Attached files
file | filename |
---|---|
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.
2
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").
3
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”).
4
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.
5
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;
|
6
|
·
|
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.
7
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.
8
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.
9
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.
10
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.