UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549




Form
10-Q




x           Quarterly
report under section 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934




For the
quarterly period ended September 30, 2009




 ̈           TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT




For the
transition period from ______ to ______




Commission
file number 333-71773




Horizon Bancorporation,
Inc.


(Exact
Name of Registrant as Specified in Its Charter)




Florida
              65-0840545(State
      or Other Jurisdiction of
              (IRS
      EmployerIncorporation
      or Organization)
              Identification
      No.)




900
53rd
Avenue East


Bradenton, Florida
34203


(Address
of Principal Executive Offices)




941-753-2265


(Registrant's
Telephone Number, Including Area Code)




N/A


(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)




Indicate
by check mark whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.




Yes x  No  ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “accelerated filer,” “large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act) (Check one):





Large
      Accelerated Filer  ̈
            Accelerated
      Filer  ̈Non-Accelerated
      Filer  ̈
            Smaller
      reporting company  ̈


(Do not
check if a smaller reporting company)




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)




Yes  ̈  No x




Indicate
the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:




Common
Stock $0.01 Par Value as of November 6, 2009: Issued 1,808,219 Shares;
Outstanding: 1,768,446 Shares








Index




Part
      I. Financial InformationItem
      1. Financial Statements (unaudited)Consolidated
      Balance Sheets as of September 30, 2009 and December 31,
    2008
                    3Consolidated
      Statements of Income for the Three and Nine Months EndedSeptember
      30, 2009 and 2008
                    4Consolidated
      Statements of Cash Flows for the Nine Months EndedSeptember
      30, 2009 and 2008
                    5Consolidated
      Statements of Changes in Shareholders' Equity for the NineMonths
      Ended September 30, 2009 and 2008
                    6Notes
      to Consolidated Financial Statements
                    7Item
      2.  Management's Discussion and Analysis of Financial Conditions
      and Results of Operations
                    13Item
      3.  Quantitative and Qualitative Disclosures About Market
      Risk
                    24Item
      4T.  Controls and Procedures
                    24Part
      II. Other InformationItem
      1.  Legal Proceedings
                    25Item
      1A. Risk Factors
                    25Item
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds
                    25Item
      3.  Defaults Upon Senior Securities
                    25Item
      4.  Submission of Matters to a Vote of Security
      Holders
                    25Item
      5.  Other Information
                    25Item
      6.  Exhibits
                    25







PART
I - FINANCIAL INFORMATION




Item 1.  Financial
Statements.





HORIZON
BANCORPORATION, INC.


Consolidated
Balance Sheets





September 30,
                      2009
                      (Unaudited)
                    
                    
                    December 31,
                      2008ASSETSCash
      and cash equivalentsCash
      and due from banks
                    
                    $
                    8,289,847
                    
                    
                    $
                    2,236,783Federal
      funds sold
                    
                    
                    —0—
                    
                    
                    
                    147,000Total
      cash and cash equivalents
                    
                    
                    8,289,847
                    
                    
                    
                    2,383,783Securities:Held
      to maturity, at amortized cost
                    
                    
                    14,103,714
                    
                    
                    
                    13,086,900Available-for-sale
      at fair value
                    
                    
                    15,830,139
                    
                    
                    
                    17,965,410Loans
      held for sale
                    
                    
                    —0—
                    
                    
                    
                    2,000,000Loans
      receivable, net
                    
                    
                    159,627,647
                    
                    
                    
                    166,027,061Property
      and equipment, net
                    
                    
                    2,250,287
                    
                    
                    
                    2,029,877Other
      real estate owned
                    
                    
                    2,414,108
                    
                    
                    
                    2,815,386Other
      assets
                    
                    
                    5,347,350
                    
                    
                    
                    2,989,837$
                    207,863,092
                    
                    
                    $
                    209,298,254LiabilitiesDepositsNoninterest-bearing
                    
                    $
                    8,470,522
                    
                    
                    $
                    8,572,582Interest-bearing
                    
                    
                    164,948,366
                    
                    
                    
                    157,705,963Total
      deposits
                    
                    
                    173,418,888
                    
                    
                    
                    166,278,545Federal
      Home Loan Bank borrowings
                    
                    
                    26,000,000
                    
                    
                    
                    29,000,000Dividends
      Payable
                    
                    
                    —0—
                    
                    
                    
                    805,764Note
      Payable
                    
                    
                    1,046,632
                    
                    
                    
                    199,090Other
      liabilities
                    
                    
                    169,362
                    
                    
                    
                    220,325Total
      liabilities
                    
                    
                    200,634,882
                    
                    
                    
                    196,503,724Shareholders'
      equityPreferred
      stock,  $.01 par value 1,000,000 shares authorized;
      none    outstanding
                    
                    
                    -Treasury
      stock  outstanding 39,733 shares at September 30, 2009 and
      39,773 shares at December 31, 2008
                    
                    
                    (479,393
                    )
                    
                    
                    (479,393
                    )Common
      stock, $.01 par value 25,000,000 shares authorized; 1,809,912 Issued and
      1,770,139 outstanding at September 30, 2009 and 1,808,219 issued and
      1,768,446 outstanding at  December 31, 2008
                    
                    
                    18,099
                    
                    
                    
                    18,082Additional
      paid in capital
                    
                    
                    10,413,214
                    
                    
                    
                    10,358,919Retained
      earnings
                    
                    
                    (2,483,305
                    )
                    
                    
                    4,116,602Accumulated
      other comprehensive income (loss), net of tax
                    
                    
                    (240,405
                    )
                    
                    
                    (1,219,680
                    )Total
      shareholders' equity
                    
                    
                    7,228,210
                    
                    
                    
                    12,794,530$
                    207,863,092
                    
                    
                    $
                    209,298,254




See
accompanying notes to the financial statements


3


HORIZON
BANCORPORATION, INC.


Consolidated
Statements of Income (Unaudited)





Three Months Ended
                  September 30,
                
                
                Nine Months Ended September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Interest
      incomeInterest
      and fees on loans
                
                $
                2,502,337
                
                
                $
                2,871,753
                
                
                $
                7,870,732
                
                
                $
                8,492,312Interest
      on investment securities
                
                
                378,884
                
                
                
                483,811
                
                
                
                1,191,259
                
                
                
                1,418,478Interest
      on federal funds
                
                
                1,750
                
                
                
                4,358
                
                
                
                3,455
                
                
                
                30,754Total
      interest income
                
                
                2,882,971
                
                
                
                3,359,922
                
                
                
                9,065,446
                
                
                
                9,941,544Interest
      expenseInterest
      on deposits
                
                
                1,079,464
                
                
                
                1,440,780
                
                
                
                3,635,155
                
                
                
                4,568,804Interest
      on borrowings
                
                
                279,491
                
                
                
                275,624
                
                
                
                836,305
                
                
                
                803,134Total
      interest expense
                
                
                1,358,955
                
                
                
                1,716,404
                
                
                
                4,471,460
                
                
                
                5,371,938Net
      interest income
                
                
                1,524,016
                
                
                
                1,643,518
                
                
                
                4,593,986
                
                
                
                4,569,606Provision
      for loan losses
                
                
                —0—
                
                
                
                145,000
                
                
                
                8,791,842
                
                
                
                360,000Net
      interest income after provision for loan losses
                
                
                1,524,016
                
                
                
                1,498,518
                
                
                
                (4,197,856
                )
                
                
                4,209,606Noninterest
      incomeGain
      on sales of loans
                
                
                178,560
                
                
                
                —0—
                
                
                
                302,337
                
                
                
                —0—Gain
      on sale of servicing
                
                
                —0—
                
                
                
                266,947
                
                
                
                200,392
                
                
                
                379,367Gain/(loss)
      on sale of repossessed assets
                
                
                (6,200
                )
                
                
                —0—
                
                
                
                (4,201
                )
                
                
                —0—Gain
      on sale of other assets, net
                
                
                —0—
                
                
                
                585
                
                
                
                7,500
                
                
                
                168,085Recognized
      impairment of bank owned real estate
                
                
                (29,091
                )
                
                
                —0—
                
                
                
                (394,279
                )
                
                
                —0—Recognized
      loss on securities available for sale
                
                
                (509,686
                )
                
                
                (451,228
                )
                
                
                (1,524,534
                )
                
                
                (451,228
                )Service
      charges on deposit accounts
                
                
                16,273
                
                
                
                23,118
                
                
                
                54,463
                
                
                
                69,108Miscellaneous
      , other
                
                
                16,108
                
                
                
                19,416
                
                
                
                180,409
                
                
                
                117,727Total
      noninterest income
                
                
                (334,036
                )
                
                
                (141,162
                )
                
                
                (1,177,913
                )
                
                
                283,059Noninterest
      expenseSalaries
      and benefits
                
                
                583,709
                
                
                
                599,194
                
                
                
                1,788,383
                
                
                
                1,786,240Building
      and equipment expense
                
                
                253,291
                
                
                
                180,966
                
                
                
                704,966
                
                
                
                543,107Professional
      fees
                
                
                101,065
                
                
                
                60,160
                
                
                
                229,425
                
                
                
                191,605Data
      processing and software expense
                
                
                98,105
                
                
                
                84,527
                
                
                
                294,051
                
                
                
                266,760Other
      noninterest expense
                
                
                330,354
                
                
                
                198,539
                
                
                
                876,847
                
                
                
                635,788Total
      noninterest expense
                
                
                1,366,524
                
                
                
                1,123,386
                
                
                
                3,893,672
                
                
                
                3,423,500Income
      before income taxes
                
                
                (176,544
                )
                
                
                233,970
                
                
                
                (9,269,441
                )
                
                
                1,069,165Income
      tax expense
                
                
                (338,208
                )
                
                
                61,262
                
                
                
                (2,669,534
                )
                
                
                357,821Net
      Income
                
                $
                161,664
                
                
                $
                172,708
                
                
                $
                (6,599,907
                )
                
                $
                711,344Basic
      earnings per share
                
                $
                0.09
                
                
                $
                0.10
                
                
                $
                (3.73
                )
                
                $
                0.40Diluted
      earnings per share
                
                $
                0.09
                
                
                $
                0.10
                
                
                $
                (3.71
                )
                
                $
                0.39




See
accompanying notes to the financial statements


4




HORIZON
BANCORPORATION, INC.


Consolidated
Statements of Cash Flows (Unaudited)





For the nine months
                    ended September 30,
                    2009
                  
                  
                  For the nine months
                    ended September 30,
                    2008Cash
      flows from operating activitiesNet
      cash provided by operating activities
                  
                  $
                  499,639
                  
                  
                  $
                  781,846Cash
      flows from investing activitiesProceeds
      from sale of other assets
                  
                  
                  162,969
                  
                  
                  
                  190,000Proceeds
      from sale of loan servicing
                  
                  
                  9,328,258
                  
                  
                  
                  5,176,384Purchase
      of securities held to maturity
                  
                  
                  (1,019,875
                  )
                  
                  
                  —0—Purchase
      of securities available for sale
                  
                  
                  (500,000
                  )
                  
                  
                  (4,661,437
                  )Proceeds
      from maturities and principal repayments of securities available for
      sale
                  
                  
                  2,508,836
                  
                  
                  
                  3,459,828(Purchase)/Repayment
      of Federal Home Loan Bank Stock
                  
                  
                  125,750
                  
                  
                  
                  (115,212
                  )Other
      real estate owned
                  
                  
                  (155,970
                  )
                  
                  
                  (1,470,975
                  )Increase
      in funded loans held for sale
                  
                  
                  (6,825,529
                  )
                  
                  
                  (8,797,017
                  )Loan
      originations, net
                  
                  
                  (2,392,428
                  )
                  
                  
                  (9,817,111
                  )Property
      and equipment expenditures, net
                  
                  
                  (216,109
                  )
                  
                  
                  (162,041
                  )Net
      cash provided (used) by investing activities
                  
                  
                  1,015,902
                  
                  
                  
                  (16,197,581
                  )Cash
      flows from financing activitiesExercise
      of warrants and options
                  
                  
                  9,312
                  
                  
                  
                  —0—Increase
      in deposits
                  
                  
                  7,140,343
                  
                  
                  
                  20,927,110Increase/(decrease)
      in fed funds purchased
                  
                  
                  —0—
                  
                  
                  
                  (5,028,000
                  )Increase/(decrease)
      in borrowings, net
                  
                  
                  (3,000,000
                  )
                  
                  
                  462,500Increase
      in Note Payable by Parent
                  
                  
                  240,868
                  
                  
                  
                  300,000Purchase
      of treasury stock
                  
                  
                  —0—
                  
                  
                  
                  (247,000
                  )Net
      cash provided by financing activities
                  
                  
                  4,390,523
                  
                  
                  
                  16,414,610Net
      change in cash and cash equivalents
                  
                  
                  5,906,064
                  
                  
                  
                  998,875Cash
      and cash equivalents at beginning of period
                  
                  
                  2,383,783
                  
                  
                  
                  3,009,201Cash
      and cash equivalents at end of period
                  
                  $
                  8,289,847
                  
                  
                  $
                  4,008,076


See
accompanying notes to the financial statements


5


HORIZON BANCORPORATION, INC.


Consolidated
Statements of Changes in Shareholders' Equity (Unaudited)


for the
nine-month periods ended September 30, 2009 and 2008





AccumulatedCommon
      Stock
                                                                                        
                                                                                        
                                                                                        Treasury
                                                                                        
                                                                                        
                                                                                        Paid
      in
                                                                                        
                                                                                        
                                                                                        Retained
                                                                                        
                                                                                        
                                                                                        OtherShares
                                                                                        
                                                                                        
                                                                                        Par
      Value
                                                                                        
                                                                                        
                                                                                        Stock
                                                                                        
                                                                                        
                                                                                        Capital
                                                                                        
                                                                                        
                                                                                        Earnings
                                                                                        
                                                                                        
                                                                                        Income
                                                                                        
                                                                                        
                                                                                        TotalBalance,
      December 31, 2007
                                                                                        
                                                                                        
                                                                                        1,788,446
                                                                                        
                                                                                        
                                                                                        $
                                                                                        18,082
                                                                                        
                                                                                        
                                                                                        
                                                                                        (232,393
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        10,288,581
                                                                                        
                                                                                        
                                                                                        $
                                                                                        3,727,722
                                                                                        
                                                                                        
                                                                                        $
                                                                                        (648,467
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        13,153,525Comprehensive
      Income:Net
      income, nine-month period ended September 30, 2008
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        711,344
                                                                                        
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        711,344Net
      unrealized loss on securities, nine-month period ended September 30,
      2008
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        (838,259
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (838,259
                                                                                        )Total
      comprehensive income/(loss) net of tax
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        (126,915
                                                                                        )Repurchase
      of common stock
                                                                                        
                                                                                        
                                                                                        (20,000
                                                                                        )
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        (247,000
                                                                                        )
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        (247,000
                                                                                        )Stock
      Based Compensation
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        72,001
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        72,001Balance,
      September 30, 2008
                                                                                        
                                                                                        
                                                                                        1,768,446
                                                                                        
                                                                                        
                                                                                        $
                                                                                        18,082
                                                                                        
                                                                                        
                                                                                        $
                                                                                        (479,393
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        10,360,582
                                                                                        
                                                                                        
                                                                                        $
                                                                                        4,439,066
                                                                                        
                                                                                        
                                                                                        $
                                                                                        (1,486,726
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        12,851,611Balance,
      December 31, 2008
                                                                                        
                                                                                        
                                                                                        1,768,446
                                                                                        
                                                                                        
                                                                                        $
                                                                                        18,082
                                                                                        
                                                                                        
                                                                                        $
                                                                                        (479,393
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        10,358,919
                                                                                        
                                                                                        
                                                                                        $
                                                                                        4,116,602
                                                                                        
                                                                                        
                                                                                        $
                                                                                        (1,219,680
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        12,794,530Comprehensive
      Income:Net
      income, nine-month period ended September 30, 2009
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        (6,599,907
                                                                                        )
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        (6,599,907
                                                                                        )Net
      unrealized loss on securities, nine-month period ended September 30,
      2009
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        979,275
                                                                                        
                                                                                        
                                                                                        
                                                                                        979,275Total
      comprehensive income/(loss) net of tax
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        (5,620,632
                                                                                        )Exercise
      of warrants to purchase common stock
                                                                                        
                                                                                        
                                                                                        1,693
                                                                                        
                                                                                        
                                                                                        
                                                                                        17
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        9,295
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        9,312Stock
      Based Compensation
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        45,000
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        45,000Balance,
      September 30, 2009
                                                                                        
                                                                                        
                                                                                        1,770,139
                                                                                        
                                                                                        
                                                                                        $
                                                                                        18,099
                                                                                        
                                                                                        
                                                                                        $
                                                                                        (479,393
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        10,413,214
                                                                                        
                                                                                        
                                                                                        $
                                                                                        (2,483,305
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (240,405
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        7,228,210


See
accompanying notes to the financial statements


6




HORIZON
BANCORPORATION, INC.


Notes to
the Consolidated Financial Statements (Unaudited)


NOTE
1 – BASIS OF PRESENTATION





The
accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and, therefore, do not include
information or footnotes necessary for a complete presentation of consolidated
financial condition, results of operations, and cash flows in conformity with
U.S. generally accepted accounting principles.  However, all
adjustments, consisting of normal recurring accruals, which, in the opinion of
management, are necessary for fair presentation of the consolidated financial
statements, have been included.  The results of operations for the
period ended September 30, 2009, are not necessarily indicative of the results
which may be expected for the entire fiscal year or for any other
period.  For further information, refer to the consolidated financial
statements and footnotes thereto for the year ended December 31, 2008 included
in Horizon Bancorporation, Inc.'s Form 10-K.





The
consolidated financial statements include the accounts of the Company and its
subsidiary.  Significant intercompany transactions and balances have
been eliminated in consolidation.





In
preparing the consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.





Material
estimates that are particularly susceptible to significant change in the
near-term relate to the determination of the allowance for loan losses, the
valuation of foreclosed real estate, contingent assets and liabilities and
deferred tax assets.





NOTE
2 – SUMMARY OF ORGANIZATION





Horizon
Bancorporation, Inc., Bradenton, Florida (the "Company"), is a one-bank holding
company with respect to Horizon Bank, Bradenton, Florida (the "Bank"). The
Company commenced banking operations on October 25, 1999 when the Bank commenced
operations. The Bank is primarily engaged in the business of obtaining deposits
and providing commercial, consumer and real estate loans to the general public.
The Bank's depositors are each insured up to $250,000 by the Federal Deposit
Insurance Corporation (the "FDIC") subject to certain limitations imposed by the
FDIC. This $250,000 limit is set to expire on December 31, 2013 and revert back
to $100,000 unless extended or voted in permanently by an act of
Congress.  The Bank has also chosen to opt in to the FDIC's "Temporary
Liquidity Guarantee Program" for unlimited deposit insurance coverage for
non-interest bearing transaction accounts.  This coverage is available
until June 30, 2010.





The
Company is authorized to issue up to 25.0 million shares of its $.01 par value
per share common stock. Each share is entitled to one vote and shareholders have
no preemptive or conversion rights. As of September 30, 2009, and December 31,
2008, there were 1,809,912 and 1,808,219 shares issued respectively. As of
September 30, 2009 and December 31, 2008 there were1,770,139 and 1,768,446
shares outstanding, respectively. Additionally, the Company has authorized the
issuance of up to 1.0 million shares of its $.01 par value per share preferred
stock. The Company's Board of Directors may, without further action by the
shareholders, direct the issuance of preferred stock for any proper corporate
purpose with preferences, voting powers, conversion rights, qualifications,
special or relative rights and privileges which could adversely affect the
voting power or other rights of shareholders of common stock. Effective October
22, 2009, the Board of Directors did designate, by amending the Company’s
Articles of Incorporation, a series of preferred stock.  The series,
designated as Series A Preferred Stock, consists of 5,000 shares with a
liquidation preference of $1,000 per share.  The shares of Series A
Preferred Stock are, as of the date of this Report, being offered for sale by
the Company in a private offering.  Further details about the offering
are set forth in Item 2 of this Part I of this Report. As of September 30, 2009,
and December 31, 2008, there were no shares of the Company's preferred stock
issued or outstanding.


7


HORIZON
BANCORPORATION, INC.
 Notes to
the Consolidated Financial Statements (Unaudited)


NOTE
3 – LOANS RECEIVABLE





Loans
receivable consist of the following:





September 30,
                    2009
                  
                  
                  December 31,
                    2008Real
      estate – commercial
                  
                  $
                  98,324,172
                  
                  
                  $
                  95,871,496Real
      estate – construction
                  
                  
                  1,554,192
                  
                  
                  
                  4,378,504Real
      estate – residential
                  
                  
                  36,997,308
                  
                  
                  
                  34,662,690Commercial
                  
                  
                  25,030,173
                  
                  
                  
                  30,036,270Consumer
                  
                  
                  2,348,885
                  
                  
                  
                  2,580,924Loans,
      gross
                  
                  
                  164,254,730
                  
                  
                  
                  167,529,884Deduct
      allowance for loan losses
                  
                  
                  (4,627,083
                  )
                  
                  
                  (1,502,823
                  )Loans,
      net
                  
                  $
                  159,627,647
                  
                  
                  $
                  166,027,061





Activity
in the allowance for loan losses for the quarter ended September 30, are as
follows:




2009
                  
                  
                  2008Balance
      at beginning of period
                  
                  $
                  5,107,465
                  
                  
                  $
                  1,468,279Provision
      for loan losses
                  
                  
                  —0—
                  
                  
                  
                  145,000Loans
      charged-off
                  
                  
                  (595,679
                  )
                  
                  
                  (98,282
                  )Recoveries
                  
                  
                  115,297
                  
                  
                  
                  1,700Balance
      at end of period
                  
                  $
                  4,627,083
                  
                  
                  $
                  1,516,697





Activity
in the allowance for loan losses for the nine months ended September 30, are as
follows





2009
                  
                  
                  2008Balance
      at beginning of period
                  
                  $
                  1,502,823
                  
                  
                  $
                  1,402,843Provision
      for loan losses
                  
                  
                  8,791,842
                  
                  
                  
                  360,000Loans
      charged-off
                  
                  
                  (5,782,879
                  )
                  
                  
                  (259,177
                  )Recoveries
                  
                  
                  115,297
                  
                  
                  
                  13,031Balance
      at end of period
                  
                  $
                  4,627,083
                  
                  
                  $
                  1,516,697





The very
significant increase, for the nine months ended September 30, in the Provision
for loan losses, or the Allowance for Loan and Lease Loss (“ALLL”), was recorded
to reflect most but not all of the addition to the ALLL mandated by the findings
in an examination of the Bank conducted by the Federal Reserve which commenced
on May 29, 2009 (the “Last Examination”).  The Company is currently
engaged in discussions with the Federal Reserve with respect to the necessity of
adding the unrecorded portion of such increase in the ALLL (such unrecorded
portion herein called the “Disputed Addition to the ALLL”) to the Bank’s
ALLL.  The results of these discussions will be reported in the fourth
quarter of 2009.


8


HORIZON
BANCORPORATION, INC.
 Notes to
the Consolidated Financial Statements (Unaudited)


NOTE
4 – SECURITIES HELD-TO-MATURITY




Information
pertaining to securities with gross unrealized losses at September 30, 2009,
aggregated by investment category and further segregated by length of time (less
than or over twelve months) that the securities have been in a continuous loss
position follows:




Less Than
                
                
                OverTwelve Months
                
                
                Twelve Months
                
                
                TotalFair
                  Value
                
                
                Unrealized
                  Loss
                
                
                Fair
                  Value
                
                
                Unrealized
                  Loss
                
                
                Fair
                  Value
                
                
                Unrealized
                  LossState,
      Countyand
      Municipal
                
                $
                —0—
                
                
                $
                —0—
                
                
                $
                5,493,234
                
                
                $
                (518,932
                )
                
                $
                5,493,234
                
                
                $
                (518,932
                )Corporate
      Securities
                
                
                —0—
                
                
                
                —0—
                
                
                
                869,600
                
                
                
                (130,400
                )
                
                
                869,600
                
                
                
                (130,400
                )Total
                
                $
                —0—
                
                
                $
                —0—
                
                
                $
                6,362,834
                
                
                $
                (649,332
                )
                
                $
                6,362,834
                
                
                $
                (649,332
                )




At
September 30, 2009, unrealized losses on held-to-maturity securities amounted to
$649,332 representing 4.6% of the total held to maturity
portfolio.  Management evaluates securities for other-than-temporary
impairment on a quarterly basis, or more frequently when economic or market
concerns warrant such evaluation.  In analyzing an issuer's financial
condition, management considers whether the securities are issued by the federal
government or its agencies, whether downgrades by bond rating entities have
occurred, the severity and duration of the impairment and the volatility of the
security's fair value.  As management has the intent and ability to
hold the securities until maturity, or for the foreseeable future and due to the
fact that the unrealized losses relate primarily to the lack of liquidity in the
market rather than the expected cash flows of the underlying collateral or
issuer, no declines are deemed to be other than temporary.





NOTE
5 – SECURITIES AVAILABLE FOR SALE




Information
pertaining to securities with gross unrealized losses at September 30, 2009,
aggregated by investment category and further segregated by the length of time
(less than or over twelve months) that the securities have been in a continuous
loss position follows:




Less than
                        Twelve Months
                      
                      
                      Greater than
                        Twelve Months
                      
                      
                      TotalFair
                        Value
                      
                      
                      Unrealized
                        Loss
                      
                      
                      Fair
                        Value
                      
                      
                      Unrealized
                        Loss
                      
                      
                      Fair
                        Value
                      
                      
                      Unrealized
                        LossU.S.
      Agency
                      
                      $
                      990,060
                      
                      
                      $
                      (2,929
                      )
                      
                      $
                      —0—
                      
                      
                      $
                      —0—
                      
                      
                      $
                      990,060
                      
                      
                      $
                      (2,929
                      )Collateralized
      Mortgage obligations
                      
                      
                      —0—
                      
                      
                      
                      —0—
                      
                      
                      
                      —0—
                      
                      
                      
                      —0—
                      
                      
                      
                      —0—
                      
                      
                      
                      —0—Mortgage
      backedsecurities
                      
                      
                      —0—
                      
                      
                      
                      —0—
                      
                      
                      
                      805,924
                      
                      
                      
                      (157,039
                      )
                      
                      
                      805,924
                      
                      
                      
                      (157,039
                      )Trust
      preferred securities & other corporate notes
                      
                      
                      —0—
                      
                      
                      
                      —0—
                      
                      
                      
                      1,108,038
                      
                      
                      
                      (537,190
                      )
                      
                      
                      1,108,038
                      
                      
                      
                      (537,190
                      )Total
                      
                      $
                      990,060
                      
                      
                      $
                      (2,929
                      )
                      
                      $
                      1,913,962
                      
                      
                      $
                      (694,229
                      )
                      
                      $
                      2,904,022
                      
                      
                      $
                      (697,158
                      )





At
September 30, 2009, unrealized losses in the securities portfolio amounted to
$697,158, representing 4.3% of the total available for sale portfolio. Two
securities make up $468,193 of the $697,158 loss noted above.  These
two securities are noted as substandard in portfolio records, but do not meet
all the criteria for a permanent write down to market
value.  Generally, management evaluates securities for
other-than-temporary impairment on a quarterly basis, or more frequently when
economic or market concerns warrant such evaluation.  In analyzing an
issuer's financial condition, management considers whether the securities are
issued by the federal government or its agencies, whether downgrades by bond
rating entities have occurred, the severity and duration of the impairment and
the volatility of the security's fair value.  As management has the
intent and ability to hold the securities until maturity, or for the foreseeable
future, and due to the fact that the unrealized losses relate primarily to the
lack of liquidity in the market rather than the expected cash flows of the
underlying collateral or issuer, no declines are deemed to be other than
temporary.


9


HORIZON
BANCORPORATION, INC.
 Notes to
the Consolidated Financial Statements (Unaudited)


NOTE
6 - EARNINGS PER SHARE





The
following summarizes the computation of basic and diluted earnings per
share.


Three Months Ended September 30,
                                2009
                              
                              
                              Three Months Ended September 30,
                                2008Basic
      earnings per shareNet
      income applicable to common stock
                              
                              $
                              161,664
                              
                              
                              $
                              172,708Weighted
      average shares outstanding
                              
                              
                              1,770,139
                              
                              
                              
                              1,768,446Basic
      earnings per share
                              
                              $
                              0.09
                              
                              
                              $
                              0.10Diluted
      earnings per shareNet
      income applicable to common stock
                              
                              $
                              161,664
                              
                              
                              $
                              172,708Weighted
      average shares outstanding
                              
                              
                              1,770,139
                              
                              
                              
                              1,768,446Dilutive
      effect of assumed exercise of stock options/warrants
                              
                              
                              —0—
                              
                              
                              
                              59,282Diluted
      average shares outstanding
                              
                              
                              1,770,139
                              
                              
                              
                              1,827,728Diluted
      earnings per share
                              
                              $
                              0.09
                              
                              
                              $
                              0.10Nine Months Ended September
30,
                                2009
                              
                              
                              Nine Months Ended September
30,
                                2008Basic
      earnings per shareNet
      income applicable to common stock
                              
                              $
                              (6,599,907
                              )
                              
                              $
                              711,344Weighted
      average shares outstanding
                              
                              
                              1,770,108
                              
                              
                              
                              1,769,823Basic
      earnings per share
                              
                              $
                              (3.73
                              )
                              
                              $
                              0.40Diluted
      earnings per shareNet
      income applicable to common stock
                              
                              $
                              (6,599,907
                              )
                              
                              $
                              711,344Weighted
      average shares outstanding
                              
                              
                              1,770,108
                              
                              
                              
                              1,769,823Dilutive
      effect of assumed exercise of stock options/warrants
                              
                              
                              9,175
                              
                              
                              
                              76,247Diluted
      average shares outstanding
                              
                              
                              1,779,283
                              
                              
                              
                              1,846,070Diluted
      earnings per share
                              
                              $
                              (3.71
                              )
                              
                              $
                              0.39




NOTE
7 - FAIR VALUE OF FINANCIAL INSTRUMENTS




Assets
and liabilities are grouped for fair value in six level based on the markets in
which the assets and liabilities are traded and the reliability of the
assumptions used to determine fair value.  These levels
are:




Level 1 -
Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical unrestricted
assets or liabilities;





Level 2
-  Quoted prices in markets that are not active, or inputs that are
observable, either directly or indirectly, for substantially
the full term of the asset or liability;


Level 3 -
Prices or valuation techniques that require inputs that are both significant to
the fair value measurement and unobservable (i.e., supported by little or no
market activity).


10


HORIZON
BANCORPORATION, INC.
 Notes to
the Consolidated Financial Statements (Unaudited)




The
following table summarizes fair value measurements as of September 30, 2009: (in
thousands)




Fair Value Measurements
      UsingQuoted Prices in
                    Active Markets
                    for Identical
                    Assets
                  
                  
                  Significant Other
                    Observable Input
                  
                  
                  Significant
                    Unobservable
                    InputsDescriptions
                  
                  9/30/2009
                  
                  
                  (Level 1)
                  
                  
                  (Level 2)
                  
                  
                  (Level 3)Held
      to maturity securities
                  
                  $
                  14,104
                  
                  
                  
                  
                  
                  $
                  14,104Available-for-sale
      securities
                  
                  $
                  15,830
                  
                  
                  $
                  1,490
                  
                  
                  $
                  14,340Impaired
      Loans
                  
                  $
                  4,081
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  4,081Total
                  
                  $
                  34,015
                  
                  
                  $
                  1,490
                  
                  
                  $
                  28,444
                  
                  
                  $
                  4,081





The types
of instruments valued based on quoted market prices in active markets include
most U.S. Government debt and agency debt securities. Such instruments are
generally classified within Level 1 or Level 2 of the fair value hierarchy.
As required by SFAS No. 157, the Company does not adjust the quoted price
for such instruments.





The types
of instruments valued based on quoted prices in markets that are not active,
broker or dealer quotations, or alternative
pricing sources with reasonable levels of price transparency include state and
municipal obligations, mortgage backed securities and collateralized
mortgage obligations. Such instruments are generally classified within Level 2
of the fair value hierarchy.





Impaired
loans are evaluated and valued at the time the loan is identified as impaired,
at the lower of cost or market value, and classified at Level 3 in the fair
value hierarchy. Market value is measured based on the value of the collateral
securing these loans or techniques that are not supported by market activity for
loans that are not collateral dependent
and require management’s judgment. Collateral may be real estate and/or
business assets including equipment, inventory and/or accounts receivable. The value of real estate
collateral is determined based on appraisals by qualified licensed appraisers
hired bythe
Company. The value of business equipment may be based on an appraisal by
qualified licensed appraisers hired by the Company if significant, or may be
valued based on the equipment’s net book value on the business’ financial
statements. Inventory and accounts receivable collateralmaybe valued based on independent field
examiner review or aging reports, if significant.Field examiner reviews
may be conducted based on the loan exposure and reliance on this type of
collateral. Appraised and reported values may be discounted based on
management’s historical knowledge, changes in market conditions from the
time of valuation, and/or management’s expertise and knowledge of the
client and client’s business. Impaired loans are reviewed and evaluated on at least a quarterly
basis for additional impairment and adjusted accordingly, based on the same
factorsidentified above.




NOTE
8 - RECENT ACCOUNTING PRONOUNCEMENTS




On April
9, 2009, the Financial Accounting Standard Board (“FASB”) issued six FASB Staff
Positions (“FSP”) intended to provide additional application guidance and
enhance disclosures regarding fair value measurements and impairments of
securities:




1.
            FSP
      FAS 107-1 and APB 28-1, Interim Disclosures about Fair
      Value of Financial Instruments, amends FASB Statement No. 107,
      Disclosures about Fair
      Value of Financial Instruments, to require an entity to provide
      quantitative and qualitative disclosures about fair value of any financial
      instruments for interim reporting periods as well as in annual financial
      statements.  Prior to issuing this FSP, fair values for these
      assets and liabilities were only disclosed annually. This FSP also amends
      APB Opinion No. 28, Interim Financial
      Reporting, to require those disclosures in summarized financial
      information at interim reporting periods.  We adopted FSP 107-1
      and APB 28-1 for the quarter ending June 30,
  2009.


11


HORIZON
BANCORPORATION, INC.
 Notes to
the Consolidated Financial Statements (Unaudited)




2.
            FSP
      FAS 115-2 and FAS 124-2, Recognition and Presentation
      of Other-Than-Temporary Impairments, is intended to bring greater
      consistency to the timing of impairment recognition, and provide greater
      clarity to investors about the credit and non-credit components of
      impaired debt securities that are not expected to be
      sold.  Further, it replaces the existing requirement that the
      entity’s management assert it has both the intent and ability to hold an
      impaired security until recovery with a requirement that management
      assert: (a) it does not have the intent to sell the security; and (b) it
      is more likely than not it will not have to sell the security before
      recovery of its cost basis.  The FSP also requires increased and
      timelier disclosures sought by investors regarding expected cash flows,
      credit losses, and an aging of securities with unrealized losses. When
      adopting FSP FAS 115-2 and FAS 124-2, an entity is required to record a
      cumulative-effect adjustment as of the beginning of the period of adoption
      to reclassify the non-credit component of a previously recognized
      other-than-temporary impairment from retained earnings to accumulated
      other comprehensive income if the entity does not intend to sell the
      security and it is more likely than not that the entity will not be
      required to sell the security before recovery.  FSP FAS 115-2
      and FSP 124-2 FSP will be effective for us for the quarter ending June 30,
      2009.  Adoption of this FSP did not have a significant impact on
      our financial condition or results of
  operations.




3.
            FSP
      FAS 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,reaffirms the objective of fair value measurement
      stated in FASB Statement No. 157, Fair Value Measurements
      (“SFAS No. 157”) to reflect how much an asset would be sold for in an
      orderly transaction (as opposed to a distressed or forced transaction) at
      the date of the financial statements under current market
      conditions.  Specifically, it reaffirms the need to use judgment
      to ascertain if a formerly active market has become inactive and in
      determining fair values when markets have become inactive.  It
      also requires an entity to base its conclusion as to whether a transaction
      was not orderly on the weight of the evidence.  FSP FAS 157-4
      will be effective for us for the quarter ending June 30,
      2009.  Adoption of this FSP did not have a significant impact on
      our financial condition or results of
  operations.




On
October 10, 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not
Active.  The FSP clarifies the application of SFAS No. 157 in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active.  FSP FAS 157-3 is
effective upon issuance, including prior periods for which financial statements
have not been issued. Revisions resulting form a change in the valuation
technique or its applications should be accounted for as a change in accounting
estimate following the guidance in SFAS No. 154, Accounting Changes and Error
Corrections.  However, the disclosure provisions in SFAS No.
154 for a change in accounting estimate are not required for revisions resulting
from a change in valuation techniques or its application.  Adoption of
FSP FAS 157-3 did not have a significant Impact on our financial condition or
results of operations.


12


Item
2: Management's Discussion and Analysis of Financial Condition and
Operations


Forward
Looking Statements




This
Quarterly Report on Form 10-Q contains or incorporates by reference statements
that are “forward-looking statements” within the meaning of Section 27A of
the Securities Act of 1933, as amended (the Securities Act) and Section 21E
of the Securities Exchange Act of 1934, as amended (the Exchange Act).
Forward-looking statements discuss future expectations, describe future plans
and strategies, contain projections of results of operations or of financial
condition or state other forward-looking information. Forward-looking statements
are generally identifiable by the use of forward-looking terminology such as
“anticipate,” “assume,” “believe,” “continue,” “could,” “would,” “endeavor,”
“estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “objective,” “plan,”
“potential,” “predict,” “project,” “seek,” “should,” “target,” “will” and other
similar words and expressions of future intent.




Our
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Although we believe that the expectations reflected in
such forward-looking statements are based on reasonable assumptions, our actual
results and performance could differ materially from those set forth in the
forward-looking statements. Factors that could cause actual results and
performance to differ from those expressed in our forward-looking statements we
make or incorporate by reference in this Quarterly Report on Form 10-Q include,
but are not limited to:




·
            the effects of the current global
      economic crisis, including, without limitation, the dramatic deterioration
      of real estate values, the subprime mortgage, credit and liquidity
      markets, as well as the Federal Reserve’s actions with respect to interest
      rates, may lead to a further deterioration in credit quality, thereby
      requiring continued increases in our provision for loan losses, or a
      reduced demand for credit, which will continue to negatively impact our
      earnings;


·
            the imposition of enforcement
      orders, capital directives or other enforcement actions by the Federal
      Reserve, including restrictions and limitations that might be placed on
      the Bank pursuant to the  Written Agreement described
      below;




·
            possible changes in trade,
      monetary and fiscal policies, as well as legislative and regulatory
      changes, including changes in accounting standards and banking, securities
      and tax laws and regulations and governmental intervention in the U.S.
      financial system, as well as changes affecting financial institutions’
      ability to lend and otherwise do business with
      consumers;




·
            increases in our nonperforming
      assets, or our inability to recover or absorb losses created by such
      nonperforming assets;




·
            our ability to effectively manage
      liquidity risk, interest rate risk and other market risk, credit risk and
      operational risk




·
            our ability to manage negative
      developments and disruptions in the credit and lending markets, including
      the impact of the ongoing credit crisis on our business and on the
      businesses of
      our           customers
      as well as other financial institutions with which we have commercial
      relationships;




·
            the continuation of the recent
      unprecedented volatility in the credit markets and overall
      economy;


·
            possible changes in the quality
      or composition of our loans or investment portfolios, including further
      adverse developments in the real estate markets, the borrowers’ industries
      or in the repayment ability of individual borrowers or
      issuers;




·
            changes in the interest rate
      yield curve such as flat, inverted or steep yield curves, or changes in
      the interest rate environment that impact interest margins and may impact
      prepayments on the mortgage-backed securities
      portfolio;




·
            our
      ability to manage fluctuations in the value of assets and liabilities and
      off-balance sheet exposure so as to maintain sufficient capital and
      liquidity to support our
business;


13




·
            the failure of our assumptions
      underlying the establishment of allowances for loan losses and other
      estimates, or dramatic changes in those underlying assumptions or
      judgments in future periods, that, in either case, render the allowance
      for loan losses inadequate or require that further provisions for loan
      losses be made;




·
            unexpected outcomes of existing
      or new litigation;


·
            the threat or occurrence of war
      or acts of terrorism and the existence or exacerbation of general
      geopolitical instability and
uncertainty;




·
            management’s ability to develop
      and execute plans to effectively respond to the Orders and any unexpected
      events in the future; and




·
            other factors and information
      contained in this Quarterly Report on Form 10-Q and other reports that we
      file with the Securities and Exchange Commission (SEC) under the Exchange
      Act.




The
cautionary statements in this Quarterly Report on Form 10-Q also identify
important factors and possible events that involve risk and uncertainties that
could cause our actual results to differ materially from those contained in the
forward-looking statements. These forward-looking statements speak only as of
the date on which the statements were made. We do not intend, and undertake no
obligation, to update or revise any forward-looking statements contained in this
Quarterly Report on Form 10-Q, whether as a result of differences in actual
results, changes in assumptions or changes in other factors affecting such
statements, except as required by law.




Readers
should carefully review all disclosures we file from time to time with the
SEC.





Overview





The
Company serves as the holding company for the Bank.  The Bank’s
business activities involve attracting deposits from the general public and
using these funds to originate consumer, commercial, and real estate loans, from
its four offices, two in Bradenton, Florida, one in Brandon, Florida and one in
Palmetto, Florida.




The
Company's earnings are primarily dependent upon three sources: net interest
income, which is the difference between interest earned on interest-earning
assets and interest paid on interest-bearing liabilities; fee income from
customers; and gains realized on sales of loans.  These revenues are
in turn significantly affected by factors such as changes in prevailing interest
rates and in the yield curve (that is, the difference between prevailing
short-term and long-term interest rates).




Similar
to other financial institutions, our business, financial condition, and
operating results have been and continue to be adversely affected by, among
other trends, ongoing disruptions in the real estate and capital
markets.  As a result of these significant disruptions, which caused
dramatic declines in the real estate and capital markets in Manatee County, the
credit performance of our loans has been significantly negatively
affected.  In order to adequately reflect such negative credit
performance, and in response to the findings in the Last Examination, during the
seccond 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.  For the three months ended June 30, 2009,
we incurred a $6.9 million operating loss, having otherwise been profitable for
25 of the last 26 quarters.




As a
result of these actions, the Bank’s Total Risk-Based Capital fell below the
required minimum for adequately capitalized banks of 8%.  On August 5,
2009, the Bank received a letter from the Federal Reserve 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 Federal Reserve: (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 Federal
Reserve 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.


14




On August
20, 2009, we submitted a capital restoration plan to the Federal
Reserve.  The plan shows that, combined with projected net earnings
for the Bank during the rest of 2009 and certain cost cutting measures, and not
taking into account the Disputed Addition to the ALLL, completing a $3.5 million
offering of equity securities would cause the Bank to be considered adequately
capitalized.  By the same token, completing an approximately $4.2
million offering of equity securities, even if the Disputed Addition to the ALLL
is taken into account, would cause the Bank to be considered adequately
capitalized.




The
discussions with the Federal Reserve regarding the Disputed Addition to the ALLL
and the proposed capital restoration plan are currently ongoing.  In
the meantime, 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.




The
offering expires on November 30, 2009, but may be extended until December 31,
2009.  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 Federal
Reserve has approved the capital restoration plan.  Given the impact
of the resolution of the Disputed Addition to the ALLL 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 Federal Reserve, 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 Federal Reserve are in accord regarding
the Disputed Addition to the ALLL 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, 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
$405,000, and discussions with the Federal Reserve regarding the Disputed
Addition to the ALLL and the capital restoration plan are
ongoing.  There is no assurance that (a) the offering will be
successful to an extent which would cause the Bank to become adequately
capitalized whether or not the Disputed Addition to the ALLL is resolved in the
Bank’s favor or (b) the capital restoration plan will be accepted by the
Federal Reserve even if the offering is successful to any extent.  The
failure of any of the foregoing to occur will have a material negative effect on
the Company’s liquidity, capital resources and financial condition and could
trigger additional enforcement action against the Bank and/or the
Company.




In
addition, on November 4, 2009, the Bank entered into an agreement with the
Federal Reserve and the State of Florida Office of Financial Regulation (“OFR”)
(the “Written Agreement”).  Under the Written Agreement, among other
things, the Bank has agreed to:




·
            Within
      60 days of the date of the Written Agreement, submit a written plan to
      strengthen the oversight by the Board of Directors of the management and
      operations of the Bank;




·
            Within
      60 days of the date of the Written Agreement, submit a written plan
      acceptable to the Federal Reserve and the OFR to strengthen the Bank’s
      management of commercial real estate concentration, including steps to
      reduce the risk of concentration;




·
            Within
      60 days of the date of the Written Agreement, submit a written plan
      acceptable to the Federal Reserve and the OFR to strengthen risk
      management practices;




·
            Within
      60 days of the date of the Written Agreement, submit a written program
      acceptable to the Federal Reserve and the OFR for lending and credit
      administration;


15




·
            Within
      10 days of the date of the Written Agreement, retain an independent
      consultant acceptable to the Federal Reserve and the OFR to conduct an
      independent review of the portion of the Bank’s loan portfolio that was
      not reviewed during the Last
Examination;




·
            Not
      to extend or renew credit to or for the benefit of any borrower (a) with
      respect to whose loans the Bank has charged off or classified a loss in
      the report of the Last Examination or (b) whose loan(s) were classified as
      “doubtful” or “substandard” in such
report;




·
            Within
      60 days of the date of the Written Agreement, submit a written plan
      acceptable to the Federal Reserve and the OFR designed to improve the
      Bank’s position with respect to any asset in excess of
      $250,000;




·
            Within
      60 days of the date of the Written Agreement, submit a report describing a
      revised methodology for the determination and maintenance of an adequate
      ALLL;




·
            Within
      60 days of the date of the Written Agreement, submit a written plan
      acceptable to the Federal Reserve 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 plan requested by the Federal Reserve on August 5,
      2009;




·
            Within
      90 days of the date of the Written Agreement, submit a written plan
      acceptable to the Federal Reserve and the OFR to strengthen the oversight
      of the Bank’s audit program by its audit
  committee;




·
            Within
      60 days of the date of the Written Agreement, submit a written plan
      acceptable to the Federal Reserve and the OFR to improve management of the
      Bank’s liquidity position and funds management
  practices;




·
            Within
      60 days of the date of the Written Agreement, submit written policies and
      procedures to strengthen the management of the Bank’s investment
      portfolio;




·
            Within
      90 days of the date of the Written Agreement, submit to the Federal
      Reserve and the OFR a written business plan for 2010 to improve the Bank’s
      earnings and overall condition; and




·
            Not
      to declare or pay dividends without the prior written approval of the
      Federal Reserve and the OFR.




As of the
date of this Report, the Company and the Bank have taken preliminary steps
towards implementation of the Written Agreement.




Results
of Operations





Overall Net
Income





The
Company reported net income $162,000 for the quarter ended September 30, 2009,
compared to net income of $172,000 for the quarter ended September 30,
2008.  Basic and diluted earnings per share were $0.09 for the three
months ended September 30, 2009. Basic and diluted earnings per share for the
three months ended September 30, 2008 were $.10 and $.10,
respectively.





For the
nine months ended September 30, 2009, the Company reported a net loss of
$6,600,000, compared to net income of $711,000 for the same period in
2008.  Basic and diluted loss per share were $3.73 and $3.71,
respectively, for the nine months ended September 30, 2009, compared to earnings
of $0.40 and $0.39, respectively, for the nine months ended September 30,
2008.


16





Net Interest
Income.





Net
interest income was $1.52 million and $1.64 million for the three months ended
September 30, 2009 and 2008, respectively.  Decreasing rates and
volumes led to the decrease of $119,000 between these two
periods.  For the nine months ended September 30, 2009 and 2008, net
interest income rounded was $4.59 million and $4.57 million,
respectively.  Decreasing rates offset by increased volumes led to the
increase of $24,000 between these two periods.




The
effect on interest income, interest expenses and net interest income during the
periods indicated, from changes in average balances and rates from the
corresponding prior period, is shown below.  The effect of a change in
average balance has been determined by applying the average rate in the earlier
period to the change in the average balance in the later
period.  Changes resulting from average balance/rate variances are
included in changes resulting from rate.  The balance of the change in
interest income or expense and net interest income has been attributed to a
change in average rate:




Three months ended September 30,
                                  2009
                                  Compared with
                                  Three months ended September 30,
                                  2008
                                  (in thousands)
                                
                                
                                Nine months ended September 30,
                                  2009
                                  Compared with
                                  Nine months ended September 30,
                                  2008
                                  (in thousands)Increase (decrease) due to:
                                
                                
                                Increase (decrease) due to:Interest earned on:
                                
                                Volume
                                
                                
                                Rate
                                
                                
                                Total
                                
                                
                                Volume
                                
                                
                                Rate
                                
                                
                                TotalTaxable/Nontaxable
      securities
                                
                                
                                (36
                                )
                                
                                
                                (69
                                )
                                
                                
                                (105
                                )
                                
                                
                                (54
                                )
                                
                                
                                (174
                                )
                                
                                
                                (228
                                )Federal
      funds sold
                                
                                
                                8
                                
                                
                                
                                (9
                                )
                                
                                
                                (1
                                )
                                
                                
                                7
                                
                                
                                
                                (35
                                )
                                
                                
                                (28
                                )Net
      loans
                                
                                
                                17
                                
                                
                                
                                (387
                                )
                                
                                
                                (370
                                )
                                
                                
                                611
                                
                                
                                
                                (1,232
                                )
                                
                                
                                (621
                                )Total
      Interest Income
                                
                                
                                (11
                                )
                                
                                
                                (465
                                )
                                
                                
                                (476
                                )
                                
                                
                                564
                                
                                
                                
                                (1,441
                                )
                                
                                
                                (877
                                )Interest paid on:NOW
      and money market deposits
                                
                                
                                (6
                                )
                                
                                
                                (50
                                )
                                
                                
                                (56
                                )
                                
                                
                                3
                                
                                
                                
                                (145
                                )
                                
                                
                                (142
                                )Savings
      deposits
                                
                                
                                0
                                
                                
                                
                                (51
                                )
                                
                                
                                (51
                                )
                                
                                
                                (16
                                )
                                
                                
                                (148
                                )
                                
                                
                                (164
                                )Time
      deposits
                                
                                
                                108
                                
                                
                                
                                (361
                                )
                                
                                
                                (253
                                )
                                
                                
                                650
                                
                                
                                
                                (1,278
                                )
                                
                                
                                (628
                                )Other
      borrowings
                                
                                
                                (12
                                )
                                
                                
                                15
                                
                                
                                
                                3
                                
                                
                                
                                42
                                
                                
                                
                                (9
                                )
                                
                                
                                33Total
      interest Expense
                                
                                
                                90
                                
                                
                                
                                (447
                                )
                                
                                
                                (357
                                )
                                
                                
                                679
                                
                                
                                
                                (1,580
                                )
                                
                                
                                (901
                                )Change
      in net interest income
                                
                                $
                                (101
                                )
                                
                                $
                                (18
                                )
                                
                                $
                                (119
                                )
                                
                                $
                                (115
                                )
                                
                                $
                                139
                                
                                
                                $
                                24


17




Average Balance
Sheet





The
following tables summarize the average yields earned on interest-earning assets
and the average rates paid on interest-bearing liabilities for the Bank and
helps to further explain the slight increase in net interest
income.





Three months ended September 30,2009
                
                
                2008Average
                  Volume
                
                
                Interest
                
                
                Yield/Cost
                
                
                Average
                  Volume
                
                
                Interest
                
                
                Yield/CostASSETSInterest-earning
      assets:Federal
      funds sold
                
                $
                1,215
                
                
                $
                2
                
                
                
                0.66
                %
                
                $
                791
                
                
                $
                4
                
                
                
                2.02
                %Securities
                
                
                29,864
                
                
                
                379
                
                
                
                5.08
                
                
                
                32,419
                
                
                
                484
                
                
                
                5.97Loans
      receivable
                
                
                166,365
                
                
                
                2,502
                
                
                
                6.02
                
                
                
                165,395
                
                
                
                2,872
                
                
                
                6.95Total
      interest-earning assets
                
                $
                197,444
                
                
                
                2,883
                
                
                
                5.84
                
                
                $
                198,605
                
                
                
                3,360
                
                
                
                6.77LIABILITIESInterest-bearing
      liabilities:Transactional
      accounts
                
                $
                25,095
                
                
                
                75
                
                
                
                1.20
                
                
                $
                26,443
                
                
                
                131
                
                
                
                1.98Savings
      deposits
                
                
                16,489
                
                
                
                65
                
                
                
                1.58
                
                
                
                16,494
                
                
                
                116
                
                
                
                2.81Time
      deposits
                
                
                122,368
                
                
                
                940
                
                
                
                3.07
                
                
                
                113,211
                
                
                
                1,194
                
                
                
                4.22Other
      borrowings
                
                
                26,000
                
                
                
                279
                
                
                
                4.29
                
                
                
                27,865
                
                
                
                276
                
                
                
                3.96Total
      interest-bearing liabilities
                
                $
                189,952
                
                
                
                1,359
                
                
                
                2.86
                
                
                $
                184,013
                
                
                
                1,717
                
                
                
                3.73Interest
      rate spread
                
                
                
                
                
                
                
                
                
                
                2.98
                %
                
                
                
                
                
                
                
                
                
                
                3.04
                %Net
      interest income and net interestMargin
                
                
                
                
                
                $
                1,524
                
                
                
                3.09
                %
                
                
                
                
                
                $
                1,643
                
                
                
                3.31
                %





Nine months ended September 30,2009
                
                
                2008Average
                  Volume
                
                
                Interest
                
                
                Yield/Cost
                
                
                Average
                  Volume
                
                
                Interest
                
                
                Yield/CostASSETSInterest-earning
      assets:Federal
      funds sold
                
                $
                1,636
                
                
                $
                3
                
                
                
                0.24
                %
                
                $
                1,390
                
                
                $
                31
                
                
                
                2.97
                %Securities
                
                
                30,863
                
                
                
                1,191
                
                
                
                5.15
                
                
                
                32,111
                
                
                
                1,419
                
                
                
                5.89Loans
      receivable
                
                
                170,523
                
                
                
                7,871
                
                
                
                6.15
                
                
                
                160,287
                
                
                
                8,492
                
                
                
                7.06Total
      interest-earning assets
                
                $
                203,022
                
                
                
                9,065
                
                
                
                5.95
                
                
                $
                193,788
                
                
                
                9,942
                
                
                
                6.84LIABILITIESInterest-bearing
      liabilities:Transactional
      accounts
                
                $
                24,866
                
                
                
                236
                
                
                
                1.27
                
                
                $
                24,642
                
                
                
                378
                
                
                
                2.05Savings
      deposits
                
                
                14,900
                
                
                
                190
                
                
                
                1.70
                
                
                
                15,647
                
                
                
                354
                
                
                
                3.02Time
      deposits
                
                
                127,479
                
                
                
                3,209
                
                
                
                3.36
                
                
                
                112,479
                
                
                
                3,837
                
                
                
                4.55Other
      borrowings
                
                
                27,272
                
                
                
                836
                
                
                
                4.09
                
                
                
                25,891
                
                
                
                803
                
                
                
                4.14Total
      interest-bearing liabilities
                
                $
                194,517
                
                
                
                4,471
                
                
                
                3.06
                
                
                $
                178,659
                
                
                
                5,372
                
                
                
                4.01Interest
      rate spread
                
                
                
                
                
                
                
                
                
                
                2.89
                %
                
                
                
                
                
                
                
                
                
                
                2.83
                %Net
      interest income and net interestMargin
                
                
                
                
                
                $
                4,594
                
                
                
                3.02
                %
                
                
                
                
                
                $
                4,570
                
                
                
                3.14
                %





Net
interest income represents the excess of income on interest-earning assets over
interest expense on interest bearing liabilities.  The principal
interest-earning assets are federal funds sold, investment securities and loans
receivable.  Interest-bearing liabilities primarily consist of FHLB
borrowings, time deposits, interest-bearing checking accounts (NOW accounts),
savings deposits and money market accounts.  Funds attracted by these
interest-bearing liabilities are invested in interest-earning
assets.  Accordingly, net interest income depends upon the volume of
average interest-earning assets and average interest bearing liabilities and the
interest rates earned or paid on them.


18





Noninterest
Income.





A
noninterest loss of $334,000 was recorded for the three months ended September
30, 2009.  This loss compares to $141,000 loss of income for the same
period in 2008, an increase of $193,000.  During the three months
ended September 30, 2009, the Bank realized security losses of $510,000, while a
loss of $451,000 was recorded in 2008.  An impairment of other real
estate owned of $29,000, as well as a $6,000 loss on the sale of repossessed
assets, were recorded in 2009.  These losses were offset by a gain on
sale of loans of $179,000.  In 2008 a gain on sale of servicing of
$267,000 was realized while no such gain was recorded during the same period of
2009.





Noninterest
loss for the nine months ended September 30, 2009 was
$1,178,000.  This loss compares to $283,000 of income for the same
period in 2008, a decrease of $1,461,000.  During the nine months
ending September 30, 2009 the Bank realized security losses of $1,525,000 and
impairment of other real estate owned properties of $394,000.  These
losses were offset by gains on the sale of servicing of $200,000 and gains on
the sale of loans of $302,000.  In 2008 the bank realized gains on the
sale of an interest rate contract of $168,000 and gains on the sale of servicing
of $379,000 offset set by the write down of an investment security of
$451,000.  In 2009, with the FDIC's closing of Silverton Bank (the
Bank's correspondent bank), the Company realized a loss of $425,000 for a
Silverton holding company trust preferred security it owned.  The Bank
also had to write off $87,000 in Silverton's common stock it held.  In
addition, the Bank realized a loss of $849,000 on a private issue mortgage
backed security it owns.





The gains
on loans and servicing are related to loans that are partially guaranteed by an
agency of the United States government, such as the SBA (Small Business
Administration) and the USDA (United States Department of Agriculture).
Generally, we sell these loans neither because of credit quality deterioration
or liquidity but in order to mitigate the risk of early payoffs and thus the
risk of adverse impact on our net income.  Specifically, in case of a
government-guaranteed loan exceeding $1.5 million, we generally sell the
guaranteed portion and, at nearly the same time, acquire from an unrelated party
the guaranteed portion of several loans that are much smaller.  We
believe that by exchanging, in effect, the guaranteed portion of a large loan
for the guaranteed portion of several smaller loans we are spreading the risk of
an early pay-off.





Noninterest
Expense.





Total
noninterest expense for the three months ended September 30, 2009, was
$1,367,000, compared to $1,123,000 for the same period in 2008, an increase of
approximately $243,000.  The majority of this increase was
attributable to an $119,000 increase in FDIC insurance (coupled with a special
assessment by the FDIC). Another $72,000 increase in building & equipment
expense and a $13,000 increase in data processing and software expense were
related to the opening of the Brandon branch in 2009.  Professional
fees increased during this period by $41,000.





Total
noninterest expense for the nine months ended September 30, 2009, was
$3,894,000, compared to $3,424,000 for the same period in 2008, an increase of
approximately $470,000.  As described above, the majority of this
increase $256,000 was attributable to the increased FDIC insurance
assessments.  Building & equipment expense increased $162,000 due
to the Brandon branch opening.  Professional fees increased by $38,000
during this period.





Balance
Sheet Analysis





The
following is a discussion of the consolidated balance sheet of the
Company.





Total
Assets





As of
September 30, 2009, total assets of the Company were $207,863,092, compared to
$209,298,524 at December 31, 2008, a decrease of $1.4 million.  The
decrease is primarily due to increased deposits of $7.1 million and decreased
other borrowings of $3.0 million.  These liability decreases were
offset by decreases in the loan portfolio of $3.3 million, the $3.1 million
increase in the ALLL and a $1.1 million decrease in the securities portfolios
due to the losses realized and mentioned above.


19





Investment
Securities




As of
September 30, 2009, the securities portfolio comprised approximately 14% of the
Company's assets. The Bank invests primarily in obligations of the United States
or obligations guaranteed as to principal and interest by the United States and
other taxable securities.  In addition, the Bank enters into Federal
Funds transactions with its principal correspondent banks, and acts as a net
seller of such funds.  The sale of Federal Funds amounts to a
short-term loan from the Bank to another bank.




The
following table presents, for the periods ended September 30, 2009 and December
31, 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):





Investment Category





September 30,
                            2009
                          
                          
                          December 31,
                            2008Available-for-Sale:U.S.
      Agency Bonds
                          
                          $
                          1,490
                          
                          
                          $
                          1,014Collateralized
      mortgage obligations
                          
                          
                          3,769
                          
                          
                          
                          4,708Mortgage-backed
      securities
                          
                          
                          2,292
                          
                          
                          
                          2,668Trust
      Preferred & Other Corporate Securities
                          
                          
                          6,384
                          
                          
                          
                          7,467Equity
      securities
                          
                          
                          1,895
                          
                          
                          
                          2,108Total
      Available-for-Sale Securities
                          
                          $
                          15,830
                          
                          
                          $
                          17,965Held-to-Maturity
Securities:Corporate
      Securities
                          
                          $
                          870
                          
                          
                          $
                          550General
      obligation bonds of municipalities
                          
                          
                          8,021
                          
                          
                          
                          6,450Revenue
      bonds of municipalities
                          
                          
                          4,777
                          
                          
                          
                          4,451Total
      Held-to-Maturity Securities
                          
                          $
                          13,668
                          
                          
                          $
                          11,451Total Portfolio
                          
                          $
                          29,498
                          
                          
                          $
                          29,416





Loans
Receivable


The Bank
engages in a full complement of lending activities, including commercial,
consumer installment and real estate loans.




Commercial
lending is directed principally towards businesses whose demands for funds fall
within the Company's legal lending limits and which are potential deposit
customers of the Bank.  These loans include loans obtained for a
variety of business purposes, and are made to individual, partnership and
corporate borrowers.  The Bank places particular emphasis on loans to
small and medium-sized businesses.




The
Bank's consumer loans consist primarily of installment loans to individuals for
personal, family and household purposes, including automobile loans and
pre-approved lines of credit to individuals.  This category of loans
includes lines of credit and term loans secured by second mortgages on
residences for a variety of purposes, including home improvements, education and
other personal expenditures.




The
Bank's real estate loans consist of residential and commercial first and second
mortgages.


20




The
following table presents various categories of loans contained in the Bank's
loan portfolio as of September 30, 2009 and December 31, 2008, and the total
amount of all loans for such periods (in thousands):




Type of Loan
                      
                      September 30, 2009
                      
                      
                      December 31, 2008Commercial
      real estate
                      
                      $
                      98,324
                      
                      
                      $
                      95,871Residential
      real estate
                      
                      
                      36,998
                      
                      
                      
                      34,663Construction
      loans
                      
                      
                      1,554
                      
                      
                      
                      4,379Commercial
      loans
                      
                      
                      25,030
                      
                      
                      
                      30,036Consumer
      loans
                      
                      
                      2,349
                      
                      
                      
                      2,581Subtotal
                      
                      
                      164,255
                      
                      
                      
                      167,530Allowance
      for loan losses
                      
                      
                      (4,627
                      )
                      
                      
                      (1,503
                      )Total
      (net of allowance)
                      
                      $
                      159,628
                      
                      
                      $
                      166,027





Asset
Quality


The Bank
has developed policies and procedures for evaluating the overall quality of our
credit portfolio and the timely identification of potential problem
loans.  The Bank's judgment as to the adequacy of the allowance is
based upon a number of assumptions about future events that it believes to be
reasonable, but which may or may not be valid.  Thus, there can be no
assurance that charge-offs in future periods will not exceed the allowance for
loan losses or that additional increases in the loan loss allowance will not be
required.





Asset
Classification.


Commercial
banks are required to review and, when appropriate, classify their assets on a
regular basis.  The Federal Reserve and the OFR have the authority to
identify problem assets and, if appropriate, require them to be
classified.  There are three classifications for problem assets:
substandard, doubtful, and loss. Substandard assets have one or more defined
weaknesses and are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not
corrected.  Doubtful assets have the weaknesses of substandard assets
with the additional characteristic that the weaknesses make collection or
liquidation in full on the basis of currently existing facts, conditions, and
values questionable, and there is a high possibility of loss.  An
asset classified as loss is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted.  If
an asset or portion thereof is classified as loss, the insured institution must
establish a specific reserve for the full amount of the portion of the asset
classified as loss.  All or a portion of general loss allowances
established to cover possible losses related to assets classified as substandard
or doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses generally do not qualify as
regulatory capital.  Assets that do not warrant classification in the
aforementioned categories, but possess weaknesses, must be classified as special
mention and monitored.




The
following table presents information regarding non-accrual, past due and
restructured loans as of September 30, 2009 and December 31, 2008 (dollars in
thousands):




Sept. 30, 2009
                      
                      
                      December 31, 2008Loans
      accounted for on a non-accrual basis:Number:
                      
                      Thirty-one
                      
                      
                      Twenty-fourAmount:
                      
                      $
                      13,513
                      
                      
                      $
                      7,289Accruing
      loans which are contractually past due 90 days or more as to principal and
      interest payments:Number:
                      
                      Thirteen
                      
                      
                      TwoAmount:
                      
                      $
                      1,412
                      
                      
                      $
                      84Loans
      which were renegotiated to provide a reduction or deferral of interest or
      principal because of deterioration in the financial position of the
      borrower:Number:
                      
                      
                      
                      
                      
                      OneAmount
                      
                      None
                      
                      
                      $
                      479Loans
      for which there are serious doubts as to the borrower's ability to comply
      with existing terms:Number:
                      
                      Thirty-Five
                      
                      
                      TenAmount:
                      
                      $
                      26,856
                      
                      
                      $
                      5,308


21


At
September 30, 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.





Allowance for Loan
Losses.





The ALLL
is established through a provision for loan losses charged against
income.  Loans are charged against the allowance when the Bank
believes that the collectibility of principal is unlikely.  The
provision is an estimated amount that the Bank believes will be adequate to
absorb probable losses inherent in the loan portfolio based on evaluations of
its collectibility.  The evaluations take into consideration such
factors as changes in the nature and volume of the portfolio, overall portfolio
quality, specific problem loans and commitments, and current anticipated
economic conditions that may affect the borrower's ability to
pay.  While the Bank uses the best information available to recognize
losses on loans, future additions to the provision may be necessary based on
changes in economic conditions.





A summary
of balances in the ALLL, nonperforming assets and key ratios follows (dollars in
thousands):





September 30,
                  
                  
                  December, 312009
                  
                  
                  2008
                  
                  
                  
                  2008End
      of period loans (net of deferred fees)
                  
                  $
                  164,255
                  
                  
                  $
                  164,488
                  
                  
                  $
                  167,530End
      of period allowance for loan losses
                  
                  $
                  4,627
                  
                  
                  $
                  1,517
                  
                  
                  $
                  1,503Percentage
      of allowance for loan losses to total loans
                  
                  
                  2.82
                  %
                  
                  
                  0.92
                  %
                  
                  
                  .90
                  %Average
      loans for the period
                  
                  $
                  170,523
                  
                  
                  $
                  161,395
                  
                  
                  $
                  162,671Net
      charge-offs as a percentage of average loansfor
      the period
                  
                  
                  3.32
                  %
                  
                  
                  .15
                  %
                  
                  
                  .21
                  %Nonperforming
      assetsNonaccrual
      loans
                  
                  $
                  13,516
                  
                  
                  $
                  4,405
                  
                  
                  $
                  7,289Loans
      past due 90 days or more and still accruing**
                  
                  $
                  1,412
                  
                  
                  $
                  2,195
                  
                  
                  $
                  84Other
      real estate
                  
                  $
                  2,415
                  
                  
                  $
                  2,590
                  
                  
                  $
                  2,815$
                  17,343
                  
                  
                  $
                  9,190
                  
                  
                  $
                  10,188Nonperforming
      assets to period end loans
                  
                  
                  10.56
                  %
                  
                  
                  5.59
                  %
                  
                  
                  6.08
                  %Nonperforming
      assets to period end total assets
                  
                  
                  8.34
                  %
                  
                  
                  4.35
                  %
                  
                  
                  4.87
                  %


22


Liquidity
and Capital Resources





Liquidity
is the Company's ability to meet all deposit withdrawals immediately, while also
providing for the credit needs of customers. The September 30, 2009
financial statements evidence a marginally satisfactory liquidity position, as
total cash and cash equivalents amounted to $8.3 million, representing 4% of
total assets. Investment securities, which amounted to $30 million or 14.4% of
total assets, provide a secondary source of liquidity because they can be
converted into cash in a timely manner. The Bank is a member of the Federal
Reserve System and maintains relationships with several correspondent banks and,
thus, could obtain funds from those banks on short notice. The Company's
management closely monitors and maintains appropriate levels of interest earning
assets and interest bearing liabilities, so that maturities of assets can
provide adequate funds to meet customer withdrawals and loan demand.





Including
the adjustments mandated in the Last Examination (except for the Disputed
Addition to the ALLL), the Bank’s capital ratios as of September 30, 2009,
compared to the minimum regulatory requirements were as follows:





Bank's
                  
                  
                  Minimum RegulatorySeptember30,2009
                  
                  
                  RequirementLeverage
      Ratio
                  
                  
                  4.1
                  %
                  
                  
                  4.0
                  %Total
      Risk Weighted ratio
                  
                  
                  6.9
                  %
                  
                  
                  8.0
                  %Tier
      1 Risk Weighted ratio
                  
                  
                  5.6
                  %
                  
                  
                  4.0
                  %





In light
of the fact that for banks not rated a CAMELS 1, the regulators expect the
minimum leverage rate to be between 5.0% to 6.0%, and given that the Bank's
total weighted risk weighted ratio of 6.9% is below the required minimum,
the Bank is considered to be undercapitalized.





As
discussed above, the Company is currently conducting an offering of shares of
the Series A Preferred Stock and is engaged in discussions with the Federal
Reserve and the OFR regarding the previously submitted capital restoration
plan.  There is no assurance that the offering will be successful and,
even if it is, that the Company’s capital restoration plan will be accepted by
the Federal Reserve.  If the capital restoration plan is accepted and
the Company is successful in implementing such plan, if and to the extent the
shares of the Series A Preferred Stock are converted into shares of common
stock, the offering may have a dilutive effect on the existing
shareholders.  If the capital restoration plan is not accepted by the
Federal Reserve, or if the Company is not successful in implementing an
acceptable plan, the Federal Reserve will have the statutory authority to impose
on the Bank other corrective action, including forcing a sale of the Bank or
dismissing senior executive officers.





Other
than as stated above, the Company knows of no trends, demands, commitments,
events or uncertainties that will result in or are reasonably likely to result
in its liquidity increasing or decreasing in any material way.





In the
normal course of business, the Bank has various commitments outstanding to
extend credit in the form of unused loan commitments and standby letters of
credit that are not reflected in the Company’s consolidated financial
statements.  Since these commitments may expire without being
exercised, they do not necessarily represent future funding
requirements.  The Bank uses the same credit and collateral policies
in making commitments as those it uses in making loans.





As of
September 30, 2009, the Bank had outstanding loan commitments of
approximately $4.5 million and outstanding letters of credit of approximately
$133 thousand.  Various assets collateralize the majority of these
commitments.  The Bank does not anticipate that it will suffer any
material losses as a result of these transactions.


23




Item
3:  Quantitative and Qualitative Disclosure About Market
Risk





Not
applicable.





Item 4T.  Controls
and Procedures





Evaluation of
Disclosure Controls and Procedures.





The
Company maintains controls and procedures designed to ensure that information
required to be disclosed in the reports that the Company files or submits under
the Securities and Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission.  Based upon management’s
evaluation of those controls and procedures performed within the 90 days
preceding the filing of this Report, the Chief Executive Officer and Chief
Financial Officer of the Company concluded that, subject to the limitations
noted below, the Company’s disclosure controls and procedures (as defined in
Rule 13a-14 under the Securities Exchange Act of 1934) are effective to ensure
that the information required to be disclosed by the Company in the reports that
it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms.




Changes in Internal Controls
Over Financial Reporting.




There
have been no changes in the Company’s internal control over financial reporting
during the first nine months of 2009 that have materially affected or are
reasonably likely to materially affect the Company’s internal control over
financial reporting.





Limitations on the
Effectiveness of Controls




Our
management (including our Chief Executive Officer and Chief Financial Officer)
does not expect that our financial reporting, disclosure controls and other
internal controls will prevent all errors and all fraud.  A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are
met.  Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs.  Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected.  These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or
mistake.  Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override or the control.




The
design of the system of controls is also based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions; over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate.  Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be
detected.


24


PART
II. OTHER INFORMATION





Item
1.   Legal Proceedings





There
have been no material changes to the pending legal proceedings to which the
Company or the Bank is a party since the filing of the Registrant’s Form 10-K
for the year ended December 31, 2008.





Item 1A.  Risk
Factors





Not
applicable.





Item
2.  Unregistered Sales of Equity Securities and Use of
Proceeds




Not
Applicable.




Item
3.   Defaults Upon Senior Securities





Not
Applicable.


Item
4.   Submission of Matters to a Vote of Security
Holders





None





Item
5.   Other Information





None





Item
6.   Exhibits





3.1
              Third
      Amended and Restated Articles of Incorporation31.1
              Certification
      of Chief Executive Officer31.2
              Certification
      of Chief Financial Officer32.1
              Certification
      Pursuant to 18 U.S.C. Section 1350 as AdoptedPursuant
      to Section 906 of the Sarbanes-Oxley Act of 200232.2
              Certification
      of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002


25


SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





/s/ Charles S. ConoleyCharles
      S. ConoleyPresident
      and Chief Executive Officer(Principal
      Executive Officer)/s/ Kathleen M. JepsonKathleen
      M. JepsonSenior
      Vice President and Chief Financial Officer(Principal
      Financial and Accounting
Officer)


Date:
November 16, 2009


26