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").
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”).
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:
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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;
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Refrain from making any capital distributions, including dividends.
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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
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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.
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:
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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;
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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;
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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;
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Within 60 days of the date of the Written Agreement, submit a written program acceptable to the Atlanta Fed and the OFR for lending and credit administration;
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Within 10 days of the date of the Written Agreement, retain an independent consultant acceptable to the Atlanta Fed and the OFR to conduct an independent review of the portion of the Bank’s loan portfolio that was not reviewed during the May 25, 2010 Examination;
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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;
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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;
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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;
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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;
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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;
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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;
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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;
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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
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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.
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:
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The Bank is considered “significantly undercapitalized.”
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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.
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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:
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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
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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.
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.
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.
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:
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to complement strategies developed in assets/liquidity management, including desired liquidity levels;
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to maximize after-tax income from funds not needed for day-to-day operations and loan demand; and
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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.
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
AVERAGE CONSOLIDATED
LIABILITIES AND STOCKHOLDERS' EQUITY
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):
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:
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):
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):
The following is a presentation of an analysis of maturities and/or repricing of loans as of December 31, 2009 (in thousands):
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):
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, 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):
As of December 31, 2009, the allowance for possible losses was allocated as follows (dollars in thousands):
As of December 31, 2008, the allowance for possible losses was allocated as follows (dollars in thousands):
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.
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):
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):
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:
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.
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
·
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.
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.
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.
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.
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.
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.
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:
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:
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.
(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.
Item 5.
Selected Financial Data.
Not Applicable.
Item 6.
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
Item 7.
Financial Statements and Supplementary Data.
The following financial statements are contained in this Item 7:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 2009 and
Consolidated Statements of Income for the years ended December 31, 2009 and
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2009 and 2008
Consolidated Statements of Cash Flows for the years ended December 31, 2009 and
Notes to Consolidated Financial Statements
HORIZON BANCORPORATION, INC.
BRADENTON, FLORIDA
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2009 AND 2008
F-i
F-ii
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Horizon Bancorporation, Inc.
Bradenton, Florida
We have audited the accompanying consolidated balance sheets of Horizon Bancorporation, Inc., Bradenton, Florida and subsidiary (the "Company") as of December 31, 2009 and 2008, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders' equity and cash flows for each of the two years in the period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Horizon Bancorporation, Inc., and subsidiary at December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed under Note 2 to the financial statements, the Company has suffered heavy losses in calendar year 2009, reducing its capital accounts significantly. Due to the 2009 losses, the significant decline in capital ratios, regulatory concerns over the adequacy of the allowance for loan and lease losses, as well as other concerns, a formal supervisory agreement was imposed by Federal and State regulators. Failure to fully comply with the requirements of the above agreement may lead to additional regulatory actions such as prompt corrective action directive (imposed in 2010) or even placing the Company into receivership/conservatorship. In addition, the Company has not been able to pay off a loan that matured on December 31, 2009. The loan, in the amount of $1.1 million, is secured by 100% of the subsidiary Bank’s common stock. On March 26, 2010, the lending institution and the Company have entered into an agreement to extend the maturity date of the loan to June 15, 2010 in consideration of a $104,000 payment by the Company. The payment is payable in two installments, $44,000 on March 29, 2010, and $60,000 on or before April 19, 2010. The Company’s ability to resolve all of the above concerns in a timely manner raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are described under Note 2. The accompanying financial statements do not include any adjustments that would be necessary should the Company be unable to continue as a going concern.
HORIZON BANCORPORATION, INC.
BRADENTON, FLORIDA
Consolidated Balance Sheets
Refer to notes to the consolidated financial statements.
HORIZON BANCORPORATION, INC.
BRADENTON, FLORIDA
Consolidated Statements of Operations
Refer to notes to the consolidated financial statements
HORIZON BANCORPORATION, INC.
BRADENTON, FLORIDA
Consolidated Statements of Changes in Shareholders' Equity
For the years ended December 31, 2009 and 2008
Refer to notes to the consolidated financial statements.
HORIZON BANCORPORATION, INC.
BRADENTON, FLORIDA
Consolidated Statements of Cash Flows
Refer to notes to the consolidated financial statements
Financial Statements
December 31, 2009 and 2008
Note 1 - Organization and Summary of Significant Accounting Policies
Horizon Bancorporation, Inc., Bradenton, Florida (the "Company") is a one-bank holding company with respect to Horizon Bank, Bradenton, Florida (the "Bank"). The Company commenced banking operations on October 25, 1999 when the Bank opened for business. The Bank is primarily engaged in the business of obtaining deposits and providing commercial, consumer, and real estate loans to the general public. Bank deposits are each insured up to $250,000 by the Federal Deposit Insurance Corporation (the "FDIC") subject to certain limitations imposed by the FDIC. The $250,000 deposit insurance limit will expire on December 31, 2013 and revert back to $100,000 on January 1, 2014. Certain retirement accounts limits will remain at $250,000 permanently.
The Company is authorized to issue up to 25.0 million shares of its $.01 par value per share common stock. Each share is entitled to one vote and shareholders have no preemptive or conversion rights. As of December 31, 2009 there were 1,809,912 shares issued and 1,770,139 shares of the Company's common stock outstanding. As of December 31, 2008 there were 1,808,219 shares issued and 1,768,446 shares of the Company's common stock outstanding. As of December 31, 2009 the Company held 39,773 shares of treasury stock. Additionally, the Company has authorized the issuance of up to 1.0 million shares of its $.01 par value per share preferred stock. The Company's Board of Directors may, without further action by the shareholders, direct the issuance of preferred stock for any proper corporate purpose with preferences, voting powers, conversion rights, qualifications, special or relative rights and privileges which could adversely affect the voting power or other rights of shareholders of common stock. As of December 31, 2009, there were no shares of the Company's preferred stock issued or outstanding.
Basis of Presentation and Reclassification. The consolidated financial statements include the accounts of the Company and its subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior year's amounts have been reclassified to conform to the current year presentation; such reclassifications had no impact on net income or shareholders' equity.
Uses of Estimates. The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles and to general practices within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for possible loan losses, the valuation of foreclosed real estate, the fair value of financial instruments, other than temporary impairment analysis, and the realization of deferred tax assets.
Financial Statements
December 31, 2009 and 2008
Cash and Cash Equivalents. Cash and cash equivalents include cash, demand balances due from banks, federal funds sold, and interest bearing deposits due from other banks, all of which mature within 90 days.
Securities. Securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and are reported at amortized cost. Securities held for current resale are classified as trading securities and are reported at fair value, with unrealized gains and losses included in earnings. Securities to be held for indefinite periods of time are classified as available-for-sale and carried at fair value with the unrealized holding gains/losses reported as a component of other comprehensive income, net of tax. Generally, in the available-for-sale category are securities that are held to meet investment objectives such as interest rate risk, liquidity management and asset-liability management strategies among others. The classification of investment securities as held-to-maturity, trading or available-for-sale is determined at the date of purchase. The Company does not have trading securities at December 31, 2009 and 2008. Securities with limited marketability, such as stock in the Federal Reserve Bank and the Federal Home Loan Bank, are classified as available for sale and recorded at cost.
The amortization of premiums and accretion of discounts are recognized in interest income using methods approximating the interest method over the life of the securities. Realized gains and losses, determined on the basis of the cost of specific securities sold, are included in earnings on the settlement date. Declines in the fair value of specific securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.
Management evaluates investment securities for other-than-temporary impairment on an annual basis. A decline in the market value of any investment below cost that is deemed other-than-temporary is charged to earnings if the decline in value is deemed to be credit related. The decline in value attributed to non-credit related factors is recognized in other comprehensive income and/or new cost basis in the security is established. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to the yield. Realized gains and losses for securities classified as available for sale and held to maturity are included in net income and derived using the specific identification method for determining the cost of the securities sold.
Loans Held For Sale. Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. In estimating fair value, consideration is given to commitments from investors and prevailing market prices
Loans. Loans that management have the intent and ability to hold for the foreseeable future or until maturity or pay-off are generally reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or origination costs. Interest income is accrued on the outstanding principal balance. Loan origination fees, net of certain direct origination costs are deferred and recognized as an adjustment of the related loan yield on a straight line basis, which approximates the interest method.
Financial Statements
December 31, 2009 and 2008
The accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due, unless the loan is well-secured. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income, unless management believes that the accrued interest is recoverable through the liquidation of collateral. Interest income on nonaccrual loans is recognized on the cash-basis or cost-recovery method until the loans are returned to accrual status. Loans are returned to accrual status when all the principal and interest amounts are brought current and future payments are reasonably assured.
A loan is considered impaired when it is probable, based on current information and events, the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Impaired loans are measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses. Interest on accruing impaired loans is recognized as long as such loans do not meet the criteria for nonaccrual status. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.
Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to expense. Loan losses are charged against the allowance when management believes the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.
The allowance is an amount that management believes will be adequate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectability of existing loans and prior loss experience. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectability of loans in light of historical experience, the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, current economic conditions that may affect the borrower's ability to pay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The evaluation does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses, and may require the Bank to make additions to the allowance based on their judgment about information available to them at the time of their examinations.
Financial Statements
December 31, 2009 and 2008
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows, or collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
Concentration of Credit Risk. The company makes loans to individuals as well as to small and medium-sized enterprises located mainly in the Florida counties of Manatee and Sarasota. While the loan portfolio is generally diversified, a large portion of the Company’s loans are secured by real estate located in the above counties. As a result, significant decreases in real estate values in the Company’s geographical market could increase loan losses and have an adverse effect on future earnings.
Property and Equipment. Building, leasehold improvements, furniture, and equipment are stated at cost, net of accumulated depreciation. Land is carried at cost. Depreciation is computed principally by the straight-line method based on the estimated useful lives of the related assets. Maintenance and repairs are charged to operations, while major improvements are capitalized. Upon retirement, sale or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from the accounts, and gain or loss is included in operations. The Company had no capitalized lease obligations at December 31, 2009 and 2008.
Other Real Estate Owned. Other real estate owned represents property acquired by the Company in satisfaction of a loan. Other real estate owned is carried at the lower of: (i) cost or (ii) fair value less estimated selling costs. Fair value is determined on the basis of current appraisals, comparable sales and other estimates of value obtained principally from independent sources. Any excess of the loan balance at the time of foreclosure over the fair value of the real estate held as collateral is treated as a loan loss and charged against the allowance for loan losses. Gain or loss on the sale of the property and any subsequent adjustments to reflect changes in fair value of the property are reflected in the income statement. Recoverable costs relating to the development and improvement of the property are capitalized whereas routine holding costs are charged to expense.
Income Taxes. The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.
Financial Statements
December 31, 2009 and 2008
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets may be reduced by deferred tax liabilities and a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
On January 1, 2009, the Company adopted the recent accounting guidance related to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions.
Stock-Based Compensation. Accounting principles require that the compensation cost relating to share-based payment transaction be recognized in the financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. Accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees’ service period, generally defined as the vesting period. The Company used the Black-Scholes Option-Pricing model to estimate the fair value of stock options and stock warrants. No stock options or stock warrants were granted during calendar year 2009. For the year ended December 31, 2008, 20,200 options were granted.
Earnings Per Share. Basic earnings per share are determined by dividing net income by the weighted-average number of common shares outstanding. Diluted income per share is determined by dividing net income by the weighted average number of common shares outstanding increased by the number of common shares that would be issued assuming exercise of stock options. This also assumes that only options with an exercise price below the existing market price will be exercised. In computing net income per share, the Company uses the treasury stock method.
Comprehensive Income. Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. Comprehensive income for calendar years 2009 and 2008 are shown in the consolidated statements of changes in shareholders' equity.
Financial Statements
December 31, 2009 and 2008
Recent Accounting Pronouncements.
Effective July 1, 2009, the Company adopted a new accounting guidance related to U.S. GAAP [FASB Accounting Standards Codification (“ASC”) 105, Generally Accepted Accounting Principles]. This guidance establishes FASB ASC as the source of authoritative U.S. GAAP recognized by FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. FASB ASC supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the ASC has become non-authoritative. FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASU”), which will serve to update the ASC, provide background information about the guidance, and provide the basis for conclusions on the changes to the ASC. The ASC is not intended to change U.S. GAAP or any requirements of the SEC. This guidance is effective for the Company as of December 31, 2009.
In April 2009, the FASB issued the following three FASB Staff Position (“FSPs”) intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities.
1) FSP SFAS No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and identifying Transactions That Are Not Orderly,” codification standard ASC 820-10-65-4 (“ASC 820”), transition related to FSP SFAS No. 157-4, provides additional guidance for estimating fair value in accordance with ASC 820 when the volume and level of activity for the asset or liability have decreased significantly. This ASC also provides guidance on identifying circumstances that indicate a transaction is not orderly. The provisions of this ASC are effective for the Company’s interim period ending on June 30, 2009. The adoption of ASC 820 at June 30, 2009 did not have a material impact on this Company’s financial condition or results of operations.
2) FSP SFAS No. 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” codification standard ASC 825-10-65-1, transition related to FSP SFAS No. 107-1 and APB 28-1, requires disclosures about fair value of financial instruments in interim reporting periods of publicly traded companies that were previously only required to be disclosed in annual financial statements. The provisions of this ASC are effective for the Company’s interim period ending on June 30, 2009, and only amend the disclosure requirements about fair value of financial instruments in interim periods.
3) FSP SFAS No. 115-2 and SFAS No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” codification standard ASC 320-10-65-1, transition related to FSP SFAS No 115-2 and SFAS No. 124-2, amends current other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This ASC does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The provisions of this ASC are effective for the Company’s interim period ending on June 30, 2009. Adoption of this provision had a material impact on the Company’s financial condition or results of operations.
Financial Statements
December 31, 2009 and 2008
In May 2009, the FASB issued SFAS no. 165, “Subsequent Events,” codification standard ASC 855. ASC 855 establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this statement sets forth: (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The Company adopted this standard effective for the quarterly period ended June 30, 2009, and its adoption had no material impact on the Company’s financial condition or results of operations.
In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, “Fair Value Measurements and Disclosures,” codification standard ASC 820. This ASU provides amendments for fair value measurements of liabilities. It provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more techniques. ASU 2009-05 also clarifies that when estimating a fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. ASU 2009-05 is effective for the first reporting period (including interim periods) beginning after issuance of fourth quarter 2009 financial statement information. The Company is assessing the impact of ASU 2009-05 on its financial condition, results of operations, and disclosures.
Other accounting standards that have been issued or proposed by the FASB or other standard-setting bodies are not expected to have a material impact on the Company’s financial statements.
Note 2 - Regulatory Matters, Company Loan, Going Concern Consideration and Equity Offering
Regulatory Matters
(a) Written Agreement
On November 10, 2009, the Federal Reserve Bank of Atlanta (the “FRB”), the State of Florida Office of Financial Regulation (the “OFR”) and the Bank have mutually agreed to enter into a Written Agreement (“the Agreement”). The Agreement contains a list of strict requirements with which the Bank must comply. A summary of the Agreement is as follows:
Financial Statements
December 31, 2009 and 2008
·
Submit a written plan to strengthen Board oversight of the management and operations of the Bank.
·
Submit a written plan to strengthen the Bank’s management of commercial real estate concentrations, including steps to reduce the risk of concentrations.
·
Submit a written plan to strengthen credit risk management practices.
·
Submit a written plan to strengthen lending and credit administration policies, procedures, and practices.
·
Retain an independent and acceptable (to FRB, OFR) consultant to assess the level of risk or exposure in the portion of the Bank’s loan portfolio not reviewed at the most recent regulatory examination.
·
Submit a written plan to provide for the ongoing review and grading of the Bank’s loan portfolio by a qualified independent party.
·
The Bank shall not, directly or indirectly, extend or renew any credit to or for the benefit of any borrower, including related interest of the borrower, who is obligated to the Bank on any extension of credit that have been charged off by the Bank, or classified “loss” in the most recent report of examination or in any subsequent report of examination so long as such credit remains uncollected.
·
The Bank shall not, directly or indirectly, extend or renew any credit to or for the benefit of any borrower, including related interest of the borrower, whose extension of credit has been classified as “doubtful” or “substandard” in the most recent report of examination or in any subsequent report of examination without the prior approval of the Bank’s Board of Directors.
·
Submit a written plan for each problem loan and for other real estate exceeding $250,000 that is designed to improve the Bank’s position with respect to the above assets.
·
Provide a written report after each calendar quarter updating each asset improvement plan; in addition, provide the problem loan list, a listing of past due/non-accrual loans, and a list of all loan renewals and extensions for which the Bank did not collect the full interest.
·
Eliminate from the Bank’s balance sheet all assets or portions of assets classified “loss” in the most recent report of examination as well as in future reports of examination.
·
Review and revise the methodology used to construct the allowance for loan and lease losses (“the ALLL”). Upon completion, submit the ALLL methodology to the regulators for their review.
·
Submit a written plan for the maintenance of an adequate ALLL, with periodic updates incorporating all changes.
·
Submit a written plan for maintaining sufficient capital at the Bank, including an analysis of current and future capital needs as well as compliance with capital adequacy guidelines and ratios. In measuring capital adequacy, consideration of the volume and severity of classified credits, portfolio concentration, adequacy of the ALLL, projected growth in assets and earnings, among others, should be taken into account.
·
Notify the regulators, in writing, shortly after the end of each calendar quarter if any of the Bank’s capital ratios (total risk-based, Tier 1, or Leverage) had fallen below the approved capital plan’s minimum ratios. Contemporaneously, provide a plan that details steps to be taken by the Bank to increase the affected capital ratios to or above the approved capital plan’s minimums.
Financial Statements
December 31, 2009 and 2008
·
Provide a written plan to strengthen the oversight of the Bank’s audit program by the Audit Committee.
·
Submit a written plan to improve management of the Bank’s liquidity position and funds management practices. A contingency funding plan should be provided as well.
·
Submit written policies and procedures to strengthen the management of the Bank’s investment portfolio.
·
Submit a business plan for calendar year 2010 to improve the Bank’s earnings and overall condition. The plan shall include a realistic and comprehensive operational budget and balance sheet projections.
·
The Bank shall not declare or pay dividends without the prior approval of FRB and OFR.
·
Ascertain full compliance with respect to appointments of new directors, and new executive officers, including the assumption of new responsibilities by an existing executive officer. Also, ascertain compliance with restrictions on indemnification and severance payments.
·
Form a new Board Committee, the Compliance Committee, to monitor and coordinate the Bank’s compliance with the provisions of the Agreement. The Compliance Committee shall include a majority of outside directors who are not executive officers or principal shareholders. Shortly after the end of each calendar quarter, the Bank shall submit a written progress report detailing the form and manner of all actions taken to secure compliance with the Agreement.
·
All written plans, programs, policies and procedures that are submitted by the Bank, shall be acceptable to FRB and OFR, and within the prescribed time period. Once approved by the regulators, the Bank shall adopt the approved plans, programs, policies and procedures within ten days and implement them promptly.
As of the date of this report, management believes that the Bank is in compliance with most of the items in the Agreement. The two items that are yet to be resolved have to do with (a) determining an appropriate level of the ALLL so as to render it adequate, and (b) increasing the capital accounts, primarily through a capital injection from the Parent Company, to an acceptable level.
(b) Prompt Corrective Action Directive
On March 9, 2010, the Board of Governors of the Federal Reserve System (the ”Board of Governors”) delivered to Horizon Bank, the Company’s wholly-owned subsidiary (the “Bank”), a Prompt Corrective Action Directive Issued Pursuant to Section 38 of the Federal Deposit Insurance (“FDI”) Act, As Amended (the “PCA Directive”). The PCA Directive, which was dated March 4, 2010, states that the Bank has been undercapitalized and has not filed an acceptable capital restoration plan. Accordingly, the PCA Directive directs the Bank, the Company and the Bank’s Board of Directors to:
·
Not later than 45 days from March 4, 2010, increase the Bank’s equity through the sale of shares or contribution to surplus sufficient to make the Bank adequately capitalized, enter into and close a contract to be acquired or combine with another depository institution, or take other necessary measures to make the Bank adequately capitalized.
Financial Statements
December 31, 2009 and 2008
·
Comply fully with the provisions of Section 38 of the FDI Act restricting the Bank from making any capital distributions.
·
Refrain, without prior written approval of the FRB, from soliciting, accepting or renewing time deposits bearing an interest rate exceeding the prevailing interest rates in the Bank’s market area, and, within 30 days, submit an acceptable plan and timetable to the FRB for conforming such interest rates to the prevailing interest rates.
·
Comply with the provisions of Section 38 of the FDI Act requiring that all transactions between the Bank and any affiliate comply with Section 23A of the Federal Reserve Act.
·
Comply with the provisions of Section 38 of the FDI Act restricting the payment of bonuses to senior executive officers and increases in compensation of such officers, and
·
Comply with the provisions of Section 38 of the FDI Act restricting asset growth, acquisitions, branching and new lines of business.
In the past few months, three capital plans were submitted by the Bank for the approval of the FRB. The first two plans were deemed unacceptable, while the third plan still awaits the FRB’s determination. It appears that the first two plans were deemed unacceptable because, according to the FRB, an additional provision of approximately $5.0 million to the ALLL is required in order to attain an adequate level. The higher the provision to the ALLL, the higher the amount of capital needed to attain the “adequately capitalized” category. After the first two plans were deemed unacceptable, a third plan, together with an independent third party study and opinion with respect to the adequacy of the ALLL was forwarded to the FRB. The evaluation conducted by the independent party found that approximately $.5 million in additional provision to the ALLL is required, far below the amount that FRB is requiring. As of the date of this report, the Bank has not received a response from the FRB with regard to the most recent capital plan.
The Board of Governors may withdraw the PCA Directive, extend the 45-day deadline within which the Bank shall attain the “adequately capitalized” category, accelerate the 45-day deadline, or take no action. By withdrawing or extending the 45-day deadline the Bank will have additional time to increase capital. By accelerating the deadline or taking no action, the deadline will eventually be violated. If and when the deadline is violated, the Board of Governors/FRB/OFR may take other actions.
Any material failure to comply with the provisions of the Agreement or PCA Directive could result in further enforcement actions by the regulators. Such additional enforcement actions may include the placement of the Bank into receivership/conservatorship.
Financial Statements
December 31, 2009 and 2008
Company Loan
The Company has been unable to pay back a $1.1 million loan secured by 1,536,000 of the Bank’s shares of common stock. The loan matured on December 31, 2009, but was eventually extended. The most recent extension, as of March 26, 2010, extended the maturity date to June 15, 2010 upon receipt of two payments to be made by the Company, $44,000 on March 29, 2010 and $60,000 on or before April 19, 2010. As of the date of this report, the second payment was not made yet.
At this time, under the PCA Directive and the Written Agreement entered into by the Bank with FRB and OFR on November 10, 2009, the Bank may not make any capital distributions, including dividends, to the Company without the prior written consent of the Board of Governors. 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 with certain members of its Board of Directors, regarding the purchase of the loan from the lending institution. There is no assurance that these discussions will result in a satisfactory arrangement.
In the event the common stock of the Bank is sold at a public sale, the purchaser would, subject to approval by the banking regulators, become the sole shareholder of the Bank.
Going Concern
As previously mentioned, the Company faces a number of challenges that may be difficult to correct in a timely manner. These challenges include, but are not limited to, the achievement of full compliance with the requirements of the Written Agreement and the PCA Directive, as well as the payment or extension of the Company’s $1.1 million loan secured by 100% of the subsidiary Bank’s common stock. To achieve the above requirements, and assuming the ALLL will be deemed acceptable by the FRB, a minimum of approximately $5.0 million in additional capital will be necessary
The Company’s ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside the Company’s control, and on the Company’s financial performance. Accordingly, the Company cannot be certain of its ability to raise additional capital if needed or on terms acceptable to the Company. Inability to raise additional capital when needed or comply with the terms of the loan agreement, the Written Agreement and the PCA Directive raise substantial doubt about the Company’s ability to continue as a going concern.
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future, and do not include any adjustments to reflect the possible future effects on the recoverability or classification of assets, and the amounts of classification of liabilities that may result from the outcome of any regulatory action including being placed into receivership or conservatorship.
Financial Statements
December 31, 2009 and 2008
Equity Offering
On October 23, 2009 the Company commenced an equity offering of shares of 7% Series A Cumulative Convertible Preferred Stock (the “Series A Preferred Stock”). The minimum and maximum offering of $3.5 million and $5.0 million, respectively, are being offered in a private placement to accredited investors only. The Series A Preferred Stock 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. The conversion price will be the greater of: (a) book value of the Company’s common stock at the time of conversion or (b) the market price of the Company’s common stock on the date of issuance of the Company’s shares of Series A Preferred stock. Under the terms of the offering, proceeds from the sale of the above shares can only be released if both items below are satisfied: (i) the minimum offering of $3.5 million is sold and, (ii) the FRB approves the Bank’s capital restoration plan. Note that in the event the minimum offering is not sold, all proceeds collected in the above offering will be returned to the investors. As of the date of this report, the required minimum of $3.5 million has not yet been attained.
Note 3 - Federal Funds Sold & Purchased
The Bank is required to maintain legal cash reserves computed by applying prescribed percentages to its various types of deposits. When the Bank's cash reserves are in excess of the required amount, the Bank may lend the excess to other banks on a daily basis. At December 31, 2009 and 2008, federal funds sold were $0 and $147,000, respectively. Federal funds purchased represent unsecured borrowing form other financial institutions and generally mature daily. At December 31, 2009 and 2008 the bank had no Federal funds purchased.
Note 4 - Securities Held-to-Maturity
The amortized costs and estimated market values of securities held-to-maturity as of December 31, 2009 follow:
The amortized costs and estimated market values of securities held-to-maturity as of December 31, 2008 follow:
Financial Statements
December 31, 2009 and 2008
The amortized costs and estimated market values of securities held-to-maturity at December 31, 2009 by contractual maturity are shown in the following chart. Expected maturities may differ from contractual maturities because issuers may have the right to call or repay obligations with or without call or prepayment penalties.
At December 31, 2009 and 2008, none of the securities were pledged to secure public funds, repurchase agreements, and for other purposes required or permitted by law. Due to circumstances, the Company changed its intent to hold certain securities to maturity without calling into question the intent to hold other debt securities to maturity in the future. Proceeds from sales of securities held-to-maturity for the years ended December 31, 2009 and 2008 were $2,586,770 and $0, respectively; net gains on the above sales were $16,895 and $0, respectively. For the years ended December 31, 2009 and 2008, impairment charges were $70,000 and $0 respectively.
Information pertaining to securities with gross unrealized losses at December 31, 2009 and 2008, aggregated by investment category and further segregated by length of time (less than or over twelve months) that the securities have been in a continuous loss position follows:
Financial Statements
December 31, 2009 and 2008
December 31, 2009
December 31, 2008
Unrealized losses on held-to-maturity securities amounted to $978,608 (2009) and $1,639,849 (2008) representing 8.54% (2009) and 12.53% (2008) of the total held to maturity securities portfolio. Management evaluates securities for other-than-temporary impairment on a quarterly basis, or more frequently when economic or market concerns warrant such evaluation. In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating entities have occurred, the severity and duration of the impairment and the volatility of the security's fair value. As management has the intent and ability to hold the securities for a period of time sufficient to allow for any anticipated recovery in fair value and due to the fact that the decline in fair value is attributable to changes in interest rates and not credit quality, these investments are not considered other-than-temporarily impaired.
Note 5 - Securities Available-for-Sale
The amortized costs and estimated market values of securities available-for-sale as of December 31, 2009 follow:
Financial Statements
December 31, 2009 and 2008
Other securities include equity investments in FRB, FHLB, and one other bank whose owners are other financial institutions. These restricted equity securities are recorded at cost because of the lack of a readily determinable fair value.
The amortized costs and estimated market values of securities available-for-sale as of December 31, 2008 follow:
The amortized costs and estimated market values of securities available-for-sale at December 31, 2009 by contractual maturity are shown in the following chart. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
At December 31, 2009 and 2008, respectively, $2,998,000 and $6,797,000 agency securities were pledged to secure public funds, repurchase agreements, and for other purposes required or permitted by law. Proceeds from sales of securities, available-for-sale, for the years ended December 31, 2009 and 2008 were $3,757,123 and $0 respectively; net gains on the above sales were $101,861 and $0 respectively.
Information pertaining to securities with gross unrealized losses at December 31, 2009 and 2008, aggregated by investment category and further segregated by the length of time (less than or over twelve months) that the securities have been in a continuous loss position follows:
Financial Statements
December 31, 2009 and 2008
Unrealized losses in the securities available for sale portfolio amounted to $600,086 (2009) and $2,042,534 (2008) representing 4.59% (2009) and 10.32% (2008) of the total available-for-sale portfolio.
Management evaluates securities for other-than-temporary impairment on a quarterly basis, or more frequently when economic or market concerns warrant such evaluation. As mentioned above in 2009 management did mark two securities down permanently due these evaluations. In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating entities have occurred, the severity and duration of the impairment and the volatility of the security's fair value. As management has the intent and ability to hold the securities for a period of time sufficient to allow for any anticipated recovery in fair value and due to the fact that the decline in fair value is attributable to changes in interest rates and not to credit quality, these investments are not considered other-than-temporarily impaired.
During calendar year 2009 and 2008, a decline in the fair value of certain securities was deemed to be other-than-temporarily impaired. The impairments in fair value resulted from the decline in the credit quality of the issuer and not from fluctuations in interest rates. Consequently, losses related to the above impairments in the amount of $2,213,807 and $1,166,136 were realized by the Company for the years ended December 31, 2009 and 2008, respectively.
Financial Statements
December 31, 2009 and 2008
Note 6 - Loans
The composition of net loans by major loan category, as of December 31, 2009 and 2008, follows:
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual term of the loan. Impaired loans include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.
The following is a summary of information pertaining to impaired loans:
Loans on non-accrual status amounted to $15,685,437 at December 31, 2009 and to $7,288,982 at December 31, 2008. Interest recognized on non-accruing loans at December 31, 2009 and 2008 was $318,562 and $111,667, respectively. Loans past due ninety days or more and still accruing interest amounted to $0 and $83,734 at December 31, 2009 and 2008, respectively.
Note 7 - Allowance for Possible Loan Losses
The allowance for possible loan losses (the "Allowance") is a valuation reserve available to absorb future loan charge-offs. The Allowance is increased by provisions charged to operating expenses and by recoveries of loans which were previously written-off. The Allowance is decreased by the aggregate loan balances, if any, which were deemed uncollectible during the year.
Financial Statements
December 31, 2009 and 2008
Individual consumer loans are predominantly under secured, and the allowance for possible losses associated with these loans has been established accordingly. Real estate, receivables, inventory, machinery, equipment, or financial instruments generally secure the majority of the non-consumer loan categories. The amount of collateral obtained is based upon management's evaluation of the borrower.
Activity within the Allowance accounts for the years ended December 31, 2009 and 2008 follows:
Note 8 - Property and Equipment
Building, furniture, equipment, and land improvements are stated at cost less accumulated depreciation. Land is stated at cost. Components of property and equipment included in the consolidated balance sheets at December 31, 2009 and 2008 follow:
Depreciation expense for the years ended December 31, 2009 and 2008 amounted to $204,731 and $210,398, respectively. Depreciation is charged to operations over the estimated useful lives of the assets. The estimated useful lives and methods of depreciation for the principal items follow:
Financial Statements
December 31, 2009 and 2008
Type of Asset
Life in Years
Depreciation method
Furniture and equipment
to 20
Straight-line
Leasehold improvements
to 10
Straight-line
Building
Straight-line
Note 9 - Commitments and Contingencies
In the normal course of business, there are various outstanding commitments to extend credit in the form of unused loan commitments and standby letters of credit that are not reflected in the consolidated financial statements. Since commitments may expire without being exercised, these amounts do not necessarily represent future funding requirements. The Company uses the same credit and collateral policies in making commitments as those it uses in making loans.
At December 31, 2009 and 2008, the Company had unused loan commitments of approximately $4.8 million and $6.5 million, respectively. Additionally, there were $0 and $133,000 in commitments under standby letters of credit at December 31, 2009 and 2008, respectively. Various assets collateralize the majority of the loan commitments. No material losses are anticipated as a result of these transactions.
On June 30, 1999, the Bank entered into a seven-year contractual agreement (the "Agreement") with a data processing provider. That Agreement was renegotiated on May 11, 2001, with the new owner of the data processing company. The Agreement was extended to August, 2008, with a renewal feature for an additional seven-year period. In March, 2008 the contract was renegotiated with an expiration date of March, 2011. The monthly service fee varies according to the services used and the number and type of transactions processed. Expenses associated with the above and predecessor agreements associated with data processing services amounted to $240,349 and $224,349 respectively, for the years ended December 31, 2009 and 2008.
The Company and its subsidiary are subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position of the Company and its subsidiary.
Please refer to Note 15 concerning leases for branch offices from a partnership.
Please refer to Note 15 concerning warrants and options earned by directors and employees of the Bank.
Note 10 - Deposits
The following details deposit accounts at December 31, 2009 and 2008:
At December 31, 2009, the scheduled maturities of all certificates of deposit were as follows:
At December 31, 2009 and 2008, the Company held brokered time deposits in the amount of $11,647,000 and $26,543,000, respectively. At December 31, 2009 and 2008, overdraft deposit accounts reclassified to loans aggregated $43,175 and $23,160, respectively.
Note 11 - Borrowings
During calendar year 2008, the Company obtained a $1.1 million line of credit (the “LOC”), of which $1,065,205 and $805,764 were outstanding at December 31, 2009 and 2008, respectively. The above LOC is secured by all of the Bank's issued and outstanding common stock; it carries a rate of published "Wall Street Journal" prime rate plus 1.00% with a floor of 6.00%. The LOC provides for interest-only monthly payments until December 31, 2009, when principal and accrued interest became due. Upon maturity, the LOC was subsequently extended for two additional weeks. At the end of the expiration period, the LOC remained unpaid and is therefore in default.
During calendar years 2009 and 2008, the Bank obtained several funding advances from the Federal Home Loan Bank (the "FHLB"). The above advances are secured by a blanket lien on all real estate mortgages held by the Bank. The outstanding balance on the above funding advances amounted to $18,000,000 and $29,000,000, respectively, at December 31, 2009 and 2008. Additional information concerning these advances follow. Note that all interest rates are fixed:
Financial Statements
December 31, 2009 and 2008
During calendar year 2009, a $3.0 million advance matured and was paid-off. Two other advances, aggregating $8.0 million were paid-off prior to maturity to improve the Bank’s liquidity position and reduce interest expense. A penalty of approximately $413,000 was incurred by the Bank during calendar year 2009 to compensate the FHLB for the early prepayments of the advances.
Note 12 - Interest on Deposits and Borrowings
A summary of interest expense for the years ended December 31, 2009 and 2008 follows:
Note 13 - Other Operating Expenses
A summary of other operating expenses for the years ended December 31, 2009 and 2008 follows:
Financial Statements
December 31, 2009 and 2008
Note 14 - Income Taxes
As of December 31, 2009 and 2008, the Company's provision for income taxes consisted of the following:
The Company’s income tax expense differs from the amounts computed by applying the federal income tax statutory rates to income before income taxes. A reconciliation of the differences is as follows:
The components of deferred income taxes are as follows:
Financial Statements
December 31, 2009 and 2008
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projection for future taxable income over the periods which the temporary differences resulting in the deferred tax assets are deductible, management believes it is more likely than not that deferred tax assets, net of the valuation allowance, will be recognized in future years.
Note 15 - Related Party Transactions
Under the terms of the existing Stock Option Plan (the "Plan"), options to purchase shares of the Company's common stock may be granted to directors and employees at a price that is not less than the fair market value of such stock at the date of the grant. Options granted to employees under the Plan may be designated as incentive stock options. All options, as well as organizer warrants, expire no more than ten years from the date of the grant and fully vest over a period of between three-to-five years.
No options/warrants were granted during calendar year 2009. For the year ended December 31, 2008, 20,200 options were granted to Bank employees with a fair value of $2.87 per option. Below are the assumptions used to determine the fair value of each option:
In connection with the initial offering of common stock, the Company granted warrants to certain organizers to purchase 206,280 shares of the Company’s common stock at an exercise price of $5.50 per share. These warrants, which were fully vested as of December 31, 2002, have expired on October 25, 2009.
A summary of the options/warrants activity for the years ended December 31, 2009 and 2008 is presented below.
Financial Statements
December 31, 2009 and 2008
Lease of a Branch Office. On February 9, 2001, the Bank entered into a lease agreement with Horizon Partnership, LLP, (the "Horizon Partnership") to lease approximately 3,800 square-feet of a new office building in Bradenton, Florida. Four of the Company's board members are also the majority owners of the Horizon Partnership. The lease, which commenced on June 1, 2001, is for a period of 10 years with two consecutive five-year extensions. In addition to the monthly lease payment, the Bank is required to pay pro-rata real-estate taxes and special assessments that may be levied against the property. The total monthly payment approximates $9,500, an amount that was paid beginning with the September 1, 2001 payment. The monthly lease payments increase by 3% on the date of each anniversary. For the years ended December 31, 2009 and 2008, expenses associated with this lease amounted to $120,074 and $117,911, respectively.
On May 18, 2005, the Bank entered into a lease agreement with TCB,LLP, (the "TCB Partnership") to lease approximately 3,800 square-feet of a new office building in Palmetto, Florida. Five of the Company's board members are also the majority owners of TCB, LLP. The lease, which commenced on October 10, 2005, is for a period of 10 years with two consecutive five-year extensions. In addition to the monthly lease payment, the Bank is required to pay pro-rata real estate taxes and special assessments that may be levied against the property. The total monthly payment approximates $10,000, an amount that was paid beginning with the October 11, 2005 payment. The monthly lease payments increase by 3% on the date of each anniversary. For the years ended December 31, 2009 and 2008, expenses associated with this lease amounted to $124,797 and $120,142 respectively.
Financial Statements
December 31, 2009 and 2008
On February 8, 2008, the Bank entered into a lease agreement with Horizon Partnership, LLP, (the "Horizon Partnership") to lease approximately 3,550 square-feet of a new office building in Brandon, Florida. Four of the Company's board members are also the majority owners of the Horizon Partnership. The lease, which commenced on March 19, 2009, is for a period of 10 years with two consecutive five-year extensions. In addition to the monthly lease payment, the Bank is required to pay pro-rata real-estate taxes and special assessments that may be levied against the property. The total monthly payment approximates $15,985, an amount that was paid beginning with the March 19, 2009 payment. The monthly lease payments increase by 3% on the date of each anniversary. For the year ended December 31, 2009, expenses associated with this lease amounted to $159,850.
As of December 31, 2009, the future minimum lease commitments are as follows:
Payments to Directors. One director received $27,230 and $19,114 for products and services sold to the Company during the years ended December 31, 2009 and 2008, respectively. The aggregate fees to directors during the years ended December 31, 2009 and 2008 amounted to $31,700 and $53,200, respectively.
Borrowings and Deposits by Directors and Executive Officers. Certain directors, principal officers and companies with which they are affiliated are customers of and have banking transactions with the Bank in the ordinary course of business. As of December 31, 2009 and 2008, loans outstanding to directors, their related interests and executive officers aggregated $7,935,266 and $8,109,442 respectively. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with unrelated parties. In the opinion of management, loans to related parties did not involve more than normal credit risk or present other unfavorable features.
A summary of the related party loan transactions during the calendar years 2009 and 2008 follows:
Financial Statements
December 31, 2009 and 2008
Deposits by directors, executive officers and their related interests, as of December 31, 2009 and 2008 approximated $1,559,642 and $3,077,357 respectively.
Note 16 - Concentrations of Credit
The Company originates primarily commercial, residential, and consumer loans to customers in Manatee County, Florida, and surrounding counties. The ability of the majority of the Company's customers to honor their contractual loan obligations is dependent on economic conditions prevailing at the time in Manatee County and the surrounding counties.
Eighty-two percent of the Company's loan portfolio is concentrated in loans secured by real estate, of which a substantial portion is secured by real estate in the Company's primary market area. Accordingly, the ultimate collectability of the loan portfolio is susceptible to changes in market conditions in the Company's primary market area. Another five percent or $8,473,726 of the Company's loan portfolio is concentrated in loans guaranteed by the United States Department of Agriculture. The majority of these loans are secured by real estate and all are guaranteed with the full faith and credit of the United States government. The other significant concentrations of credit by type of loan are set forth under Note 6.
The Company, as a matter of policy, does not generally extend credit to any single borrower or group of related borrowers in excess of 25% of the Bank's statutory capital, or approximately $1.9 million at December 31, 2009.
Note 17 - Regulatory Matters
The Company is supervised and regulated by OFR and FRB. The Bank was chartered by the State of Florida and is a member of the Federal Reserve System. As such, the Bank too is supervised and regulated by OFR and by the FRB.
Various requirements and restrictions under federal and state laws regulate the operations of the Company. These laws, among other things, require the maintenance of reserves against deposits, impose certain restrictions on the nature and terms of the loans, restrict investments and other activities, and regulate mergers and the establishment of branches and related operations. The ability of the parent company to pay cash dividends to its shareholders and service debt may be dependent upon cash dividends from its subsidiary bank. The Bank is subject to limitations under state and federal laws in the amount of dividends it may declare. At December 31, 2009, none of the Bank's retained earnings was available for dividend declaration. During the year ended December 31, 2009 the Bank paid no dividends to its parent company.
The banking industry is also affected by the monetary and fiscal policies of regulatory authorities, including the FRB. Through open market securities transactions, variations in the discount rate, the establishment of reserve requirements and the regulation of certain interest rates payable by member banks, the FRB exerts considerable influence over the cost and availability of funds obtained for lending and investing. Changes in interest rates, deposit levels and loan demand are influenced by the changing conditions in the national economy and in the money markets, as well as the effect of actions by monetary and fiscal authorities. Pursuant to the FRB's reserve requirements, the Bank was not required to maintain cash reserve balances at December 31, 2009.
Financial Statements
December 31, 2009 and 2008
The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements (see Note 2). Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the company's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.
Qualitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined).
The prompt corrective action regulations provide five capital categories, including (in descending order) well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. These categories are not meant to represent overall financial conditions. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required.
Below are the Bank’s and the Company’s three capital ratios, as of December 31, 2009, as well as the standardized ratio metrics associated with certain capital categories. Note that RWA denotes risk-weighted assets.
Financial Statements
December 31, 2009 and 2008
The Bank is significantly undercapitalized based on two capital ratio standards, and adequately capitalized based on one capital ratio standard. The Company is significantly undercapitalized based on two capital ratio standards and undercapitalized based on one capital ratio standard. Refer to Note 2 for information concerning the Written Agreement and the PCA Directive.
The Company's and the Bank's actual capital amounts and ratios are presented in the following table:
Financial Statements
December 31, 2009 and 2008
Note 18 - Fair Value of Financial Instruments
Determination of Fair Value
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the accounting standards for fair value measurements and disclosure, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
The recent fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
Financial Statements
December 31, 2009 and 2008
Level 3: Significant unobservable inputs that are supported by little or no market activity for the asset or liability: Level 3 assets and liabilities include financial instruments whose value is determined using pricing models discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.
Recurring Fair Value Changes
Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheet, as well as the general classifications of such instruments pursuant to the valuation hierarchy.
Investment securities: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.
Assets and liabilities measured at fair value on a recurring basis are summarized below as of December 31:
Financial Statements
December 31, 2009 and 2008
Nonrecurring Fair Value Changes
Certain assets and liabilities are measured at fair value on a nonrecurring basis. These instruments are not measured at fair value on an ongoing basis, but subject to fair value in certain circumstances, such as when there is evidence of impairment that may require write-downs. The write-downs for the Company’s more significant assets or liabilities measured on a nonrecurring basis are based on the lower of amortized or estimated fair value.
Impaired loans and other real estate owned (“OREO”): Impaired loans and OREO are evaluated and valued at the time the loan or OREO is identified as impaired, at the lower of cost or market value. Market value is measured based on the value of the collateral securing these loans and is classified at a Level 3 in the fair value hierarchy. Collateral for impaired loans may be real estate and/or business assets, including equipment, inventory and/or accounts receivable. Its fair value is generally determined based on real estate appraisals or other independent evaluations by qualified professionals. Impaired loans and OREO are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above. Impaired loans measured on a nonrecurring basis do not include pools of impaired loans.
Assets and liabilities with an impairment charge during the current year and measured at fair value on a nonrecurring basis are summarized below as of December 31:
Fair Value Disclosures
Accounting standards require the disclosure of the estimated fair value of financial instruments including those financial instruments for which the Company did not elect the fair value option. The fair value represents management’s best estimates based on a range of methodologies and assumptions.
Cash and due from banks, federal funds sold, loans held for sale, accrued interest receivable, all non-maturity deposits, short-term borrowings, subordinated debt and accrued interest payable have carrying amounts which approximate fair value primarily because of the short repricing opportunities of those instruments.
Financial Statements
December 31, 2009 and 2008
Following is a description of the methods and assumptions used by the Company to estimate the fair value of its financial instruments:
Investment securities: Fair value is based upon quoted market prices if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Restricted equity securities are carried at cost because no market value is available.
Loans: The fair value is estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, mortgage, and consumer loans. The fair value of the loan portfolio is calculated by discounting contractual cash flows using estimated market discount rates which reflect the credit and interest rate risk inherent in the loan. The estimated fair value of the Bank’s off-balance sheet commitments is nominal since the committed rates approximate current rates offered for commitments with similar rate and maturity characteristics and since the estimated credit risk associated with such commitments is not significant.
Deposit liabilities: The fair value of time deposits is estimated using the discounted value of contractual cash flows based on current rates offered for deposits of similar remaining maturities.
FHLB advances - long term: The fair value is estimated using the discounted value of contractual cash flows based on current rates offered for debt of similar remaining maturities and/or termination values provided by the FHLB.
The following table presents the carrying amounts and fair values of the specified assets and liabilities held by the Company at December 31, 2009 and 2008. The information presented is based on pertinent information available to management as of December 31, 2009 and 2008. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued since that time, and the current estimated fair value of these financial instruments may have changed since that point in time.
Financial Statements
December 31, 2009 and 2008
Note 19 - Dividends
In accordance with regulatory directives, the Bank is unable to pay dividends unless it obtains prior approval from its banking regulators.
Note 20 - Parent Company Financial Information
This information should be read in conjunction with the other notes to the consolidated financial statements.
Financial Statements
December 31, 2009 and 2008
Item 8.
Item 8.
Changes in and Disagreements With Accountants and Financial Disclosure.
The registrant did not change accountants in 2009 and continues to engage the independent accounting firm of Francis & Company, CPAs.
Item 8A(T).
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the Company's disclosure controls and procedures (as provided in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information required to be included in periodic filings with the Securities and Exchange Commission.
Management’s Annual Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the Chief Executive Officer and the Chief Financial Officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Our evaluation of internal control over financial reporting as of December 31, 2009, was conducted on the basis of framework in “Internal Control-Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2009.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation requirements by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.
Changes in Internal Control Over Financial Reporting.
There has been no change in the Company's internal controls over financial reporting during the quarter ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.
Item 8B.
Other Information.
There is no information that was required to be disclosed by the Company on Form 8-K during the fourth quarter of 2009, that was not reported.
PART III
Item 9.
Item 9.
Directors, Executive Officers and Corporate Governance.
The Company has adopted a Code of Conduct for directors and officers, including its Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer. The Company will provide to shareholders and all other persons a copy of the Company's Code of Conduct upon request and without charge. This document may be requested by writing to Horizon Bancorporation, Inc., 900 53rd Avenue East, Bradenton, Florida 34203, Attention: Charles S. Conoley.
The remaining information required by this Item is incorporated herein by reference to the applicable information in the definitive proxy statement for the Company's 2009 annual meeting, including the information set forth under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance."
Item 10.
Item 10.
Executive Compensation.
The information required by this Item is incorporated herein by reference to the applicable information in the definitive proxy statement for the Company's 2010 annual meeting, including the information set forth under the caption "Executive Compensation."
Item 11.
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item is incorporated herein by reference to the applicable information in the definitive proxy statement for the Company's 2010 annual meeting, including the information set forth under the captions "Beneficial Ownership of the Company's Common Stock."
Item 12.
Item 12.
Certain Relationships and Related Transactions and Director Independence.
The information required by this Item is incorporated herein by reference to the applicable information in the definitive proxy statement for the Company's 2010 annual meeting, including the information set forth under the caption "Certain Relationships and Related Transactions."
Item 13.
Item 13.
Principal Accountant Fees and Services.
The information required by this Item is incorporated herein by reference to the applicable information in the definitive proxy statement for the Company's 2010 annual meeting, including the information set forth under the caption "Fees Paid to Independent Auditors."
Item 14.
Item 14.
Exhibits and Financial Statement Schedules.
Exhibit
Number
Sequential Description
3(i)
Amended and Restated Articles of Incorporation of registrant dated October 2, 1998, incorporated by reference to Exhibit 2.1 of Registration Statement on Form SB-1, File No. 333-71773, filed on February 9, 1999.
3(ii)
Amended and Restated Bylaws of registrant, incorporated by reference to Exhibit 2.2 of Registration Statement on Form SB-1, File No. 333-71773, filed on February 9, 1999.
Subsidiaries of registrant
31.1
Certification of Chief Executive Officer
31.2
Certification of Chief Financial Officer
32.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HORIZON BANCORPORATION, INC.
(Registrant)
BY:
/S/ Charles S. Conoley
Charles S. Conoley, President and Chief Executive Officer
(Principal Executive Officer)
/S/ Kathleen M. Jepson
Kathleen M. Jepson, Senior Vice President and Chief
Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Date: April 15, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature
Title
Date
/S/ Charles S. Conoley
President, Chief Executive Officer and Director
April 15, 2010
Charles S. Conoley
/S/ Michael Shannon Glasgow
Director
April 15, 2010
Michael Shannon Glasgow
/S/ Barclay Kirkland, D.D.S.
Director
April 15, 2010
Barclay Kirkland, D.D.S.
/S/ C. Donald Miller, Jr.
Director
April 15, 2010
C. Donald Miller, Jr.
/S/ David K. Scherer
Director
April 15, 2010
David K. Scherer
/S/ Bruce E. Shackelford
Director
April 15, 2010
Bruce E. Shackelford
/S/ Elizabeth Thomason, D.M.D.
Director
April 15, 2010
Elizabeth Thomason, D.M.D.
/S/ Mary Ann P. Turner
Chairman of the Board of Directors
April 15, 2010
Mary Ann P. Turner
/S/ Clarence R. Urban
Director
April 15, 2010
Clarence R. Urban