REGULATORY MATTERS

6 Months Ended

Jun. 30, 2011

REGULATORY MATTERS [Abstract]

REGULATORY MATTERS

NOTE 10-REGULATORY MATTERS

The Corporation (on a consolidated basis) and its Bank subsidiaries are subject to various regulatory capital requirements administered by the federal and state regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory — and possibly additional discretionary — actions by regulators that, if undertaken, could have a direct material effect on the Corporation. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Banks must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items that are calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require FDIC insured Banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). As of June 30, 2011 and December 31, 2010, the most recent notifications from Federal Deposit Insurance Corporation categorized the subsidiary Bank as adequately capitalized in accordance with standards.

     As of December 31, 2010, West Michigan Community Bank had a Tier 1 capital to average assets ratio of 7.5%. West Michigan Community Bank was placed under a Consent Order with federal and state banking regulators containing provisions to foster improvement in West Michigan Community Bank’s earnings, reduce non performing loan levels, and increase capital. The Consent Order required West Michigan Community Bank to retain a Tier 1 capital to average assets ratio of a minimum of 8.0%.West Michigan Community Bank was not in compliance with the Consent Order requirements at December 31, 2010. As previously mentioned, West Michigan Community Bank was sold on January 31, 2011; therefore the Consent Order is no longer applicable to the Corporation.

In January 2010, The State Bank entered into a Consent Order with federal and state banking regulators containing provisions to foster improvement in The State Bank’s earnings, reduce nonperforming loan levels, increase capital, and require revisions to various policies. The Consent Order requires The State Bank to maintain a Tier 1 capital to average asset ratio of a minimum of 8.0%. It also requires The State Bank to maintain a total capital to risk weighted asset ratio of 12.0%. At June 30, 2011, The State Bank had a Tier 1 capital to average assets ratio of 7.9% and a total capital to risk-weighted assets ratio of 12.4%. The State Bank is not in compliance with all Consent Order requirements, and therefore cannot be considered well capitalized.

The Consent Order restricts the Bank from issuing or renewing brokered deposits. The Consent Order also restricts dividend payments from The State Bank to the Corporation. The Corporation, the Board of Directors and management continue to work on plans to come into compliance with the Consent Order. Recent actions included the injection of capital into The State Bank resulting from the sale of West Michigan Community Bank. On January 31, 2011, $900,000 of capital was injected into The State Bank. On June 2, 2011, $2,862,000 of additional capital was injected into The State Bank. Future capital injections are anticipated following the sale of additional non-performing assets acquired by the newly formed subsidiary of the Corporation. It is anticipated that an additional $850,000 of capital may be injected into to The State Bank in July 2011, following the sale of non-performing assets from the subsidiary of the Corporation. While below the compliance level required by the Order, the Bank maintains capital levels that would be considered adequately capitalized by regulatory standards. Non-compliance with Consent Order requirements may cause the bank to be subject to further enforcement actions by the FDIC.

In October 2010, the Corporation received a notice from The Federal Reserve which defined restrictions being placed upon the holding company. The restrictions include the declaration or payment of any dividends, the receipt of dividends from subsidiary banks, the repayment of any principal or interest on subordinated debentures or Trust Preferred securities, restrictions on debt, any changes in

Executive or Senior Management or change in the role of Senior Management. In addition, the notice provided an expectation that the Corporation “maintain sufficient capital” levels.

As illustrated in the table below, at June 30, 2011, the Consolidated Corporation’s total capital to risk weighted assets ratio indicates that it is adequately capitalized. The Corporation’s total capital to risk weighted assets ratio of 10.8% at June 30, 2011 was above the minimum requirement to be adequately capitalized of 8.0%. This is compared to December 31, 2010 when the total capital to risk weighted assets for the Corporation was at 7.8% and was under capitalized. The improvement in capital ratios was largely driven by the sale of West Michigan Community Bank and the recapture of capital related to the sale. Despite the improvements and current capital levels, the Corporation continues to be required to obtain written approval prior to payments of any dividends or for any increase or decrease to outstanding debt.

The Corporation’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years, subject to the limitations described above.

						For Capital					Regulatory
						Adequacy					Agreement
	Actual					Purposes					Requirements
(000s omitted)	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2011
Total Capital (to Risk Weighted Assets) Consolidated	$	24,515		10.8	%	$	18,137		8.0	%	NA		NA
The State Bank		26,433		12.4			17,079		8.0		$	21,348		12.0	%
Tier 1 Capital (to Risk Weighted Assets) Consolidated		21,681		9.6			9,068		4.0		NA		NA
The State Bank		23,673		11.1			8,539		4.0		NA		NA
Tier 1 Capital (to Average Assets)
Consolidated		21,681		7.2			12,085		4.0		NA		NA
The State Bank		23,673		7.9			11,921		4.0			23,843		8.0

						For Capital					Regulatory
						Adequacy					Agreement
	Actual					Purposes					Requirements
(000s omitted)	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2010
Total Capital (to Risk Weighted Assets)
Consolidated	$	25,443		7.8	%	$	26,073		8.0	%	NA		NA
The State Bank		22,670		10.0			18,152		8.0		$	27,228		12.0	%
West Michigan Community Bank		10,722		11.0			7,794		8.0		NA		NA
Tier 1 Capital (to Risk Weighted Assets)
Consolidated		21,261		6.5			13,036		4.0		NA		NA
The State Bank		19,735		8.7			9,076		4.0		NA		NA
West Michigan Community Bank		9,475		9.7			3,897		4.0		NA		NA
Tier 1 Capital (to Average Assets)
Consolidated		21,261		4.9			17,330		4.0		NA		NA
The State Bank		19,735		6.5			12,204		4.0			24,408		8.0
West Michigan Community Bank		9,475		7.5			5,025		4.0			10,050		8.0