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Manasota Group, Inc. – ‘10-Q’ for 3/31/10

On:  Monday, 5/24/10, at 2:21pm ET   ·   For:  3/31/10   ·   Accession #:  1144204-10-29824   ·   File #:  0-50748

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

 5/24/10  Manasota Group, Inc.              10-Q        3/31/10    5:875K                                   Vintage/FA

Quarterly Report   —   Form 10-Q
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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 March 31, 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 ¨
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

 
 

 

Index

Part I. Financial Information
   
     
Item 1.  Financial Statements (unaudited)
   
     
Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009
 
3
     
Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009
 
4
     
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009
 
5
     
Consolidated Statements of Changes in Shareholders' Equity for the Three Months Ended March 31, 2010 and 2009
 
6
     
Notes to Consolidated Financial Statements
 
7
     
Item 2.  Management's Discussion and Analysis of Financial Conditions and Results of Operations
 
13
     
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
 
24
     
Item 4T.  Controls and Procedures
 
24
     
Part II.       Other Information
   
     
Item 1.  Legal Proceedings
 
26
     
Item 1A. Risk Factors
 
26
     
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
26
     
Item 3.  Defaults Upon Senior Securities
 
26
     
Item 4.  Submission of Matters to a Vote of Security Holders
 
26
     
Item 5.  Other Information
 
26
     
Item 6.  Exhibits
  
26

 
 

 
 
PART I - FINANCIAL INFORMATION
 
Item 1.  Financial Statements.

HORIZON BANCORPORATION, INC.
Consolidated Balance Sheets

   
(Unaudited)
     
ASSETS
           
Cash and cash equivalents
           
Cash and due from banks
  $ 10,574,103     $ 9,719,612  
Federal funds sold
    —0—       —0—  
Total cash and cash equivalents
    10,574,103       9,719,612  
Securities:
               
Held to maturity, at amortized cost
    10,909,566       11,462,744  
Available-for-sale at fair value
    12,450,146       13,080,811  
Loans held for sale
    —0—       1,262,199  
Loans receivable, net
    143,718,949       151,127,759  
Property and equipment, net
    3,665,084       3,698,502  
Other real estate owned
    6,776,662       2,579,138  
Other assets
    7,027,815       6,568,241  
                 
    $ 195,122,325     $ 199,499,006  
                 
Liabilities
               
Deposits
               
Noninterest-bearing
  $ 11,415,503     $ 9,686,614  
Interest-bearing
    160,749,781       164,889,658  
Total deposits
    172,165,284       174,576,272  
Federal Home Loan Bank borrowings
    18,000,000       18,000,000  
Note Payable
    1,025,205       1,065,205  
Other liabilities
    35,232       190,368  
Total liabilities
    191,225,721       193,831,845  
                 
Shareholders' equity
               
Preferred stock,  $.01 par value 1,000,000 shares authorized; none outstanding
    -          
Treasury stock  outstanding 39,733 shares at March 31, 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 March 31, 2010 and December 31, 2009
    18,099       18,099  
Additional paid in capital
    10,440,895       10,428,214  
Retained earnings
    (5,877,088 )     (4,006,176 )
Accumulated other comprehensive income (loss), net of tax
    (205,909 )     (293,583 )
Total shareholders' equity
    3,896,604       5,667,161  
                 
    $ 195,122,325     $ 199,499,006  

See accompanying notes to the financial statements

 
3

 

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

   
Three Months Ended March 31,
 
       
2009
 
Interest income
           
Interest and fees on loans
  $ 2,285,300     $ 2,711,003  
Interest on investment securities
    277,350       416,742  
Interest on federal funds
    3,267       782  
Total interest income
    2,565,917       3,128,527  
Interest expense
               
Interest on deposits
    852,127       1,329,086  
Interest on borrowings
    210,393       277,559  
Total interest expense
    1,062,520       1,606,645  
Net interest income
    1,503,397       1,521,882  
Provision for loan losses
    2,697,973       220,000  
Net interest income after provision for loan losses
    (1,194,576 )     1,301,882  
Other income
               
Gain on sales of loans
    200,000       —0—  
Impairment loss, other real estate owned
    (246,276 )     (1,631 )
Impairment loss, securities
    (61,081 )     —0—  
Gain on sale of servicing assets
    —0—       —0—  
Gain on sale of other assets
    —0—       7,500  
Gain on sale of  securities
    995       —0—  
Service charges on deposit accounts
    20,815       18,896  
Loan servicing income
    48,570       —0—  
Miscellaneous , other
    52,815       35,234  
Total other income
    15,838       59,999  
Other expenses
               
Salaries and benefits
    637,504       629,398  
Building and equipment expense
    237,584       198,591  
Professional fees
    142,531       49,979  
FDIC insurance expense
    188,922       34,107  
Data processing and software expense
    87,510       94,637  
Other operating expense
    275,752       190,404  
Total operating expense
    1,569,803       1,197,116  
Income/(loss) before income taxes
    (2,748,541 )     164,765  
Income tax expense/(benefit)
    (877,629 )     21,510  
Net Income/(loss)
  $ (1,870,912 )   $ 143,255  
Basic income/(loss)  per share
  $ (1.06 )   $ 0.08  
Diluted income/(loss) per share
  $ (1.06 )   $ 0.08  
 
See accompanying notes to the financial statements

 
4

 

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

   
For the
Three months
ended
   
For the
Three months
ended
 
Cash flows from operating activities
           
Net cash provided by operating activities
  $ (1,871,693 )   $ (4,223,496 )
Cash flows from investing activities
               
Proceeds from sale of other assets
    97,769       164,265  
Proceeds from sale of loans
    4,200,000       —0—  
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
    157,897       137,660  
(Purchase)/Repayment of Federal Home Loan Bank Stock
    —0—       103,250  
(Increase)/decrease in Other real estate owned
    (4,542,569 )     165,896  
Loan originations, net
    4,710,837       (646,753 )
Property and equipment expenditures, net
    2,123       (139,474 )
Net cash provided (used) by investing activities
    5,177,172       (1,235,031 )
Cash flows from financing activities
               
Exercise of warrants and options
    —0—       9,312  
Increase/(decrease)  in deposits
    (2,410,988 )     15,285,339  
Increase/(decrease) in fed funds purchased
    —0—       —0—  
Increase/(decrease) in borrowings, net
    —0—       (3,000,000 )
Increase/(decrease)  in Note Payable by Parent
    (40,000 )     225,000  
Purchase of treasury stock
    —0—       —0—  
Net cash provided by financing activities
    (2,450,988 )     12,519,651  
Net change in cash and cash equivalents
    854,491       7,061,124  
Cash and cash equivalents at beginning of period
    9,719,612       2,383,783  
Cash and cash equivalents at end of period
  $ 10,574,103     $ 9,444,907  

See accompanying notes to the financial statements

 
5

 

HORIZON BANCORPORATION, INC.
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
for the Three-month periods ended March 31, 2010 and 2009

               
Paid in
   
Retained
   
Accumulated
       
   
Common Stock
   
Treasury
   
Capital
   
Earnings
   
Other
       
   
Shares
   
Par Value
   
Stock
               
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, Three-month period ended March 31, 2009
                              143,255             143,255  
Net unrealized gain on securities, Three-month period ended March 31, 2009
                -                     262,640       262,640  
                                                         
Total comprehensive income/(loss) net of tax
                -                   -       405,895  
                                                         
Exercise of warrants
    1,693       17       -       9,295               -       9,312  
Stock Based Compensation
                            15,000               -       15,000  
    1,770,139     $ 18,099     $ (479,393 )   $ 10,383,214     $ 4,259,857     $ (957,040 )   $ 13,224,737  
    1,770,139     $ 18,099     $ (479,393 )   $ 10,428,214     $ (4,006,176 )   $ (293,583 )   $ 5,667,161  
Comprehensive Income:
                                                       
Net income, Three-month period ended March 31, 2010
                              (1,870,912 )           (1,870,912 )
Net unrealized gain on securities, Three-month period ended March 31, 2010
                -                     87,674       87,674  
                                                         
Total comprehensive income/(loss) net of tax
                -                   -       (1,783,238 )
                                                         
Stock Based Compensation
    -                       12,681               -       12,681  
    1,770,139     $ 18,099     $ (479,393 )   $ 10,440,895     $ (5,877,088 )   $ (205,909 )   $ 3,896,604  

 
6

 

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 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.

 
7

 

NOTE 3 – LOANS RECEIVABLE

Loans receivable consist of the following:

         
Real estate – commercial
  $ 92,288,381     $ 97,783,166  
Real estate – construction
    1,010,552       1,369,987  
Real estate – residential
    36,085,683       37,438,678  
Commercial
    17,098,495       17,217,611  
Consumer
    2,554,392       2,049,597  
Loans, gross
    149,037,503       155,859,039  
Deduct allowance for loan losses
    (5,318,554 )     (4,731,280 )
Loans, net
  $ 143,718,949     $ 151,127,759  

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 March 31, 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.
   
Three Months Ended
   
Three Months Ended
 
Basic earnings/(loss) per share
           
Net income/(loss) applicable to common stock
  $ (1,870,912 )   $ 143,254  
Weighted average shares outstanding
    1,770,139       1,770,045  
Basic earnings/(loss) per share
  $ (1.06 )   $ 0.08  
                 
Diluted earnings/(loss) per share
               
Net income/(loss) applicable to common stock
  $ (1,870,912 )   $ 143,254  
                 
Weighted average shares outstanding
    1,770,139       1,770,045  
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.
 
2.  The Company’s Loan From 1st Manatee Bank.
 
     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:
 
   
Three months ended March 31, 2010
Compared with
Three months ended March 31, 2009
 
   
(in thousands)
 
   
Increase (decrease) due to:
 
     
Volume
   
Rate
   
Total
 
Interest earned on:                  
                   
Taxable/Nontaxable securities
    (107 )     (33 )     (140 )
Federal funds sold
          2       2  
Net loans
    (261 )     (164 )     (425 )
                         
Total Interest Income
    (368 )     (195 )     (563 )
                         
Interest paid on:
                       
                         
NOW and money market deposits
    3       (13 )     (10 )
Savings deposits
    8       (4 )     4  
Time deposits
    (71 )     (400 )     (471 )
Other borrowings
    (100 )     33       (67 )
                         
Total interest Expense
    (160 )     (384 )     (544 )
                         
Change in net interest income
  $ (208 )   $ 189     $ (19 )
 
 
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 slight increase in net interest income.

   
Three months ended March 31,
 
       
2009
 
   
Average
Volume
   
Interest
   
Yield/Cost
   
Average
Volume
   
Interest
   
Yield/Cost
 
                                     
ASSETS
                                   
Interest-earning assets:
                                   
Federal funds sold
  $ 2,999     $ 3       0.40 %   $ 2,228     $ 1       0.18 %
Securities
    23,982       277       4.62       33,083       417       5.04  
Loans receivable
    153,858       2,286       5.94       170,968       2,711       6.34  
Total interest-earning assets
  $ 180,839       2,566       5.68     $ 206,279       3,129       6.07  
                                                 
LIABILITIES
                                               
Interest-bearing liabilities:
                                               
Transactional accounts
  $ 25,285       70       1.11     $ 24,461       80       1.31  
Savings deposits
    15,668       65       1.66       13,490       61       1.81  
Time deposits
    122,627       718       2.34       130,849       1,189       3.63  
Other borrowings
    19,065       210       4.41       27,752       277       3.99  
Total interest-bearing liabilities
  $ 182,645       1,063       2.33     $ 196,552       1,607       3.27  
Interest rate spread
                    3.35 %                     2.80 %
Net interest income and net interest Margin
          $ 1,503       3.32 %           $ 1,522       2.95 %

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):

Investment Category

         
             
Available-for-Sale:
           
             
U.S. Agency Bonds
  $ 1,982     $ 2,457  
Collateralized mortgage obligations
    1,490       1,644  
Mortgage-backed securities
    219       228  
Trust Preferred & Other Corporate Securities
    6,900       6,893  
Equity securities
    1,859       1,859  
Total Available-for-Sale Securities
  $ 12,450     $ 13,081  
                 
Held-to-Maturity Securities:
               
                 
Corporate Securities
  $ 853     $ 775  
General obligation bonds of municipalities
    5,030       5,595  
Revenue bonds of municipalities
    4,141       4,147  
                 
Total Held-to-Maturity Securities
  $ 10,025     $ 10,517  
                 
Total Portfolio
  $ 22,475     $ 23,598  
 
 
20

 

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 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):

Type of Loan
       
Commercial real estate
  $ 92,288     $ 97,783  
Residential real estate
    36,086       37,439  
Construction loans
    1,011       1,370  
Commercial loans
    17,098       17,218  
Consumer loans
    2,554       2,049  
Subtotal
    149,038       155,859  
Allowance for loan losses
    (5,319 )     (4,731 )
Total (net of allowance)
  $ 143,719     $ 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 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):
 
         
             
Loans accounted for on a non-accrual basis:
           
             
Number:
 
Forty
   
Thirty-three
 
Amount:
  $ 12,540     $ 15,685  
                 
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 March 31, 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:

   
Bank’s
   
Minimum
Regulatory
Requirement
 
Leverage Ratio
    1.3 %     4.0 %
Total Risk Assets Based Ratio
    3.1 %     8.0 %
Tier 1 Risk Assets Based Ratio
    1.8 %     4.0 %

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

None

Item 5.   Other Information

None

Item 6.   Exhibits

 
3.1
Third Amended and Restated Articles of Incorporation
     
 
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
 
 
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.

   
   
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)
   
 
 
27

 

Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘10-Q’ Filing    Date    Other Filings
12/31/13
6/30/1010-Q,  NT 10-Q
6/20/10
6/15/10
Filed on:5/24/10
5/19/10
5/6/10
4/30/10
4/21/10
4/19/10
For Period End:3/31/108-K,  NT 10-Q
3/26/108-K,  NT 10-K
3/22/10
3/12/10
3/4/108-K
1/27/10
12/31/0910-K,  NT 10-K
11/4/09
10/22/09
10/9/09
9/28/09
8/20/09
8/5/09
7/1/09
6/30/0910-Q
5/28/09
5/25/09
3/31/0910-Q,  4,  DEF 14A
12/31/0810-K
10/25/99
 List all Filings 
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