Regulatory Matters

12 Months Ended

Dec. 31, 2012

Regulatory Matters [Abstract]

Regulatory Matters

Note 12 - Regulatory Matters

The Company and its subsidiary, NorStates 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 weighting, and other factors, and the regulators can change 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 statutory classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required for the Bank to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required.

Actual capital levels and minimum statutory required levels were as follows at December 31, 2012 and 2011:

											Minimum Required to be
						Minimum Required					Well Capitalized
						For Capital					Under Prompt Corrective
	Actual					Adequacy Purposes					Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
2012
Tier I Capital (to average assets)
Consolidated	$	19,254		4.56	%	$	16,884		4.00	%	N/A
NorStates Bank		27,854		6.67			16,711		4.00			20,889		5.00
Tier I Capital (to risk weighted assets)
Consolidated		19,254		7.44			10,356		4.00		N/A
NorStates Bank		27,854		10.77			10,342		4.00			15,512		6.00
Total Capital (to risk weighted assets)
Consolidated		27,395		10.58			20,712		8.00		N/A
NorStates Bank		31,302		12.11			20,683		8.00			25,854		10.00
2011
Tier I Capital (to average assets)
Consolidated	$	36,918		7.53	%	$	19,599		4.00	%	N/A
NorStates Bank		39,855		8.20			19,449		4.00			24,311		5.00
Tier I Capital (to risk weighted assets)
Consolidated		36,918		11.64			12,686		4.00		N/A
NorStates Bank		39,855		12.55			12,699		4.00			19,049		6.00
Total Capital (to risk weighted assets)
Consolidated		41,555		13.10			25,372		8.00		N/A
NorStates Bank		44,009		13.86			25,398		8.00			31,748		10.00

On March 17, 2011, the Company and the Federal Reserve Bank entered into a Written Agreement. Pursuant to the Written Agreement, among other things, the Company has agreed to: (i) serve as a source of strength to the Bank; (ii) abstain from paying any dividends, redeeming any stock or incurring any debt without Federal Reserve approval; (iii) adopt a capital plan; (iv) provide the Federal Reserve with cash flow projections on a quarterly basis; (v) notify the Federal Reserve of the proposed addition of any individual to the Board of Directors or the employment of any individual as a senior executive officer of the Company before such addition or employment becomes effective; and (vi) provide progress reports to the Federal Reserve concerning the Company's compliance with the Written Agreement.

Prior to the Written Agreement, the Company adopted a Board Resolution dated November 17, 2009 which the Written Agreement superseded. The Board Resolution required that the Company obtain written approval from the Federal Reserve prior to: (i) paying dividends to common or preferred stockholders (ii) increasing holding company level debt or subordinated debentures issued in conjunction with trust preferred securities obligations (iii) paying interest on subordinated debentures or (iv) repurchasing Company stock.

In November 2009, in response to the Board Resolution, the Company notified the Treasury of its intent to suspend its dividend payments on its Fixed Rate Cumulative Perpetual Preferred Stock, Series A ("Series A Preferred Stock"). The suspension of the dividend payments is permissible under the terms of the Troubled Asset Relief Program Capital Purchase Program, but the dividend is a cumulative dividend and failure to pay dividends for six dividend periods triggers board of director appointment rights for the holder of the Series A Preferred Stock. At December 31, 2012, the Company had suspended thirteen dividend payments and has a payable of $3,144,000 for the preferred stock dividends. In December 2012, the Treasury exercised its director appointment rights and appointed one director to the Board of Directorsand has the contractual right to appoint one more director. Previously, in January 2011, the Company agreed to allow a Treasury representative to attend its Board of Directors meetings as an observer, however upon appointment of P. David Kuhl as director, the Treasury observer attendance has been discontinued. While dividends are being deferred on the preferred stock issued under the TARP CPP, the Company may not pay dividends on its common stock.

In November 2009, the Company notified the trustee that holds the Company's junior subordinated debentures relating to its trust preferred securities that the Company would be deferring its regularly scheduled quarterly interest payments. The Company has the right to defer the payment of interest on the junior subordinated debentures at any time, for a period not to exceed 20 consecutive quarters. At December 31, 2012, the Company had deferred payment of thirteen regularly scheduled quarterly interest payments and has a payable of $1.0 million for the interest on the subordinated debentures. During the deferral period, the Company may not pay any dividends on its common or preferred stock.

On April 16, 2010, the Bank's board of directors, management, the FDIC and the IDFPR entered into the 2010 Consent Order. On January 14, 2013 the 2010 Consent Order was terminated and was replaced by the 2013 Consent Order. Both the 2010 and the 2013 Consent Orders require, among other items, continued Bank Board of Directors oversight, certain minimum capital levels, action plans to reduce and manage its classified assets, and restrictions on the payment of dividends without prior approval from its regulators (see Note 19).

Both the 2010 and 2013 Consent Orders require the Bank to maintain Tier 1 Capital to average assets at a minimum of 8.00% and total capital to risk weighted assets at a minimum of 12.00%. As noted above, the Bank's Tier 1 Capital to average assets was 6.67%, below the minimum required by the Consent Orders, and total risk-based capital ratio was 12.11% as of December 31, 2012. Under the 2013 Consent Order the Bank may not be considered "well capitalized" for capital adequacy purposes even if it exceeds the levels of capital set forth in the Consent Order. As of December 31, 2012, the Bank was considered "adequately capitalized".

For additional information on regulatory matters, see Note 19 and Note 20.