Quarterly report pursuant to Section 13 or 15(d)

SHAREHOLDERS' EQUITY

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SHAREHOLDERS' EQUITY
 9 Months Ended
Sep. 30, 2013
SHAREHOLDERS' EQUITY [Abstract]  
SHAREHOLDERS' EQUITY
NOTE 13 – SHAREHOLDERS' EQUITY

In connection with the October 26, 2012 termination of the Company’s Written Agreement with the Federal Reserve Bank of Chicago (the "FRB"), the Board of Directors of the Company adopted a resolution (the "Board Resolution") requiring the Company to obtain written approval from the FRB before declaring or paying any dividends, increasing holding company debt or redeeming any capital stock. By letter dated August 1, 2013, the FRB advised the Company that, based on the overall satisfactory condition of the organization, the FRB poses no objection should the Board of Directors choose to rescind the Board Resolution. Accordingly, the Company's Board of Directors rescinded the Board Resolution effective August 1, 2013. The payment of future cash dividends by the Company is largely dependent upon dividends received from the Bank out of its earnings. The Bank had retained earnings of approximately $11.9 million at September 30, 2013.

On April 12, 2013, the FDIC and DIFS, the primary banking regulators of the Bank, notified the Bank that the Bank’s MOU with the FDIC and DIFS had served its purpose and was released.  As a result, the Bank is no longer subject to any regulatory order, memorandum of understanding or other similar regulatory directive or proceeding and has returned to a normal regulatory operating environment.  The requirements of the MOU which are described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 are no longer applicable to the Bank.  In particular, the enhanced regulatory capital requirements of the MOU no longer apply to the Bank and the Bank is no longer required to obtain the prior written consent of the FDIC and DIFS before the Bank declares or pays dividends.

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.

At September 30, 2013 and December 31, 2012, actual capital levels and minimum required levels were (in thousands):

 
  
   
   
   
   
To Be Well
    
   
 
 
  
   
   
Minimum Required
    
Capitalized Under
    
   
 
 
  
   
   
For Capital
    
Prompt Corrective
    
Minimum Required
  
 
  
Actual
    
Adequacy Purposes
    
Action Regulations
    
Under MOU (1)
  
 
  
Amount
    
Ratio
    
Amount
    
Ratio
    
Amount
    
Ratio
    
Amount
    
Ratio
  
September 30, 2013
  
   
   
   
   
   
   
   
 
Total capital (to risk weighted assets)
  
   
   
   
   
   
   
   
 
Consolidated
  
$
177,037
      
16.0
%
  
$
88,285
      
8.0
%
    
N/
A
    
N/
A
    
N/
A
    
N/
A
Bank
    
175,541
      
15.9
      
88,336
      
8.0
    
$
110,421
      
10.0
%
    
N/
A
    
N/
A
Tier 1 capital (to risk weighted assets)
                                                                
Consolidated
    
163,150
      
14.8
      
44,143
      
4.0
      
N/
A
    
N/
A
    
N/
A
    
N/
A
Bank
    
161,646
      
14.6
      
44,168
      
4.0
      
66,252
      
6.0
      
N/
A
    
N/
A
Tier 1 capital (to average assets)
                                                                
Consolidated
    
163,150
      
10.9
      
59,922
      
4.0
      
N/
A
    
N/
A
    
N/
A
    
N/
A
Bank
    
161,646
      
10.8
      
59,887
      
4.0
      
74,859
      
5.0
      
N/
A
    
N/
A
 
                                                                
December 31, 2012
                                                                
Total capital (to risk weighted assets)
                                                                
Consolidated
  
$
168,929
      
15.0
%
  
$
90,244
      
8.0
%
    
N/
A
    
N/
A
    
N/
A
    
N/
A
Bank
    
164,214
      
14.5
      
90,299
      
8.0
    
$
112,874
      
10.0
%
    
N/
A
    
N/
A
Tier 1 capital (to risk weighted assets)
                                                                
Consolidated
    
150,857
      
13.4
      
45,122
      
4.0
      
N/
A
    
N/
A
    
N/
A
    
N/
A
Bank
    
149,960
      
13.3
      
45,150
      
4.0
      
67,724
      
6.0
      
N/
A
    
N/
A
Tier 1 capital (to average assets)
                                                                
Consolidated
    
150,857
      
10.4
      
58,312
      
4.0
      
N/
A
    
N/
A
    
N/
A
    
N/
A
Bank
    
149,960
      
10.3
      
58,371
      
4.0
      
72,964
      
5.0
    
$
116,742
      
8.0
%

(1) The MOU is applicable only to the December 31, 2012 information presented in these columns.

Approximately $40.0 million and $37.7 million of trust preferred securities outstanding at September 30, 2013 and December 31, 2012, respectively, qualified as Tier 1 capital. Refer to our 2012 Form 10-K for more information on the trust preferred securities.
The Bank was categorized as "well capitalized" at September 30, 2013 and December 31, 2012.

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 our capital levels and balance sheet composition at September 30, 2013, we  believe implementation of the new rule will have no material impact on our capital needs.