Shareholders' Equity

9 Months Ended

Sep. 30, 2012

Shareholders' Equity

NOTE 11 — Shareholders’ Equity

The Treasury provides banks with capital under the SBLF program by purchasing Tier 1-qualifying preferred stock or equivalents in each bank. The dividend rate on SBLF funding will be reduced as a participating community bank increases its lending to small businesses. The initial dividend rate will be, at most, 5%. If a bank’s small business lending increases by 10% or more, then the rate will fall to as low as 1%. Banks that increase their lending by amounts less than 10% can benefit from rates set between 2% and 4%. If lending does not increase in the first two years, however, the rate will increase to 7%. After 4.5 years, the rate will increase to 9% if the bank has not already repaid the SBLF funding. The dividend rate was 1.0% for the periods ended September 30, 2012 and December 31, 2011.

On January 23, 2012, the Board of Directors changed the par value of its common stock from $5.00 to $0.01.

On January 23, 2012, the Board of Directors declared a 5 percent stock dividend. The stock dividend was paid on February 29, 2012, to shareholders of record as of February 15, 2012. Following the stock dividend the number of outstanding shares increased by 137,873. The stock dividend required a reclassification of retained earnings in the amount of $1.4 million to common stock and paid-in-capital common. All per share amounts in this report have been retroactively adjusted to reflect the stock dividend.

In connection with the issuance of subordinated debt on June 15, 2012, the Company issued to Community Bancapital LP (“CBC”) that would allow it to purchase 55,018 warrants at a share price equal to $11.36. These warrants can be exercised any time within the next 8 years. These were valued at $0.3 million using the Black-Scholes option pricing model and are being expensed monthly over the life of the debt. The assumptions for the calculation were dividend rate of 0.0%, risk free factor of 1.2% and a 42.0% volatility factor.

In addition to the warrants issued to CBC as of September 30, 2012, the Company had 158,743 warrants outstanding, expiring February 2013 with a weighted average exercise price of $11.42 per share.