loan is
evaluated for impairment. Often this is associated with a delay or shortfall in payments
of 90 days or less. Commercial loans are rated on a scale of 1 to 9, with grades 1 to 4
being satisfactory grades, 5 and 6 being special attention or watch, 7 being substandard,
8 being doubtful, and 9 loss. Loans graded 6 through 9 are considered for impairment.
Loans are generally moved to nonaccrual status when 90 days or more past due. These loans
are often considered impaired. Impaired loans, or portions thereof, are charged off when
deemed uncollectible.

Fair Value of Securities and Other
Financial Instruments Securities available for sale consist of bonds and notes which
might be sold prior to maturity due to changes in interest rate, prepayment risks, yield
and availability of alternative investments, liquidity needs or other factors. Securities
classified as available for sale are reported at their fair value. Declines in the fair
value of securities below their cost that are other than temporary are reflected as
realized losses. In estimating other-than-temporary losses, management considers: (1) the
length of time and extent that fair value has been less than carrying value; (2) the
financial condition and near term prospects of the issuer; and (3) our ability and intent
to hold the security for a period of time sufficient to allow for any anticipated recovery
in fair value.

Market values for securities
available for sale are obtained from outside sources and applied to individual securities
within the portfolio. The difference between the amortized cost and the current market
value of securities is recorded as a valuation adjustment and reported in other
comprehensive income.

Valuation of Mortgage Servicing
Rights Mortgage servicing rights are recognized as assets for the allocated value of
retained servicing rights on loans sold. Servicing rights are expensed in proportion to,
and over the period of, estimated net servicing revenues.

We utilize a discounted cash flow
model to determine the value of our servicing rights. The valuation model utilizes
mortgage prepayment speeds, the remaining life of the mortgage pool, delinquency rates,
our cost to service loans, and other factors to determine the cash flow that we will
receive from serving each grouping of loans. These cash flows are then discounted based on
current interest rate assumptions to arrive at the fair value of the right to service
those loans. Impairment is evaluated based on the fair value of the rights, using
groupings of the underlying loans classified by interest rates. Any impairment of a
grouping is reported as a valuation allowance.

Acquisition Intangibles
Generally accepted accounting principles require us to determine the fair value of all
of the assets and liabilities of an acquired entity, and record their fair value on the
date of acquisition. We employ a variety of means in determination of the fair value,
including the use of discounted cash flow analysis, market comparisons, and projected
future revenue streams. For certain items that we believe we have the appropriate
expertise to determine the fair value, we may choose to use our own calculation of the
value. In other cases, where the value is not easily determined, we consult with outside
parties to determine the fair value of the asset or liability. Once valuations have been
adjusted, the net difference between the price paid for the acquired company and the value
of its balance sheet is recorded as goodwill.

16

Contingent Tax Liabilities
Contingent tax liabilities, primarily Michigan business tax liabilities, are estimated
based on our exposures to interpretation of the applicable tax codes. We estimate our
contingent tax liabilities by determining the amount of income that may be at risk of an
adverse interpretation by taxing authorities on specific issues, multiplied by our
effective tax rate, to determine our gross exposure. Once this exposure is determined, an
estimate of the probability of an adverse adjustment being required is determined and
applied to the gross liability to determine the contingent tax reserve.

CRITICAL ACCOUNTING
POLICIES

Certain of our accounting policies
are important to the portrayal of our financial condition since they require management to
make difficult, complex or subjective judgments, some of which may relate to matters that
are inherently uncertain. Estimates associated with these policies are susceptible to
material changes as a result of changes in facts and circumstances. Facts and
circumstances which could affect these judgments include, without limitation, changes in
interest rates, in local and national economic conditions or the financial condition of
borrowers. Our significant accounting policies are discussed in detail in Note 1 of the
Notes to the Consolidated Financial Statements.

We view critical accounting policies
to be those which are highly dependent on subjective or complex judgments, estimates and
assumptions, and where changes in those estimates and assumptions could have a significant
impact on the financial statements. We believe that our critical accounting policies
include determining the allowance for loan losses, determining the fair value of
securities and other financial instruments, including possible impairment of goodwill and
other assets, the valuation of mortgage servicing rights, determination of purchase
accounting adjustments, and estimating state and federal tax liabilities.

Allowance for Loan Losses The
allowance for loan losses is a valuation allowance for probable incurred credit losses. We
use a quantitative and qualitative methodology for analyzing factors which impact the
allowance for loan losses consistently across our six banking subsidiaries. The process
applies risk factors for historical charge-offs and delinquency experience, portfolio
segment weightings and industry and regional factors and trends as they affect the
banks’ portfolios. The consideration of exposures to industries potentially most
affected by current risks in the economic and political environment, and the review of
potential risks in certain credits that either are, or are not, considered part of the
non-performing loan category contributed to the establishment of the allowance levels at
each bank. Loan losses are charged off against the allowance when management believes the
uncollectibility of a loan balance is confirmed.

15

Loans are reviewed on an ongoing
basis for impairment. A loan is impaired when it is probable that we will be unable to
collect all amounts due substantially in accordance with the contractual terms of the loan
agreement. Impaired loans are measured based on the present value of expected cash flows
discounted at the loan’s effective interest rate or, as a practical expedient, the
fair value of collateral if the loan is collateral dependent. Loans considered to be
impaired are reduced to the present value of expected future cash flow or to the fair
value of collateral by allocating a portion of the allowance for loan losses to such
loans. If these allocations cause an increase in the calculated allowance for loan losses,
such increase is reported as provision for loan loss expense. Increases or decreases in
carrying value due to changes in estimates of future payments or the passage of time are
reported as reductions or increases in the provision for loan losses.

Smaller balance homogeneous loans
such as residential first mortgage loans secured by one to four family residences,
residential construction, automobile, home equity and second mortgage loans, are
collectively evaluated for impairment. Commercial loans and first mortgage loans secured
by other properties are evaluated individually for impairment. When credit analysis of the
borrower’s operating results and financial condition indicates the underlying ability
of the borrower’s business activity is not sufficient to generate adequate cash flow
to service the business’ cash needs, including our loans to the borrower, the loan is
evaluated for impairment. Often this is associated with a delay or shortfall in payments
of 90 days or less. Commercial loans are rated on a scale of 1 to 9, with grades 1 to 4
being satisfactory grades, 5 and 6 being special attention or watch, 7 being substandard,
8 being doubtful, and 9 loss. Loans graded 6 through 9 are considered for impairment.
Loans are generally moved to nonaccrual status when 90 days or more past due. These loans
are often considered impaired. Impaired loans, or portions thereof, are charged off when
deemed uncollectible.

Fair Value of Securities and Other
Financial Instruments Securities available for sale consist of bonds and notes which
might be sold prior to maturity due to changes in interest rate, prepayment risks, yield
and availability of alternative investments, liquidity needs or other factors. Securities
classified as available for sale are reported at their fair value. Declines in the fair
value of securities below their cost that are other than temporary are reflected as
realized losses. In estimating other-than-temporary losses, management considers: (1) the
length of time and extent that fair value has been less than carrying value; (2) the
financial condition and near term prospects of the issuer; and (3) our ability and intent
to hold the security for a period of time sufficient to allow for any anticipated recovery
in fair value.

Market values for securities
available for sale are obtained from outside sources and applied to individual securities
within the portfolio. The difference between the amortized cost and the current market
value of securities is recorded as a valuation adjustment and reported in other
comprehensive income.

Valuation of Mortgage Servicing
Rights Mortgage servicing rights are recognized as assets for the allocated value of
retained servicing rights on loans sold. Servicing rights are expensed in proportion to,
and over the period of, estimated net servicing revenues.

We utilize a discounted cash flow
model to determine the value of our servicing rights. The valuation model utilizes
mortgage prepayment speeds, the remaining life of the mortgage pool, delinquency rates,
our cost to service loans, and other factors to determine the cash flow that we will
receive from serving each grouping of loans. These cash flows are then discounted based on
current interest rate assumptions to arrive at the fair value of the right to service
those loans. Impairment is evaluated based on the fair value of the rights, using
groupings of the underlying loans classified by interest rates. Any impairment of a
grouping is reported as a valuation allowance.

Acquisition Intangibles
Generally accepted accounting principles require us to determine the fair value of all
of the assets and liabilities of an acquired entity, and record their fair value on the
date of acquisition. We employ a variety of means in determination of the fair value,
including the use of discounted cash flow analysis, market comparisons, and projected
future revenue streams. For certain items that we believe we have the appropriate
expertise to determine the fair value, we may choose to use our own calculation of the
value. In other cases, where the value is not easily determined, we consult with outside
parties to determine the fair value of the asset or liability. Once valuations have been
adjusted, the net difference between the price paid for the acquired company and the value
of its balance sheet is recorded as goodwill.

16

Contingent Tax Liabilities
Contingent tax liabilities, primarily Michigan business tax liabilities, are estimated
based on our exposures to interpretation of the applicable tax codes. We estimate our
contingent tax liabilities by determining the amount of income that may be at risk of an
adverse interpretation by taxing authorities on specific issues, multiplied by our
effective tax rate, to determine our gross exposure. Once this exposure is determined, an
estimate of the probability of an adverse adjustment being required is determined and
applied to the gross liability to determine the contingent tax reserve.

Critical Accounting Policies

Certain of the Corporation’s accounting policies are important to the portrayal of the Corporation’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, without limitation, changes in interest rates, in local and national economic conditions, or the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses, determining the fair value of securities and other financial instruments, the valuation of mortgage servicing rights, determination of purchase accounting adjustments, and estimating state and federal contingent tax liabilities. The Corporation’s significant accounting policies are discussed in detail in Managements Discussion and Analysis on pages 15 through 16 in the Corporation’s annual report to shareholders for the year ended December 31, 2007.

Critical Accounting Policies

Certain of the Corporation’s accounting policies are important to the portrayal of the Corporation’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, without limitation, changes in interest rates, in local and national economic conditions, or the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses, determining the fair value of securities and other financial instruments, the valuation of mortgage servicing rights, determination of purchase accounting adjustments, and estimating state and federal contingent tax liabilities. The Corporation’s significant accounting policies are discussed in detail in Managements Discussion and Analysis on pages 15 through 16 in the Corporation’s annual report to shareholders for the year ended December 31, 2007.

Critical Accounting Policies

Certain of the Corporation’s accounting policies are important to the portrayal of the Corporation’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, without limitation, changes in interest rates, in local and national economic conditions, or the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses, determining the fair value of securities and other financial instruments, the valuation of mortgage servicing rights, determination of purchase accounting adjustments, and estimating state and federal contingent tax liabilities. The Corporation’s significant accounting policies are discussed in detail in Managements Discussion and Analysis on pages 15 through 16 in the Corporation’s annual report to shareholders for the year ended December 31, 2007.

CRITICAL ACCOUNTING POLICIES

Certain of our accounting policies are important to the portrayal of our financial condition since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, without limitation, changes in interest rates, in local and national economic conditions or the financial condition of borrowers. Our significant accounting policies are discussed in detail in Note 1 of the Notes to the Consolidated Financial Statements.

We view critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. We believe that our critical accounting policies include determining the allowance for loan losses, determining the fair value of securities and other financial instruments, the valuation of mortgage servicing rights, determination of purchase accounting adjustments, and estimating state and federal tax liabilities.

Allowance for Loan Losses The allowance for loan losses is a valuation allowance for probable incurred credit losses. We use a quantitative and qualitative methodology for analyzing factors which impact the allowance for loan losses consistently across its seven banking subsidiaries. The process applies risk factors for historical charge-offs and delinquency experience, portfolio segment weightings and industry and regional factors and trends as they affect the banks’ portfolios. The consideration of exposures to industries potentially most affected by current risks in the economic and political environment, and the review of potential risks in certain credits that either are, or are not, considered part of the non-performing loan category contributed to the establishment of the allowance levels at each bank. Loan losses are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed.

Loans are reviewed on an ongoing basis for impairment. A loan is impaired when it is probable that we will be unable to collect all amounts due substantially in accordance with the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected cash flows discounted at the loan’s effective interest rate or, as a practical expedient, the fair value of collateral if the loan is collateral dependent. Loans considered to be impaired are reduced to the present value of expected future cash flow, or to the fair value of collateral by allocating a portion of the allowance for loan losses to such loans. If these allocations cause an increase in the allowance for loan losses, such increase is reported as provision for loan loss expense. Increases or decreases in carrying value due to changes in estimates of future payments or the passage of time are reported as reductions or increases in the provision for loan losses.

Smaller balance homogeneous loans such as residential first mortgage loans secured by one to four family residences, residential construction, automobile, home equity and second mortgage loans, are collectively evaluated for impairment. Commercial loans and first mortgage loans secured by other properties are evaluated individually for impairment. When credit analysis of the borrower’s operating results and financial condition indicates the underlying ability of the borrower’s business activity is not sufficient to generate adequate cash flow to service the business’ cash needs, including our loans to the borrower, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 90 days or less. Commercial loans are rated on a scale of 1 to 8, with grades 1 to 4 being satisfactory grades, 5 being special attention or watch, 6 — substandard, 7 — doubtful, and 8 — loss. Loans graded 5, 6, 7, and 8 are considered for impairment. Loans are generally moved to nonaccrual status when 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Fair Value of Securities and Other Financial Instruments Securities available for sale consist of bonds and notes which might be sold prior to maturity due to changes in interest rate, prepayment risks, yield and availability of alternative investments, liquidity needs or other factors. Securities classified as available for sale are reported at their fair value. Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers: (1) the length of time and extent that fair value has been less than carrying value; (2) the financial condition and near term prospects of the issuer; and (3) the Company’s ability and intent to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.

Market values for securities available for sale are obtained from outside sources and applied to individual securities within the portfolio. The difference between the amortized cost and the current market value of securities is recorded as a valuation adjustment and reported in other comprehensive income.

15

Valuation of Mortgage Servicing Rights Mortgage servicing rights are recognized as assets for the allocated value of retained servicing rights on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues.

We utilize a discounted cash flow model to determine the value of its servicing rights. The valuation model utilizes mortgage prepayment speeds, the remaining life of the mortgage pool, delinquency rates, our cost to service loans, and other factors to determine the cash flow that we will receive from serving each grouping of loans. These cash flows are then discounted based on current interest rate assumptions to arrive at the fair value for the right to service those loans. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans classified by interest rates. Any impairment of a grouping is reported as a valuation allowance.

Acquisition Intangibles Generally accepted accounting principles require us to determine the fair value of all of the assets and liabilities of an acquired entity, and record their fair value on the date of acquisition. We employ a variety of means in determination of the fair value, including the use of discounted cash flow analysis, market comparisons, and projected future revenue streams. For certain items that we believe we have the appropriate expertise to determine the fair value, we may choose to use our own calculation of the value. In other cases, where the value is not easily determined, we consult with outside parties to determine the fair value of the asset or liability. Once valuations have been adjusted, the net difference between the price paid for the acquired company and the value of its balance sheet is recorded as goodwill.

Contingent Tax Liabilities Contingent tax liabilities, primarily Michigan single business tax liabilities, are estimated based on our exposures to interpretation of the applicable tax codes. We estimate our contingent tax liabilities by determining the amount of income that may be at risk of an adverse interpretation by taxing authorities on specific issues, multiplied by our effective tax rate, to determine our gross exposure. Once this exposure is determined, an estimate of the probability of an adverse adjustment being required is determined and applied to the gross liability to determine the contingent tax reserve.

CRITICAL ACCOUNTING
POLICIES

Certain of our accounting policies
are important to the portrayal of our financial condition since they require management to
make difficult, complex or subjective judgments, some of which may relate to matters that
are inherently uncertain. Estimates associated with these policies are susceptible to
material changes as a result of changes in facts and circumstances. Facts and
circumstances which could affect these judgments include, without limitation, changes in
interest rates, in local and national economic conditions or the financial condition of
borrowers. Our significant accounting policies are discussed in detail in Note 1 of the
Notes to the Consolidated Financial Statements.

We view critical accounting policies
to be those which are highly dependent on subjective or complex judgments, estimates and
assumptions, and where changes in those estimates and assumptions could have a significant
impact on the financial statements. We believe that our critical accounting policies
include determining the allowance for loan losses, determining the fair value of
securities and other financial instruments, the valuation of mortgage servicing rights,
determination of purchase accounting adjustments, and estimating state and federal tax
liabilities.

Allowance for Loan Losses The
allowance for loan losses is a valuation allowance for probable incurred credit losses. We
use a quantitative and qualitative methodology for analyzing factors which impact the
allowance for loan losses consistently across its seven banking subsidiaries. The process
applies risk factors for historical charge-offs and delinquency experience, portfolio
segment weightings and industry and regional factors and trends as they affect the
banks’ portfolios. The consideration of exposures to industries potentially most
affected by current risks in the economic and political environment, and the review of
potential risks in certain credits that either are, or are not, considered part of the
non-performing loan category contributed to the establishment of the allowance levels at
each bank. Loan losses are charged off against the allowance when management believes the
uncollectibility of a loan balance is confirmed.

Loans are reviewed on an ongoing
basis for impairment. A loan is impaired when it is probable that we will be unable to
collect all amounts due substantially in accordance with the contractual terms of the loan
agreement. Impaired loans are measured based on the present value of expected cash flows
discounted at the loan’s effective interest rate or, as a practical expedient, the
fair value of collateral if the loan is collateral dependent. Loans considered to be
impaired are reduced to the present value of expected future cash flow, or to the fair
value of collateral by allocating a portion of the allowance for loan losses to such
loans. If these allocations cause an increase in the allowance for loan losses, such
increase is reported as provision for loan loss expense. Increases or decreases in
carrying value due to changes in estimates of future payments or the passage of time are
reported as reductions or increases in the provision for loan losses.

Smaller balance homogeneous loans
such as residential first mortgage loans secured by one to four family residences,
residential construction, automobile, home equity and second mortgage loans, are
collectively evaluated for impairment. Commercial loans and first mortgage loans secured
by other properties are evaluated individually for impairment. When credit analysis of the
borrower’s operating results and financial condition indicates the underlying ability
of the borrower’s business activity is not sufficient to generate adequate cash flow
to service the business’ cash needs, including our loans to the borrower, the loan is
evaluated for impairment. Often this is associated with a delay or shortfall in payments
of 90 days or less. Commercial loans are rated on a scale of 1 to 8, with grades 1 to 4
being satisfactory grades, 5 being special attention or watch, 6 — substandard, 7
— doubtful, and 8 — loss. Loans graded 5, 6, 7, and 8 are considered for
impairment. Loans are generally moved to nonaccrual status when 90 days or more past due.
These loans are often considered impaired. Impaired loans, or portions thereof, are
charged off when deemed uncollectible.

Fair Value of Securities and Other
Financial Instruments Securities available for sale consist of bonds and notes which
might be sold prior to maturity due to changes in interest rate, prepayment risks, yield
and availability of alternative investments, liquidity needs or other factors. Securities
classified as available for sale are reported at their fair value. Declines in the fair
value of securities below their cost that are other than temporary are reflected as
realized losses. In estimating other-than-temporary losses, management considers: (1) the
length of time and extent that fair value has been less than carrying value; (2) the
financial condition and near term prospects of the issuer; and (3) the Company’s
ability and intent to hold the security for a period of time sufficient to allow for any
anticipated recovery in fair value.

Market values for securities
available for sale are obtained from outside sources and applied to individual securities
within the portfolio. The difference between the amortized cost and the current market
value of securities is recorded as a valuation adjustment and reported in other
comprehensive income.

15

Valuation of Mortgage Servicing
Rights Mortgage servicing rights are recognized as assets for the allocated value of
retained servicing rights on loans sold. Servicing rights are expensed in proportion to,
and over the period of, estimated net servicing revenues.

We utilize a discounted cash flow
model to determine the value of its servicing rights. The valuation model utilizes
mortgage prepayment speeds, the remaining life of the mortgage pool, delinquency rates,
our cost to service loans, and other factors to determine the cash flow that we will
receive from serving each grouping of loans. These cash flows are then discounted based on
current interest rate assumptions to arrive at the fair value for the right to service
those loans. Impairment is evaluated based on the fair value of the rights, using
groupings of the underlying loans classified by interest rates. Any impairment of a
grouping is reported as a valuation allowance.

Acquisition Intangibles
Generally accepted accounting principles require us to determine the fair value of all
of the assets and liabilities of an acquired entity, and record their fair value on the
date of acquisition. We employ a variety of means in determination of the fair value,
including the use of discounted cash flow analysis, market comparisons, and projected
future revenue streams. For certain items that we believe we have the appropriate
expertise to determine the fair value, we may choose to use our own calculation of the
value. In other cases, where the value is not easily determined, we consult with outside
parties to determine the fair value of the asset or liability. Once valuations have been
adjusted, the net difference between the price paid for the acquired company and the value
of its balance sheet is recorded as goodwill.

Contingent Tax Liabilities
Contingent tax liabilities, primarily Michigan single business tax liabilities, are
estimated based on our exposures to interpretation of the applicable tax codes. We
estimate our contingent tax liabilities by determining the amount of income that may be at
risk of an adverse interpretation by taxing authorities on specific issues, multiplied by
our effective tax rate, to determine our gross exposure. Once this exposure is determined,
an estimate of the probability of an adverse adjustment being required is determined and
applied to the gross liability to determine the contingent tax reserve.

Critical Accounting Policies

Certain of the Corporation’s accounting policies are important to the portrayal of the Corporation’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, without limitation, changes in interest rates, in local and national economic conditions, or the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses, determining the fair value of securities and other financial instruments, the valuation of mortgage servicing rights, determination of purchase accounting adjustments, and estimating state and federal contingent tax liabilities. The Corporation’s significant accounting policies are discussed in detail in Managements Discussion and Analysis on pages 13 through 16 in the Corporation’s annual report to shareholders for the year ended December 31, 2006.

15

Critical Accounting Policies

Certain of the Corporation’s accounting policies are important to the portrayal of the Corporation’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, without limitation, changes in interest rates, in local and national economic conditions, or the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses, determining the fair value of securities and other financial instruments, the valuation of mortgage servicing rights, determination of purchase accounting adjustments, and estimating state and federal contingent tax liabilities. The Corporation’s significant accounting policies are discussed in detail in Managements Discussion and Analysis on pages 13 through 16 in the Corporation’s annual report to shareholders for the year ended December 31, 2006.

Critical Accounting Policies

Certain of the Corporation’s accounting policies are important to the portrayal of the Corporation’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but without limitation, changes in interest rate, in local and national economic conditions, or the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses, determining the fair value of securities and other financial instruments, the valuation of mortgage servicing rights, determination of purchase accounting adjustments, and estimating state and federal contingent tax liabilities. The Corporation’s significant accounting policies are discussed in detail in Managements Discussion and Analysis on pages 13 through 16 in the Corporation’s annual report to shareholders for the year ended December 31, 2006.

CRITICAL ACCOUNTING POLICIES

Certain of our accounting policies are important to the portrayal of our financial condition since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, without limitation, changes in interest rates, in local and national economic conditions or the financial condition of borrowers. Our significant accounting policies are discussed in detail in Note 1 of the Notes to the Consolidated Financial Statements.

14

We view critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. We believe that our critical accounting policies include determining the allowance for loan losses, determining the fair value of securities and other financial instruments, the valuation of mortgage servicing rights, determination of purchase accounting adjustments, and estimating state and federal contingent tax liabilities.

Allowance for Loan Losses The allowance for loan losses is a valuation allowance for probable incurred credit losses. We use a quantitative and qualitative methodology for analyzing factors which impact the allowance for loan losses consistently across its six banking subsidiaries. The process applies risk factors for historical charge-offs and delinquency experience, portfolio segment weightings and industry and regional factors and trends as they affect the banks’ portfolios. The consideration of exposures to industries potentially most affected by current risks in the economic and political environment, and the review of potential risks in certain credits that either are, or are not, considered part of the non-performing loan category contributed to the establishment of the allowance levels at each bank. Loan losses are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed.

Loans are reviewed on an ongoing basis for impairment. A loan is impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected cash flows discounted at the loan’s effective interest rate or, as a practical expedient, the fair value of collateral if the loan is collateral dependent. Loans considered to be impaired are reduced to the present value of expected future cash flows, or to the fair value of collateral by allocating a portion of the allowance for loan losses to such loans. If these allocations cause an increase in the allowance for loan losses, such increase is reported as provision for loan loss expense. Increases or decreases in carrying value due to changes in estimates of future payments or the passage of time are reported as reductions or increases in the provision for loan losses.

Smaller balance homogeneous loans such as residential first mortgage loans secured by one to four family residences, residential construction, automobile, home equity and second mortgage loans, are collectively evaluated for impairment. Commercial loans and first mortgage loans secured by other properties are evaluated individually for impairment. When credit analysis of the borrower’s operating results and financial condition indicates the underlying ability of the borrower’s business activity is not sufficient to generate adequate cash flow to service the business’ cash needs, including our loans to the borrower, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 90 days or less. Commercial loans are rated on a scale of 1 to 8, with grades 1 to 4 being satisfactory grades, 5 being special attention or watch, 6 — substandard, 7 — doubtful, and 8 — loss. Loans graded 5, 6, 7, and 8 are considered for impairment. Loans are generally moved to nonaccrual status when 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Fair Value of Securities and Other Financial Instruments Securities available for sale consist of bonds and notes which might be sold prior to maturity due to changes in interest rate, prepayment risks, yield and availability of alternative investments, liquidity needs or other factors. Securities classified as available for sale are reported at their fair value. Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers: (1) the length of time and extent that fair value has been less than carrying value; (2) the financial condition and near term prospects of the issuer; and (3) the Company’s ability and intent to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.

Market values for securities available for sale are obtained from outside sources and applied to individual securities within the portfolio. The difference between the amortized cost and the current market value of securities is recorded as a valuation adjustment and reported in other comprehensive income.

Valuation of Mortgage Servicing Rights Mortgage servicing rights are recognized as assets for the allocated value of retained servicing rights on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues.

15

We utilize a discounted cash flow model to determine the value of its servicing rights. The valuation model utilizes mortgage prepayment speeds, the remaining life of the mortgage pool, delinquency rates, our cost to service loans, and other factors to determine the cash flow that we will receive from serving each grouping of loans. These cash flows are then discounted based on current interest rate assumptions to arrive at the fair value for the right to service those loans. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans classified by interest rates. Any impairment of a grouping is reported as a valuation allowance.

Acquisition Intangibles Generally accepted accounting principles require us to determine the fair value of all of the assets and liabilities of an acquired entity, and record their fair value on the date of acquisition. We employ a variety of means in determination of the fair value, including the use of discounted cash flow analysis, market comparisons, and projected future revenue streams. For certain items that we believe we have the appropriate expertise to determine the fair value, we may choose to use our own calculation of the value. In other cases, where the value is not easily determined, we consult with outside parties to determine the fair value of the asset or liability. Once valuations have been adjusted, the net difference between the price paid for the acquired company and the value of its balance sheet is recorded as goodwill.

Contingent Tax Liabilities Contingent tax liabilities, primarily Michigan single business tax liabilities, are estimated based on the our exposures to interpretation of the applicable tax codes. We estimate our contingent tax liabilities by determining the amount of income that may be at risk of an adverse interpretation by taxing authorities on specific issues, multiplied by our effective tax rate, to determine our gross exposure. Once this exposure is determined, an estimate of the probability of an adverse adjustment being required is determined and applied to the gross liability to determine the contingent tax reserve.

Critical Accounting Policies

Certain of the Corporation’s accounting policies are important to the portrayal of the Corporation’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but without limitation, changes in interest rate, in local and national economic conditions, or the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses, determining the fair value of securities and other financial instruments, the valuation of mortgage servicing rights, determination of purchase accounting adjustments, and estimating state and federal contingent tax liabilities. The Corporation’s significant accounting policies are discussed in detail in Managements Discussion and Analysis on pages 14 through 16 in the Corporation’s annual report to shareholders for the year ended December 31, 2005.

Critical Accounting Policies

Certain of the Corporation’s accounting policies are important to the portrayal of the Corporation’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but without limitation, changes in interest rate, in local and national economic conditions, or the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses, determining the fair value of securities and other financial instruments, the valuation of mortgage servicing rights, determination of purchase accounting adjustments, and estimating state and federal contingent tax liabilities. The Corporation’s significant accounting policies are discussed in detail in Managements Discussion and Analysis on pages 14 through 16 in the Corporation’s annual report to shareholders for the year ended December 31, 2005.

CRITICAL ACCOUNTING POLICIES

Certain of the Company’s accounting policies are important to the portrayal of the Company’s financial condition since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but without limitation, changes in interest rate, in local and national economic conditions or the financial condition of borrowers. The Company’s significant accounting policies are discussed in detail in Note A of the Notes to the Consolidated Financial Statements.

Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management believes that its critical accounting policies include determining the allowance for loan losses, determining the fair value of securities and other financial instruments, the valuation of mortgage servicing rights, determination of purchase accounting adjustments, and estimating state and federal contingent tax liabilities.

14

Allowance for Loan Losses The allowance for loan losses is a valuation allowance for probable incurred credit losses. Management uses a quantitative and qualitative methodology for analyzing factors which impact the allowance for loan losses consistently across its six banking subsidiaries. The process applies risk factors for historical charge-offs and delinquency experience, portfolio segment weightings and industry and regional factors and trends as they affect the banks’ portfolios. The consideration of exposures to industries potentially most affected by current risks in the economic and political environment and the review of potential risks in certain credits that either are, or are not, considered part of the non-performing loan category contributed to the establishment of the allowance levels at each bank. Loan losses are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed.

Loans are reviewed on an ongoing basis for impairment. A loan is impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected cash flows discounted at the loan’s effective interest rate or, as a practical expedient, the fair value of collateral, if the loan is collateral dependent. Loans considered to be impaired are reduced to the present value of expected future cash flows or to the fair value of collateral by allocating a portion of the allowance for loan losses to such loans. If these allocations cause an increase in the allowance for loan losses such increase is reported as provision for loan loss. Increases or decreases in carrying value due to changes in estimates of future payments or the passage of time are reported as reductions or increases in the provision for loan losses.

Smaller balance homogeneous loans such as residential first mortgage loans secured by one to four family residences, residential construction, automobile, home equity and second mortgage loans, are collectively evaluated for impairment. Commercial loans and first mortgage loans secured by other properties are evaluated individually for impairment. When credit analysis of the borrower’s operating results and financial condition indicates the underlying ability of the borrower’s business activity is not sufficient to generate adequate cash flow to service the business’ cash needs, including the Company’s loans to the borrower, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 90 days or less. Commercial loans are rated on a scale of 1 to 8, with grades 1 to 4 being pass grades, 5 being special attention or watch, 6 substandard, 7 doubtful, and 8 loss. Loans graded 5, 6, 7, and 8 are considered for impairment. Loans are generally moved to nonaccrual status when 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Fair Value of Securities and Other Financial Instruments Securities available for sale consist of bonds and notes which might be sold prior to maturity due to changes in interest rate, prepayment risks, yield and availability of alternative investments, liquidity needs or other factors. Securities classified as available for sale are reported at their fair value. Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers: (1) the length of time and extent that fair value has been less than carrying value; (2) the financial condition and near term prospects of the issuer; and (3) the Company’s ability and intent to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.

Market values for securities available for sale are obtained from outside sources and applied to individual securities within the portfolio. The difference between the amortized cost and the current market value of securities is recorded as a valuation adjustment and reported in other comprehensive income.

Valuation of Mortgage Servicing Rights Mortgage servicing rights are recognized as assets for the allocated value of retained servicing rights on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues.

The Company utilizes a discounted cash flow model to determine the value of its servicing rights. The valuation model utilizes mortgage prepayment speeds, the remaining life of the mortgage pool, delinquency rates, the Company’s cost to service loans, and other factors to determine the cash flow that the Company will receive from serving each grouping of loans. These cash flows are then discounted based on current interest rate assumptions to arrive at the fair value for the right to service those loans. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates. Any impairment of a grouping is reported as a valuation allowance.

15

Acquisition Intangibles Generally accepted accounting principles require the Company to determine the fair value of all of the assets and liabilities of an acquired entity, and record their fair value on the date of acquisition. The Company employs a variety of means in determination of the fair value, including the use of discounted cash flow analysis, market comparisons, and projected future revenue streams. For certain items that the Company believes it has the appropriate expertise to determine the fair value, it may chose to use its own calculation of the value. In other cases, where the value is not easily determined, the Company consults with outside parties to determine the fair value of the asset or liability. Once valuations have been adjusted, the net difference between the price paid for the acquired company and the value of its balance sheet is recorded as goodwill.

Contingent Tax Liabilities State and Federal contingent tax liabilities are estimated based on the Company’s exposures to interpretation of the US tax code. The Company estimates its contingent tax liabilities by determining the amount of income that may be at risk of an adverse interpretation by taxing authorities on specific issues, multiplied by its effective tax rate, to determine its gross exposure. Once this exposure is determined, an estimate of the probability of an adverse adjustment being required is determined and applied to the gross liability to determine the contingent tax reserve.

CRITICAL ACCOUNTING POLICIES

Certain of the Company’s accounting policies are important to the portrayal of the Company’s financial condition since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but without limitation, changes in interest rate, in local and national economic conditions or the financial condition of borrowers. The Company’s significant accounting policies are discussed in detail in Note A of the Notes to the Consolidated Financial Statements.

Management views critical accounting policies to be those which are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management believes that its critical accounting policies include determining the allowance for loan losses, determining the fair value of securities and other financial instruments, the valuation of mortgage servicing rights, determination of purchase accounting adjustments, and estimating state and federal contingent tax liabilities.

14

Allowance for Loan Losses The allowance for loan losses is a valuation allowance for probable incurred credit losses. Management uses a quantitative and qualitative methodology for analyzing factors which impact the allowance for loan losses consistently across its six banking subsidiaries. The process applies risk factors for historical charge-offs and delinquency experience, portfolio segment weightings and industry and regional factors and trends as they affect the banks’ portfolios. The consideration of exposures to industries potentially most affected by current risks in the economic and political environment and the review of potential risks in certain credits that either are, or are not, considered part of the non-performing loan category contributed to the establishment of the allowance levels at each bank. Loan losses are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed.

Loans are reviewed on an ongoing basis for impairment. A loan is impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected cash flows discounted at the loan’s effective interest rate or, as a practical expedient, the fair value of collateral, if the loan is collateral dependent. Loans considered to be impaired are reduced to the present value of expected future cash flows or to the fair value of collateral by allocating a portion of the allowance for loan losses to such loans. If these allocations cause an increase in the allowance for loan losses such increase is reported as provision for loan loss. Increases or decreases in carrying value due to changes in estimates of future payments or the passage of time are reported as reductions or increases in the provision for loan losses.

Smaller balance homogeneous loans such as residential first mortgage loans secured by one to four family residences, residential construction, automobile, home equity and second mortgage loans, are collectively evaluated for impairment. Commercial loans and first mortgage loans secured by other properties are evaluated individually for impairment. When credit analysis of the borrower’s operating results and financial condition indicates the underlying ability of the borrower’s business activity is not sufficient to generate adequate cash flow to service the business’ cash needs, including the Company’s loans to the borrower, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 90 days or less. Commercial loans are rated on a scale of 1 to 8, with grades 1 to 4 being pass grades, 5 being special attention or watch, 6 substandard, 7 doubtful, and 8 loss. Loans graded 5, 6, 7, and 8 are considered for impairment. Loans are generally moved to nonaccrual status when 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Fair Value of Securities and Other Financial Instruments Securities available for sale consist of bonds and notes which might be sold prior to maturity due to changes in interest rate, prepayment risks, yield and availability of alternative investments, liquidity needs or other factors. Securities classified as available for sale are reported at their fair value. Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers: (1) the length of time and extent that fair value has been less than carrying value; (2) the financial condition and near term prospects of the issuer; and (3) the Company’s ability and intent to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.

Market values for securities available for sale are obtained from outside sources and applied to individual securities within the portfolio. The difference between the amortized cost and the current market value of securities is recorded as a valuation adjustment and reported in other comprehensive income.

Valuation of Mortgage Servicing Rights Mortgage servicing rights are recognized as assets for the allocated value of retained servicing rights on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues.

The Company utilizes a discounted cash flow model to determine the value of its servicing rights. The valuation model utilizes mortgage prepayment speeds, the remaining life of the mortgage pool, delinquency rates, the Company’s cost to service loans, and other factors to determine the cash flow that the Company will receive from serving each grouping of loans. These cash flows are then discounted based on current interest rate assumptions to arrive at the fair value for the right to service those loans. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates. Any impairment of a grouping is reported as a valuation allowance.

15

Acquisition Intangibles Generally accepted accounting principles require the Company to determine the fair value of all of the assets and liabilities of an acquired entity, and record their fair value on the date of acquisition. The Company employs a variety of means in determination of the fair value, including the use of discounted cash flow analysis, market comparisons, and projected future revenue streams. For certain items that the Company believes it has the appropriate expertise to determine the fair value, it may chose to use its own calculation of the value. In other cases, where the value is not easily determined, the Company consults with outside parties to determine the fair value of the asset or liability. Once valuations have been adjusted, the net difference between the price paid for the acquired company and the value of its balance sheet is recorded as goodwill.

Contingent Tax Liabilities State and Federal contingent tax liabilities are estimated based on the Company’s exposures to interpretation of the US tax code. The Company estimates its contingent tax liabilities by determining the amount of income that may be at risk of an adverse interpretation by taxing authorities on specific issues, multiplied by its effective tax rate, to determine its gross exposure. Once this exposure is determined, an estimate of the probability of an adverse adjustment being required is determined and applied to the gross liability to determine the contingent tax reserve.