Shareholders' Equity, Other Comprehensive Income and Earnings Per Common Share

12 Months Ended

Dec. 31, 2011

Shareholders' Equity, Other Comprehensive Income and Earnings Per Common Share [Abstract]

Shareholders' Equity, Other Comprehensive Income and Earnings Per Common Share

NOTE 9: Shareholders' Equity, Other Comprehensive Income and Earnings Per Common Share

Shareholders' Equity

Preferred Shares.On January 9, 2009, as part of the Capital Purchase Program (Capital Purchase Program) established by the U.S. Department of the Treasury (Treasury) under the Emergency Economic Stabilization Act of 2008 (EESA), the Corporation issued and sold to Treasury for an aggregate purchase price of $20.00 million in cash (1) 20,000 shares of the Corporation's fixed rate cumulative perpetual preferred stock, Series A, par value $1.00 per share, having a liquidation preference of $1,000 per share (Series A Preferred Stock) and (2) a ten-year warrant to purchase up to 167,504 shares of the Corporation's common stock, par value $1.00 per share (Common Stock), at an initial exercise price of $17.91 per share (Warrant). The Series A Preferred Stock may be treated as Tier 1 capital for regulatory capital adequacy determination purposes.

Cumulative dividends on the Series A Preferred Stock will accrue on the liquidation preference at a rate of 5% per annum for the first five years, and at a rate of 9% per annum thereafter. The Series A Preferred Stock has no maturity date and ranks senior to the Common Stock with respect to the payment of dividends. The Corporation may redeem the Series A Preferred Stock at 100% of its liquidation preference (plus any accrued and unpaid dividends), subject to the consent of the Federal Deposit Insurance Corporation.

The Warrant has a 10-year term and was immediately exercisable upon issuance, with an exercise price, subject to anti-dilution adjustments, equal to $17.91 per share of Common Stock. Of the aggregate amount of $20.00 million received, approximately $19.21 million was attributable to the Series A Preferred Stock and approximately $792,000 was attributable to the Warrant, based on the relative fair values of these instruments on the date of issuance. The Corporation used a discounted cash flow analysis to determine the fair value of the Series A Preferred Stock, which included the following key assumptions: (i) a discount rate of 10 percent, (ii) a dividend rate for the first five years of 5 percent and (iii) a dividend rate after five years of 9 percent. The Corporation used the Black-Scholes option-pricing model to determine the fair value of the Warrant, which included the following key assumptions: (i) volatility of 30 percent, (ii) an exercise price of $17.91, (iii) a dividend yield of 4.0 percent, and (iv) the five-year risk-free rate of 2.4 percent. The resulting fair values of the Series A Preferred Stock and the Warrant were used to allocate the aggregate purchase price of $20.00 million on a relative fair value basis. As the Series A Preferred Stock was initially valued at $19.21 million, the difference between the initial value and the par value of the Series A Preferred Stock will be accreted over a period of five years through a reduction to retained earnings on an effective yield basis. While this accretion does not affect net income, it, along with the dividends, reduces the amount of net income available to common shareholders, and thus reduces both basic and diluted earnings per common share.

The purchase agreement pursuant to which the Series A Preferred Stock and the Warrant were sold contains limitations, until January 9, 2012, on the payment of dividends or distributions on the Common Stock (including the payment of the cash dividends in excess of the Corporation's quarterly cash dividend at the time of issuance of the Series A Preferred Stock of $0.31 per share) and on the Corporation's ability to repurchase, redeem or acquire its Common Stock or other securities, and subjects the Corporation to certain of the executive compensation limitations included in the EESA until such time as Treasury no longer owns any Series A Preferred Stock acquired through the Capital Purchase Program.

On July 27, 2011, the Corporation redeemed $10.00 million, or 50 percent, of the total $20.00 million liquidation preference of its Series A Preferred Stock. The Corporation paid $10.10 million to redeem this portion of the Series A Preferred Stock, consisting of $10.00 million in liquidation preference and $100,000 of accrued and unpaid dividends associated with the preferred stock being redeemed.

Common Shares.The Corporation did not repurchase any shares of its common stock during the years ended December 31, 2011, 2010 or 2009. Limitations on future share repurchases in effect as of December 31, 2011 are described above.

Other Comprehensive Income

The following table presents the cumulative balances of the components of other comprehensive income, net of deferred taxes,  of $1.79 million, $30,000 and $521,000 as of December 31, 2011, 2010 and 2009, respectively.

	December 31,
(Dollars in thousands)	2011			2010			2009
Net unrealized gains on securities	$	4,596		$	500		$	1,168
Net unrecognized loss on cash flow hedges		(314	)		(90	)		-
Net unrecognized losses on defined benefit plan		(898	)		(339	)		(200	)
Total cumulative other comprehensive income	$	3,384		$	71		$	968

The Corporation reclassified net gains from securities of $8,000, $46,000 and $14,000 from other comprehensive income to earnings for the years ended December 31, 2011, 2010 and 2009, respectively.

Earnings Per Common Share

The components of the Corporation's earnings per common share calculations are as follows:

	December 31,
(Dollars in thousands)	2011			2010			2009
Net income	$	12,976		$	8,110		$	5,526
Accumulated dividends on Series A Preferred Stock		(850	)		(1,000	)		(992	)
Amortization of Series A Preferred Stock discount		(333	)		(149	)		(138	)
Net income available to common shareholders	$	11,793		$	6,961		$	4,396
Weighted average number of common shares used in earnings per common share-basic		3,135,645			3,085,025			3,044,009
Effect of dilutive securities:
Stock option awards and warrant		36,632			18,444			4,482
Weighted average number of common shares used in earnings per common share-assuming dilution		3,172,277			3,103,469			3,048,491

Potential common shares that may be issued by the Corporation for its stock option awards and Warrant are determined using the treasury stock method. Approximately 316,000 and 361,000 shares issuable upon exercise of options for the years ended December 31, 2011 and 2010, respectively, and 548,000 shares issuable upon exercise of options and the Warrant for the year ended December 31, 2009 were not included in computing diluted earnings per common share because they were anti-dilutive.