PREFERRED STOCK

9 Months Ended

Sep. 30, 2012

Preferred Stock Disclosure [Abstract]

Preferred Stock [Text Block]

11. PREFERRED STOCK

On January 9, 2009, we issued $20 million of cumulative perpetual preferred shares, with a liquidation preference of $1,000 per share (the “Senior Preferred Shares”) to the United States Treasury under its Capital Purchase Program (“CPP”). The Senior Preferred Shares constitute Tier 1 capital and rank senior to our common shares. The Senior Preferred Shares pay cumulative dividends quarterly at a rate of 5% per year for the first five years and will reset to a rate of 9% per year on January 9, 2014. The Senior Preferred Shares may be redeemed at any time, subject to prior approval from bank regulatory agencies. We also have the ability to defer dividend payments at any time, at our option.

We also issued a warrant to purchase 215,983 common shares to the U.S. Treasury at a purchase price of $13.89 per share. The aggregate purchase price equals 15% of the aggregate amount of the Senior Preferred Shares purchased by the U.S. Treasury, which was $3 million. The initial purchase price per share for the warrant and the number of common shares subject to the warrant were determined by reference to the market price of the common shares (calculated on a 20-day trailing average) on December 8, 2008, the date the U.S. Treasury approved our TARP application. The warrant has a term of 10 years and is potentially dilutive to earnings per share.

On October 29, 2010, we gave written notice to the U.S. Treasury that effective with the fourth quarter of 2010, we were suspending the payment of regular quarterly cash dividends on our Senior Preferred Shares. Under the CPP provisions, failure to pay dividends for six quarters would trigger the right of the holder of our Senior Preferred Shares to appoint representatives to our Board of Directors. A representative from the U.S. Treasury attended Board meetings during the nine months of 2012. The dividends will continue to be accrued for payment in the future and reported as a preferred dividend requirement that is deducted from income to common shareholders for financial statement purposes. As of September 30, 2012, these accrued but unpaid dividends totaled $2.2 million.

Participation in the CPP requires a participating institution to comply with a number of restrictions and provisions, including standards for executive compensation and corporate governance and limitations on share repurchases and the declaration and payment of dividends on common shares. The standard terms of the CPP require that a participating financial institution limit the payment of dividends to the most recent quarterly amount prior to October 14, 2008, which is $0.19 per share in our case. This dividend limitation will remain in effect until the preferred shares are redeemed.

On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was enacted. As required by ARRA, the U.S. Treasury has issued additional compensation standards on companies receiving financial assistance from the U.S. government. In addition, ARRA imposes certain new executive compensation and corporate expenditure limits on each CPP recipient, until the recipient has repaid the Treasury. ARRA also permits CPP participants to redeem the preferred shares held by the Treasury Department without penalty and without the need to raise new capital, subject to the Treasury’s consultation with the recipient’s appropriate regulatory agency.

On June 19, 2012, the U.S. Treasury (“Treasury”) notified us that the Company’s Series A Preferred Stock would be included in one of a series of pooled auctions of the securities of financial institutions purchased by Treasury under its Capital Purchase Program, which were scheduled to be conducted in the fall of 2012. Treasury also informed us that we could submit a bid to purchase all of our Series A Preferred Stock in advance of the pooled auction, either by us directly or by one or more qualified investors designated by us. Acceptance of any bid is at the discretion of the Treasury, assuming the bid meets a minimum price established internally by Treasury. Our Board of Directors engaged a financial advisor to assist it in identifying, selecting and negotiating with qualified accredited investors regarding the terms of a possible bid. On August 6, 2012, we submitted to Treasury a bid by a group of investors designated by us. Treasury has acknowledged receipt of the bid and notified us that they have opted to include our Series A Preferred Stock in a future individual auction instead of accepting the bid that was submitted. Once Treasury completes a sale of our Series A Preferred Stock, the full $20 million stated value of our Series A Preferred Stock would still remain outstanding and our obligation to pay dividends, currently at an annual rate of 5% and increasing to 9% in January 2014, would continue until the securities are retired.