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EX-32.1 - Manasota Group, Inc.v181277_ex32-1.htm
EX-31.1 - Manasota Group, Inc.v181277_ex31-1.htm
EX-31.2 - Manasota Group, Inc.v181277_ex31-2.htm

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
 
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2009
 
Commission File Number 333-71773
 
HORIZON BANCORPORATION, INC.
a Florida corporation
 
(IRS Employer Identification No. 65-0840565)
900 53rd Avenue East
Bradenton, Florida 34203
(941) 753-2265
 
Securities Registered Pursuant to Section 12(b)
of the Exchange Act:
 
None
 
Securities Registered Pursuant to Section 12(g)
of the Exchange Act:
 
Common Stock, $.01 par value
 

 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
Yes ¨    No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
 
Yes ¨    No x
 
Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding twelve 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained here, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.     x
 
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12-2 of the Exchange Act (Check one):

Large accelerated filer    ¨
Accelerated filer    ¨
   
Non-accelerated filer    ¨
Smaller reporting company    x
(Do not check if 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
 
The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant on the last business day of the registrant’s most recently completed second fiscal quarter, was $8,850,695.  Such value was computed by reference to the closing price of the common stock on such date on the Over-the-Counter Bulletin Board inter-dealer trading system ("OTCBB"), of $5.00.  For purposes of this determination, directors, executive officers and holders of 10% or more of the registrant's common stock were considered the affiliates of the registrant at that date.
 
The number of shares outstanding of the registrant's common stock as of March 19, 2010: 1,770,139 shares of common stock, par value $.01 per share (the "Common Stock").
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the registrant's definitive Proxy Statement to be filed with the Securities and Exchange Commission (the "Commission") pursuant to Regulation 14A in connection with the 2010 Annual Meeting of Shareholders are incorporated herein by reference into Part III of this report.

 
 

 
 
 
Certain statements set forth in this Report or incorporated herein by reference, including, without limitation, matters discussed under the caption “Management's Discussion and Analysis of Financial Condition and Results of Operations” are “forward-looking statements” within the meaning of the federal securities laws, including, without limitation, statements regarding our outlook on earnings, stock performance, asset quality, economic conditions, real estate markets and projected growth, and are based upon management’s beliefs as well as assumptions made based on data currently available to management.  In this Report, the terms “the Company”, “we”, “us”, or “our” refer to Horizon Bancorporation, Inc.  When words like “anticipate”, “believe”, “intend”, “plan”, “may”, “continue”, “project”, “would”, “expect”, “estimate”, “could”, “should”, “will”, and similar expressions are used, you should consider them as identifying forward-looking statements.  These forward-looking statements are not guarantees of future performance, and a variety of factors could cause our actual results to differ materially from the anticipated or expected results expressed in these forward-looking statements.  Many of these factors are beyond our ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements.  The following list, which is not intended to be an all-encompassing list of risks and uncertainties affecting us, summarizes several factors that could cause our actual results to differ materially from those anticipated or expected in these forward-looking statements: (1) competitive pressures among depository and other financial institutions may increase significantly; (2) changes in the interest rate environment may reduce margins or the volumes or values of loans made by us; (3) general economic conditions (both generally and in our markets) may continue to be less favorable than expected, resulting in, among other things, a further deterioration in credit quality and/or a reduction in demand for credit; (4) continued weakness in the real estate market has adversely affected us and may continue to adversely affect us; (5) legislative or regulatory changes, including changes in accounting standards and compliance requirements, may adversely affect the businesses in which we are engaged; (6) competitors may have greater financial resources and develop products that enable such competitors to compete more successfully than we can; (7) our ability to attract and retain key personnel can be affected by the increased competition for experienced employees in the banking industry; (8) adverse changes may occur in the bond and equity markets; (9) our ability to raise capital to protect against further deterioration in our loan portfolio may be limited due to unfavorable conditions in the equity markets; (10) war or terrorist activities may cause further deterioration in the economy or cause instability in credit markets; (11) restrictions or conditions imposed by our regulators on our operations may make it more difficult for us to achieve our goals; (12) economic, governmental or other factors may prevent the projected population and commercial growth in the markets in which we operate; and (13) the risk factors discussed from time to time in the Company’s periodic reports filed with the Securities and Exchange Commission (the “SEC”), including but not limited to, this Annual Report on Form 10-K (the “Report”).  We undertake no obligation to, and we do not intend to, update or revise these statements following the date of this filing, whether as a result of new information, future events or otherwise, except as may be required by law.

 
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PART I

Item 1.
Description of Business.
 
 
A.
Business Development.
 
     Horizon Bancorporation, Inc. (hereinafter, the "Company" or the "Registrant") was incorporated in the State of Florida on May 27, 1998, under the name of Manasota Group, Inc., for the purpose of becoming a bank holding company owning all of the outstanding capital stock of Horizon Bank, a commercial bank chartered under the laws of Florida (the "Bank").  In anticipation of the filing for regulatory approval for the Bank, the Company amended its Articles of Incorporation on October 2, 1998, changing its name to Horizon Bancorporation, Inc., authorizing additional capital stock and adopting anti-takeover provisions typical of a bank holding company for a community bank.  All of the regulatory approvals necessary for the operation of the Company and the Bank were granted as of October 25, 1999.
 
     The Company began its initial public offering of the Common Stock at $5.50 per share on February 9, 1999, and completed its minimum offering of 1,023,638 shares on October 13, 1999. Of the total proceeds of $5,630,009, the Company used $5,280,000 to capitalize the Bank, which opened for business on October 25, 1999.  The Company raised an additional $673,414.50 as of December 31, 1999, when the offering closed, with a total of 1,146,077 shares of Common Stock sold for the aggregate amount of $6,303,423.50 (the "Initial Offering").
 
     To satisfy its needs for additional capital, in April 2003, the Company conducted a public offering solely to its existing shareholders (the "Rights Offering"), whereby each shareholder could purchase one unit for each 3.333 shares of the Company's common stock already owned.  Each unit consisted of one share of the Company's common stock and one warrant (expiring on July 6, 2005) to purchase one share of the Company's common stock for $7.00 per share, subject to certain limitations.  The Company sold 246,038 units for $6.00 per unit.  In an unrelated private placement, also during 2003, the Company sold 100,000 units, each consisting of one share of common stock and one warrant (expiring on August 12, 2005) to purchase one-half of one share of the Company's common stock at $3.50 (or $7.00 per share), for $6.00 per unit.  Total proceeds to the Company from the Rights Offering and the private placement, amounted to $2,043,012, net of direct selling expenses.
 
     On or about July 6, 2005, all of the warrants issued in the Rights Offering and the private placement were either exercised or expired. Total proceeds from such exercise amounted to $1,941,793.
 
     On May 10, 2004, the Company registered, by filing an SEC Form 8A, the Common Stock under Section 12(g) of the Securities Exchange Act of 1934 (the "Exchange Act").  Subsequently, in November 2004, the Common Stock began trading in the OTCBB under the Symbol "HZNB".
 
     Our internet address is www.horizonbankfl.com.  We make available free of charge on www.horizonbankfl.com our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission ("SEC").

 
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        The information on the website listed above, is not and should not be considered part of this Annual Report on Form 10-K and is not incorporated by reference in this document.  This website is and is only intended to be an inactive textual reference.
 
     The Company maintains its corporate offices and main banking center at 900 53rd Avenue East, Bradenton, Florida 34203.  On June 25, 2001, the Bank opened a branch facility located at 2102 59th Street West, Bradenton, Florida.  On October 31, 2005, the Bank opened a branch facility located at 501 8th Avenue West, Palmetto, Florida.  A branch at 1525 E. Brandon Boulevard, Brandon, Florida was opened in March, 2009.
 
 
B.
Recent Developments.
 
1.  The May 2009 Examination of the Bank and its Aftermath.
 
     Similar to other financial institutions, our business, financial condition, credit performance from loans and operating results have been and continue to be adversely affected by dramatic declines in the real estate and capital markets in Manatee County.  In order to adequately reflect such negative credit performance, and in response to the findings in the May 25, 2009 examination (the “May 2009 Examination”) of the Bank by the Federal Reserve Bank of Atlanta (the “Atlanta Fed”) and the Florida Office of Financial Regulation (the “OFR”), which findings were set forth in the official report delivered to the Bank in October 2009.  During the second quarter of 2009, the Bank charged off a significant amount of commercial and real estate loans, placed additional loans into non-accrual, reclassified certain other loans, wrote down certain investment securities and increased its reserves for loan losses.  As a result of these actions, the Bank’s Total Risk-Based Capital fell to 6.6%, which is below the required minimum for adequately capitalized banks of 8%.  On August 5, 2009, the Bank received a letter from the Atlanta Fed in which the Bank was declared to be undercapitalized and was required to submit a capital restoration plan under which it can be shown that the Bank will become and maintain for four consecutive quarters the status of an adequately capitalized bank.  The letter also prohibited, without prior written approval of the Atlanta Fed: (a) the Bank’s payment of dividends and any other capital distributions; (b) growth of the Bank’s total assets; and (c) the Bank’s expansion through acquisition, branching or new lines of business.  Previously, by letter dated May 28, 2009, the Atlanta Fed also 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.
 
     From the outset we disagreed with the Atlanta Fed’s opinion that the Bank methodology used for computing the appropriate level in arriving at the addition of the Bank’s Allowance for Loan and Lease Losses (“ALLL”) was flawed.  We contended, and continue to contend, that the methodology used by the Atlanta Fed was not consistent with the relevant accounting rules and was based on data relating to financial institutions not comparable to the Bank.  As a result of this disagreement, the Bank’s levels of ALLL, as of each of June 30, 2009, September 30, 2009 and as of December 31, 2009, have been in the range of $2.0 to $3.0  million lower than the level claimed by the Atlanta Fed (the “Disputed ALLL Addition”).

 
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     On August 20, 2009, we submitted a capital restoration plan to the Atlanta Fed.  That plan was deemed by the Atlanta Fed not be acceptable by letter dated September 28, 2009.  On October 9, 2009, we submitted a revised capital restoration plan.  The revised plan was also deemed by the Atlanta Fed not to be acceptable by letter dated January 27, 2010.  In the wake of the January 27, 2010 letter, the Board of Governors of the Federal Reserve System (the “Board of Governors”) issued to the Bank, on March 4, 2010, a Prompt Corrective Action Directive Pursuant to Section 38 of the Federal Deposit Insurance Act, as Amended (the “PCA”).  The PCA directs 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
 
 
·
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.
 
     On March 22, 2010, the Bank filed an appeal of the PCA with the Board of Governors.  In the appeal, we contended that the revised capital restoration plan should not have been deemed not to be acceptable because, among other things, the Atlanta Fed’s refusal to resolve the Disputed ALLL Addition has hindered the Company’s ability to complete the equity offering described below.  Given that the proceeds from the equity offering would have been the main source for the additional capital required for the capital restoration plan to be accepted, we requested in the appeal that the PCA be suspended and that the Bank and the Atlanta Fed be given a new opportunity to resolve the Disputed ALLL Addition.
 
     Since the filing of the appeal, 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 has amended its December 31, 2009 Call Report to further reduce its regulatory capital.  As a result, even without taking into account the Disputed ALLL Addition, the Bank has been classified, as of December 31, 2009, as a “significantly undercapitalized” financial institution.
 
2.  Equity Offering.
 
    All capital restoration plans submitted by us thus far have shown that, combined with projected net earnings for the Bank and certain cost cutting measures and not taking into account the Disputed ALLL Addition, completing a $3.5 million offering of equity securities would cause the Bank to be considered adequately capitalized.  On this basis, on October 23, 2009, the Company commenced an offering of a minimum of $3.5 million and a maximum of $5.0 million of 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 greater of (a) book value of the common stock at the time of conversion or (b) the market price of the common stock on the date of issuance of the shares of the Series A Preferred Stock.

 
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     Under the terms of the offering, the proceeds may be released to the Company from escrow only if the $3.5 million minimum is reached and the Atlanta Fed approves a capital restoration plan for the Bank.  This means that, given the impact of the resolution of the Disputed ALLL Addition may have on whether the $3.5 million minimum offering will cause the Bank to become adequately capitalized and thus, in turn, whether the capital restoration plan is accepted by the Atlanta Fed, 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 Company and the Atlanta Fed are in accord regarding the Disputed ALLL Addition and the Company’s plan to restore the Bank’s capital.  A copy of the Confidential Private Placement Memorandum, dated September 30, 2009, as supplemented by Supplement No. 1, dated October 23, 2009, Supplement No. 2, dated December 2, 2009 and Supplement No. 3, dated February 26, 2010, describing the offering, is available at the Company’s website at www.horizonbankfl.com.
 
     As of the 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.  The offering expires on April 30, 2010.
 
     In light of the recent reduction in the Bank’s regulatory capital in response to the preliminary findings of the March 2010 Examination, raising the current $3.5 million minimum amount, or even the current $5.0 maximum amount, of the equity offering will not be sufficient to allow the Bank to become adequately capitalized.  As of the date of this Report, we are in the process of determining the new required minimum, which we believe would be in the range of $7.0 - $8.5 million.
 
3.  Written Agreement.
 
     On November 4, 2009, the Bank entered into an agreement with the Atlanta Fed and the OFR (the “Written Agreement”).  Under the Written Agreement, among other things, the Bank has agreed to:
 
 
·
Within 60 days of the date of the Written Agreement, submit a written plan to strengthen the oversight by the Board of Directors of the management and operations of the Bank;
 
 
·
Within 60 days of the date of the Written Agreement, submit a written plan acceptable to the Atlanta Fed and the OFR to strengthen the Bank’s management of commercial real estate concentration, including steps to reduce the risk of concentration;
 
 
·
Within 60 days of the date of the Written Agreement, submit a written plan acceptable to the Atlanta Fed and the OFR to strengthen risk management practices;
 
 
·
Within 60 days of the date of the Written Agreement, submit a written program acceptable to the Atlanta Fed and the OFR for lending and credit administration;

 
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·
Within 10 days of the date of the Written Agreement, retain an independent consultant acceptable to the Atlanta Fed and the OFR to conduct an independent review of the portion of the Bank’s loan portfolio that was not reviewed during the May 25, 2010 Examination;
 
 
·
Not to extend or renew credit to or for the benefit of any borrower (a) with respect to whose loans the Bank has charged off or classified a loss in the report of the May 25, 2010 Examination or (b) whose loan(s) were classified as “doubtful” or “substandard” in such report;
 
 
·
Within 60 days of the date of the Written Agreement, submit a written plan acceptable to the Atlanta Fed and the OFR designed to improve the Bank’s position with respect to any asset in excess of $250,000;
 
 
·
Within 60 days of the date of the Written Agreement, submit a report describing a revised methodology for the determination and maintenance of an adequate ALLL;
 
 
·
Within 60 days of the date of the Written Agreement, submit a written plan acceptable to the Atlanta Fed and the OFR to maintain sufficient capital at the Bank over a period, which, it is understood, is for a period beyond the four consecutive quarters covered in the capital restoration plans requested by the Atlanta Fed as described in C.1. above;
 
 
·
Within 90 days of the date of the Written Agreement, submit a written plan acceptable to the Atlanta Fed and the OFR to strengthen the oversight of the Bank’s audit program by its audit committee;
 
 
·
Within 60 days of the date of the Written Agreement, submit a written plan acceptable to the Atlanta Fed and the OFR to improve management of the Bank’s liquidity position and funds management practices;
 
 
·
Within 60 days of the date of the Written Agreement, submit written policies and procedures to strengthen the management of the Bank’s investment portfolio;
 
 
·
Within 90 days of the date of the Written Agreement, submit to the Atlanta Fed and the OFR a written business plan for 2010 to improve the Bank’s earnings and overall condition; and
 
 
·
Not to declare or pay dividends without the prior written approval of the Atlanta Fed and the OFR.
 
     As of the date of this Report, the Company has complied with all of the provisions of the Written Agreement.  The capital plan submitted pursuant to the Written Agreement is currently being reviewed by the Federal Reserve.

 
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4.  The Company’s Loan From 1st Manatee Bank.
 
     As previously reported, since March 4, 2010, the Company has been engaged in discussions with 1st Manatee Bank, Bradenton, Florida, regarding the notice given to the Company by 1st Manatee Bank on March 4, 2010.  In the notice, 1st Manatee Bank informed the Company that the principal of the approximately $1.1 million loan made to the Company by 1st Manatee Bank on December 31, 2008, is due and that it intends to sell the collateral pledged by the Company under the loan in a public sale.  The collateral consists of 1,536,000 shares of common stock of the Bank, i.e. all of the outstanding capital stock of the Bank.  On March 12, 2010, 1st Manatee Bank and the Company entered into a forbearance agreement pursuant to which any such public sale was cancelled, though 1st Manatee has the right to reschedule a sale after March 26, 2010.  Subsequently, 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.  Pursuant to the forebearance agreement as amended, in consideration of the payment of $104,000, payable in two installments, $44,000 on March 29, 2010 and $60,000 on or before April 19, 2010, the forebearance period with respect to the failure to pay off the 1st Manatee Loan at maturity 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.
 
5.  Summary.
 
     As of the date of this Report the situation surrounding the Company and the Bank may be summarized as follows:
 
 
·
The Bank is considered “significantly undercapitalized.”
 
 
·
In the meantime, the appeal of the PCA is pending, the formal findings of the March 2010 Examination have not yet been communicated to the Bank, no resolution has been reached regarding the Disputed ALLL Addition and the equity offering as currently structured, even if the current maximum of $5.0 million is raised in the offering, will not be sufficient to restore the Bank’s status as adequately capitalized.
 
 
·
The 45-day deadline set forth in the PCA expires on April 19, 2010.  Because the appeal had not stayed the effectiveness of the directives contained in the PCA, any one of the following outcomes is possible:
 
 
·
On or immediately afterApril 19, 2010, the Federal Reserve may deny the appeal, and the Atlanta Fed may then take the position that the Bank did not comply with the directives set forth in the PCA.  Depending on the Atlanta Fed’s perception of the Bank’s financial position, the Atlanta Fed may then take further actions, ranging from dismissing the Bank’s directors and/or senior executive officers to the appointment of a receiver; or
 
 
·
The Atlanta Fed may grant the appeal or otherwise provide clear guidance as to the additional capital required for the Bank to become adequately capitalized and allow the Company and Bank additional time to raise such capital.
 
     We are currently actively engaged in disucssions with investors potentially willing to acquire shares of the Series A preferred Stock in an amount enough to add up to $10 million of capital to the Bank, which we believe would be sufficient to allow the Bank to become, in the first instance, adequately capitalized.  These discussions could possibly lead to an investment if and only if the Atlanta Fed does provide the clear guidance and aditional time.  In this connection, there is no assurance that the Atlanta Fed will not choose to appoint a receiver, i.e. to allow the Bank to fail, causing the existing shareholders to lose their entire investment in the Company.

 
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     With respect to the loan from 1st Manatee Bank, at this time, under the PCA and the Written Agreement, the Bank may not make any capital distributions, including dividends, to the Company without the prior written consent of the Atlanta Fed.  Such consent is unlikely to be given and the Company may rely solely on an outside injection of capital as the source for repayment of this loan.  The Company is currently engaged in discussions with an investor, as well as members of its Board of Directors, regarding the purchase of the loan from 1st Manatee and its subsequent contribution to the capital of the Company.  There is no assurance that these discussions will result in a satisfactory arrangement.  If the Bank does not obtain the clear guidance and additional time described above, or even if it does but we are unable to raise the required capital, then in the absence of a satisfactory arrangement with 1st Manatee Bank, the common stock of the Bank would be sold in a public sale.  Were common stock of the Bank to be sold at a public sale, the purchaser would, subject to approval by the Federal Reserve and the OFR, become the sole shareholder of the Bank. If the purchase price paid by such purchaser at the public sale were to exceed $1.1 million, the Company would recover such excess.  Otherwise, there would be no recovery and the existing shareholders would lose their entire investment in the Company.
 
 
C.
Business.
 
1.  Services Offered by the Bank.
 
     The Company's sole subsidiary, the Bank, conducts a commercial banking business in its primary service area of Bradenton, Florida, the surrounding area of Manatee County and with expansion into Eastern Hillsborough County.  The Bank offers a full range of commercial banking services to individual, professional and business customers in its primary service area.  These services include personal and business checking accounts and savings and other time certificates of deposit.  The transaction accounts and time certificates are at rates competitive with those offered in the primary service area.  Customer deposits with the Bank are insured to the maximum extent provided by law through the FDIC.  The Bank issues credit cards and acts as a merchant depository for cardholder drafts under both Visa and MasterCard.  It offers night depository and bank-by-mail services and sells travelers checks issued by an independent entity and cashiers checks.  The Bank does not offer trust and fiduciary services presently and will rely on trust and fiduciary services offered by correspondent banks until it determines that it is profitable to offer these services directly.  In 2005 the Bank began offering internet bank services to its customers.
 
Lending Activities
 
     The Bank seeks to attract deposits from the general public and uses those deposits, together with borrowings and other sources of funds, to originate and purchase loans.  It offers a full range of short and medium-term commercial, consumer and real estate loans.  The Bank attempts to react to prevailing market conditions and demands in its lending activities, while avoiding excessive concentrations of any particular loan category.  The Bank has a loan approval process that provides for various levels of officer lending authority.  When a loan amount exceeds an officer's lending authority, it is transferred to an officer with a higher limit, with ultimate lending authority resting with the Loan Committee of the Board of Directors.
 
     The risk of nonpayment of loans is inherent in making all loans.  However, management carefully evaluates all loan applicants and attempts to minimize its credit risk exposure by use of thorough loan application and approval procedures that are established for each category of loan prior to beginning operation.  In determining whether to make a loan, the Bank considers the borrower's credit history, analyzes the borrower's income and ability to service the loan and evaluates the need for collateral to secure recovery in the event of default.

 
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     Under Florida law, the Bank is limited in the amount it can loan to a single borrower to no more than 15% of its statutory capital base, unless a loan that is greater than 15% of the statutory capital base is approved by the Board of Directors and unless the entire amount of the loan is secured.  In no event, however, may the loan be greater than 25% of a bank's statutory capital base.  The Bank's legal lending limit under Florida law for one borrower, based upon its statutory capital base, is approximately $1,140,364 for unsecured loans and $1,900,607 for fully secured loans.
 
     The Bank maintains an allowance for loan losses based upon management's assumptions and judgments regarding the ultimate collectibility of loans in its portfolio and based upon a percentage of the outstanding balances of specific loans when their ultimate collectibility is considered questionable.  Certain risks with regard to specific categories of loans are described below.
 
     Commercial Loans.  Commercial lending activities are directed principally toward businesses whose demand for funds will fall within the Bank's anticipated lending limit.  These businesses include small to medium-size professional firms, retail and wholesale businesses, light industry and manufacturing concerns operating in and around the primary service area.  The types of loans provided include principally term loans with variable interest rates secured by equipment, inventory, receivables and real estate, as well as secured and unsecured working capital lines of credit.  Repayment of these loans is dependent upon the financial success of the business borrower.  Personal guarantees are obtained from the principals of business borrowers and/or third parties to further support the borrower's ability to service the debt and reduce the risk of nonpayment.
 
     Real Estate Loans.  Commercial real estate lending is oriented toward short-term interim loans and construction loans.  The Bank also originates variable-rate residential and other mortgage loans for its own account and both variable and fixed-rate residential mortgage loans for resale.  The residential loans are secured by first mortgages on one-to-four family residences in the primary service area.  Loans secured by second mortgages on a borrower's residence are also made.
 
     Consumer Loans.  Consumer lending is made on a secured or unsecured basis and is oriented primarily to the requirements of the Bank's customers, with an emphasis on automobile financing, home improvements, debt consolidation and other personal needs.  Consumer loans generally involve more risk than first mortgage loans because the collateral for a defaulted loan may not provide an adequate source of repayment of the principal due to damage to the collateral or other loss of value while the remaining deficiency often does not warrant further collection efforts.  In addition, consumer loan performance is dependent upon the borrower's continued financial stability and are, therefore, more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.  Various Federal and state laws, including Federal and state bankruptcy and insolvency laws, also limit the amount that can be recovered.

 
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Asset and Liability Management
 
     The primary assets of the Bank consist of its loan portfolio and investment accounts.  Consistent with the requirements of prudent banking necessary to maintain liquidity, the Bank seeks to match maturities and rates of loans and the investment portfolio with those of deposits, although exact matching is not always possible.  The Bank seeks to invest the largest portion of its assets in commercial, consumer and real estate loans.  Generally, loans are limited to less than 85% of deposits and capital funds; however, this ratio may be exceeded as the Bank from time to time will purchase government guaranteed loans that carry minimal risk.   The Bank's investment account consists primarily of marketable securities of the United States government, Federal agencies, trust preferred issues of sound financial institutions, agency and corporate mortgage backed issues and bonds issued by various state and municipal governments, generally with varied maturities.
 
     The Bank's investment policy provides for a portfolio divided among issues purchased to meet one or more of the following objectives:
 
·
to complement strategies developed in assets/liquidity management, including desired liquidity levels;
 
·
to maximize after-tax income from funds not needed for day-to-day operations and loan demand; and
 
·
to provide collateral necessary for acceptance of public funds.
 
     This policy allows the Bank to deal with seasonal deposit fluctuations and to provide for basic liquidity consistent with loan demand and, when possible, to match maturities with anticipated liquidity demands.  Longer term securities are sometimes selected for a combination of yield and exemption from Federal income taxation when appropriate.  Deposit accounts represent the majority of the liabilities of the Bank.  These include savings accounts, transaction accounts and time deposits.
 
     The Bank derives its income principally from interest charged on loans and, to a lesser extent, from interest earned on investments, fees received in connection with the origination of loans and miscellaneous fees and service charges.  Its principal expenses are interest expense on deposits and operating expenses.  The funds for these activities are provided principally by operating revenues, deposit growth, purchase of Federal funds from other banks, repayment of outstanding loans and sale of loans and investment securities.
 
2.  Market Area and Competition.
 
     The Bank's primary service area has been Bradenton, Florida and the surrounding area of Manatee County. Manatee County is situated in the Tampa Bay region, south of Tampa and north of Sarasota. Bradenton is the county's largest city and the county seat.  The primary service area from which the Bank draws 75% of its business is defined as the area bounded on the north by the Hillsborough/Manatee County line, on the south by the Manatee County line, on the east by Interstate 75 and on the West by Sarasota Bay/Palma Sola Bay.  The Bank's service area has been expanded into North Manatee County (Manatee River to the North County Line) with the opening of the Palmetto branch location..  The current population of Manatee County is estimated at 323,400 and the median age is estimated at 43.
 
     Service and retail industries employ more than  half of the workforce (estimated at 156,000 in 2007) in Manatee County.  Manatee County has an estimated median income of $43,000.

 
11

 
 
   The Bank has recently expanded its service area to include parts of eastern Tampa and eastern Hillsborough County to include the areas known as Brandon, Plant City, Riverview and Gibsonton.  This coincides with the new branch which opened in Brandon in March of 2009.
  
     The Bank has substantial competition for accounts, commercial, consumer and real estate loans and for the provision of other services in the primary service area.  The leading factors in competing for bank accounts are interest rates, the range of financial services offered, convenience of office locations and flexible office hours.  Direct competition for bank accounts comes from other commercial banks, savings institutions, credit unions, brokerage firms and money market funds.  The leading factors in competing for loans are interest rates, loan origination fees and the range of lending services offered.  Competition for origination of loans normally comes from other commercial banks, savings institutions, credit unions and mortgage banking firms.  These entities may have competitive advantages as a result of greater resources and higher lending limits by virtue of their greater capitalization.  These competitors also may offer their customers certain services that the Bank does not provide directly but might offer indirectly through correspondent institutions.
 
3.  Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differential.
 
     The following is a presentation of the average consolidated balance sheet of the Company for the year ended December 31, 2008.  This presentation includes all major categories of interest-earning assets and interest-bearing liabilities (in thousands):
 
AVERAGE CONSOLIDATED ASSETS
 
   
Year Ended
December 31, 2009
   
Year Ended
December 31, 2008
 
Cash and due from banks
  $ 7,463     $ 2,174  
Taxable/Nontaxable securities
  $ 31,404     $ 31,887  
Federal funds sold
    1,224       1,119  
Net Loans
    165,284       162,671  
Total earning assets
  $ 197,912     $ 195,677  
Other assets
    7,851       5,325  
Total assets
  $ 213,226     $ 203,176  
  
AVERAGE CONSOLIDATED
LIABILITIES AND STOCKHOLDERS' EQUITY

   
Year Ended
December 31, 2009
   
Year Ended
December 31, 2008
 
Non interest bearing-deposits
  $ 9,269     $ 9,478  
NOW and money market deposits
    24,890       24,924  
Savings Deposits
    15,148       15,409  
Time Deposits
    126,764       113,768  
Borrowings
    26,721       26,500  
Other liabilities
    394       24  
Total liabilities
  $ 203,186     $ 190,103  
Common Stock
  $ 18     $ 18  
Paid-in Capital
    9,259       10,323  
Retained earnings
    763       2,732  
Total stockholders' equity
  $ 10,040     $ 13,073  
Total liabilities and stockholders' equity
  $ 213,226     $ 203,176  

 
12

 
 
     The following is a presentation of an analysis of the net interest earnings of the Company for the period indicated with respect to each major category of interest-earning asset and each major category of interest-bearing liability (dollars in thousands):

   
Year Ended December 31, 2009
 
 
 
Average
Amount
   
Interest
   
Average
Yield/
Rate
 
Assets                   
Taxable/Nontaxable securities
  $ 31,404     $ 1,455       4.63 %
Federal funds sold
    1,224       4       0.33 %
Net loans
    165,284       10,296       6.23 %
Total earning assets
  $ 197,912     $ 11,755       5.94 %
Liabilities
                       
NOW and money market deposits
  $ 24,890     $ 306       1.23 %
Savings deposits
    15,148       248       1.64 %
Time deposits
    126,764       4,067       3.21 %
Borrowings
    26,721       1,169       4.37 %
Total interest bearing liabilities
  $ 193,523     $ 5,790       2.99 %
Interest spread
                    2.95 %
Net interest income
          $ 5,965          
                         
Net yield on interest earning assets
                    3.01 %

   
Year Ended December 31, 2008
 
 
 
Average
Amount
   
Interest
   
Average
Yield/
Rate
 
Assets                  
Taxable/Nontaxable securities
  $ 31,887     $ 1,837       5.76 %
Federal funds sold
    1,119       32       2.86 %
Net loans
    162,671       11,260       6.92 %
Total earning assets
  $ 195,677     $ 13,129       6.71 %
Liabilities
                       
NOW and money market deposits
  $ 24,924     $ 485       1.95 %
Savings deposits
    15,409       438       2.84 %
Time deposits
    113,768       5,001       4.40 %
Borrowings
    26,500       1,092       4.12 %
Total interest bearing liabilities
  $ 180,601     $ 7,016       3.88 %
Interest spread
                    2.83 %
Net interest income
          $ 6,113          
                         
Net yield on interest earning assets
                    3.12 %

 
13

 

4.  Rate/Volume Analysis of Net Interest Income.
 
     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:
 
   
Year Ended December 31, 2009
Compared with 
Year Ended December 31, 2008
 
    
Increase (decrease) due to:
 
 
 
Volume
   
Rate
   
Total
 
Interest earned on:                   
                         
Taxable/Nontaxable securities
    (27 )     (355 )     (382 )
Federal funds sold
    3       (31 )     (28 )
Net loans
     184       (1,148 )     (964 )
                         
Total Interest Income
    160       (1,534 )     (1,374 )
                         
Interest paid on:
                       
                         
NOW deposits and money market deposits
    (1 )     (178 )     (179 )
Savings deposits
    (7 )     (183 )     (190 )
Time deposits
    684       (1,618 )     (934 )
Other borrowings
    9       68       77  
                         
Total interest Expense
    685       (1,911 )     (1,226 )
                         
Change in net interest income
  $ (525 )   $ 377     $ (148 )

   
Year Ended December 31, 2008
Compared with
Year Ended December 31, 2007
 
   
Increase (decrease) due to:
 
 
 
Volume
   
Rate
   
Total
 
Interest earned on:                   
                   
Taxable/Nontaxable securities
    127       (8 )     119  
Federal funds sold
    82       (97 )     (15 )
Net loans
     92       (81 )     11  
                         
Total Interest Income
    301       (186 )     115  
                         
Interest paid on:
                       
                         
NOW deposits and money market deposits
    (173 )     (349 )     (522 )
Savings deposits
    210       (295 )     (85 )
Time deposits
    850       (453 )     397  
Other borrowings
    170       31       201  
                         
Total interest Expense
    1,057       (1,066 )     (9 )
                         
Change in net interest income
  $ (756 )   $ 880     $ 124  

 
14

 
 
5.  Deposits Analysis.
 
     The Bank offers a full range of interest-bearing and non-interest bearing accounts, including commercial and retail checking accounts, negotiable order of withdrawal ("NOW") accounts, individual retirement accounts, regular interest-bearing savings accounts and certificates of deposit with a range of maturity date options.  The sources of deposits are residents, businesses and employees of businesses within the Bank's market area.  Customers are obtained through personal solicitation, direct mail solicitation and advertisements published in the local media.
 
     The Bank pays competitive interest rates on time and savings deposits up to the maximum permitted by law or regulation.  In addition, the Bank has implemented a service charge fee schedule competitive with other financial institutions, covering such matters as maintenance fees on checking accounts, per item processing fees on checking accounts, returned check charges and the like.
 
     The following table presents, for the periods indicated, the average amount of and average rate paid on each of the indicated deposit categories (dollars in thousands):

   
Year Ended December 31, 2009
 
Deposit Category
 
Average Amount
   
Average Rate Paid
 
             
Non interest bearing demand deposits
  $ 9,269        
NOW and money market deposits
    24,890       1.23 %
Savings deposits
    15,148       1.64 %
Time deposits
    126,764       3.21 %
Total
  $ 176,071       2.77 %

Time Certificates of Deposit with balance of $100,000 and above.       
       
3 months or less
  $ 6,748  
3-6 months
    3,971  
6-12 months
    11,023  
over twelve months
    4,165  
Total
  $ 25,907  

 
15

 

   
Year Ended December 31, 2008
 
Deposit Category
 
Average Amount
   
Average Rate Paid
 
             
Non interest bearing demand deposits
  $ 9,478        
NOW and money market deposits
    24,924       1.95 %
Savings deposits
    15,409       2.84 %
Time deposits
    113,768       4.40 %
Total
  $ 163,579       3.84 %

Time Certificates of Deposit with balance of $100,000 and above.       
       
3 months or less
  $ 5,841  
3-6 months
    8,135  
6-12 months
    11,658  
over twelve months
    2,550  
Total
  $ 28,184  

6.  Loan Portfolio Analysis.
 
     The Bank engages in a full complement of lending activities, including commercial, consumer installment and real estate loans.
 
     Commercial lending is directed principally towards businesses whose demands for funds fall within the Company's legal lending limits and which are potential deposit customers of the Bank.  These loans include loans obtained for a variety of business purposes, and are made to individual, partnership or corporate borrowers.  The Bank places particular emphasis on loans to small and medium-sized businesses.
 
     The Bank's consumer loans consist primarily of installment loans to individuals for personal, family and household purposes, including automobile loans and pre-approved lines of credit to individuals.  This category of loans includes lines of credit and term loans secured by second mortgages on residences for a variety of purposes, including home improvements, education and other personal expenditures.
 
     The Bank's real estate loans consist of residential and commercial first and second mortgages.
 
    The following table presents various categories of loans contained in the Bank's loan portfolio as of December 31, 2009 and 2008 and the total amount of all loans for such periods (in thousands):

   
As of December 31
 
Type of Loan
 
2009
   
2008
 
Commercial real estate
  $ 97,783     $ 95,871  
Residential real estate
    37,439       34,663  
Construction loans
    1,370       4,379  
Commercial loans
    17,218       30,036  
Consumer loans
    2,049       2,581  
Subtotal
    155,859       167,530  
Allowance for loan losses
    (4,731 )     (1,503 )
                 
Total (net of allowance)
  $ 151,128     $ 166,027  

 
16

 
 
     The following is a presentation of an analysis of maturities and/or repricing of loans as of December 31, 2009 (in thousands):

Type of Loan
 
Due in 1
Year or Less
   
Due in 1
To 5 Years
   
Due After
5 Years
   
Total
 
                         
Commercial Real Estate
  $ 28,915     $ 12,537     $ 56,331     $ 97,783  
                                 
Residential Real Estate
  $ 15,738     $ 15,949     $ 5,752     $ 37,439  
                                 
Construction Loans
  $ 1,370       — 0 —       — 0 —     $ 1,370  
                                 
Commercial Loans
  $ 6,845     $ 2,415     $ 7,958     $ 17,218  
                                 
Consumer Loans
  $ 943     $ 662     $ 444     $ 2,049  
                                 
Total
  $ 53,811     $ 31,563     $ 70,485     $ 155,859  
 
     Experience of the Bank has shown that some receivables will be paid prior to contractual maturity and others will be converted, extended or renewed.  Therefore, the tabulation of contractual payments should not be regarded as a forecast of future cash collections.
 
     The following is a presentation of an analysis of sensitivity of loans, excluding installment and other loans to individuals, to changes in interest rates as of December 31, 2009 (in thousands):

Type of Loan
 
Due in 1
Year or Less
   
Due in 1
to 5 Years
   
Due After
5 Years
   
Total
 
                         
Fixed rate loans
  $ 14,274     $ 5,519     $ 13,837     $ 33,630  
Variable rate loans
    39,537       26,044       56,648       122,229  
                                 
Total
  $ 53,811     $ 31,563     $ 70,485     $ 155,859  

 
17

 
 
     The following table presents information regarding non-accrual, past due and restructured loans as of December 31, 2009 and 2008 (dollars in thousands):

   
As of December 31,
 
   
2009
   
2008
 
             
Loans accounted for on a non-accrual basis:
           
             
Number:
 
Thirty-three
   
Twenty-four
 
Amount:
  $ 15,685     $ 7,289  
                 
Accruing loans which are contractually past due 90 days or more as to principal and interest payments:
               
                 
Number:
 
None
   
Two
 
Amount:
  $ 0     $ 84  
                 
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
   
One
 
Amount:
  $ 0     $ 479  
                 
Loans for which there are serious doubts as to the borrower's ability to comply with existing terms:
               
                 
Number:
 
Forty-four
   
Twenty
 
Amount:
  $ 24,210     $ 12,458  
 
     As of December 31, 2009, 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.
 
     Loans are classified as non-accruing when the probability of collection of either principal or interest becomes doubtful.  The balance classified as non-accruing represents the net realizable value of the account, which is the most realistic estimate of the amount the Company expects to collect in final settlement.  If the account balance exceeds the estimated net realizable value, the excess is written off at the time this determination is made.
 
     At December 31, 2009, 33 loans with an aggregate balance of $15,685,437 were not accruing interest.  There are no other loans which are not disclosed above where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.
 
7.  Summary of Loan Loss Experience.
 
     An analysis of the Company's loan loss experience is furnished in the following table for the years ended December 31, 2009 and 2008, as well as a breakdown of the allowance for possible loan losses (dollars in thousands):

 
18

 

   
Year Ended December 31
 
   
2009
   
2008
 
             
Balance at beginning of period
  $ 1,503     $ 1,403  
Charge-offs (commercial loans)
    (6,623 )     (66 )
Charge-offs (residential loans)
    (1,496 )     (269 )
Charge-offs (consumer loans)
    (86 )     (24 )
Recoveries
    236       14  
Provision charged to Operations
    11,197       445  
                 
Balance at end of period
  $ 4,731     $ 1,503  
                 
Ratio of allowance for loan losses to total loans outstanding during the period
    3.03 %     .90 %
                 
Net charge-offs/(recoveries) to average loans
    4.73 %     .21 %
 
     As of December 31, 2009, the allowance for possible losses was allocated as follows (dollars in thousands):

Loans
 
Amount
   
Percent of Loan
in Each Category
to Total Loans
 
Commercial real estate & construction 
  $ 532       63.6
Residential real estate
    1,441       24.0 %
Commercial loans
    42       11.1 %
Consumer loans
    —0—       1.3 %
Unallocated
    2,716       N/A  
Total
  $ 4,731       100.0 %
 
  As of December 31, 2008, the allowance for possible losses was allocated as follows (dollars in thousands):

Loans
 
Amount
   
Percent of Loan
in Each Category
to Total Loans
 
Commercial real estate & construction
  $ 685       59.1 %
Residential real estate
    415       20.5 %
Commercial loans
    364       18.9 %
Consumer loans
    19       1.5 %
Unallocated
    20       N/A  
Total
  $ 1,503       100.0 %
 
8.  Loan Loss Reserve.
 
     In considering the adequacy of the Company's allowance for possible loan losses, management has focused on the fact that as of December 31, 2009, 75% of outstanding loans were in the category of commercial loans.  Management generally regards these loans as riskier than other categories of loans in the Company's loan portfolio.  However the majority of the loans in this category at December 31, 2009, were made on a secured basis, such collateral consisting primarily of real estate and equipment.  Management believes that the secured condition of the preponderant portion of its commercial loan portfolio greatly reduces any risk of loss inherently present in these loans.

 
19

 
 
     The Company's consumer loan portfolio is also secured.  At December 31, 2009, the majority of the Company's consumer loans were secured by collateral primarily consisting of automobiles, boats and second mortgages on real estate.  Management believes that these loans involve less risk than other categories of loans.
 
     Residential real estate mortgage loans constitute 24% of outstanding loans.  Management considers these loans to have minimal risk due to the fact that these loans represent conventional residential real estate mortgages where the amount of the original loan does not exceed 80% of the appraised value of the collateral.
 
     The allowance for loan losses reflects an amount which, in management's judgment, is adequate to provide for potential loan losses.  Management's determination of the proper level of the allowance for loan losses is based on the ongoing analysis of the credit quality and loss potential of the portfolio, actual loan loss experience relative to the size and characteristics of the portfolio, changes in composition and risk characteristics of the portfolio and anticipated impacts of national and regional economic policies and conditions.  Senior management and the Board of Directors of the Bank review the adequacy of the allowance for loan losses on a monthly basis.
 
     Management considers the year-end allowance appropriate and adequate to cover possible losses in the loan portfolio; however, management's judgment is based upon a number of assumptions about future events, which are believed to be reasonable, but which may or may not prove 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.
 
9.  Investments.
 
     As of December 31, 2009, the securities portfolio comprised approximately 12.3% of the Company's assets, while loans comprised approximately 75.8% 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 years ended December 31, 2009 and 2008, 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):

 
20

 

Investment Category
 
December 31
 
   
2009
   
2008
 
             
Available-for-Sale:
           
             
U.S. Agency Bonds
  $ 2,457     $ 1,014  
Collateralized mortgage obligations
    1,644       4,708  
Mortgage-backed securities
    228       2,668  
Trust Preferred & Other Corporate Securities
    6,893       7,467  
Equity securities
    1,859       2,108  
Total Available-for-Sale Securities
  $ 13,081     $ 17,965  
                 
Held-to-Maturity Securities:
               
                 
Corporate Securities
  $ 775     $ 550  
General obligation bonds of municipalities
    5,595       6,450  
Revenue bonds of municipalities
    4,147       4,451  
                 
Total Held-to-Maturity Securities
  $ 10,517     $ 11,451  
                 
Total Portfolio
  $ 23,598     $ 29,416  
 
     The following table indicates, for the year ended December 31, 2009, the amount of investments, appropriately classified, due in (i) one year or less, (ii) one to five years, (iii) five to ten years, and (iv) over ten years (dollars in thousands):

 
 
Amount
   
Average
Weighted Yield
 
Available-for-Sale:             
             
Other Securities after 10 years
  $ 1,859       0.74 %
                 
Obligations of U.S. Agency after 10 years
    2,457       4.46 %
                 
Collateralized Mortgage Obligations after 10 years
    1,644       6.11 %
                 
Mortgage-backed securities after 10 years
    228       4.97 %
                 
Trust Preferred & Corporate Securities after 10 years
    6,893       5.56 %
                 
Total Available-for-Sale
  $ 13,081       4.79 %
                 
Held-to-Maturity
               
                 
 Corporate Securities after 10 years
  $ 775       6.45 %
                 
General obligation Bonds after 10 years
    5,595       4.29 %
                 
Revenue bonds after 10 years
    4,147       4.31 %
                 
Total Held-to-Maturity
  $ 10,517       4.49 %
                 
Total
  $ 23,598       4.65 %

 
21

 

 
10.  Return on Equity and Assets
 
     Returns on average consolidated assets and average consolidated equity for the year ended December 31, 2009 and 2008 are as follows:
 
   
2009
   
2008
 
                 
Return on average assets
    (3.81 )%     .29 %
Return on average equity
    (80.95 )%     4.50 %
Equity to assets ratio
    4.71 %     6.43 %
Dividend payout ratio
    N/A       33.86 %
 
11.  Asset/Liability Management
 
     The Bank seeks to manage assets and liabilities to provide a satisfactory, consistent level of profitability within the framework of established cash, loan investment, borrowing and capital policies.  Certain of its officers are responsible for monitoring policies and procedures that are designed to ensure acceptable composition of the asset/liability mix, stability and leverage of all sources of funds while adhering to prudent banking practices.  It is the overall philosophy of management to support asset growth primarily through growth of core deposits of all categories made by individuals, partnerships and corporations.  The management of the Bank seeks to invest the largest portion of their assets in commercial, consumer and real estate loans.
 
     The asset/liability mix of the Bank is monitored on a daily basis by its management.  A quarterly report reflecting interest-sensitive assets and interest-sensitive liabilities is prepared and presented to its Board of Directors.  The objective of this policy is to control interest-sensitive assets and liabilities so as to minimize the impact of substantial movements in interest rates on their respective earnings.
 
12.  Employees.
 
     As of March 17, 2010, the Bank employed 45 full-time equivalent employees.  Management of the Bank believes that its employee relations are good.  There are no collective bargaining agreements covering any of the Bank's employees.
 
13.  Supervision and Regulation.
 
Supervision and Regulation of the Company.
 
     The Company is a bank holding company within the meaning of the Federal Bank Holding Company Act of 1956.  As a bank holding company, the Company is required to file with the Board of Governors of the Federal Reserve System (the "Federal Reserve") annual and semi-annual reports and information regarding its business operations and those of the Bank.  The Company is also examined by the Federal Reserve.

 
22

 
 
     A bank holding company is required by the Federal Bank Holding Company Act to obtain approval from the Federal Reserve prior to acquiring control of any bank that it does not already own or engaging in any business other than banking or managing, controlling or furnishing services to banks and other subsidiaries authorized by the statute.  The Federal Reserve would approve the ownership of shares by a bank holding company in any company the activities of which it has determined by order or regulation to be so closely related to banking or to managing or controlling banks as to be a proper incident thereto.  In other words, the Company would require Federal Reserve approval if we were to engage in any of the foregoing activities.
 
     The Company is compelled by the Federal Reserve to invest additional capital in the event the Bank experiences either significant loan losses or rapid growth of loans or deposits.  The Federal Reserve requires a bank holding company to act as a source of financial strength and to take measures to preserve and protect its bank subsidiaries
 
     As a bank holding company, the Company operates under the capital adequacy guidelines established by the Federal Reserve.  Under the Federal Reserve's current risk-based capital guidelines for bank holding companies, the minimum required ratio for total capital to risk weighted assets we will be required to maintain is 8%, with at least 4% consisting of Tier 1 capital.  Tier 1 capital consists of common and qualifying preferred stock and minority interests in equity accounts of consolidated subsidiaries, less goodwill and other intangible assets.  Because the Company is a bank holding company with less than $500 million in total consolidated assets, these guidelines apply on a Bank-only basis.  These risk-based capital guidelines establish minimum standards and bank holding companies generally are expected to operate well above the minimum standards.
 
     The Company also is subject to requirements to file annual, quarterly and certain other reports with the SEC applicable under the Securities Exchange Act of 1934.
 
In addition, the Federal Reserve, through guidance reissued on February 24, 2009, also maintains supervisory policies that:
 
 
·
may restrict the ability of a bank from paying dividends on any class of capital stock or any other Tier 1 capital instrument if the holding company is not deemed to have a strong capital position.
 
 
·
states that a holding company should reduce or eliminate dividends when
 
 
·
the holding company’s net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends;
 
 
·
the holding company’s prospective rate of earnings retention is not consistent with the holding company’s capital needs and overall current and prospective financial condition; or

 
23

 
 
 
·
the holding company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.
 
 
·
requires that a holding company must inform the Federal Reserve in advance of declaring or paying a dividend that exceeds earnings for the period (e.g., quarter) for which the dividend is being paid or that could result in a material adverse change to the organization’s capital structure. Declaring or paying a dividend in either circumstance could raise supervisory concerns.
 
     In the current financial and economic environment, the Federal Reserve has indicated that bank holding companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong.
 
     The Company also is subject to requirements to file annual, quarterly and certain other reports with the SEC applicable under the Securities Exchange Act of 1934.
 
Supervision and Regulation of the Bank.
 
     The Bank is examined and regulated by the Florida Office of Financial Regulation (the "Florida Department") and, as a member of the Federal Reserve Bank System, the Federal Reserve Bank of Atlanta.  Under Florida law and Florida Department's regulations, the Bank may pay cash dividends only up to the sum of:
 
·
current period net profits; plus
 
·
80% of its cumulative retained net profits for the preceding two years or, with the approval of the Florida Department, 80% of its cumulative retained net profits for a period longer than two years.
 
Also, no dividend may be paid by the Bank if
 
·
the sum of the amounts equal to the remaining 20% of the retained net profits for the periods from which the 80% is used to pay the dividends is less than the Bank's book value of its common and preferred stock; or
 
 
·
the sum of the current period net profits plus the retained net profits for the preceding two years is less than zero.
 
     Until December 31, 2013, the Bank's deposits are insured by the FDIC for a maximum of $250,000 per depositor.  For this protection, the Bank pays quarterly statutory assessments and will have to comply with the rules and regulations of the FDIC.  Due to the increased number of bank failures that occurred during 2008 and 2009, the FDIC has increased the Bank’s risk-based deposit assessment beginning with the first quarter of 2009 to twelve cents for each $100 of risk-based deposits held by the Bank.  These assessments are likely to increase further during 2010.
 
     Effective November 21, 2008 and until December 31, 2009, the FDIC expanded deposit insurance limits for certain accounts under the Temporary Liquidity Guarantee Program (“TLGP”). Provided an institution has not opted out of TLGP, the FDIC will fully guarantee funds deposited in non-interest bearing transaction accounts, including (1) interest on Lawyer Trust Accounts and (2) negotiable order of withdrawal accounts with rates no higher than 0.50 percent if the institution has committed to maintain the interest rate at or below that rate. In conjunction with the increased deposit insurance coverage, insurance assessments also increase for participating institutions.  As previously reported, the Bank has not opted out of TLGP.

 
24

 
 
     In case of member banks like the Bank, the Federal Reserve has the authority to prevent the continuance or development of unsound and unsafe banking practices and to approve conversions, mergers and consolidations.  As a member of the Federal Reserve, the Bank also has to comply with rules that restrict preferential loans by the bank to "insiders," require the Bank to keep information on loans to principal shareholders and executive officers, and prohibit certain director and officer interlocks between financial institutions.  Also, under the Federal Reserve's current risk-based capital guidelines for member banks, the Bank will be required to maintain a minimum ratio of total capital to risk weighted assets of 8%, with at least 4% consisting of Tier 1 capital.
 
     In addition, the Federal Reserve requires its member banks to maintain a minimum ratio of Tier 1 capital to total assets.  This capital measure is generally referred to as the leverage capital ratio.  The minimum required leverage capital ratio is 4 percent if the Federal Reserve determines that the institution is not anticipating or experiencing significant growth and has well-diversified risks — including no undue interest rate exposure, excellent asset quality, high liquidity and good earnings — and, in general, is considered a strong banking organization and rated Composite 1 under the Uniform Financial Institutions Rating Systems.  If the Bank does not satisfy any of these criteria it may be required to maintain a ratio of total capital to risk-based assets of 10% and a ratio of Tier 1 capital to risk-based assets of at least 6%.  The Bank would then be required to maintain a 5% leverage capital ratio.
 
Significant Legislation.
 
     Under Florida law, which is designed to implement the Interstate Banking Act, a non-Florida bank may not open new branches in Florida but may, beginning May 31, 1997, acquire by merger a Florida bank and operate its branches after the merger, provided that the Florida bank is at least three years old.  Also, since May 31, 1997, Florida law has prohibited the establishment in Florida of new banks by non-Florida bank holding companies.  A non-Florida bank holding company may, however, acquire a Florida bank or bank holding company, provided that the Florida bank involved is at least three years old.  These interstate acquisitions are prohibited if they result in the control of more than 30% of the total amount of insured deposits in Florida, except where the acquisition is an initial entry into Florida by the out-of-state bank holding company.  This legislation has had and continues to have the potential of increasing the competitive forces to which we would be subject.
 
     Under the Gramm-Leach-Bliley Act, enacted in 1999 (the GLB Act”), which essentially repealed the Glass-Steagall Act of 1933, a bank holding company that elects to become a financial holding company may engage in any activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is: (1) financial in nature; (2) incidental to any such financial activity; or (3) complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally.  The GLB Act specifies certain activities that are deemed to be financial in nature, including lending, exchanging, transferring, investing for others, or safeguarding money or securities; underwriting and selling insurance; providing financial, investment or economic advisory services; underwriting, dealing in or making a market in, securities; and any activity currently permitted for bank holding companies by the Federal Reserve under Section 4(c)(8) of the Bank Holding Company Act. The GLB Act does not authorize banks or their affiliates to engage in commercial activities that are not financial in nature. A bank holding company may elect to be treated as a financial holding company only if all depository institution subsidiaries of the holding company are well-capitalized, well-managed and have at least a satisfactory rating under the Community Reinvestment Act.  Because of the GLB Act, the Company has been placed in more direct competition with other financial institutions including mutual funds, securities brokerage firms, insurance companies and investment banking firms.

 
25

 
 
Proposed Legislation and Regulatory Action.
 
     New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structure, competitive relationships and the regulatory framework in which we and the Bank operate.  For example, under the Emergency Economic Stabilization Act of 2008 (“EESA”), Congress has the ability to impose “after-the-fact” terms and conditions on participants in the Capital Purchase Program administered under the Troubled Asset Relief Program (“TARP”).  As previously reported, we have applied for participation in the Capital Purchase Program and, if we were approved for such participation and actually participated in it, we could be subject to any such retroactive legislation. On February 10, 2009, the Treasury announced the Financial Stability Plan under the EESA (the “Financial Stability Plan”) which is intended to further stabilize financial institutions and stimulate lending across a broad range of economic sectors. On February 18, 2009, President Obama signed the America Recovery and Reinvestment Act (“ARRA”), a broad economic stimulus package that included additional restrictions on, and potential additional regulation of, financial institutions. Additional regulations adopted as part of the EESA, the Financial Stability Plan, the ARRA, or other legislation may subject us to additional regulatory requirements.  We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.
 
     The earnings and growth of the Bank are also affected by the monetary and fiscal policies of the federal government, particularly the Federal Reserve.  The Federal Reserve implements national monetary policy by its open market operations in United States government securities, adjustments in the amount of industry reserves that banks and other financial institutions are required to maintain and adjustments to the discount rates applicable to borrowings by banks from the Federal Reserve.  The actions of the Federal Reserve in these areas influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits.  We cannot predict the nature and impact of any future changes in monetary policies.
 
Item 2.
Description of Property.
 
     In August 2000, the Company and the Bank moved their operations into a new one-story building located at 900 53rd Avenue East, in Bradenton.  The new facility, after the addition of almost 2,000 square feet of interior space in August, 2004, consists of approximately 7,000 square feet of interior space, four interior teller windows, four exterior drive-through teller stations and 36 parking spaces.  The interior includes executive offices, work stations for support staff and safe deposit box storage areas.  The original total cost of for the new facility, including the costs of construction, landscaping, and furniture and equipment, was approximately $1.7 million. The 2004 addition cost the Company approximately $260,000, and the Company spent another approximately $40,000 to furnish the additional space with furniture and equipment.

 
26

 
 
     On June 25, 2001, the Bank opened a new branch facility located at 2102 59th Street West, Bradenton, Florida (the "Blake Hospital Branch"). The Blake Hospital Branch was built by a Florida limited liability partnership composed of four of the Company's directors and a relative of one of the Company's directors.  The Bank leased 3,812 square feet of the facility from the partnership on a ten year lease, at a rate of $23.50/square foot, with 3% annual increases and two five-year options.
 
     On October 31, 2005, the Bank opened a new branch facility at 501 8th Avenue West, Palmetto, Florida (the "Palmetto Branch").  The Palmetto Branch was built by a Florida limited liability partnership composed of five of the Company's directors.   The Bank leased 3,731 square feet of the facility from the partnership on a ten year lease, at the rate of $28.50/square foot, with 3% annual increases and two five-year options.
 
     In April of 2009, the Bank opened a new branch facility at 1525 East Brandon Boulevard, Brandon, Florida (the "Brandon Branch").   The Brandon Branch was built by a Florida limited liability partnership composed of four of the Company's directors and a relative of one of the Company's directors.  The Bank leased 3,550 square feet of the facility from the partnership on a ten year lease, at a rate of $50.50/square foot, with 3% annual increases and two five-year options.
 
     On December 30, 2009, the Bank purchased a 26,000 square foot historic building in downtown Bradenton for $1.5 million.  This building will be used to consolidate Holding Company and Bank accounting and bookkeeping functions.  It will also provide space for future growth.  It is anticipated the Bank will lease out a portion of the building.
 
Item 3.
Legal Proceedings.
 
     Neither the Company nor the Bank is a party to, nor is any of their property the subject of, any material pending legal proceeding that is not routine litigation that is incidental to the business or any other material legal proceeding.
 
PART II
 
Item 4.
Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
    Market for Common Stock and Dividend Policy.
 
     Our Amended and Restated Articles of Incorporation authorize us to issue up to 25,000,000 shares of the Common Stock and 1,000,000 shares of preferred stock.  As of March 17, 2010, 1,809,912 shares of the Common Stock were issued, and 1,770,139 were outstanding and held by 586 holders of record.  No shares of preferred stock were then issued and outstanding.
 
     Since November 2004, the Common Stock has been trading on the OTCBB under the symbol "HZNB".  The following table sets forth the range of high and low bid information for the four quarters of 2009, as reported by Bloomberg.com:

Quarter ended
 
High
   
Low
 
March 31
    7.75       6.00  
June 30
    9.25       3.10  
September 30
    5.00       3.90  
December 31
    4.95       1.60  
 
 
27

 
 
     These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
 
   The following table sets forth the range of high and low bid information for the four quarters of 2008, as reported by Bloomberg.com:

Quarter ended
 
High
   
Low
 
March 31
    14.00       10.10  
June 30
    12.50       10.10  
September 30
    11.30       8.25  
December 31
    8.50       6.50  
 
     These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
 
       For  2008  we paid $.11 per share in dividends.  We were restricted by the FRB from paying any dividends in 2009. The declaration of future dividends is within the discretion of the Board of Directors and will depend, among other things, upon business conditions, earnings, the financial condition of the Bank and the Company, and regulatory requirements.
 
Equity Compensation Plan Information.
 
     The following chart sets forth information relating to the Company's stock option plans.
 

   
Number of
Securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
(a)
   
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
(b)
   
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluded
securities reflected
in column (a))
(c)
 
Equity compensation plans approved by security holders
    90,320     $ 11.10       37,887  
Equity compensation plans not approved by security holders
    34,380
(1)
  $ 5.50       -0-  
Total
    124,700               37,887  
 
 
28

 

(1) These ten-year options were granted to Charles S. Conoley, the President and Chief Executive Officer, under an individual compensation arrangement on October 28, 1998. The expiration date of these options was extended to December 31, 2012 pursuant to Mr. Conoley's employment agreement effective January 1, 2008.
 
Item 5.
Selected Financial Data.
 
Not Applicable.
 
Item 6.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
     Discussion of the financial condition and results of operations of the Company should be read in conjunction with the Company's consolidated financial statements and related notes which are included under Item 7 below.
 
Critical Accounting Policies
 
     Critical accounting policies are defined as those that were reflective of significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions.  Management believes that the most critical accounting policies upon which its financial condition depends, and which involve the most complex or subjective decisions or assessments are as follows:
 
     Allowance for Loan Losses:  Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment.  The Company's allowance for loan losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio.  Management uses historical information to assess the adequacy of the allowance for loan losses as well as the prevailing business environment as it is affected by changing economic conditions and various external factors, which may impact the portfolio in ways currently unforeseen.  The allowance is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by loans charged-off.  For an additional discussion of the Company's methodology of assessing the adequacy of the allowance for loan losses, see Note 1 in the Company's consolidated financial statements for years ended December 31, 2009 and 2008.
 
     Income Taxes:  The Company estimates income tax expense based on the amount it expects to owe various tax authorities.  Income taxes are discussed in more detail in Note 14 of the consolidated financial statements.  Accrued taxes represent the net estimated amount due to or to be received from taxing authorities.  In estimating accrued taxes, management assesses the relative merits and risks of the appropriate tax treatments taking into account statutory, judicial and regulatory guidance in the context of its tax position.  Although the Company uses available information to record accrued income taxes, underlying estimates and assumptions can change over time as a result of unanticipated events or circumstances, such as changes in tax laws influencing the Company's overall tax position.  Refer to Note 1 in the Company’s consolidated financial statements for years ended December 31, 2009 and 2008 for a more detailed discussion.

 
29

 
 
Overview
 
     The Company's results of operations are largely dependent on interest income, which is the difference between the interest earned on loans and securities and interest paid on deposits and borrowings.  The results of operations are also affected by the level of income/fees from loans, deposits, borrowings, as well as operating expenses, the provision for loan losses, the impact of federal and state income taxes, and the relative levels of interest rates and economic activity.
 
     In its projections for fiscal 2009, the Company anticipated increased net interest income as the Bank continued to expand its base of earning assets.  The actual results for the year ended December 31, 2009  show that, in spite of decreasing interest rates on both the earning asset and interest bearing liabilities sides of the balance sheet the rate and volume decreases on the asset side outpaced  those on the liability side resulting in a slight decrease of  $148,000 in net interest income for the year ended December 31, 2009.
 
     Looking ahead to 2010, the Company expects general rates to remain steady throughout the year which will decrease cost of funds slightly while the yield on earning assets will remain constant.  The strategy for 2010 is to increase the net yield approximately .20%.  In addition, expense control and growth in non-interest income will also be main objectives for 2010.  Large increases in FDIC charges will have a significant negative impact on 2010 earnings.  The Bank has budgeted $420,000 for the loan loss provision for fiscal year 2010, but expects this number to be higher to satisfy the bank regulators' drive for "cushion capital" in the loan loss reserve.
 
     As discussed under “Future Prospects” below, of much greater concern is the fact that for the last two quarters the Bank has been significantly undercapitalized under the applicable capital ratios.  The Atlanta Fed is not likely to allow this condition to continue for another full fiscal quarter and, unless, with the Atlanta Fed’s cooperation, the Company engineers a major infusion of capital into the Bank in the next 30-45 days, the Bank is likely to be placed under a receivership and the Company will go out of business.
 
A.     
Results of Operations.
 
Year Ended December 31, 2009 as Compared to Year Ended December 31, 2008.
 
     For the years ended December 31, 2009 and 2008, net income/(loss) amounted to $(8,127,338) and $587,970 respectively.  For 2009, basic and diluted income/(loss) per share of Common Stock was $(4.59).  For 2008, basic and diluted income per share of Common Stock was $.33 and $.32, respectively.  Because of the existence of warrants and stock options, the Company has a complex capital structure, necessitating the disclosure of basic and dilutive income per share. While none of the warrants/options were dilutive in 2009, a portion of the warrants/options were dilutive during calendar year 2008.
 
     In general terms, the Company's results of operations are determined by its ability to manage effectively interest income and expense, to minimize loan and investment losses, to generate non-interest income and to control non-interest expense.  Since interest rates are determined by market forces and economic conditions beyond the control of the Company, the ability to generate net interest income is dependent upon the Company's ability to maintain an adequate spread between the rate earned on earning assets and the rate paid on interest-bearing liabilities, such as deposits and borrowings. Thus, net interest income is the key performance measure of income.

 
30

 
 
        Following is a comparison of the Company's performance during calendar year 2009 and 2008.
 
     Average earning assets increased from $195.7 million at December 31, 2008, to $197.9 million at December 31, 2009, representing an increase of $2.2 million, or 1%.  Below are the various components of average earning assets for the periods indicated (in thousands):
   
December 31
 
   
2009
   
2008
 
Federal funds sold
  $ 1,224     $ 1,119  
Taxable/nontaxable securities
    31,404       31,887  
Loans
    165,284       162,671  
     Total earning assets
  $ 197,912     $ 195,677  
 
     Net interest income decreased, from $6,113,313 for the year ended December 31, 2008, to $5,964,885 for the year ended December 31, 2009.  Below are the various components of interest income and expense, as well as their yield/cost for the periods indicated:
 

Years Ended:
 
December 31, 2009
   
December 31, 2008
 
                         
   
Interest Income
/Expense
   
Yield
/Cost
   
Interest Income
/Expense
   
Yield
/Cost
 
       
 
 
($ in 000's)
 
Interest income:
                       
                         
Federal funds sold
  $ 4       .33 %   $ 32       2.86 %
Taxable/nontaxable securities
    1,455       4.63 %     1,837       5.76 %
Loans
    10,296       6.23 %     11,260       6.92 %
                                 
Total
  $ 11,755       5.94 %   $ 13,129       6.71 %
                                 
Interest expense:
                               
                                 
NOW and money market deposits
  $ 306       1.23 %   $ 485       1.95 %
Savings deposits
    248       1.64 %     438       2.84 %
Time deposits
    4,067       3.21 %     5,001       4.40 %
Other borrowings
    1,169       4.37 %     1,092       4.12 %
                                 
Total
  $ 5,790       2.99 %   $ 7,016       3.88 %
                                 
Net interest income
  $ 5,965             $ 6,113          
Net yield on earning assets
            3.01 %             3.12 %
 
     The above table indicates that the net yield on earning assets decreased from 3.12% for the year ended December 31, 2008, to 3.01% for the year ended December 31, 2009.  As shown in the table, the decrease in net yield occurred because the decreased yield on loans and securities were not sufficient to offset the decrease in rates the Bank had to pay on deposits in a competitive local market environment. For further explanation see the discussion under Rate/Volume Analysis of Net Interest Income beginning on page 15 above.

 
31

 
 
Non-interest Income
 
     Non-interest income as a percentage of average total assets declined from (.16%) for calendar year 2008 to (.41%) for calendar year 2009.  In terms of dollars, the decline amounted to approximately $540,000.
 
     Components of non-interest income for calendar years 2009 and 2008 are as follows:
  
   
Year Ended December 31
 
   
2009
   
2008
 
Gain on sale of loans and servicing assets
  $ 927,494     $ 433,034  
Impairment (loss) on security
    (2,213,807 )     (1,166,136 )
Impairment (loss), OREO
    (515,773 )     —0—  
Gain on sale of assets
    1,299       168,085  
Service fees on deposit accounts
    76,284       91,381  
Loan servicing income
    508,340       —0—  
Gain on sale of securities
    118,756       —0—  
Miscellaneous other
    230,670       151,396  
      Total
  $ (866,737 )   $ (322,240 )
 
Non-Interest Expense
 
     Non-interest expense as a percentage of average total assets for years ended December 31, 2009 and 2008, respectively, was 2.64% and 2.24%, respectively.     
 
Components of non-interest expense for calendar years 2009 and 2008 are as follows:

   
Year Ended December 31,
 
   
2009
   
2008
 
Salaries and benefits
  $ 2,386,675     $ 2,344,286  
Building and equipment expense
    916,857       703,815  
Professional fees
    296,825       226,296  
FDIC insurance expense
    521,639       124,129  
Data processing and software expense
    348,531       344,301  
Other operating expenses
    1,169,029       811,495  
     Total
  $ 5,639,556     $ 4,554,322  
 
     During calendar year 2009, the allowance for loan losses increased from $1,502,823 to $4,731,280.  The allowance for loan losses, as a percentage of gross loans, increased from .90% for December 31, 2008 and 3.03% for December 31, 2009.  As a result of the severe economic downturn in 2008, and especially in 2009, real estate values plummeted and the rate of unemployment increased dramatically.  These two factors combined had a significant impact on the Bank’s loan portfolio.  Specifically, loan quality declined drastically, necessitating very significant provisions to the allowance for loan losses. For the years ended December 31, 2009 and 2008, provisions for loan losses amounted to $11.2 million and $.4 million, respectively.

 
32

 
 
     As of December 31, 2009, management considers the allowance for loan losses to be adequate to absorb possible future losses.  However, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional provisions to the allowance will not be required.
 
Liquidity and Interest Rate Sensitivity
 
     Net interest income, the Company's primary source of earnings, fluctuates with significant interest rate movements.  To lessen the impact of these margin swings, the balance sheet should be structured so that repricing opportunities exist for both assets and liabilities in roughly equivalent amounts at approximately the same time intervals.  Imbalances in these repricing opportunities at any point in time constitute interest rate sensitivity.
 
     Interest rate sensitivity refers to the responsiveness of interest-bearing assets and liabilities to changes in market interest rates.  The rate sensitive position, or gap, is the difference in the volume of rate sensitive assets and liabilities, at a given time interval.  The general objective of gap management is to manage actively rate sensitive assets and liabilities so as to reduce the impact of interest rate fluctuations on the net interest margin.  Management generally attempts to maintain a balance between rate sensitive assets and liabilities as the exposure period is lengthened to minimize the Company's overall interest rate risks.  The asset mix of the balance sheet is continually evaluated in terms of several variables:  yield, credit quality, appropriate funding sources and liquidity.  To effectively manage the liability mix of the balance sheet focuses on expanding the various funding sources.  The interest rate sensitivity position at year-end 2009 is presented below.  Since all interest rates and yields do not adjust at the same velocity, the gap is only a general indicator of rate sensitivity (dollars in thousands):

   
Within
three
months
   
After
three
months
but
within
six
months
   
After
six
months
but
within
one year
   
After
one year
but
within
five
years
   
After
five
years
   
Total
 
EARNING ASSETS
                                   
                                     
Loans
    50,946       15,432       15,233       56,584       17,664       155,859  
Securities
    58       2,649       275       2,256       19,309       24,547  
Federal funds sold
    — 0 —       — 0 —       — 0 —       — 0 —       — 0 —       — 0 —  
Total earning assets
    51,004       18,081       15,508       58,840       36,973       180,406  
   
SUPPORTING SOURCES OF FUNDS
 
Interest-bearing demand deposits and savings
    41,597       — 0 —       — 0 —       — 0 —       — 0 —       41,597  
Certificates, Less than $100M
    16,863       13,979       35,182       31,362       — 0 —       97,386  
Certificates, $100M and over
    6,748       3,971       11,946       3,242       — 0 —       25,907  
Borrowings
    1,065       — 0 —        — 0 —       13,000       5,000       19,065  
Total interest-bearing liabilities
    66,273       17,950       47,128       47,604       5,000       183,955  
                                                 
Interest rate sensitivity gap
    (15,269 )     131       (31,620 )     11,236       31,973       (3,549 )
Cumulative gap
    (15,269 )     (15,138 )     (46,758 )     (35,522 )     (3,549 )      
Interest rate sensitivity gap ratio
    0.77       1.01       0.33       1.24       7.39       .98  
Cumulative interest rate sensitivity gap ratio
    0.77       0.82       0.64       0.80       .98        
 
 
33

 
 
     As evidenced by the table above, the Company is liability sensitive from zero to within three months and six months to within one year.  It is asset sensitive after three months to within six months and after one year.  On a cumulative basis, however, the Company is liability sensitive throughout all time spans.
 
     In a declining interest rate environment, a liability sensitive position (a gap ratio of less than 1.0) is generally more advantageous since liabilities are repriced sooner than assets.  Conversely, in a rising interest rate environment, an asset sensitive position (a gap ratio over 1.0) is generally more advantageous, as earning assets are repriced sooner than liabilities.  With respect to the Company, an increase in interest rates would reduce income for all time periods up to one year.  Conversely, a decline in interest rates would increase income for all time periods up to one year.  This, however, assumes that all other factors affecting income remain constant.
 
     As the Company continues to grow, management will continuously structure its rate sensitivity position to best hedge against rapidly rising or falling interest rates. The Bank's Asset/Liability Committee meets on a quarterly basis and develops management's strategy for the upcoming period.  Such strategy includes anticipations of future interest rate movements.  Interest rate risk will, nonetheless, fall within previously adopted policy parameters to contain any risk.
 
     Liquidity represents the ability to provide steady sources of funds for loan commitments and investment activities and to maintain sufficient funds to cover deposit withdrawals and payment of debt and operating obligations.  These funds can be obtained by converting assets to cash or by attracting new deposits.  The Company's primary source of liquidity comes from its ability to maintain and increase deposits through the Bank. Below are pertinent liquidity balances and ratios for the years ended December 31, 2009 and 2008 (dollars in thousands):
 
   
2009
   
2008
 
Cash and cash equivalents
    9,720       2,384  
CDs, over $100,000 to total deposits (ratio)
    14.8 %     17.0 %
Loan to deposit ratio