Annual report pursuant to Section 13 and 15(d)

SHAREHOLDERS' EQUITY

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SHAREHOLDERS' EQUITY
 12 Months Ended
Dec. 31, 2014
SHAREHOLDERS' EQUITY [Abstract]  
SHAREHOLDERS' EQUITY
NOTE 17 – SHAREHOLDERS' EQUITY

Subordinated Notes
In 2009, the Company received proceeds of $1,650,000 from the issuance of unsecured subordinated debt in the form of 11% subordinated notes due in 2017. On August 13, 2013, the Company prepaid and redeemed all of the subordinated notes for $1,650,000 plus interest accrued through the prepayment date.

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.

Actual capital levels (dollars in thousands) and minimum required levels were as follows at year-end:

   
Actual
    
Minimum Required
For Capital
Adequacy Purposes
    
To Be Well
Capitalized Under
Prompt Corrective
Action Regulations
  
   
Amount
    
Ratio
    
Amount
    
Ratio
    
Amount
    
Ratio
  
December 31, 2014
                        
Total capital (to risk weighted assets)
                        
Consolidated
  
$
189,353
      
15.6
%
  
$
97,420
      
8.0
%
    
N/A
 
    
N/A
 
Bank
    
186,276
      
15.3
      
97,575
      
8.0
    
$
121,969
      
10.0
%
Tier 1 capital (to risk weighted assets)
                                                
Consolidated
    
174,084
      
14.3
      
48,706
      
4.0
      
N/A
 
    
N/A
 
Bank
    
170,983
      
14.0
      
48,788
      
4.0
      
73,182
      
6.0
  
Tier 1 capital (to average assets)
                                                
Consolidated
    
174,084
      
11.6
      
59,998
      
4.0
      
N/A
 
    
N/A
 
Bank
    
170,983
      
11.4
      
59,923
      
4.0
      
74,904
      
5.0
  
                                                 
December 31, 2013
                                                
Total capital (to risk weighted assets)
                                                
Consolidated
  
$
174,433
      
15.7
%
  
$
88,915
      
8.0
%
    
N/A
 
    
N/A
 
Bank
    
171,811
      
15.4
      
88,968
      
8.0
    
$
111,210
      
10.0
%
Tier 1 capital (to risk weighted assets)
                                                
Consolidated
    
160,455
      
14.4
      
44,457
      
4.0
      
N/A
 
    
N/A
 
Bank
    
157,825
      
14.2
      
44,484
      
4.0
      
66,726
      
6.0
  
Tier 1 capital (to average assets)
                                                
Consolidated
    
160,455
      
10.6
      
60,482
      
4.0
      
N/A
 
    
N/A
 
Bank
    
157,825
      
10.5
      
60,407
      
4.0
      
75,509
      
5.0
  

Approximately $40.0 million of trust preferred securities outstanding at December 31, 2014 and 2013, respectively, qualified as Tier 1 capital.

The Bank was categorized as "well capitalized" at December 31, 2014 and 2013.

On July 3, 2013, the FDIC Board of Directors approved the Regulatory Capital Interim Final Rule, implementing Basel III.  This rule redefines Tier 1 capital as two components (Common Equity Tier 1 and Additional Tier 1), creates a new capital ratio (Common Equity Tier 1 Risk-based Capital Ratio) and implements a capital conservation buffer.  It also revises the prompt corrective action thresholds and makes changes to risk weights for certain assets and off-balance-sheet exposures.  Banks are required to transition into the new rule beginning on January 1, 2015.  Based on the Company’s capital levels and balance sheet composition at December 31, 2014, the Company believes implementation of the new rule will have no material impact on its capital needs.
 
Issuance of Capital

A summary of the capital instruments issued during recent years is as follows:

Convertible Preferred Stock

In 2008, the Company completed a private offering of 31,290 shares of 12.0% Series A Noncumulative Convertible Perpetual Preferred Stock (Series A Preferred Stock) with a liquidation preference of $1,000 per share, resulting in an aggregate liquidation preference of $31.3 million.  Proceeds of $30.6 million from issuance were net of $686,000 of costs.

In 2009, the Company issued 2,600 shares of 9.0% Series B Noncumulative Convertible Perpetual Preferred Stock (Series B Preferred Stock) with a liquidation preference of $1,000 per share, resulting in an aggregate liquidation preference of $2.6 million.  Proceeds of $2.6 million from issuance were net of $40,000 of costs.

On December 30, 2013, the Company completed the cancellation and exchange (the “Exchange”) of each share of issued and outstanding Series A and Series B Preferred Stock for shares of Company stock and cash, at the election of the holder.  Pursuant to the Exchange, the Company canceled and exchanged each share of Preferred Stock for shares of Company common stock, no par value, in an amount equal to $1,000, the preferred stocks’ liquidation preference amount, divided by $5.25 plus, at the election of the holder, an amount of cash equal to $142.00, in the case of Series A Preferred Stock, or $182.00, in the case of Series B Preferred Stock, or a number of shares of Company common stock equal to this cash amount divided by $5.25.  The one-time cash payments approximated a 5.0% and 4.5% dividend rate for the Series A and Series B, respectively, after considering previous dividends paid and is considered an inducement payment.  The Exchange resulted in cash payments of $4.4 million for the Series A Preferred Stock and $319,000 for Series B Preferred Stock.  Under the accounting guidance for induced conversions of convertible preferred stock, the cash inducement payments were recorded as a reduction to common stock, rather than retained earnings, as the Company had a retained deficit at December 30, 2013.

In addition to the cash payment discussed above, the Exchange resulted in the issuance of 5,973,519 shares of Company common stock in exchange for the Series A Preferred Stock and 457,159 shares in exchange for the Series B Preferred Stock.   The total of the fair value of the new common shares issued and the $4.7 million inducement payment exceeded the fair value of the Preferred shares issuable according to the original conversion terms by $17.6 million, which amount is reflected as a reduction of net income available to common shares in the computation of earnings per share for the year ended December 31, 2013.

Common Stock

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 in 2018 in the aggregate principal amount of $1,000,000 to a director of the Company. On June 29, 2011, the director executed his right to convert the 2% Subordinated Note into 491,830 shares of common stock.

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.

The net proceeds from the offerings and subordinated note conversion were $20.3 million. The Company contributed $10.0 million to the Bank on June 30, 2011 and held the remaining proceeds at the holding company.
 
Warrants

In 2009 the Company and Macatawa Bank entered into a Settlement and Release and Stock and Warrant Issuance Agreement in connection with legal proceedings related to Trade Partners, Inc.  In connection with the Settlement, the Company issued warrants to purchase a total of 1,478,811 shares of common stock at an exercise price of $9.00 per share.  The fair value of the warrants issued was $806,000 and was recorded in Common Stock based upon $0.54 per warrant as determined using a Black-Scholes model.  The warrants expire on June 18, 2015 (five years after issuance).