11. 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 Board ("FRB") and the Michigan Office of Financial and Insurance Regulation ("OFIR");

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

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

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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:

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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;

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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;

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

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

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

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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 believed most required our focus at that time.

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

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Submission of a joint revised capital plan (the "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;

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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;

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

●

Enhanced interest rate risk modeling practices.

We submitted our Capital Plan on a timely basis and believe that we are generally in compliance with the provisions of the MOU, however, we must still execute on certain strategies outlined in our Capital Plan.

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, 2012 and December 31, 2011 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:

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

September 30, 2012
Total capital to risk-weighted assets
Consolidated	$	189,627		12.98	%	$	116,898		8.00	%	NA		NA
Independent Bank		192,779		13.22			116,682		8.00		$	145,853		10.00	%

Tier 1 capital to risk-weighted assets
Consolidated	$	165,638		11.34	%	$	58,449		4.00	%	NA		NA
Independent Bank		174,171		11.94			58,341		4.00		$	87,512		6.00	%

Tier 1 capital to average assets
Consolidated	$	165,638		6.92	%	$	95,732		4.00	%	NA		NA
Independent Bank		174,171		7.29			95,626		4.00		$	119,533		5.00	%

December 31, 2011
Total capital to risk-weighted assets
Consolidated	$	174,547		11.31	%	$	123,470		8.00	%	NA		NA
Independent Bank		175,868		11.41			123,254		8.00		$	154,068		10.00	%

Tier 1 capital to risk-weighted assets
Consolidated	$	144,265		9.35	%	$	61,735		4.00	%	NA		NA
Independent Bank		156,104		10.13			61,627		4.00		$	92,441		6.00	%

Tier 1 capital to average assets
Consolidated	$	144,265		6.25	%	$	92,338		4.00	%	NA		NA
Independent Bank		156,104		6.77			92,268		4.00		$	115,335		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,
	2012			2011			2012			2011
	(In thousands)
Total shareholders' equity	$	121,528		$	102,627		$	173,283		$	152,987
Add (deduct)
Qualifying trust preferred securities		43,320			38,183			-			-
Accumulated other comprehensive loss		8,432			11,921			8,530			11,583
Intangible assets		(6,793	)		(7,609	)		(6,793	)		(7,609	)
Disallowed capitalized mortgage loan servicing rights		(849	)		(857	)		(849	)		(857	)
Tier 1 capital		165,638			144,265			174,171			156,104
Qualifying trust preferred securities		5,348			10,485			-			-
Allowance for loan losses and allowance for unfunded lending commitments limited to 1.25% of total risk-weighted assets		18,641			19,797			18,608			19,764
Total risk-based capital	$	189,627		$	174,547		$	192,779		$	175,868

In November, 2011, our Board adopted the Capital Plan and submitted such Capital Plan to the FRB and the OFIR. The Capital Plan was updated in February, 2012. The FRB and OFIR have accepted such Capital Plan, assuming the execution of certain strategies and the attainment of the required Tier 1 Capital to Average Total Assets Ratio of 8%.

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 prevailing elevated level of non-performing assets and given certain other risks and uncertainties we face. As of September 30, 2012, our Bank continued to meet the requirements to be considered "well-capitalized" under federal regulatory standards and met one of the minimum capital ratio goals established by our Board.

Set forth below are the actual capital ratios of our Bank as of September 30, 2012, the minimum capital ratios imposed by the Board resolutions, and the minimum ratios necessary to be considered "well-capitalized" under federal regulatory standards:

	Independent						Minimum
	Bank			Minimum			Ratio
	Actual as of			Ratios			Required to
	September 30,			Established			be Well-
	2012			by our Board			Capitalized
Total Capital to Risk-Weighted Assets		13.22	%		11.00	%		10.00	%
Tier 1 Capital to Average Total Assets		7.29			8.00			5.00

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 future losses. In addition, we believe that if our financial condition and performance deteriorate, 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 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, due to our projected further decline in total assets (principally loans), our improved performance in 2012 and the impact of a pending branch sale (see Note #16).