Regulatory Matters

6 Months Ended

Jun. 30, 2013

Regulatory Matters [Abstract]

Regulatory Matters

11. Regulatory Matters

Capital guidelines adopted by Federal and State regulatory agencies and restrictions imposed by law limit the amount of cash dividends our Bank can pay to us. Under these guidelines, the amount of dividends that may be paid in any calendar year is limited to the Bank’s current year’s net profits, combined with the retained net profits of the preceding two years. Further, the Bank cannot pay a dividend at any time that it has negative undivided profits.  As of June 30, 2013 the Bank had negative undivided profits of $59.3 million. It is not our intent to have dividends paid in amounts which would reduce the capital of our Bank to levels below those which we consider prudent and in accordance with guidelines of regulatory authorities.

On October 25, 2011, the respective Boards of Directors of the Company and the Bank entered into a Memorandum of Understanding (“MOU”) with the Federal Reserve Bank (“FRB”) and the Michigan Department of Insurance and Financial Services (“DIFS”). The MOU largely duplicated certain provisions of board resolutions that were already in place, but also had the following specific requirements:

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

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

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

· Enhanced interest rate risk modeling practices.

Effective March 26, 2013, the FRB and DIFS terminated the MOU.  Also on that date, the respective Boards of Directors of the Company and the Bank passed resolutions that require the following:

· Submission of quarterly progress reports to the FRB and DIFS regarding disposition plans for any assets in excess of $1.0 million that are in ORE, are 90 days or more past due, are on our “watch list,” or are adversely classified;

· Prior approval of the FRB and DIFS for the Bank to pay any dividend to the Company; and

· Prior approval of the FRB and DIFS for the Company to pay any dividend to its shareholders, to make any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities, to increase borrowings or guarantee any debt, and/or to purchase or redeem any of its stock.

We are also subject to various regulatory capital requirements. The prompt corrective action regulations establish quantitative measures to ensure capital adequacy and require minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and Tier 1 capital to average assets. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that could have a material effect on our consolidated financial statements. Under capital adequacy guidelines, we must meet specific capital requirements that involve quantitative measures as well as qualitative judgments by the regulators. The most recent regulatory filings as of June 30, 2013 and December 31, 2012 categorized our Bank as well capitalized. Management is not aware of any conditions or events that would have changed the most recent Federal Deposit Insurance Corporation (“FDIC”)  categorization.

Our actual capital amounts and ratios follow:

						Minimum for					Minimum for
						Adequately Capitalized					Well-Capitalized
	Actual					Institutions					Institutions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
June 30, 2013
Total capital to risk-weighted assets
Consolidated	$	225,727		16.17	%	$	111,681		8.00	%	NA		NA
Independent Bank		227,860		16.35			111,519		8.00			139,399		10.00	%
Tier 1 capital to risk-weighted assets
Consolidated	$	207,938		14.90	%	$	55,840		4.00	%	NA		NA
Independent Bank		210,096		15.07			55,759		4.00			83,639		6.00	%
Tier 1 capital to average assets
Consolidated	$	207,938		10.28	%	$	80,938		4.00	%	NA		NA
Independent Bank		210,096		10.35			81,188		4.00			101,485		5.00	%
December 31, 2012
Total capital to risk-weighted assets
Consolidated	$	204,663		14.71	%	$	111,268		8.00	%	NA		NA
Independent Bank		207,553		14.95			111,063		8.00		$	138,829		10.00	%
Tier 1 capital to risk-weighted assets
Consolidated	$	185,948		13.37	%	$	55,634		4.00	%	NA		NA
Independent Bank		189,777		13.67			55,531		4.00		$	83,297		6.00	%
Tier 1 capital to average assets
Consolidated	$	185,948		8.08	%	$	92,026		4.00	%	NA		NA
Independent Bank		189,777		8.26			91,919		4.00		$	114,899		5.00	%

NA - Not applicable

The components of our regulatory capital are as follows:

	Consolidated						Independent Bank
	June 30,			December 31,			June 30,			December 31,
	2013			2012			2013			2012
	(In thousands)
Total shareholders' equity	$	208,835		$	134,975		$	250,480		$	186,384
Add (deduct)
Qualifying trust preferred securities		48,668			47,678			-			-
Accumulated other comprehensive loss		7,270			8,058			7,270			8,156
Intangible assets		(3,569	)		(3,975	)		(3,569	)		(3,975	)
Disallowed deferred tax assets		(52,769	)		-			(43,588	)		-
Disallowed capitalized mortgage loan servicing rights		(497	)		(788	)		(497	)		(788	)
Tier 1 capital		207,938			185,948			210,096			189,777
Qualifying trust preferred securities		-			990			-			-
Allowance for loan losses and allowance for unfunded lending commitments limited to 1.25% of total risk-weighted assets		17,789			17,725			17,764			17,776
Total risk-based capital	$	225,727		$	204,663		$	227,860		$	207,553

In November 2011, our Board adopted a capital plan as required by the MOU and submitted it to the FRB and the DIFS. The capital plan was updated in February 2012.  The FRB and DIFS have accepted such capital plan and as of June 30, 2013 and December 31, 2012 we have met the requirements of the capital plan.

The primary objective of our capital plan is to achieve and thereafter maintain the minimum capital ratios required by our Board. The minimum capital ratios established by our Board are higher than the ratios required in order to be considered “well-capitalized” under federal standards. The Board imposed these higher ratios in order to ensure that we have sufficient capital to withstand potential future losses based on our still somewhat elevated level of non-performing assets and given certain other risks and uncertainties we face. As of June 30, 2013, our Bank continued to meet the requirements to be considered “well-capitalized” under federal regulatory standards and met both of the minimum capital ratio goals established by our Board.

Set forth below are the actual capital ratios of our Bank as of June 30, 2013, the minimum capital ratios imposed by our Board, and the minimum ratios necessary to be considered “well-capitalized” under federal regulatory standards:

	Independent						Minimum
	Bank			Minimum			Ratio
	Actual as of			Ratios			Required to
	June 30,			Established			be Well-
	2013			by our Board			Capitalized
Total Capital to Risk-Weighted Assets		16.35	%		11.00	%		10.00	%
Tier 1 Capital to Average Total Assets		10.35			8.00			5.00

On July 2, 2013, the Federal Reserve Board approved a final rule that establishes an integrated regulatory capital framework (the “New Capital Rules”) and will implement the Basel III regulatory capital reforms in the United States.

In general, under the New Capital Rules, minimum requirements will increase for both the quantity and quality of capital held by banking organizations. Consistent with the international Basel framework, the New Capital Rules include a new minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5% and a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets that will apply to all supervised financial institutions. The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking organizations.  As to the quality of capital, the New Capital Rules emphasize common equity tier 1 capital, the most loss-absorbing form of capital, and implements strict eligibility criteria for regulatory capital instruments. The New Capital Rules also change the methodology for calculating risk-weighted assets to enhance risk sensitivity.

We are subject to the New Capital Rules beginning on January 1, 2015.  The 2.50% capital conservation buffer is being phased in over a four-year period beginning in 2016.  Also, under the New Capital Rules our existing trust preferred securities are grandfathered as qualifying regulatory capital.