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Manasota Group, Inc. – ‘10-Q’ for 6/30/10

On:  Friday, 8/20/10, at 2:27pm ET   ·   For:  6/30/10   ·   Accession #:  1144204-10-45833   ·   File #:  0-50748

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 8/20/10  Manasota Group, Inc.              10-Q        6/30/10    5:1.0M                                   Vintage/FA

Quarterly Report   —   Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                    HTML    567K 
 2: EX-31.1     Certification per Sarbanes-Oxley Act (Section 302)  HTML     15K 
 3: EX-31.2     Certification per Sarbanes-Oxley Act (Section 302)  HTML     15K 
 4: EX-32.1     Certification per Sarbanes-Oxley Act (Section 906)  HTML      8K 
 5: EX-32.2     Certification per Sarbanes-Oxley Act (Section 906)  HTML      8K 


10-Q   —   Quarterly Report


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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

Form 10-Q

x
Quarterly report under section 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

¨
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ______ to ______

Commission file number 333-71773

Horizon Bancorporation, Inc.
(Exact Name of Registrant as Specified in Its Charter)

Florida
65-0840545
(State or Other Jurisdiction of
(IRS Employer
Incorporation or Organization)
Identification No.)

900 53rd Avenue East
Bradenton, Florida 34203
(Address of Principal Executive Offices)

941-753-2265
(Registrant's Telephone Number, Including Area Code)

N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x  No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act) (Check one):

Large Accelerated Filer o
Accelerated Filer o
Non-Accelerated Filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes ¨  No x

Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:

Common Stock $0.01 Par Value as of August 6, 2010: Issued 1,809,912 Shares; Outstanding: 1,770,139 Shares

 

 

Index
 
Part I. Financial Information
   
     
Item 1.  Financial Statements (unaudited)
 
3
     
Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009
 
3
     
Consolidated Statements of Income for the Three Months and the Six Months Ended June 30, 2010 and 2009
 
4
     
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009
 
5
     
Consolidated Statements of Changes in Shareholders' Equity for the Six Months Ended June 30, 2010 and 2009
 
6
     
Notes to Consolidated Financial Statements
 
7
     
Item 2.  Management's Discussion and Analysis of Financial Conditions and Results of Operations
 
16
     
Item 3.  Quantitative and Qualitative Disclosure About Market Risk
 
25
     
Item 4T.  Controls and Procedures
 
26
     
Part II. Other Information
   
     
Item 1.  Legal Proceedings
 
27
     
Item 1A. Risk Factors
 
27
     
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
27
     
Item 3.  Defaults Upon Senior Securities
 
27
     
Item 4.  Submission of Matters to a Vote of Security Holders
 
27
     
Item 5.  Other Information
 
27
     
Item 6.  Exhibits
  
27

 
2

 

PART I - FINANCIAL INFORMATION
 
Item 1.  Financial Statements.

HORIZON BANCORPORATION, INC.
Consolidated Balance Sheets

   
June 30,
     
       
2009
 
   
(Unaudited)
   
 
 
ASSETS
           
Cash and cash equivalents
           
Cash and due from banks
  $ 8,647,623     $ 9,719,612  
Federal funds sold
    -0-       -0-  
Total cash and cash equivalents
    8,647,623       9,719,612  
Securities:
               
Held to maturity, at amortized cost
    10,908,440       11,462,744  
Available-for-sale at fair value
    11,346,023       13,080,811  
Loans held for sale
    1,416,328       1,262,199  
Loans receivable, net
    135,813,977       151,127,759  
Property and equipment, net
    3,659,435       3,698,502  
Other real estate owned
    8,649,758       2,579,138  
Other assets
    7,383,569       6,568,241  
                 
    $ 187,825,153     $ 199,499,006  
                 
Liabilities
               
Deposits
               
Noninterest-bearing
  $ 8,877,300     $ 9,686,614  
Interest-bearing
    155,698,693       164,889,658  
Total deposits
    164,575,993       174,576,272  
Federal Home Loan Bank borrowings
    18,000,000       18,000,000  
Notes Payable
    965,204       1,065,205  
Other liabilities
    193,362       190,368  
Total liabilities
    183,734,559       193,831,845  
                 
Shareholders' equity
               
Preferred stock,  $.01 par value 1,000,000 shares authorized; none    outstanding
    -       -  
Treasury stock  outstanding 39,733 shares at June 30, 2010 and December 31, 2009
    (479,393 )     (479,393 )
Common stock, $.01 par value 25,000,000 shares authorized; 1,809,912 Issued and 1,770,139 outstanding at June 30, 2010 and at December 31, 2009
    18,099       18,099  
Additional paid in capital
    10,453,576       10,428,214  
Retained earnings/(losses)
    (5,760,121 )     (4,006,176 )
Accumulated other comprehensive income (loss), net of tax
    (141,567 )     (293,583 )
Total shareholders' equity
    4,090,594       5,667,161  
                 
    $ 187,825,153     $ 199,499,006  

See accompanying notes to the financial statements

 
3

 

HORIZON BANCORPORATION, INC.
Consolidated Statements of Income (Unaudited)

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
       
2009
   
2010
   
2009
 
Interest income
                       
Interest and fees on loans
  $ 2,025,383     $ 2,657,392     $ 4,310,683     $ 5,368,395  
Interest on investment securities
    211,512       395,633       488,862       812,375  
Interest on federal funds
    2,448       923       5,715       1,705  
Total interest income
    2,239,343       3,053,948       4,805,260       6,182,475  
Interest expense
                               
Interest on deposits
    763,173       1,226,605       1,615,300       2,555,691  
Interest on borrowings
    208,570       279,255       418,963       556,814  
Total interest expense
    971,743       1,505,860       2,034,263       3,112,505  
Net interest income
    1,267,600       1,548,088       2,770,997       3,069,970  
Provision for loan losses
    -0-       8,571,842       2,697,973       8,791,842  
Net interest income after provision for loan losses
    1,267,600       (7,023,754 )     73,024       (5,721,872 )
Other income
                               
Gain on sales of loans
    212,348       123,777       412,348       123,777  
Impairment loss, other real estate owned
    -0-       (363.557 )     (240,545 )     (365,188 )
Impairment loss, securities
    -0-       (1,014,848 )     (61,081 )     (1,014,848 )
Gain on sale of servicing assets
    -0-       200,392       -0-       200,392  
Gain on sale of other assets & other real estate owned
    75,445       1,999       69,714       9,499  
Gain on sale of  securities
    1       -0-       996       -0-  
Service charges on deposit accounts
    17,902       19,294       38,717       38,190  
Loan servicing income
    64,089       -0-       112,659       -0-  
Miscellaneous , other
    79,680       129,067       132,495       164,301  
Total other income
    449,465       (903,876 )     465,303       (843,877 )
Other expenses
                               
Salaries and benefits
    607,250       575,276       1,244,754       1,204,674  
Building and equipment expense
    246,515       253,084       484,099       451,675  
Professional fees
    271,589       78,381       414,120       128,360  
FDIC insurance expense
    199,006       133,591       387,928       167,698  
Data processing and software expense
    92,056       101,309       179,566       195,946  
Other operating expense
    235,829       188,391       511,581       378,795  
Total operating expense
    1,652,245       1,330,032       3,222,048       2,527,148  
Income/(loss) before income taxes
    64,820       (9,257,662 )     (2,683,721 )     (9,092,897 )
Income tax expense/(benefit)
    (52,147 )     (2,352,836 )     (929,776 )     (2,331,326 )
Net Income/(loss)
  $ 116,967     $ (6,904,826 )   $ (1,753,945 )   $ (6,761,571 )
Basic income/(loss)  per share
  $ 0.07     $ (3.90 )   $ (0.99 )   $ (3.82 )
Diluted income/(loss) per share
  $ 0.07     $ (3.86 )   $ (0.99 )   $ (3.77 )

See accompanying notes to the financial statements

 
4

 

HORIZON BANCORPORATION, INC.
Consolidated Statements of Cash Flows (Unaudited)

   
For the six months
   
For the six months
 
Cash flows from operating activities
           
Net cash provided by operating activities
  $ (7,463,190 )   $ (3,345,254 )
Cash flows from investing activities
               
Proceeds from sale of other assets
    97,769       162,969  
Proceeds from sale of loans
    7,748,673       6,324,169  
Purchase of securities held to maturity
    -0-       (1,019,875 )
Purchase of securities available for sale
    -0-       -0-  
Proceeds from sale of securities
    551,115       -0-  
Proceeds from maturities and principal repayments of securities available for sale
    1,864,353       1,709,521  
Repayment of Federal Home Loan Bank Stock
    46,000       125,750  
(Increase)/decrease in Other real estate owned
    (6,388,620 )     185,896  
Loan originations, net
    12,615,809       (3,455,064 )
Property and equipment expenditures, net
    (43,619 )     (348,045 )
Net cash provided (used) by investing activities
    16,491,480       3,685,321  
Cash flows from financing activities
               
Exercise of warrants and options
    -0-       9,312  
Increase/(decrease)  in deposits
    (10,000,279 )     6,205,746  
Increase/(decrease) in fed funds purchased
    -0-       -0-  
Increase/(decrease) in borrowings, net
    -0-       (3,000,000 )
Increase/(decrease)  in Note Payable by Parent
    (100,000 )     225,000  
Net cash provided by financing activities
    (10,100,279 )     3,440,058  
Net change in cash and cash equivalents
    (1,071,989 )     3,780,125  
Cash and cash equivalents at beginning of period
    9,719,612       2,383,783  
Cash and cash equivalents at end of period
  $ 8,647,623     $ 6,163,908  

See accompanying notes to the financial statements

 
5

 

HORIZON BANCORPORATION, INC.
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
for the six-month periods ended June 30, 2010 and 2009

               
 
   
 
   
Accumulated
       
   
Common Stock
   
Treasury
   
Paid in
   
Retained
   
Other
       
   
Shares
   
Par Value
   
Stock
   
Capital
   
Earnings
   
Income
   
Total
 
    1,768,446     $ 18,082     $ (479,393 )   $ 10,358,919     $ 4,116,602     $ (1,219,680 )   $ 12,794,530  
Comprehensive Income:
                                                       
Net income, six-month period ended June 30, 2009
                            $ (6,761,571 )           (6,761,571 )
                                                         
Net unrealized gains on securities, six-month period ended June 30, 2009
                                      700,203       700,203  
                                                         
Total comprehensive income/(loss),net of tax
                                            (6,061,368 )
Warrant Exercise
    1,693       17               9,295                       9,312  
                                                         
Stock based Compensation
                            30,000                       30,000  
Balance, June 30, 2009
    1,770,139     $ 18,099     $ (479,393 )   $ 10,398,214     $ (2,644,969 )   $ (519,477 )   $ 6,772,474  
                                                         
    1,770,139     $ 18,099     $ (479,393 )   $ 10,428,214     $ (4,006,176 )   $ (293,583 )   $ 5,667,161  
Comprehensive Income:
                                                       
Net income/(loss), six-month period ended June 30, 2010
                              (1,753,945 )           (1,753,945 )
Net unrealized gains on securities, six-month period ended June 30, 2010
                                      152,016       152,016  
                                                         
Total comprehensive income/(loss),net of tax
                                            (1,601,929 )
                                                         
Stock based Compensation
                            25,362                       25,362  
Balance, June 30, 2010
    1,770,139     $ 18,099     $ (479,393 )   $ 10,453,576     $ (5,760,121 )   $ (141,567 )   $ 4,090,594  

 
6

 

HORIZON BANCORPORATION, INC.
Notes to the Consolidated Financial Statements (Unaudited)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles.  However, all adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for fair presentation of the consolidated financial statements, have been included.  The results of operations for the period ended June 30, 2010, are not necessarily indicative of the results which may be expected for the entire fiscal year or for any other period.  For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2009 included in Horizon Bancorporation, Inc.'s Form 10-K.

The consolidated financial statements include the accounts of the Company and its subsidiary.  Significant intercompany transactions and balances have been eliminated in consolidation.

In preparing the consolidated financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate, contingent assets and liabilities and deferred tax assets.

NOTE 2 – SUMMARY OF ORGANIZATION

Horizon Bancorporation, Inc., Bradenton, Florida (the "Company"), is a one-bank holding company with respect to Horizon Bank, Bradenton, Florida (the "Bank"). The Company commenced banking operations on October 25, 1999 when the Bank commenced operations. The Bank is primarily engaged in the business of obtaining deposits and providing commercial, consumer and real estate loans to the general public. The Bank's depositors are each insured up to $250,000 by the Federal Deposit Insurance Corporation (the "FDIC") subject to certain limitations imposed by the FDIC. This $250,000 limit has been extended permanently by an act of Congress.  The Bank has also chosen to opt in to the FDIC's "Temporary Liquidity Guarantee Program" for unlimited deposit insurance coverage for non-interest bearing transaction accounts.

The Company is authorized to issue up to 25.0 million shares of its $.01 par value per share common stock. Each share is entitled to one vote and shareholders have no preemptive or conversion rights. As of June 30, 2010, and December 31, 2009, there were 1,809,912 shares issued respectively and 1,770,139 shares outstanding, respectively. Additionally, the Company has authorized the issuance of up to 1.0 million shares of its $.01 par value per share preferred stock. The Company's Board of Directors may, without further action by the shareholders, direct the issuance of preferred stock for any proper corporate purpose with preferences, voting powers, conversion rights, qualifications, special or relative rights and privileges which could adversely affect the voting power or other rights of shareholders of common stock. Effective October 23, 2009, the Board of Directors did designate, by amending the Company’s Articles of Incorporation, a series of preferred stock.

 
7

 

NOTE 3 – LOANS RECEIVABLE

Loans receivable consist of the following:

         
Real estate – commercial
  $ 90,665,441     $ 97,783,166  
Real estate – construction
    1,029,883       1,369,987  
Real estate – residential
    36,332,149       37,438,678  
Commercial
    10,825,024       17,217,611  
Consumer
    1,959,697       2,049,597  
Loans, gross
    140,812,194       155,859,039  
Deduct allowance for loan losses
    (4,998,217 )     (4,731,280 )
Loans, net
  $ 135,813,977     $ 151,127,759  

Activity in the allowance for loan losses for the quarter ended June 30, are as follows:
 
   
2010
   
2009
 
             
Balance at beginning of period
  $ 5,318,554     $ 1,652,301  
Provision for loan losses
    -0-       8,571,842  
Loans charged-off
    (364,591 )     (5,116,678 )
Recoveries
    44,254       -0-  
                 
Balance at end of period
  $ 4,998,217     $ 5,107,465  

Activity in the allowance for loan losses for the six months ended June 30, are as follows

   
2010
   
2009
 
             
Balance at beginning of period
  $ 4,731,280     $ 1,502,823  
Provision for loan losses
    2,697,973       8,791,842  
Loans charged-off
    (2,502,636 )     (5,187,200 )
Recoveries
    71,600       -0-  
                 
Balance at end of period
  $ 4,998,217     $ 5,107,465  

NOTE 4 – SECURITIES HELD-TO-MATURITY

Information pertaining to securities with gross unrealized losses at June 30, 2010, aggregated by investment category and further segregated by length of time (less than or over twelve months) that the securities have been in a continuous loss position follows:

   
Less Than
   
Over
       
   
Twelve Months
   
Twelve Months
   
Total
 
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
 
State, County and Municipal
  $ -0-     $ (-0- )   $ 6,304,433     $ (709,916 )   $ 6,304,433     $ (709,916 )
Corporate Securities
    -0-       (-0- )     800,000       (130,000 )     800,000       (130,000 )
Total
  $ -0-     $ (-0- )   $ 7,104,443     $ (839,916 )   $ 7,104,433     $ (839,916 )

 
8

 

At June 30, 2010 unrealized losses on held-to-maturity securities amounted to $839,916 representing 7.7% of the total held to maturity portfolio.  Management evaluates securities for other-than-temporary impairment on a quarterly basis, or more frequently when economic or market concerns warrant such evaluation.  In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating entities have occurred, the severity and duration of the impairment and the volatility of the security's fair value.  As management has the intent and ability to hold the securities until maturity, or for the foreseeable future and due to the fact that the unrealized losses relate primarily to the lack of liquidity in the market rather than the expected cash flows of the underlying collateral or issuer, no declines are deemed to be other than temporary.

NOTE 5 – SECURITIES AVAILABLE FOR SALE

Information pertaining to securities with gross unrealized losses at June 30, 2010, aggregated by investment category and further segregated by the length of time (less than or over twelve months) that the securities have been in a continuous loss position follows:

   
Less than
Twelve Months
   
Greater than
Twelve Months
   
Total
 
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
 
U.S. Agency
  $ -0-     $ (-0- )   $ -0-     $ -0-     $ -0-     $ (-0- )
Mortgage backed securities
    676,793       (10,534 )     49,278       (92,842 )     726,071       (103,376 )
Collateralized mortgage securities
    250,856       (3,261 )     -0-       -0-       250,856       (3,261 )
Trust preferred securities & other corporate notes
    -0-       -0-       174,968       (277,012 )     174,968       (277,012 )
Total
  $ 927,649     $ (13,795 )   $ 224,246     $ (369,854 )   $ 1,151,895     $ (383,649 )

At June 30, 2010, unrealized losses in the securities portfolio amounted to $383,649 representing 3.3 % of the total available for sale portfolio.  Management evaluates securities for other-than-temporary impairment on a quarterly basis, or more frequently when economic or market concerns warrant such evaluation.  In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating entities have occurred, the severity and duration of the impairment and the volatility of the security's fair value.  As management has the intent and ability to hold the securities until maturity, or for the foreseeable future and due to the fact that the unrealized losses relate primarily to the lack of liquidity in the market rather than the expected cash flows of the underlying collateral or issuer, no declines are deemed to be other than temporary.

 
9

 

NOTE 6 - EARNINGS PER SHARE

The following summarizes the computation of basic and diluted earnings per share.

   
Three Months Ended June 30, 2010
   
Three Months Ended June 30, 2009
 
Basic earnings/(loss) per share
           
Net income/(loss) applicable to common stock
  $ 116,967     $ (6,904,826 )
Weighted average shares outstanding
    1,770,139       1,770,139  
Basic earnings/(loss) per share
  $ .07     $ (3.90 )
                 
Diluted earnings/(loss) per share
               
Net income/(loss) applicable to common stock
  $ 116,967     $ (6,904,826 )
Weighted average shares outstanding
    1,770,139       1,770,139  
Dilutive effect of assumed exercise of stock options/warrants
    -0-       18,200  
Diluted average shares outstanding
    1,770,139       1,788,339  
                 
Diluted earnings/(loss) per share
  $ .07     $ (3.86 )

   
  Six Months Ended June 30, 2010  
   
  Six Months Ended June 30, 2009  
 
Basic earnings/(loss) per share
           
Net income/(loss) applicable to common stock
  $ (1,753,945 )   $ (6,761,571 )
Weighted average shares outstanding
    1,770,139       1,770,092  
Basic earnings/(loss) per share
  $ (0.99 )   $ (3.82 )
                 
Diluted earnings per share
               
Net income/(loss) applicable to common stock
  $ (1,753,945 )   $ (6,761,571 )
Weighted average shares outstanding
    1,770,139       1,770,092  
Dilutive effect of assumed exercise of stock options/warrants
    -0-       24,961  
Diluted average shares outstanding
    1,770,139       1,795,053  
                 
Diluted earnings/(loss) per share
  $ (0.99 )   $ (3.77 )
 
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS
 
Assets and liabilities are grouped for fair value in three level based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.  These levels are:

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 -  Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

 
10

 

The following table summarizes fair value measurements as of June 30, 2010: (in thousands)

       
Fair Value Measurements Using
 
         
Quoted Prices in
Active Markets
for Identical
Assets
   
Significant Other
Observable Input
   
Significant
Unobservable
Inputs
 
Descriptions
 
6/30/2010
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Held to maturity securities
  $ 10,097     $ 800     $ 9,297        
Available-for-sale securities
  $ 11,346             $ 3,801     $ 7,545  
Impaired Loans
  $ 31,695                     $ 31,695  
Total
  $ 53,138     $ 800     $ 13,098     $ 39,240  

The types of instruments valued based on quoted market prices in active markets include most U.S. Government debt and agency debt securities. Such instruments are generally classified within level 1 or level 2 of the fair value hierarchy. As required by SFAS No. 157, the Company does not adjust the quoted price for such instruments.

The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include state and municipal obligations, mortgage backed securities and collateralized mortgage obligations. Such instruments are generally classified within level 2 of the fair value hierarchy.

Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or market value, and classified at level 3 in the fair value hierarchy. Market value is measured based on the value of the collateral securing these loans or techniques that are not supported by market activity for loans that are not collateral dependent and require management’s judgment. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable. The value of real estate collateral is determined based on appraisals by qualified licensed appraisers hired by the Company. The value of business equipment may be based on an appraisal by qualified licensed appraisers hired by the Company if significant, or may be valued based on the equipment’s net book value on the business’ financial statements. Inventory and accounts receivable collateral may be valued based on independent field examiner review or aging reports, if significant. Field examiner reviews may be conducted based on the loan exposure and reliance on this type of collateral. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.
 
NOTE 8 - RECENT ACCOUNTING PRONOUNCEMENTS
 
Effective July 1, 2009, the Company adopted a new accounting guidance related to U.S. GAAP [FASB Accounting Standards Codification (“ASC”) 105, Generally Accepted Accounting Principles].  This guidance establishes FASB ASC as the source of authoritative U.S. GAAP recognized by FASB to be applied by nongovernmental entities.  Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants.  FASB ASC supersedes all existing non-SEC accounting and reporting standards.  All other non-grandfathered, non-SEC accounting literature not included in the ASC has become non-authoritative.  FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASU”), which will serve to update the ASC, provide background information about the guidance, and provide the basis for conclusions on the changes to the ASC.  The ASC is not intended to change U.S. GAAP or any requirements of the SEC.  This guidance is effective for the Company as of December 31, 2009.
 
In April 2009, the FASB issued the following three FASB Staff Position (“FSPs”) intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities.

 
11

 

1)  FSP SFAS No. 157-4,  “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and identifying Transactions That Are Not Orderly,” codification standard ASC 820-10-65-4 (“ASC 820”), transition related to FSP SFAS No. 157-4, provides additional guidance for estimating fair value in accordance with ASC 820 when the volume and level of activity for the asset or liability have decreased significantly.  This ASC also provides guidance on identifying circumstances that indicate a transaction is not orderly.  The provisions of this ASC are effective for the Company’s interim period ending on June 30, 2009.  The adoption of ASC 820 at June 30, 2009 did not have a material impact on this Company’s financial condition or results of operations.

2)  FSP SFAS No. 107-1 and APB 28-1,  “Interim Disclosures about Fair Value of Financial Instruments,” codification standard ASC 825-10-65-1, transition related to FSP SFAS No. 107-1 and APB 28-1, requires disclosures about fair value of financial instruments in interim reporting periods of publicly traded companies that were  previously only required to be disclosed in annual financial statements.  The provisions of this ASC are effective for the Company’s interim period ending on June 30, 2009, and only amend the disclosure requirements about fair value of financial instruments in interim periods.

3)  FSP SFAS No. 115-2 and SFAS No. 124-2,  “Recognition and Presentation of Other-Than-Temporary Impairments,” codification standard ASC 320-10-65-1, transition related to FSP SFAS No 115-2 and SFAS No. 124-2, amends current other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements.  This ASC does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities.  The provisions of this ASC are effective for the Company’s interim period ending on June 30, 2009.  Adoption of this provision had a material impact on the Company’s financial condition or results of operations.

In May 2009, the FASB issued SFAS no. 165, “Subsequent Events,” codification standard ASC 855.  ASC 855 establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  In particular, this statement sets forth:  (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.  The Company adopted this standard effective for the quarterly period ended June 30, 2009, and its adoption had no material impact on the Company’s financial condition or results of operations.

In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, “Fair Value Measurements and Disclosures,” codification standard ASC 820.  This ASU provides amendments for fair value measurements of liabilities.  It provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more techniques.  ASU 2009-05 also clarifies that when estimating a fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability.  ASU 2009-05 is effective for the first reporting period (including interim periods) beginning after issuance of fourth quarter 2009 financial statement information.  The Company is assessing the impact of ASU 2009-05 on its financial condition, results of operations, and disclosures.

Other accounting standards that have been issued or proposed by the FASB or other standard-setting bodies are not expected to have a material impact on the Company’s financial statements.

 
12

 

NOTE 9 – REGULATORY MATTERS, COMPANY LOAN, EQUITY OFFERING AND GOING CONCERN CONSIDERATION

Regulatory Matters

 (a)  Written Agreement

On November 10, 2009, the Federal Reserve Bank of Atlanta (the “Atlanta Fed”), the State of Florida Office of Financial Regulation (the “OFR”) and the Bank have entered into a Written Agreement (“the Agreement”).  The Agreement requires the Bank to:

 
·
Submit a written plan to strengthen Board oversight of the management and operations of the Bank.
 
·
Submit a written plan to strengthen the Bank’s management of commercial real estate concentrations, including steps to reduce the risk of concentrations.
 
·
Submit a written plan to strengthen credit risk management practices.
 
·
Submit a written plan to strengthen lending and credit administration policies, procedures, and practices.
 
·
Retain an independent consultant acceptable to the regulators to assess the level of risk or exposure in the portion of the Bank’s loan portfolio not reviewed at the most recent regulatory examination.
 
·
Submit a written plan to provide for the ongoing review and grading of the Bank’s loan portfolio by a qualified independent party.
 
·
The Bank shall not, directly or indirectly, extend or renew any credit to or for the benefit of any borrower, including related interest of the borrower, who is obligated to the Bank on any extension of credit that have been charged off by the Bank, or classified “loss” in the most recent report of examination or in any subsequent report of examination so long as such credit remains uncollected.
 
·
The Bank shall not, directly or indirectly, extend or renew any credit to or for the benefit of any borrower, including related interest of the borrower, whose extension of credit has been classified as “doubtful” or “substandard” in the most recent report of examination or in any subsequent report of examination without the prior approval of the Bank’s Board of Directors.
 
·
Submit a written plan for each problem loan and for other real estate exceeding $250,000 that is designed to improve the Bank’s position with respect to the above assets.
 
·
Provide a written report after each calendar quarter updating each asset improvement plan; in addition, provide the problem loan list, a listing of past due/non-accrual loans, and a list of all loan renewals and extensions for which the Bank did not collect the full interest.
 
·
Eliminate from the Bank’s balance sheet all assets or portions of assets classified “loss” in the most recent report of examination as well as in future reports of examination.
 
·
Review and revise the methodology used to construct the allowance for loan and lease losses (“the ALLL”).  Upon completion, submit the ALLL methodology to the regulators for their review.
 
·
Submit a written plan for the maintenance of an adequate ALLL, with periodic updates incorporating all changes.
 
·
Submit a written plan for maintaining sufficient capital at the Bank, including an analysis of current and future capital needs as well as compliance with capital adequacy guidelines and ratios, where measuring capital adequacy, consideration of the volume and severity of classified credits, portfolio concentration, adequacy of the ALLL, projected growth in assets and earnings, among others, should be taken into account.
 
·
Notify the regulators, in writing, shortly after the end of each calendar quarter if any of the Bank’s capital ratios (total risk-based, Tier 1, or leverage) had fallen below the approved capital plan’s minimum ratios and, contemporaneously, provide a plan that details steps to be taken by the Bank to increase the affected capital ratios to or above the approved capital plan’s minimums.
 
·
Provide a written plan to strengthen the oversight of the Bank’s audit program by the Audit Committee.
 
·
Submit a written plan to improve management of the Bank’s liquidity position and funds management practices.
 
·
Submit written policies and procedures to strengthen the management of the Bank’s investment portfolio.
 
·
Submit a business plan for calendar year 2010 to improve the Bank’s earnings and overall condition, such plan to include a realistic and comprehensive operational budget and balance sheet projections.

 
13

 

 
·
Not declare or pay dividends without the prior approval of the regulators.
 
·
Ascertain full compliance with respect to appointments of new directors, and new executive officers, including the assumption of new responsibilities by an existing executive officer and compliance with restrictions on indemnification and severance payments.
 
·
Form a new Board Committee, the Compliance Committee, to monitor and coordinate the Bank’s compliance with the provisions of the Agreement.  The Compliance Committee shall include a majority of outside directors who are not executive officers or principal shareholders.  Shortly after the end of each calendar quarter, the Bank shall submit a written progress report detailing the form and manner of all actions taken to secure compliance with the Agreement.

All written plans, programs, policies and procedures that are submitted by the Bank pursuant to the Agreement must be acceptable to the regulators, and submitted within the prescribed time period.  Once approved by the regulators, the Bank must adopt the approved plans, programs, policies and procedures within ten days and implement them promptly.  As of the date of this report, management believes that the Bank is in compliance with all but one of the items in the Agreement, i.e. increasing the capital accounts, primarily through a capital injection from the Company, to an acceptable level.

 (b)  Prompt Corrective Action Directive

On May 27, 2010, the Board of Governors of the Federal Reserve System (the “Board of Governors”) issued to the Bank a Prompt Corrective Action Directive Issued Pursuant to Section 38 of the Federal Deposit Insurance (“FDI”) Act, as Amended (the “PCA Directive”).  The PCA Directive was issued in response to and in replacement of the Bank’s appeal of a similar directive from the Federal Reserve dated March 4, 2010.  The PCA Directive states that the Bank has been significantly undercapitalized and directs the Bank and the Company to:

 
·
Not later than 7 days from May 27, 2010, increase the Bank’s equity through the sale of shares or contribution to surplus sufficient to make the Bank adequately capitalized, enter into and close a contract to be acquired or combine with another depository institution, or take other necessary measures to make the Bank adequately capitalized.

 
·
Comply fully with the provisions of Section 38 of the FDI Act restricting the Bank from making any capital distributions.

 
·
Refrain, without prior written approval of the Atlanta Fed, from soliciting, accepting or renewing time deposits bearing an interest rate exceeding the prevailing interest rates in the Bank’s market area, and, within 7 days, submit an acceptable plan and timetable to the Atlanta Fed for conforming such interest rates to the prevailing interest rates.

 
·
Comply with the provisions of Section 38 of the FDI Act requiring that all transactions between the Bank and any affiliate comply with Section 23A of the Federal Reserve Act.

 
·
Comply with the provisions of Section 38 of the FDI Act restricting the payment of bonuses to senior executive officers and increases in compensation of such officers, and

 
·
Comply with the provisions of Section 38 of the FDI Act restricting asset growth, acquisitions, branching and new lines of business.

As of the date of this report, the Bank has complied with all but the first of the directives quoted above.

(c)  Notice from the Atlanta Fed

On June 16, 2010, the Atlanta Fed delivered to the Bank and the Company a letter (the “Notice”) notifying the Bank that, based on the Bank’s Call Report for the quarter ended March 31, 2010, the Bank’s tangible equity ratio being less than 2.0%, the Bank is considered critically undercapitalized.  The Notice states that unless the Bank is no longer critically undercapitalized, the Board of Governors may, pursuant to Section 38 of the FDI Act, within 90 days of the date of the letter, i.e. on or about September 16, 2010., take such action that the Board of Governors determines, with the concurrence of the FDIC, would achieve the purposes of the FDI Act, which could include the appointment of a receiver for the Bank.

 
14

 

Any material failure to comply with the provisions of the Agreement, the PCA Directive or the Notice is very likely to result in further enforcement actions by the regulators.

Company Loan

The Company has been unable to pay back a $1.1 million loan secured by all of the outstanding shares of Bank’s common stock (the “Company Loan”).  This loan matured on December 31, 2009, but was eventually extended through a forbearance agreement until August 15, 2010, with the provision that if the Bank were to receive a directive, on or before June 15, 2010, from the Atlanta Fed or the OFR requiring the Bank to raise additional capital, the forbearance period would be automatically extended for the period of time the Bank is given to raise the required capital.  In the event the Company Loan is not repaid, the lender could sell the common stock of the Bank at a public sale.  The purchaser in such sale would, subject to approval by the banking regulators, become the sole shareholder of the Bank.

Equity Offering

On July 15, 2010, the Company commenced an offering of its common stock (the “Offering”), where it is offering to sell to accredited investors in a private placement a minimum of 5,567,000 shares and a maximum of 13,334,000 shares, at $1.50 per share, for gross proceeds of a minimum of $8,500,500, and a maximum of $20,001,000.  The term of the Offering ends on September 15, 2010, but may be extended until November 15, 2010.  The Offering replaced the offering by the Company of shares of 7% Series A Cumulative Convertible Preferred Stock, which was terminated on June 30, 2010.  In connection with the Offering, the Company engaged Cappello Capital Corp., a Santa Monica, California-based investment banking firm, to provide financial advisory services.

Going Concern

As discussed above, the Company faces a number of challenges that may be difficult to overcome in a timely manner.  These challenges include, but are not limited to, the achievement of full compliance with the requirements of the Written Agreement, the PCA Directive and the Notice, as well as the repayment or further extension of the Company Loan.  To satisfy these requirements, including the projected costs associated with a capital raise,, a minimum of approximately $8.5 million in additional capital will be necessary.

The Company’s ability to raise the necessary capital by means of the Offering or otherwise will depend on conditions in the capital markets at this time, which are outside the Company’s control.  Accordingly, the Company cannot be certain of its ability to raise such additional capital on terms acceptable to the Company.  Inability to raise such capital and thus  comply with the terms of the Written Agreement, the PCA Directive and the Notice and to repay the Company Loan raise substantial doubt about the Company’s ability to continue as a going concern.

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future, and do not include any adjustments to reflect the possible future effects on the recoverability or classification of assets, and the amounts of classification of liabilities that may result from the outcome of any regulatory action including being placed into receivership or conservatorship.

 
15

 

Item 2: Management's Discussion and Analysis of Financial Condition and Operations

Forward Looking Statements

This Quarterly Report on Form 10-Q contains or incorporates by reference statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Forward-looking statements discuss future expectations, describe future plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Forward-looking statements are generally identifiable by the use of forward-looking terminology such as “anticipate,” “assume,” “believe,” “continue,” “could,” “would,” “endeavor,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “objective,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will” and other similar words and expressions of future intent.

Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. Factors that could cause actual results and performance to differ from those expressed in our forward-looking statements we make or incorporate by reference in this Quarterly Report on Form 10-Q include, but are not limited to:

 
·
the effects of the current global economic crisis, including, without limitation, the dramatic deterioration of real estate values, the subprime mortgage, credit and liquidity markets, as well as the Federal Reserve’s actions with respect to interest rates, may lead to a further deterioration in credit quality, thereby requiring continued increases in our provision for loan losses, or a reduced demand for credit, which will continue to negatively impact our earnings;

 
·
the imposition of enforcement orders, capital directives or other enforcement actions by the Federal Reserve, including restrictions and limitations that might be placed on the Bank pursuant to the  Written Agreement described below;

 
·
possible changes in trade, monetary and fiscal policies, as well as legislative and regulatory changes, including changes in accounting standards and banking, securities and tax laws and regulations and governmental intervention in the U.S. financial system, as well as changes affecting financial institutions’ ability to lend and otherwise do business with consumers;

 
·
increases in our nonperforming assets, or our inability to recover or absorb losses created by such nonperforming assets;

 
·
our ability to effectively manage liquidity risk, interest rate risk and other market risk, credit risk and operational risk

 
·
our ability to manage negative developments and disruptions in the credit and lending markets, including the impact of the ongoing credit crisis on our business and on the businesses of our           customers as well as other financial institutions with which we have commercial relationships;

 
·
the continuation of the recent unprecedented volatility in the credit markets and overall economy;

 
·
possible changes in the quality or composition of our loans or investment portfolios, including further adverse developments in the real estate markets, the borrowers’ industries or in the repayment ability of individual borrowers or issuers;

 
·
changes in the interest rate yield curve such as flat, inverted or steep yield curves, or changes in the interest rate environment that impact interest margins and may impact prepayments on the mortgage-backed securities portfolio;

 
·
our ability to manage fluctuations in the value of assets and liabilities and off-balance sheet exposure so as to maintain sufficient capital and liquidity to support our business;

 
16

 
 
 
·
the failure of our assumptions underlying the establishment of allowances for loan losses and other estimates, or dramatic changes in those underlying assumptions or judgments in future periods, that, in either case, render the allowance for loan losses inadequate or require that further provisions for loan losses be made;
 
 
·
unexpected outcomes of existing or new litigation;
 
 
·
the threat or occurrence of war or acts of terrorism and the existence or exacerbation of general geopolitical instability and uncertainty;
 
 
·
management’s ability to develop and execute plans to effectively respond to the Orders and any unexpected events in the future; and
 
 
·
other factors and information contained in this Quarterly Report on Form 10-Q and other reports that we file with the Securities and Exchange Commission (SEC) under the Exchange Act.
 
The cautionary statements in this Quarterly Report on Form 10-Q also identify important factors and possible events that involve risk and uncertainties that could cause our actual results to differ materially from those contained in the forward-looking statements. These forward-looking statements speak only as of the date on which the statements were made. We do not intend, and undertake no obligation, to update or revise any forward-looking statements contained in this Quarterly Report on Form 10-Q, whether as a result of differences in actual results, changes in assumptions or changes in other factors affecting such statements, except as required by law.
 
Readers should carefully review all disclosures we file from time to time with the SEC.

Overview

The Company serves as the holding company for the Bank.  The Bank’s business activities involve attracting deposits from the general public and using these funds to originate consumer, commercial, and real estate loans, from its four offices, two in Bradenton, Florida, one in Brandon, Florida and one in Palmetto, Florida.
 
The Company's earnings are primarily dependent upon three sources: net interest income, which is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities; fee income from customers; and gains realized on sales of loans.  These revenues are in turn significantly affected by factors such as changes in prevailing interest rates and in the yield curve (that is, the difference between prevailing short-term and long-term interest rates).
 
Recent Developments
 
As previously reported, during the last three quarters of 2009 and the first quarter of 2010, the Bank charged off a significant amount of commercial and real estate loans, placed additional loans into non-accrual, reclassified certain other loans, wrote down certain investment securities and increased its reserves for loan losses.  These actions negatively affected the Bank’s three key capital ratios and the Bank became classified as “significantly undercapitalized,” as of December 31, 2009 and “critically undercapitalized,” as of March 31, 2010, respectively.  These classifications triggered the issuance of the PCA Directive and Notice described in Note 9 to the financial statements set forth in Part I of this report.
 
As reported in detail immediately below, in the second quarter of 2010 the Company reversed the recent negative trend and recorded no write downs in value of investment securities or additions to the ALLL, resulting in net income of $117,000 and slight improvements in the three key capital ratios for the Bank.  Management anticipates these positive trends to continue for the rest of 2010.  Nevertheless, whether the Bank’s capital ratios allow it to be classified at least as ‘adequately capitalized,’ and thus whether it ultimately survives as an independent entity, will depend entirely on whether subscriptions to the Offering equal to the $8.5 million minimum are received by us during the term of the Offering, i.e. as it may be extended until November 15, 2010.  There is no complete assurance that the Offering will succeed to a degree and within the time frame which would boost the Bank’s capital ratios sufficiently to ensure its survival.

 
17

 
 
Results of Operations

Overall Net Income

The Company reported net income of $117,000 for the quarter ended June 30, 2010, compared to a net loss of $6,905,000 for the quarter ended June 30, 2009.  Basic and diluted earnings per share were $0.07 for the three months ended June 30, 2010. By comparison, basic and diluted losses per share for the three months ended June 30, 2009 were $3.90 and $3.86, respectively.

For the six months ended June 30, 2010, the Company reported a net loss of $1,754,000, compared to a net loss of $6,762,000 for the same period in 2009.  Basic and diluted losses per share were identical at $0.99 for the six months ended June 30, 2010, compared to losses of $3.82 and $3.77, respectively, for the six months ended June 30, 2009.

Net Interest Income.

Net interest income was $1.27 million and $1.55 million for the three months ended June 30, 2010 and 2009, respectively.  Decreasing rates and volumes led to this decrease of $281,000 between these two periods.  For the six months ended June 30, 2010 and 2009 net interest income rounded was $2.77 million and $3.07 million, respectively.  Slightly increasing rates offset by decreased volumes led to this decrease of $298,000 between these two periods.
 
The effect on interest income, interest expenses and net interest income during the periods indicated from changes in average balances and rates from the corresponding prior period, is shown below.  The effect of a change in average balance has been determined by applying the average rate in the earlier period to the change in the average balance in the later period.  Changes resulting from average balance/rate variances are included in changes resulting from rate.
 
The balance of the change in interest income or expense and net interest income has been attributed to a change in average rate:
 
   
Three months ended June 30, 2010
Compared with 
Three months ended June 30, 2009
   
Six months ended June 30, 2010
Compared with 
Six months ended June 30, 2009
 
   
(in thousands)
   
(in thousands)
 
   
Increase (decrease) due to:
   
Increase (decrease) due to:
 
 
 
Volume
   
Rate
   
Total
   
Volume
   
Rate
   
Total
 
                                     
Interest earned on: 
                                               
                                                 
Taxable/Nontaxable securities
    (93 )     (91 )     (184 )     (184 )     (139 )     (323 )
Federal funds sold
    1       (0 )     1       3       (0 )     3  
Net loans
    (288 )     (344 )     (632 )     (543 )     (514 )     (1,057 )
                                                 
Total Interest Income
    (380 )     (435 )     (815 )     (724 )     (653 )     (1,377 )
                                                 
Interest paid on:
                                               
                                                 
NOW and money market deposits
    (5 )     (26 )     (31 )     (3 )     (38 )     (41 )
Savings deposits
    (5 )     (36 )     (41 )     5       (42 )     (37 )
Time deposits
    (67 )     (325 )     (392 )     (137 )     (726 )     (863 )
Other borrowings
    (95 )     25       (70 )     (205 )     67       (138 )
                                                 
Total interest Expense
    (172 )     (362 )     (534 )     (340 )     (739 )     (1,079 )
                                                 
Change in net interest income
  $ (208 )   $ (73 )   $ (281 )   $ (384 )   $ 86     $ (298 )
 
 
18

 
 
Average Balance Sheet

The following tables summarize the average yields earned on interest-earning assets and the average rates paid on interest-bearing liabilities for the Bank and helps to further explain the decrease in net interest income.

   
Three months ended June 30,
 
       
2009
 
   
Average
Volume
   
Interest
   
Yield/Cost
   
Average
Volume
   
Interest
   
Yield/Cost
 
       
ASSETS
                                   
Interest-earning assets:
                                   
Federal funds sold
  $ 3,112     $ 2       0.26 %   $ 1,477     $ 1       0.27 %
Securities
    22,763       212       3.73       31,258       396       5.07  
Loans receivable
    148,260       2,025       5.46       167,634       2,657       6.34  
Total interest-earning assets
  $ 174,135       2,239       5.14     $ 200,369       3,054       6.10  
                                                 
LIABILITIES
                                               
Interest-bearing liabilities:
                                               
Transactional accounts
  $ 23,408       50       0.85     $ 25,034       81       1.29  
Savings deposits
    13,511       23       0.68       14,690       64       1.74  
Time deposits
    120,890       690       2.28       129,311       1,082       3.35  
Other borrowings
    18,965       209       4.41       26,000       279       4.29  
Total interest-bearing liabilities
  $ 176,774       972       2.20     $ 195,035       1,506       3.09  
Interest rate spread
                    2.94 %                     3.01 %
Net interest income and net interest Margin
          $ 1,267       2.91 %           $ 1,548       3.09 %
 
   
Six months ended June 30,
 
       
2009
 
   
Average
Volume
   
Interest
   
Yield/Cost
   
Average
Volume
   
Interest
   
Yield/Cost
 
       
ASSETS
                                   
Interest-earning assets:
                                   
Federal funds sold
  $ 4,541     $ 5       0.22 %   $ 1,850     $ 2       0.22 %
Securities
    23,369       489       4.19       31,371       812       5.18  
Loans receivable
    151,044       4,311       5.71       169,066       5,368       6.35  
Total interest-earning assets
  $ 178,954       4,805       5.37     $ 202,287       6,182       6.11  
                                                 
LIABILITIES
                                               
Interest-bearing liabilities:
                                               
Transactional accounts
  $ 24,342       120       0.99     $ 24,749       161       1.30  
Savings deposits
    14,584       88       1.21       14,093       125       1.77  
Time deposits
    121,754       1,407       2.31       130,076       2,270       3.49  
Other borrowings
    18,965       419       4.42       26,413       557       4.22  
Total interest-bearing liabilities
  $ 179,645       2,034       2.26     $ 195,331       3,113       3.19  
Interest rate spread
                    3.11 %                     2.92 %
Net interest income and net interest Margin
          $ 2,771       3.10 %           $ 3,069       3.03 %

Net interest income represents the excess of income on interest-earning assets over interest expense on interest bearing liabilities.  The principal interest-earning assets are federal funds sold, investment securities and loans receivable.  Interest-bearing liabilities primarily consist of FHLB borrowings, time deposits, interest-bearing checking accounts (NOW accounts), savings deposits and money market accounts.  Funds attracted by these interest-bearing liabilities are invested in interest-earning assets.  Accordingly, net interest income depends upon the volume of average interest-earning assets and average interest bearing liabilities and the interest rates earned or paid on them.

 
19

 
 
Noninterest Income.

Noninterest income of $449,000 was recorded for the three months ended June 30, 2010.  This income compares to a $904,000 loss for the same period in 2009, for an increase of $1,353,000.  For the three months ended June 30, 2010, the Bank recognized gains on the sale of loans of $212,000, other real estate owned of $26,000, and on land taken by Manatee County for road expansion of $49,000.  The Bank also recognized $64,000 in loan servicing income for the period.  By comparison, during the three months ended June 30, 2009, the Bank realized security losses of $1,015,000 and impairment of other real estate owned of $365,000, which losses were partially offset by a gain on sale of loans of $124,000 and a gain on sale of servicing of loans of $200,000.  Also during the three months ended June 30, 2009, as a result of the FDIC's closing of Silverton Bank (the Bank's correspondent bank), the Company realized a loss of $425,000 in connection with a Silverton holding company trust preferred security it owned and had to write off $87,000 in Silverton's common stock it held.  In addition, during that period, the Bank realized a loss of $503,000 in value of a private issue mortgage backed security it owns.

Noninterest income for the six months ended June 30, 2010, was $465,000.  This income compares to $844,000 of loss for the same period in 2009, a net increase of $1,309,000.  The items identified in the preceding paragraph account for the majority of this period-to-period change, although in 2010 the Bank experienced an increase in gains on the sale of loans of $228,000 and a decrease in other real estate owned impairments of $124,000.  The Bank also recorded year to date loan servicing income of $113,000, while no such income was realized in 2009.  The year to date impairment on securities has declined by $954,000, when compared to the corresponding period in 2009.

The gains on loans and servicing are related to loans that are partially guaranteed by an agency of the United States government, such as the SBA (Small Business Administration) and the USDA (United States Department of Agriculture). Generally, we sell these loans neither because of credit quality deterioration or liquidity but in order to mitigate the risk of early payoffs and thus the risk of adverse impact on our net income.  Specifically, in case of a government-guaranteed loan exceeding $1.5 million, we generally sell the guaranteed portion and, at nearly the same time, acquire from an unrelated party the guaranteed portion of several loans that are much smaller.  We believe that by exchanging guaranteed portion of a large loan for the guaranteed portion of several smaller loans we are, in effect, spreading the risk of an early pay-off.

Noninterest Expense.

Total noninterest expense for the three months ended June 30, 2010, was $1,652,000, compared to $1,330,000 for the same period in 2009, an increase of approximately $322,000.  The majority of this increase was attributable to increased legal expenses of $194,000 and a $65,000 increase in the FDIC assessment as well as increases in other real owned property expenses.

Total noninterest expense for the six months ended June 30, 2010, was $3,222,000, compared to $2,527,000 for the same period in 2009, an increase of approximately $695,000.  Legal expenses increased in 2010 by $286,000 as costs were incurred for foreclosures.  The expenses for other real estate owned properties increased by $200,000 in 2010 as properties were improved for sale or rent.  An increase of $220,000 for the year to date FDIC assessment was also experienced during this period.

Balance Sheet Analysis

The following is a discussion of the consolidated balance sheet of the Company.

Total Assets

As of June 30, 2010, total assets of the Company were $187,825,153, compared to $199,499,006 at December 31, 2009, a decrease of $11.7 million.  The decrease is primarily attributable to a $15 million decrease in the loan portfolio, as $7 million in loans were sold during the period, approximately $2 million was charged off and approximately $6 million moved to other real estate owned as a result of foreclosures.   During this six month period deposits decreased by $10 million.

 
20

 
 
Investment Securities
 
As of June 30, 2010, the available-for-sale and held-to-maturity securities comprised approximately 12% of the Company's assets. The Bank invests primarily in obligations of the United States, or obligations guaranteed as to principal and interest by the United States, and other taxable securities.  In addition, the Bank enters into Federal Funds transactions with its principal correspondent banks, and acts as a net seller of such funds.  The sale of Federal Funds amounts to a short-term loan from the Bank to another bank.
 
The following table presents, for the periods ended June 30, 2010 and December 31, 2009, the approximate market value of the Company's investments, classified by category and by whether they are considered available-for-sale or held-to-maturity (in thousands):

Investment Category

         
             
Available-for-Sale:
           
             
U.S. agency bonds
  $ 2,005     $ 2,457  
Collateralized mortgage obligations
    1,356       1,644  
Mortgage-backed securities
    215       228  
Trust preferred & other corporate securities
    5,957       6,893  
Equity securities
    1,813       1,859  
Total Available-for-Sale Securities
  $ 11,346     $ 13,081  
                 
Held-to-Maturity Securities:
               
                 
Corporate Securities
  $ 800     $ 775  
General obligation bonds of municipalities
    5,059       5,595  
Revenue bonds of municipalities
    4,238       4,147  
                 
Total Held-to-Maturity Securities
  $ 10,097     $ 10,517  
                 
Total Portfolio
  $ 21,443     $ 23,598  

Loans Receivable
The Bank engages in a full complement of lending activities, including commercial, consumer installment and real estate loans.
 
Commercial lending is directed principally towards businesses whose demands for funds fall within the Company's legal lending limits and which are potential deposit customers of the Bank.  These loans include loans obtained for a variety of business purposes, and are made to individual, partnership or corporate borrowers.  The Bank places particular emphasis on loans to small and medium-sized businesses.
 
The Bank's consumer loans consist primarily of installment loans to individuals for personal, family and household purposes, including automobile loans and pre-approved lines of credit to individuals.  This category of loans includes lines of credit and term loans secured by second mortgages on residences for a variety of purposes, including home improvements, education and other personal expenditures.
 
The Bank's real estate loans consist of residential and commercial first and second mortgages.

 
21

 
 
The following table presents various categories of loans contained in the Bank's loan portfolio as of June 30, 2010 and December 31, 2009 and the total amount of all loans for such periods (in thousands):
 
Type of Loan
       
Commercial real estate
  $ 90,665     $ 97,783  
Residential real estate
    36,332       37,439  
Construction loans
    1,030       1,370  
Commercial loans
    10,825       17,218  
Consumer loans
    1,960       2,049  
Subtotal
    140,812       155,859  
Allowance for loan losses
    (4,998 )     (4,731 )
Total (net of allowance)
  $ 135,814     $ 151,128  
 
Asset Quality

The Bank has developed policies and procedures for evaluating the overall quality of our credit portfolio and the timely identification of potential problem loans.  The Bank's judgment as to the adequacy of the allowance is based upon a number of assumptions about future events that it believes to be reasonable, but which may or may not be valid.  Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the loan loss allowance will not be required.

Asset Classification.

Commercial banks are required to review and, when appropriate, classify their assets on a regular basis.  The State of Florida and the Federal Reserve have the authority to identify problem assets and, if appropriate, require them to be classified.  There are three classifications for problem assets: substandard, doubtful, and loss. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected.  Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values questionable, and there is a high possibility of loss.  An asset classified as loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted.  If an asset or portion thereof is classified as loss, the insured institution must establish a specific reserve for the full amount of the portion of the asset classified as loss.  All or a portion of general loss allowances established to cover possible losses related to assets classified as substandard or doubtful may be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital.  Assets that do not warrant classification in the aforementioned categories, but possess weaknesses, must be classified as special mention and monitored.

 
22

 
 
The following table presents information regarding non-accrual, past due and restructured loans as of June 30, 2010 and December 31, 2009 (dollars in thousands):
 
         
             
Loans accounted for on a non-accrual basis:
           
             
Number:
 
Fifty
   
Thirty-three
 
Amount:
  $ 13,296     $ 15,685  
                 
Accruing loans which are contractually past due 90 days or more as to principal and interest payments:
               
                 
Number:
 
Five
         
Amount:
  $ 937    
None
 
                 
Loans which were renegotiated to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower:
               
                 
Number:
         
None
 
Amount:
 
None
         
                 
Loans for which there are serious doubts as to the borrower's ability to comply with existing terms:
               
                 
Number:
 
Thirty-four
   
Forty-four
 
Amount:
  $ 17,326     $ 24,210  
 
At June 30, 2010, there were no loans classified for regulatory purposes as doubtful, substandard or special mention that have not been disclosed in the above table, which (i) represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity, or capital resources, or (ii) represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.

Allowance for Loan Losses (ALLL).

The ALLL is established through a provision for loan losses charged against income.  Loans are charged against the allowance when the Bank believes that the collectibility of principal is unlikely.  The provision is an estimated amount that the Bank believes will be adequate to absorb probable losses inherent in the loan portfolio based on evaluations of its collectibility.  The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, specific problem loans and commitments, and current anticipated economic conditions that may affect the borrower's ability to pay.  While the Bank uses the best information available to recognize losses on loans, future additions to the ALLL may be necessary based on changes in economic conditions.

 
23

 

A summary of balances in the ALLL, nonperforming assets and key ratios follows (dollars in thousands):
 
   
For the Six
   
For the Twelve
 
   
Months Ended
   
Months Ended
 
   
June 30,
   
December, 31
 
   
2010
   
2009
   
2009
 
End of period loans (net of deferred fees)
  $ 142,229     $ 165,798     $ 157,122  
End of period allowance for loan losses
  $ 4,998     $ 5,107     $ 4,731  
Percentage of ALLL to total loans
    3.51 %     3.08 %     3.01 %
Average loans for the period
  $ 151,044     $ 173,166     $ 168,569  
Net charge-offs as a percentage of average loans for the period
    1.61 %     3.00 %     4.73 %
Nonperforming assets
                       
Nonaccrual loans
  $ 13,296     $ 15,470     $ 15,685  
Loans past due 90 days or more and still accruing
  $ 937     $ 394     $ 0  
Other real estate
  $ 8,649     $ 2,121     $ 2,580  
    $ 22,882     $ 17,985     $ 18,265  
Nonperforming assets to period end loans
    16.09 %     10.85 %     11.62 %
Nonperforming assets to period end total assets
    12.18 %     8.71 %     9.16 %

Liquidity and Capital Resources

Liquidity is the Company's ability to meet all deposit withdrawals immediately, while also providing for the credit needs of customers. The June 30, 2010, financial statements evidence a marginally satisfactory liquidity position, as total cash and cash equivalents amounted to $8.6 million, representing 5% of total assets. Investment securities, which amounted to $22.3 million or 11.9% of total assets, provide a secondary source of liquidity because they can be converted into cash in a timely manner. The Bank is a member of the Federal Reserve System and maintains relationships with several correspondent banks and, thus, could obtain funds from those banks on short notice. The Company's management closely monitors and maintains appropriate levels of interest earning assets and interest bearing liabilities, so that maturities of assets can provide adequate funds to meet customer withdrawals and loan demand.

The Bank’s capital ratios as of June 30, 2010, compared to the minimum regulatory requirements were as follows:

   
Bank's
   
Minimum Regulatory
 
       
Requirement
 
Leverage Ratio
    1.4 %     4.0 %
Total Risk Weighted ratio
    3.2 %     8.0 %
Tier 1 Risk Weighted ratio
    1.9 %     4.0 %

As stated above, these ratios have caused the Bank to be classified as “critically undercapitalized.”
 
 
24

 

As discussed above, the Company is currently conducting a private placement of its common stock, i.e. the Offering.  Based on certain assumptions regarding transaction fees payable to Cappello Capital and other expenses of the Offering, the Company’s uses of proceeds from the Offering are projected to be as follows:

(Dollars in Thousands)
 
   
Minimum Offering
   
Maximum Offering
 
Gross Proceeds
  $ 8,500,500     $ 20,001,000  
Less: Advisory Transaction Fees
    263,662       1,106,625  
Net Proceeds
    8,263,838       18,894,375  
Less: Expenses of the Offering
    350,000       350,000  
Available Net Proceeds
    7,886,838       18,544,375  
Payoff of Company Loan
    1,082,660       1,082,600  
Capital Contribution to the Bank
    6,804,178       16,461,715  
Working Capital for the Company
    -0-     $ 1,000,000  

The projected minimum capital contribution to the Bank of $6,804,178 and the projected maximum capital contribution to the Bank of $16,461,715, respectively, when added to the Bank’s existing capital would cause the Bank’s three key regulatory capital ratios to be as follows:

   
After 
Minimum 
Offering
   
Regulatory
Requirements
for Adequately
Capitalized
   
Regulatory
Requirements 
for Well
Capitalized
   
After 
Maximum 
Offering
 
Leverage Ratio
    5.25 %     4.0 %     5.0 %     10.43 %
Total Risk-Based Assets Ratio
    8.13 %     8.0 %     10 %     14.89 %
Tier 1 Risk-Based Assets Ratio
    6.85 %     4.0 %     6.0 %     13.61 %
 
Accordingly, based on the foregoing, a successful minimum Offering will restore the Bank’s status as “adequately capitalized” and a successful maximum Offering will classify the Bank as “well capitalized.”

Other than as stated above, the Company knows of no trends, demands, commitments, events or uncertainties that will result in or are reasonably likely to result in its liquidity increasing or decreasing in any material way.

In the normal course of business, the Bank has various commitments outstanding to extend credit in the form of unused loan commitments and standby letters of credit that are not reflected in the Company’s consolidated financial statements.  Since these commitments may expire without being exercised, they do not necessarily represent future funding requirements.  The Bank uses the same credit and collateral policies in making commitments as those it uses in making loans.

As of June 30, 2010, the Bank had outstanding loan commitments of approximately $846,000.  Various assets collateralize the majority of these commitments.  The Bank does not anticipate that it will suffer any material losses as a result of these transactions.

Item 3:  Quantitative and Qualitative Disclosure About Market Risk

Not applicable.

 
25

 
 
Item 4T.  Controls and Procedures

 Evaluation of Disclosure Controls and Procedures.

The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.  Based upon management’s evaluation of those controls and procedures performed within the 90 days preceding the filing of this Report, the Chief Executive Officer and Chief Financial Officer of the Company concluded that, subject to the limitations noted below, the Company’s disclosure controls and procedures (as defined in Rule 13a-14 under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
 
Changes in Internal Controls Over Financial Reporting.
 
There have been no changes in the Company’s internal control over financial reporting during the first quarter of 2010 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

Limitations on the Effectiveness of Controls.
 
Our management (including our Chief Executive Officer and Chief Financial Officer) does not expect that our financial reporting, disclosure controls and other internal controls will prevent all errors and all fraud.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override or the control.
 
The design of the system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
 
 
26

 

PART II. OTHER INFORMATION

Item 1.   Legal Proceedings

There have been no material changes to the pending legal proceedings to which the Company or the Bank is a party since the filing of the Registrant’s Form 10-K for the year ended December 31, 2009.

Item 1A.  Risk Factors

Not applicable.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
Not Applicable.
 
Item 3.   Defaults Upon Senior Securities

Not Applicable.

Item 4.   Submission of Matters to a Vote of Security Holders

The Company held its 2010 Annual Meeting of Shareholders on June 23, 2010.  The following directors were elected at the annual meeting to serve a three year term:

   
For
   
Withheld/Abstentions
 
C. Donald Miller
 
1,055,089
   
85,388
 
Charles S. Conoley
 
1,054,439
   
86,038
 
Clarence R. Urban
 
1,055,689
   
84,788
 

The following directors did not stand for reelection at the 2010 Annual Meeting of Shareholders as their term of office continued after the Annual Meeting: David K. Scherer, Elizabeth Thomason, DMD, Mary Ann Turner, Michael S. Glasgow, Barclay Kirkland, DDS, and Bruce E. Shackelford.

A vote was taken to ratify the appointment of Francis & Co., CPA's as independent auditors for the fiscal year ending December 31, 2010.  The appointment was ratified by the following votes:  1,371,919 for and 84,678 against/abstentions.

Item 5.   Other Information
None

Item 6.   Exhibits

31.1
Certification of Chief Executive Officer
   
31.2
Certification of Chief Financial Officer
   
32.1
Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.2
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
27

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
Charles S. Conoley
 
President and Chief Executive Officer
 
(Principal Executive Officer)
   
 
 
Kathleen M. Jepson
 
Senior Vice President and Chief Financial Officer
 
(Principal Financial and Accounting Officer)
 
 
 
28

 

Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘10-Q’ Filing    Date    Other Filings
12/31/1010-K,  NT 10-K
11/15/10NT 10-Q
9/16/10
9/15/10
Filed on:8/20/10
8/15/10
8/6/10
7/15/10
For Period End:6/30/10NT 10-Q
6/23/108-K,  DEF 14A
6/16/108-K
6/15/10
5/27/10
3/31/1010-Q,  8-K,  NT 10-Q
3/4/108-K
12/31/0910-K,  NT 10-K
11/10/09
10/23/09
7/1/09
6/30/0910-Q
12/31/0810-K
10/25/99
 List all Filings 
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