12.	Regulatory Matters

Capital guidelines adopted by Federal and State regulatory agencies and restrictions imposed by law limit the amount of cash dividends our Bank can pay to us. Under these guidelines, the amount of dividends that may be paid in any calendar year is limited to the Bank's current year's net profits, combined with the retained net profits of the preceding two years. It is not our intent to have dividends paid in amounts which would reduce the capital of our Bank to levels below those which we consider prudent and in accordance with guidelines of regulatory authorities.

In December 2009, the Board of Directors of Independent Bank Corporation adopted resolutions (as subsequently amended) that impose the following restrictions:

We will not pay dividends on our outstanding common stock or the outstanding preferred stock held by the UST and we will not pay distributions on our outstanding trust preferred securities without, in each case, the prior written approval of the Federal Reserve Bank (“FRB”) and the Michigan Office of Financial and Insurance Regulation (“OFIR”);

We will not incur or guarantee any additional indebtedness without the prior approval of the FRB;

We will not repurchase or redeem any of our common stock without the prior approval of the FRB; and

We will not rescind or materially modify any of these limitations without notice to the FRB and the OFIR.

In December 2009, the Board of Directors of Independent Bank adopted resolutions (as subsequently amended) designed to enhance certain aspects of the Bank's performance and, most importantly, to improve the Bank's capital position. These resolutions require the following:

The adoption by the Bank of a capital restoration plan designed to help the Bank achieve the minimum capital ratios established by the Bank's Board of Directors as described below;

The enhancement of the Bank's documentation of the rationale for discounts applied to collateral valuations on impaired loans and improved support for the identification, tracking, and reporting of loans classified as TDR's;

The adoption of certain changes and enhancements to our liquidity monitoring and contingency planning and our interest rate risk management practices;

Additional reporting to the Bank's Board of Directors regarding initiatives and plans pursued by management to improve the Bank's risk management practices;

Prior approval of the FRB and the OFIR for any dividends or distributions to be paid by the Bank to Independent Bank Corporation; and

Notice to the FRB and the OFIR of any rescission of or material modification to any of these resolutions.

The substance of all of the resolutions described above was developed in conjunction with discussions held with the FRB and the OFIR. Based on those discussions, we acted proactively to adopt the resolutions described above to address those areas of the Bank's financial condition and operations that we believe most require our focus at this time.

On October 25, 2011 the respective Boards of Directors of the Company and the Bank entered into a Memorandum of Understanding with the FRB and OFIR (the “MOU”). The MOU largely duplicates certain of the provisions in the Board resolutions described above, but also has the following specific requirements:

Submission of a joint revised capital plan by November 30, 2011 to maintain sufficient capital at the Company on a consolidated basis and at the Bank on a stand-alone basis;

Submission of quarterly progress reports regarding disposition plans for any assets in excess of $1.0 million that are in ORE, are 90 days or more past due, are on our “watch list”, or were adversely classified in our most recent examination;

Enhanced reporting and monitoring at Mepco regarding risk management and the internal classification of assets; and

Enhanced interest rate risk modeling practices.

Other than the completion of the joint revised capital plan, which we are currently working to update, we believe we have already met all of the other requirements of the MOU.

We are also subject to various regulatory capital requirements. The prompt corrective action regulations establish quantitative measures to ensure capital adequacy and require minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and Tier 1 capital to average assets. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that could have a material effect on our consolidated financial statements. Under capital adequacy guidelines, we must meet specific capital requirements that involve quantitative measures as well as qualitative judgments by the regulators. The most recent regulatory filings as of September 30, 2011 and December 31, 2010 categorized our Bank as well capitalized. Management is not aware of any conditions or events that would have changed the most recent Federal Deposit Insurance Corporation (“FDIC”) categorization.

Our actual capital amounts and ratios follow:

	Actual					Minimum for Adequately Capitalized Institutions					Minimum for Well-Capitalized Institutions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)

September 30, 2011
Total capital to risk-weighted assets
Consolidated	$	182,060		11.52	%		126,485		8.00	%	NA		NA
Independent Bank		182,998		11.57			126,549		8.00			158,186		10.00	%

Tier 1 capital to risk-weighted assets
Consolidated	$	154,069		9.74	%		63,242		4.00	%	NA		NA
Independent Bank		162,726		10.29			63,274		4.00			94,912		6.00	%

Tier 1 capital to average assets
Consolidated	$	154,069		6.70	%		92,035		4.00	%	NA		NA
Independent Bank		162,726		7.07			92,066		4.00			115,082		5.00	%

December 31, 2010
Total capital to risk-weighted assets
Consolidated	$	193,199		10.99	%	$	140,692		8.00	%	NA		NA
Independent Bank		194,524		11.06			140,760		8.00		$	175,950		10.00	%

Tier 1 capital to risk-weighted assets
Consolidated	$	166,048		9.44	%	$	70,346		4.00	%	NA		NA
Independent Bank		171,947		9.77			70,380		4.00		$	105,570		6.00	%

Tier 1 capital to average assets
Consolidated	$	166,048		6.35	%	$	104,550		4.00	%	NA		NA
Independent Bank		171,947		6.58			104,567		4.00		$	130,709		5.00	%

NA - Not applicable

The components of our regulatory capital are as follows:

	Consolidated						Independent Bank
	September 30,			December 31,			September 30,			December 31,
	2011			2010			2011			2010
	(In thousands)
Total shareholders' equity	$	110,802		$	119,085		$	160,881		$	169,986
Add (deduct)
Qualifying trust preferred securities		40,939			44,084			-			-
Accumulated other comprehensive loss		12,014			13,120			11,531			12,201
Intangible assets		(7,951	)		(8,980	)		(7,951	)		(8,979	)
Disallowed capitalized mortgage loan servicing rights		(883	)		(527	)		(883	)		(527	)
Disallowed deferred tax assets		(852	)		(780	)		(852	)		(780	)
Other		-			46			-			46
Tier 1 capital		154,069			166,048			162,726			171,947
Qualifying trust preferred securities		7,729			4,584			-			-
Allowance for loan losses and allowance for unfunded lending commitments limited to 1.25% of total risk-weighted assets		20,262			22,567			20,272			22,577
Total risk-based capital	$	182,060		$	193,199		$	182,998		$	194,524

In January 2010, we adopted a Capital Restoration Plan (the “Capital Plan”), as required by the Board resolutions adopted in December 2009 and described above, and submitted such Capital Plan to the FRB and the OFIR.

The primary objective of our Capital Plan is to achieve and thereafter maintain the minimum capital ratios required by the Board resolutions adopted in December 2009 (as subsequently amended). The minimum capital ratios established by our Board are higher than the ratios required in order to be considered “well-capitalized” under federal standards. The Board imposed these higher ratios in order to ensure that we have sufficient capital to withstand potential continuing losses based on our elevated level of non-performing assets and given certain other risks and uncertainties we face. As of September 30, 2011, our Bank continued to meet the requirements to be considered “well-capitalized” under federal regulatory standards and met one of the two minimum capital ratio goals established by our Board.

Set forth below are the actual capital ratios of our Bank as of September 30, 2011, the minimum capital ratios imposed by the Board resolutions, and the minimum ratios necessary to be considered “well-capitalized” under federal regulatory standards:

	Independent Bank Actual as of September 30, 2011			Minimum Ratios Established by our Board			Minimum Ratio Required to be Well- Capitalized
Total Capital to Risk-Weighted Assets		11.57	%		11.00	%		10.00	%
Tier 1 Capital to Average Total Assets		7.07			8.00			5.00

Our Capital Plan (as modified) sets forth an objective of achieving these minimum capital ratios as soon as practicable and maintaining such capital ratios through at least the end of 2012. We are currently working to revise and update our Capital Plan for submission to our regulators by November 30, 2011.

If we are unable to achieve both minimum capital ratios set forth in our Capital Plan it may adversely affect our business and financial condition. An inability to improve our capital position could make it difficult for us to withstand continued losses. In addition, we believe that if our financial condition and performance fail to improve, we may not be able to remain well-capitalized under federal regulatory standards. In that case, our primary bank regulators may impose additional regulatory restrictions and requirements on us. If we fail to remain well-capitalized under federal regulatory standards, we will be prohibited from accepting or renewing brokered certificates of deposit without the prior consent of the FDIC, which would likely have an adverse impact on our business and financial condition. If our regulators take more formal enforcement action against us, it would likely increase our expenses and could limit our business operations. There could be other expenses associated with a continued deterioration of our capital, such as increased deposit insurance premiums payable to the FDIC. At the present time, based on our current forecasts and expectations, we believe that our Bank can remain above “well-capitalized” for regulatory purposes for the foreseeable future, even without additional capital, primarily because of some expected further decline in total assets (principally loans) and an expected return to profitability in the second half of 2012.