Regulatory Matters

9 Months Ended

Sep. 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 September 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.

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%. 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 not in compliance with the Consent Order requirements. As previously mentioned, West Michigan Community Bank was sold on January 31, 2011.

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 September 30, 2011, The State Bank had a Tier 1 capital to average assets ratio of 8.1% and a total capital to risk-weighted assets ratio of 12.1%. While these ratios are compliant with the Consent Order requirements, additional requirements are not yet attained, and therefore The State Bank cannot be considered well capitalized.

The Consent Orders restrict the Bank from issuing or renewing brokered deposits. The Consent Orders also restrict 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 Orders 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. Additional capital injections were made on June 2, 2011 in the amount of $2,862,000 and on July 27, 2011 in the amount of $850,000. These injections were the result of the sale of non-performing assets from the subsidiary of the Corporation. Following these injections, the Bank has attained capital levels that can be considered well capitalized by regulatory standards. Future non-compliance with Consent Order requirements may cause the Bank to be subject to further enforcement actions by the FDIC.

Effective in November 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 September 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 10.4% at September 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. 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.

	Actual					For Capital Adequacy Purposes					Regulatory Agreement Requirements
(000s omitted)	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2011
Total Capital (to Risk Weighted Assets)
Consolidated	$	23,460		10.4	%	$	18,013		8.0	%		NA		NA
The State Bank		27,157		12.4			17,509		8.0		$	21,887		12.0	%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated		20,625		9.2			9,007		4.0			NA		NA
The State Bank		24,322		11.1			8,755		4.0			13,132		NA
Tier 1 Capital (to Average Assets)
Consolidated		20,625		6.2			13,328		4.0			NA		NA
The State Bank		24,322		8.1			12,000		4.0			24,000		8.0

	Actual					For Capital Adequacy Purposes					Regulatory Agreement 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