Quarterly report pursuant to Section 13 or 15(d)

SHAREHOLDERS' EQUITY

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SHAREHOLDERS' EQUITY
 9 Months Ended
Sep. 30, 2011
Shareholders' Equity [Abstract]  
SHAREHOLDERS' EQUITY
NOTE 11 – SHAREHOLDERS' EQUITY

Regulatory Capital

The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies.  Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices.  Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases.  Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.
 
The prompt corrective action regulations provide five categories, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition.  If a bank is only adequately capitalized, regulatory approval is required to, among other things, accept, renew or roll-over brokered deposits.  If a bank is undercapitalized, capital distributions and growth and expansion are limited, and plans for capital restoration are required.

At September 30, 2011 and December 31, 2010, actual capital levels and minimum required levels were (in thousands):

   
Actual
    
Minimum Required
For Capital
Adequacy Purposes
    
To Be Well
Capitalized Under
Prompt Corrective
Action Regulations
    
Minimum Required Under Consent Order
  
   
Amount
    
Ratio
    
Amount
    
Ratio
    
Amount
    
Ratio
    
Amount
    
Ratio
  
September 30, 2011
                                                
Total capital (to risk weighted assets)
                                                
Consolidated
   $ 148,988       12.9 %   $ 92,231       8.0 %     N/A       N/A       N/A       N/A  
Bank
     140,559       12.2       92,220       8.0     $ 115,275       10.0 %   $ 126,803       11.0 %
Tier 1 capital (to risk weighted assets)
                                                                
Consolidated
     123,537       10.7       46,115       4.0       N/A       N/A       N/A       N/A  
Bank
     125,875       10.9       46,110       4.0       69,165       6.0       N/A       N/A  
Tier 1 capital (to average assets)
                                                                
Consolidated
     123,537       8.1       61,244       4.0       N/A       N/A       N/A       N/A  
Bank
     125,875       8.2       61,174       4.0       76,467       5.0       122,347       8.0  
                                                                 
December 31, 2010
                                                                
Total capital (to risk weighted assets)
                                                                
Consolidated
   $ 125,483       9.7 %   $ 104,013       8.0 %     N/A       N/A       N/A       N/A  
Bank
     125,797       9.7       103,970       8.0     $ 129,963       10.0 %   $ 142,960       11.0 %
Tier 1 capital (to risk weighted assets)
                                                                
Consolidated
     89,585       6.9       52,007       4.0       N/A       N/A       N/A       N/A  
Bank
     109,160       8.4       51,985       4.0       77,978       6.0       N/A       N/A  
Tier 1 capital (to average assets)
                                                                
Consolidated
     89,585       5.8       61,605       4.0       N/A       N/A       N/A       N/A  
Bank
     109,160       7.1       61,520       4.0       76,901       5.0       123,041       8.0  

Approximately $30.9 million and $22.4 million of trust preferred securities outstanding at September 30, 2011 and December 31, 2010, respectively, qualified as Tier 1 capital.  Refer to our 2010 Form 10-K for more information on the trust preferred securities.

The Bank was categorized as "adequately capitalized" at September 30, 2011 and December 31, 2010.  The Bank's regulatory capital ratios exceeded the levels ordinarily required to be categorized as "well capitalized" at September 30, 2011.  However, because the Bank is subject to the Consent Order, the Bank cannot be categorized as "well capitalized" regardless of actual capital levels.

The Consent Order also prohibits the Bank from declaring or paying any cash dividend without the prior written consent of its regulators.  The payment of future cash dividends by the Company is largely dependent upon dividends received from the Bank out of its earnings.  Under Michigan law, the Bank is also restricted from paying dividends to the Company until its deficit retained earnings has been restored.  The Bank had a retained deficit of approximately $33.4 million at September 30, 2011.
 
Additional information about the Consent Order may be found in Note 1 under the heading "Regulatory Developments."

In order to temporarily replenish the Company's liquidity pending the Company's planned public offering of common stock, on April 21, 2011, the Company issued and sold a 2% Subordinated Note due 2018 in the aggregate principal amount of $1,000,000 to a director of the Company.  The note had a maturity date of April 30, 2018.  The note holder had a continuing right to convert the note in full into common stock with the stock to be valued at book value and the note to be valued at principal and interest accrued.

On June 7, 2011, the Company closed on a rights offering to existing shareholders, issuing 4,456,186 shares of common stock for $2.30 per share.  On June 29, 2011, the Company closed on its public offering, issuing 4,456,186 shares of common stock for $2.30 per share.  In addition, on June 29, 2011, the director discussed above executed his right to convert the 2% Subordinated Note into 491,830 shares of common stock.  The net proceeds from the offerings and subordinated note conversion were $20.4 million.  The Company contributed $10.0 million to the Bank on June 30, 2011 and held the remaining proceeds at the holding company.