(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 ¨
Accelerated
Filer ¨
Non-Accelerated
Filer ¨
Smaller
reporting company ¨
(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 May 6, 2010: Issued 1,809,912 Shares; Outstanding:
1,770,139 Shares
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 March 31, 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 is set to expire on December 31, 2013 and revert back
to $100,000 unless extended or voted in 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. This coverage is available
until June 30, 2010.
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 March 31, 2010, and December 31, 2009,
there were 1,809,912 shares issued respectively. As of March 31, 2010 and
December 31, 2009 there were1,770,139 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 22, 2009, the Board of Directors
did designate, by amending the Company’s Articles of Incorporation, a series of
preferred stock. The series, designated as Series A Preferred Stock,
consists of 5,000 shares with a liquidation preference of $1,000 per
share. The shares of Series A Preferred Stock are, as of the date of
this Report, being offered for sale by the Company in a private
offering. Further details about the offering are set forth in Note 9
and Part I, Item 2 of this Report. As of March 31, 2010, and December 31, 2009,
there were no shares of the Company's preferred stock issued or
outstanding.
Activity
in the allowance for loan losses for the three months ended March 31, are as
follows
2010
2009
Balance
at beginning of period
$
4,731,280
$
1,502,823
Provision
for loan losses
2,697,973
220,000
Loans
charged-off
(2,138,045
)
(70,522
)
Recoveries
27,346
—0—
Balance
at end of period
$
5,318,554
$
1,652,301
NOTE
4 – SECURITIES HELD-TO-MATURITY
Information
pertaining to securities with gross unrealized losses at March 31, 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
$
529,707
$
(944
)
$
6,179,713
$
(831,985
)
$
6,709,420
$
(832,929
)
Corporate
Securities
—0—
—0—
853,200
(76,800
)
853,200
(76,800
)
Total
$
529,707
$
(944
)
$
7,032,913
$
(908,785
)
$
7,562,620
$
(909,729
)
At March31, 2010, unrealized losses on held-to-maturity securities amounted to $909,729,
representing 8.3% 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.
8
NOTE
5 – SECURITIES AVAILABLE FOR SALE
Information
pertaining to securities with gross unrealized losses at March 31, 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
$
1,982,450
$
(10,722
)
$
—0—
$
—0—
$
1,982,450
$
(10,722
)
Collateralized
Mortgage obligations
298,804
(239
)
—0—
—0—
298,804
(239
)
Mortgage
backed securities
—0—
—0—
774,178
(118,567
)
774,178
(118,567
)
Trust
preferred securities & other corporate
notes
—0—
—0—
1,118,080
(333,900
)
1,118,080
(333,900
)
Total
$
2,281,254
$
(10,961
)
$
1,892,258
$
(452,467
)
$
4,173,512
$
(463,428
)
At
March 31, 2010, unrealized losses in the securities portfolio amounted to
$463,428, representing 3.7% of the total available for sale portfolio.
Generally, 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. During the first three months of 2010,
management noted a decline in the credit quality of two private issue mortgage
backed securities held in the portfolio. Management recognized an
impairment loss of $61,081 during the period with regards to these two
securities.
NOTE
6 - EARNINGS PER SHARE
The
following summarizes the computation of basic and diluted earnings per
share.
Dilutive
effect of assumed exercise of stock options/warrants
—0—
31,432
Diluted
average shares outstanding
1,770,139
1,801,477
Diluted
earnings/(loss) per share
$
(1.06
)
$
0.08
NOTE
7 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Assets
and liabilities are grouped for fair value in six 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;
9
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).
The
following table summarizes fair value measurements as of March 31, 2010: (in
thousands)
Fair Value Measurements
Using
Quoted Prices in
Active Markets
for Identical
Assets
Significant Other
Observable Input
Significant
Unobservable
Inputs
Descriptions
3/31/2010
(Level 1)
(Level 2)
(Level 3)
Available-for-sale
securities
$
12,450
$
—
$
6,668
$
5,782
Impaired
Loans
$
33,801
$
33,801
Total
$
46,251
$
—
$
6,668
$
39,583
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.
10
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.
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.
11
NOTE
9 –GOING CONCERN
As
described in detail under Item 2. - Management Discussion and Analysis
of Financial Condition and Results of Operations, the Company faces a
number of challenges that may be difficult to meet in a timely
manner. These challenges include, but are not limited to, the
achievement of full compliance with the requirements of the PCA Directive, the
Written Agreement, as well as the payment or further extension of the Company’s
$1.1 million loan from 1st Manatee
Bank secured by 100% of the Bank’s common stock. To meet these
challenges, a minimum of approximately $10.0 million of additional capital
raised by means of the Offering will be necessary.
The
Company’s ability to raise additional capital will depend on conditions in the
capital markets at this time, which are outside the Company’s control, and on
the Company’s financial performance. Accordingly, the Company cannot
be certain of its ability to raise additional capital if needed or on terms
acceptable to the Company. Inability to raise additional capital when
needed or comply with the terms of the PCA Directive, the Written Agreement and
the loan from 1st Manatee
Bank 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.
12
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;
13
·
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
1. Regulatory Enforcement
Actions.
As
previously reported, for the last twelve months, similar to other financial
institutions, our business, financial condition, credit performance from loans
and operating results have been adversely affected by dramatic declines in the
real estate and capital markets in Manatee County. As a result,
writeoffs and writedowns of loans and securities held for investment and
additions to the Bank’s Allowance for Loan and Lease Losses (“ALLL”) have caused
the Bank’s main three regulatory ratios to decline
significantly. Following is a summary of the three ratios as of the
end of the quarters indicated and the corresponding status of the Bank under the
relevant designations established by the Board of Governors of the Federal
Reserve System (the “Board of Governors”).
14
Name of Ratio
Ratio
Corresponding Status
6/30/09
Leverage
Ratio
4.0
%
Undercapitalized
Total
Risk Assets-Based Ratio
6.7
%
Tier
1 Risk Assets-Based Ratio
5.4
%
9/30/09
Leverage
Ratio
4.1
%
Undercapitalized
Total
Risk Assets-Based Ratio
6.9
%
Tier
1 Risk Assets-Based Ratio
5.6
%
12/31/09
Leverage
Ratio
2.6
%
Significantly
Total
Risk Assets-Based Ratio
4.9
%
Undercapitalized
Tier
1 Risk Assets-Based Ratio
3.6
%
3/31/10
Leverage
Ratio
1.3
%
Critically
Total
Risk Assets-Based Ratio
3.1
%
Undercapitalized
Tier
1 Risk Assets-Based Ratio
1.8
%
The
deterioration in the Bank’s capital position has given rise to several
regulatory enforcement actions followed by responses from the Company and the
Bank. Specifically:
·
Based
on the findings of the May 25, 2009 examination of the Bank by Federal
Reserve Bank of Atlanta (the “Atlanta Fed”) and the Florida Office of
Financial Regulation (the “OFR”), the Atlanta
Fed
-
by
letter, dated May 28, 2009, prohibited, without prior approval, the
incurring by the Company of any indebtedness, the purchasing or redeeming
by the Company of any stock and the taking by the Company of any payment
from the Bank representing a reduction in the Bank’s capital;
and
-
by
letter, dated August 5, 2009, declared the Bank to be undercapitalized,
required the Bank to submit a capital restoration plan and prohibited,
without prior approval, the Bank from paying dividends, growing in total
assets and expanding by acquisition, branching or new lines of
business.
·
In
response, we submitted, on August 20, 2009, a capital restoration plan,
which was deemed not to be acceptable by the Atlanta Fed on September 28,2009. We then submitted, on October 9, 2009, a revised capital
restoration plan, which was deemed not to be acceptable by the Atlanta Fed
on January 27, 2010.
·
On
November 4, 2009, the Bank entered into a written agreement with the
Atlanta Fed and the OFR (the “Written Agreement”). As
previously reported, under the Written Agreement, the Bank agreed to
submit a host of written plans, conduct an independent review of its loan
portfolio and several other measures, including another capital
enhancement plan. As of the date of this Report, the Bank has
complied with all of the provisions of the Written Agreement and has not
yet received a response to the capital enhancement plan
submitted.
On
March 4, 2010, the Board of Governors issued to the Bank a Prompt Corrective
Action Directive Pursuant to Section 38 of the Federal Deposit Insurance Act, as
Amended (the “PCA”). The PCA directed that the Bank immediately take
the following actions:
·
No
later than 45 days after the PCA, i.e. on or before April 19, 2010, (i)
increase the Bank’s equity through sale of shares or contributions to
surplus sufficient to make the Bank adequately capitalized, (ii) enter
into or close a contract whereby the Bank is acquired by another financial
institution or (iii) take other necessary measures to make the Bank
adequately capitalized;
·
Refrain
from making any capital distributions, including
dividends.
·
Refrain
from soliciting or accepting new deposits or renewing existing deposits
bearing an interest rate that exceeds the prevailing rates on deposits in
the Bank’s market area; and
15
·
Comply
with provisions of the FDI Act relating to transactions with affiliates,
restricting payment of bonuses to senior executive officers and
restricting asset growth, acquisitions branching and new lines of
business.
As
previously reported, on March 22, 2010, we filed an appeal of the PCA with the
Board of Governors. As of the date of this Report, we have received
no response from the Board of Governors with respect to the appeal.
In
March 2010, the Atlanta Fed and the OFR conducted another examination of the
Bank (the “March 2010 Examination”). Based on the preliminary results
of the March 2010 Examination, the Bank amended its December 31, 2009 and its
March 31, 2010 Call Reports to further reduce its regulatory
capital. The March 31, 2010 Call Report and the financial statements
included in this Report do not reflect an approximately $179,028 ($2,877,001 -
2,697,973) excess addition to the Bank’s ALLL claimed by the Atlanta Fed to be
necessary which we do not believe is necessary or appropriate.
On
April 21, 2010, at the request of the OFR, the Bank’s Board of Directors adopted
a series of resolutions pursuant to which, among other things, the
Bank:
·
recognized
that the OFR and the Board of Governors have reason to conclude that the
Bank is threatened with imminent insolvency;
and
·
consented
(i) to the appointment of a receiver for the Bank as such time as the OFR
determines in its sole discretion and (ii) when the OFR requests a
judicial confirmation of the appointment of a receiver, to the OFR being
allowed to represent to the relevant court that the Bank is not opposed to
the OFR’s determination that the Bank is then imminently insolvent or
insolvent.
As of
March 31, 2010, the Bank’s capital computed in accordance with the definition of
imminently insolvent, set forth in Florida Statutes Section 655.055(1)(k) is
2.54%, higher than the 2.0% treshhold below which the Bank would be considered
imminently insolvent.
As
previously reported, on March 26, 2010, 1st Manatee
Bank and the Company entered into an amendment to the forbearance agreement
previously entered into on March 12, 2010, with respect to the failure by the
Company to repay an approximately $1.1 million loan, secured by all of the
outstanding stock of the Bank held by the Company, owed by the Company to 1st Manatee
Bank. Pursuant to the forebearance agreement as amended, in
consideration of the payment of $104,000, the forebearance period with respect
to such failure has been extended to June 15, 2010. In addition, if
the Bank receives a directive, on or before June 15, 2010, from the Atlanta Fed
and the OFR requiring the Bank to raise additional capital, the forebearance
period will be automatically extended for a period of time the Bank is given to
raise the required capital.
3. Equity
Offering.
As
of the filing date of this Report, we are engaged in an urgent effort to raise
the equity capital which would allow the Bank to be restored to at least the
status of adequately capitalized. For this purpose, since April 30,2010, the Company has been conducting an equity offering (the “Offering”) of a
minimum of $10.0 million and a maximum of $12.5 million in shares of 7% Series A
Cumulative Convertible Preferred Stock (the “Series A Preferred
Stock”). The shares of the Series A Preferred Stock, which are being
offered in a private placement to accredited investors only, have a liquidation
performance of $1,000, are entitled to cumulative dividends of 7% per annum,
accruing and payable semiannually, and are convertible into shares of the
Company’s common stock after the first anniversary of the issuance date at a
conversion price equal to the higher of (a) $2.50 per share or (b) book value
per share of the common stock at the time of conversion, but not to exceed $7.50
per share.
Under
the terms of the Offering, the proceeds may be released to the Company from
escrow only if the $10.0 million minimum is reached and the Atlanta Fed
and the OFR approve the capital restoration plan for the Bank based on the
Offering. This means that the proceeds of the Offering will not be
released to the Company and, accordingly, the purchasers in the Offering will be
refunded their investment, unless the Atlanta Fed and the OFR approve the
Offering and any matters related thereto, e.g. change of control matters arising
from the number of shares of the Series A Preferred Stock acquired by a given
purchaser. A copy of the Amended and Restated Confidential Private
Placement Memorandum, dated April 30, 2010, describing the Offering, is
available at the Company’s website at www.horizonbankfl.com. The
Offering expires on June 20, 2010.
16
As
of the filing date of this Report, the Company has received subscriptions in the
Offering for approximately $1.1 million, with another $1.1 million to come from
a standby loan commitment undertaken by a group of investors, consisting mainly
of Company directors, who will use the loan proceeds to purchase Series A
Preferred Stock in the offering. Also, as of the filing date of this
Report, the Company and the Bank are engaged in negotiations with a potential
purchaser of the Bank’s main banking facility, which sale is expected to
generate a $1.3 million net profit and addition to the Bank’s
capital. Furthermore, on May 19, 2010, we have entered into a letter
of intent with Southport Asset Management, LLC, a San Diego-based investment
banking firm (“Southport”), pursuant to which Southport will arrange for both
(i) the purchase by an investor of up to $10.25 million of the Bank’s
nonperforming loans and other real estate owned at a purchase price equal to 68%
of the assets’ book value and (ii) the purchase by several investors of $3.0
million of the Series A Preferred Stock in the Offering.
4. Summary.
As
shown under “Liquidity and Capital Resources” below, the net proceeds of the
minimum Offering, after using approximately $1.1 million thereof to repay the
1st
Manatee Bank loan, would be sufficient to bring the Bank’s main capital ratios
above the minimum required for purposes of the adequately capitalized status,
while the proceeds of the maximum Offering would be sufficient to bring such
capital ratios close to the ratios required in the Bank’s case for purposes of
the well capitalized status. We are, however, engaged in a very
challenging race against time having to show to the Atlanta Fed and the OFR,
during the next
several weeks, that at least the minimum Offering is likely to be
successful and that we should thus be given additional time to close the
Offering, and, if appropriate, to sell the Bank’s building and/or the
nonperforming assets to the investor arranged by Southport. We expect
that such showing is, realistically, likely to be accepted by the Atlanta Fed
and the OFR if and only if we receive during such short period of time a
combination of cash paid into escrow and executed binding subscription
agreements equal in the aggregate to the minimum Offering.
There
is no assurance that in spite of our best efforts the Company can achieve this
combination of cash paid into the escrow and subscription agreements during the
next several weeks. Failure to do so will give the Atlanta Fed and
the OFR the basis for causing the appointment of the FDIC as the receiver for
the Bank’s assets and liabilities, most likely in conjunction with a sale of the
Bank to another financial institution. Under such circumstances, our
existing shareholders will lose their entire investment in the
Company.
Results
of Operations
Overall Net
Income
The
Company reported a net loss of $1,871,000, including a $2,697,973 addition to
the ALLL, for the quarter ended March 31, 2010, compared to net income of
$143,000 for the quarter ended March 31, 2009. Basic and diluted
losses per share were $1.06 for the three months ended March 31, 2010. Basic and
diluted earnings per share for the three months ended March 31, 2009 were
$0.08.
Net Interest
Income.
Net
interest income was $1.50 million and $1.52 million for the three months ended
March 31, 2010 and 2009, respectively. Decreasing rates and volumes
led to the decrease of $19,000 between these two periods.
17
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:
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 slight increase in net interest
income.
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.
Other
Income.
A gain of
$16,000 was recorded for the three months ended March 31, 2010. This
gain compares to $60,000 gain of other income for the same period in 2009, a
decrease of $44,000. During the three months ended March 31, 2010,
the Bank realized security losses of $61,000, while a loss of $2,000 was
recorded in 2009. An impairment of other real estate owned of
$246,000 was recorded in 2010, while an impairment of $2,000
was recorded in 2009. These losses were offset by a gain
on sale of loans of $179,000. The impairments on other real estate
owned and securities in 2010 were offset by a $200,000 gain on the sale of loans
and loan servicing income of $49,000. No such transactions were
recorded in 2009.
The gains
on loans 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, in
effect, the guaranteed portion of a large loan for the guaranteed portion of
several smaller loans we are spreading the risk of an early
pay-off.
19
Other
Expense.
Total
other expense for the three months ended March 31, 2010, was $1,570,000,
compared to $1,197,000 for the same period in 2009, an increase of approximately
$373,000. The majority of this increase was attributable to an
$155,000 increase in FDIC insurance. Another $93,000 increase in professional
fees was attributable to increased legal fees in 2010. Expenses on other real
estate owned increased by $105,000 as properties were improved for resale and
taxes and insurance were brought current.
Balance
Sheet Analysis
The
following is a discussion of the consolidated balance sheet of the
Company.
Total
Assets
As of
March 31, 2010, total assets of the Company were $195,122,325 compared to
$199,499,006 at December 31, 2009, a decrease of $4.4 million. The decrease is
primarily due to decreased deposits of $2.4 million and a $2.7 million increase
in the allowance for loan losses.
Investment
Securities
As of
March 31, 2010, the securities portfolio 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 March 31, 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):
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 and
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.
The
following table presents various categories of loans contained in the Bank's
loan portfolio as of March 31, 2010 and December 31, 2009, and the total amount
of all loans for such periods (in thousands):
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 Federal Reserve and the OFR 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.
21
The
following table presents information regarding non-accrual, past due and
restructured loans as of March 31, 2010 and December 31, 2009 (dollars in
thousands):
Accruing
loans which are contractually past due 90 days or more as to principal and
interest payments:
Number:
Two
None
Amount:
$
2,248
$
0
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
None
Amount
$
0
$
0
Loan
relationships for which there are serious doubts as to the borrower's
ability to comply with existing terms: (Including those
above)
Number:
Forty-one
Forty-four
Amount:
$
20,563
$
24,210
At March31, 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.
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 provision may be necessary based on
changes in economic conditions.
22
A summary
of balances in the ALLL, nonperforming assets and key ratios follows (dollars in
thousands):
March
31,
December,
31
2010
2009
2009
End
of period loans (net of deferred fees)
$
149,038
$
168,106
$
157,122
End
of period allowance for loan losses
$
5,319
$
1,652
$
4,731
Percentage
of allowance for loan losses to total loans
3.57
%
0.98
%
3.01
%
Average
loans for the period
$
153,858
$
170,968
$
168,569
Net
charge-offs as a percentage of average loans for the
period
1.39
%
.04
%
4.73
%
Nonperforming
assets
Nonaccrual
loans
$
12,540
$
9,208
$
15,685
Loans
past due 90 days or more and still accruing
$
2,248
$
2,294
$
-0-
Other
real estate
$
6,777
$
2,649
$
2,580
$
21,565
$
14,151
$
18,265
Nonperforming
assets to period end loans
14.47
%
8.42
%
11.62
%
Nonperforming
assets to period end total assets
10.96
%
6.43
%
9.14
%
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 March 31, 2010 financial
statements evidence a marginally satisfactory liquidity position, as total cash
and cash equivalents amounted to $10.6 million, representing 5% of total assets.
Investment securities, which amounted to $23 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.
As stated
above, the Bank’s main capital ratios as of March 31, 2010, compared to the
minimum regulatory requirements were as follows:
As a
result, under the relevant guidelines established by the Board of Governors, the
Bank is considered to be critically undercapitalized.
Following
are the relevant capital ratios computed on a pro-forma basis as of March 31,2010, assuming the completion of the minimum and maximum Offering, compared to
the minimum regulatory requirement for an adequately capitalized institution and
for a well capitalized institution in the Bank’s position:
23
Assuming the
Minimum
Offering
Assuming the
Maximum
Offering
Adequately
Capitalized
Well
Capitalized
Leverage
Ratio
6.01
%
7.31
%
4.0
%
5.0
%
Total
Risk Assets-Based Ratio
9.30
%
11.30
%
8.0
%
10.0
%
Tier
1 Risk Assets-Based Ratio
8.02
%
9.75
%
4.0
%
6.0
%
As stated
above, there is no assurance that the Offering will be successful in time for
the Atlanta Fed and the OFR to accept it as part of a capital restoration
plan. If the Offering is successful and is accepted as part of the
capital restoration plan, if and to the extent the shares of the Series A
Preferred Stock are converted into shares of common stock, the Offering may have
a dilutive effect on the existing shareholders.
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
March 31, 2010, the Bank had outstanding loan commitments of approximately $2.1
million. 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.
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 Three months of 2009 that have materially affected or are
reasonably likely to materially affect the Company’s internal control over
financial reporting.
24
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.
25
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
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
26
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.