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 June 30, 2010





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





For the
transition period from ______ to ______





Commission
file number 333-71773





Horizon Bancorporation,
Inc.


(Exact
Name of Registrant as Specified in Its Charter)





Florida
              65-0840545(State
      or Other Jurisdiction of
              (IRS
      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 o
              Accelerated
      Filer oNon-Accelerated
      Filer o
              Smaller
      reporting company o(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 August 6, 2010: Issued 1,809,912 Shares;
Outstanding: 1,770,139 Shares





Index




Part
      I. Financial InformationItem
      1.  Financial Statements (unaudited)
                  
                  3Consolidated
      Balance Sheets as of June 30, 2010 and December 31, 2009
                  
                  3Consolidated
      Statements of Income for the Three Months and the Six Months Ended June
      30, 2010 and 2009
                  
                  4Consolidated
      Statements of Cash Flows for the Six Months Ended June 30, 2010 and
      2009
                  
                  5Consolidated
      Statements of Changes in Shareholders' Equity for the Six Months Ended
      June 30, 2010 and 2009
                  
                  6Notes
      to Consolidated Financial Statements
                  
                  7Item
      2.  Management's Discussion and Analysis of Financial Conditions
      and Results of Operations
                  
                  16Item
      3.  Quantitative and Qualitative Disclosure About Market
      Risk
                  
                  25Item
      4T.  Controls and Procedures
                  
                  26Part
      II. Other InformationItem
      1.  Legal Proceedings
                  
                  27Item
      1A. Risk Factors
                  
                  27Item
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds
                  
                  27Item
      3.  Defaults Upon Senior Securities
                  
                  27Item
      4.  Submission of Matters to a Vote of Security
      Holders
                  
                  27Item
      5.  Other Information
                  
                  27Item
      6.  Exhibits
                  
                  27


2


PART
I - FINANCIAL INFORMATION





Item 1.  Financial
Statements.





HORIZON
BANCORPORATION, INC.


Consolidated
Balance Sheets





June 30,
                
                
                December 31,2010
                
                
                2009(Unaudited)ASSETSCash
      and cash equivalentsCash
      and due from banks
                
                $
                8,647,623
                
                
                $
                9,719,612Federal
      funds sold
                
                
                -0-
                
                
                
                -0-Total
      cash and cash equivalents
                
                
                8,647,623
                
                
                
                9,719,612Securities:Held
      to maturity, at amortized cost
                
                
                10,908,440
                
                
                
                11,462,744Available-for-sale
      at fair value
                
                
                11,346,023
                
                
                
                13,080,811Loans
      held for sale
                
                
                1,416,328
                
                
                
                1,262,199Loans
      receivable, net
                
                
                135,813,977
                
                
                
                151,127,759Property
      and equipment, net
                
                
                3,659,435
                
                
                
                3,698,502Other
      real estate owned
                
                
                8,649,758
                
                
                
                2,579,138Other
      assets
                
                
                7,383,569
                
                
                
                6,568,241$
                187,825,153
                
                
                $
                199,499,006LiabilitiesDepositsNoninterest-bearing
                
                $
                8,877,300
                
                
                $
                9,686,614Interest-bearing
                
                
                155,698,693
                
                
                
                164,889,658Total
      deposits
                
                
                164,575,993
                
                
                
                174,576,272Federal
      Home Loan Bank borrowings
                
                
                18,000,000
                
                
                
                18,000,000Notes
      Payable
                
                
                965,204
                
                
                
                1,065,205Other
      liabilities
                
                
                193,362
                
                
                
                190,368Total
      liabilities
                
                
                183,734,559
                
                
                
                193,831,845Shareholders'
      equityPreferred
      stock,  $.01 par value 1,000,000 shares authorized;
      none    outstanding
                
                
                -
                
                
                
                -Treasury
      stock  outstanding 39,733 shares at June 30, 2010 and December
      31, 2009
                
                
                (479,393
                )
                
                
                (479,393
                )Common
      stock, $.01 par value 25,000,000 shares authorized; 1,809,912 Issued and
      1,770,139 outstanding at June 30, 2010 and at December 31,
      2009
                
                
                18,099
                
                
                
                18,099Additional
      paid in capital
                
                
                10,453,576
                
                
                
                10,428,214Retained
      earnings/(losses)
                
                
                (5,760,121
                )
                
                
                (4,006,176
                )Accumulated
      other comprehensive income (loss), net of tax
                
                
                (141,567
                )
                
                
                (293,583
                )Total
      shareholders' equity
                
                
                4,090,594
                
                
                
                5,667,161$
                187,825,153
                
                
                $
                199,499,006





See
accompanying notes to the financial statements


3


HORIZON
BANCORPORATION, INC.


Consolidated
Statements of Income (Unaudited)





Three Months Ended June 30,
                  
                  
                  Six Months Ended June 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Interest
      incomeInterest
      and fees on loans
                  
                  $
                  2,025,383
                  
                  
                  $
                  2,657,392
                  
                  
                  $
                  4,310,683
                  
                  
                  $
                  5,368,395Interest
      on investment securities
                  
                  
                  211,512
                  
                  
                  
                  395,633
                  
                  
                  
                  488,862
                  
                  
                  
                  812,375Interest
      on federal funds
                  
                  
                  2,448
                  
                  
                  
                  923
                  
                  
                  
                  5,715
                  
                  
                  
                  1,705Total
      interest income
                  
                  
                  2,239,343
                  
                  
                  
                  3,053,948
                  
                  
                  
                  4,805,260
                  
                  
                  
                  6,182,475Interest
      expenseInterest
      on deposits
                  
                  
                  763,173
                  
                  
                  
                  1,226,605
                  
                  
                  
                  1,615,300
                  
                  
                  
                  2,555,691Interest
      on borrowings
                  
                  
                  208,570
                  
                  
                  
                  279,255
                  
                  
                  
                  418,963
                  
                  
                  
                  556,814Total
      interest expense
                  
                  
                  971,743
                  
                  
                  
                  1,505,860
                  
                  
                  
                  2,034,263
                  
                  
                  
                  3,112,505Net
      interest income
                  
                  
                  1,267,600
                  
                  
                  
                  1,548,088
                  
                  
                  
                  2,770,997
                  
                  
                  
                  3,069,970Provision
      for loan losses
                  
                  
                  -0-
                  
                  
                  
                  8,571,842
                  
                  
                  
                  2,697,973
                  
                  
                  
                  8,791,842Net
      interest income after provision for loan losses
                  
                  
                  1,267,600
                  
                  
                  
                  (7,023,754
                  )
                  
                  
                  73,024
                  
                  
                  
                  (5,721,872
                  )Other
      incomeGain
      on sales of loans
                  
                  
                  212,348
                  
                  
                  
                  123,777
                  
                  
                  
                  412,348
                  
                  
                  
                  123,777Impairment
      loss, other real estate owned
                  
                  
                  -0-
                  
                  
                  
                  (363.557
                  )
                  
                  
                  (240,545
                  )
                  
                  
                  (365,188
                  )Impairment
      loss, securities
                  
                  
                  -0-
                  
                  
                  
                  (1,014,848
                  )
                  
                  
                  (61,081
                  )
                  
                  
                  (1,014,848
                  )Gain
      on sale of servicing assets
                  
                  
                  -0-
                  
                  
                  
                  200,392
                  
                  
                  
                  -0-
                  
                  
                  
                  200,392Gain
      on sale of other assets & other real estate owned
                  
                  
                  75,445
                  
                  
                  
                  1,999
                  
                  
                  
                  69,714
                  
                  
                  
                  9,499Gain
      on sale of  securities
                  
                  
                  1
                  
                  
                  
                  -0-
                  
                  
                  
                  996
                  
                  
                  
                  -0-Service
      charges on deposit accounts
                  
                  
                  17,902
                  
                  
                  
                  19,294
                  
                  
                  
                  38,717
                  
                  
                  
                  38,190Loan
      servicing income
                  
                  
                  64,089
                  
                  
                  
                  -0-
                  
                  
                  
                  112,659
                  
                  
                  
                  -0-Miscellaneous
      , other
                  
                  
                  79,680
                  
                  
                  
                  129,067
                  
                  
                  
                  132,495
                  
                  
                  
                  164,301Total
      other income
                  
                  
                  449,465
                  
                  
                  
                  (903,876
                  )
                  
                  
                  465,303
                  
                  
                  
                  (843,877
                  )Other
      expensesSalaries
      and benefits
                  
                  
                  607,250
                  
                  
                  
                  575,276
                  
                  
                  
                  1,244,754
                  
                  
                  
                  1,204,674Building
      and equipment expense
                  
                  
                  246,515
                  
                  
                  
                  253,084
                  
                  
                  
                  484,099
                  
                  
                  
                  451,675Professional
      fees
                  
                  
                  271,589
                  
                  
                  
                  78,381
                  
                  
                  
                  414,120
                  
                  
                  
                  128,360FDIC
      insurance expense
                  
                  
                  199,006
                  
                  
                  
                  133,591
                  
                  
                  
                  387,928
                  
                  
                  
                  167,698Data
      processing and software expense
                  
                  
                  92,056
                  
                  
                  
                  101,309
                  
                  
                  
                  179,566
                  
                  
                  
                  195,946Other
      operating expense
                  
                  
                  235,829
                  
                  
                  
                  188,391
                  
                  
                  
                  511,581
                  
                  
                  
                  378,795Total
      operating expense
                  
                  
                  1,652,245
                  
                  
                  
                  1,330,032
                  
                  
                  
                  3,222,048
                  
                  
                  
                  2,527,148Income/(loss)
      before income taxes
                  
                  
                  64,820
                  
                  
                  
                  (9,257,662
                  )
                  
                  
                  (2,683,721
                  )
                  
                  
                  (9,092,897
                  )Income
      tax expense/(benefit)
                  
                  
                  (52,147
                  )
                  
                  
                  (2,352,836
                  )
                  
                  
                  (929,776
                  )
                  
                  
                  (2,331,326
                  )Net
      Income/(loss)
                  
                  $
                  116,967
                  
                  
                  $
                  (6,904,826
                  )
                  
                  $
                  (1,753,945
                  )
                  
                  $
                  (6,761,571
                  )Basic
      income/(loss)  per share
                  
                  $
                  0.07
                  
                  
                  $
                  (3.90
                  )
                  
                  $
                  (0.99
                  )
                  
                  $
                  (3.82
                  )Diluted
      income/(loss) per share
                  
                  $
                  0.07
                  
                  
                  $
                  (3.86
                  )
                  
                  $
                  (0.99
                  )
                  
                  $
                  (3.77
                  )





See
accompanying notes to the financial statements


4


HORIZON
BANCORPORATION, INC.


Consolidated
Statements of Cash Flows (Unaudited)





For the six months
                  ended June 30, 2010
                
                
                For the six months
                  ended June 30, 2009Cash
      flows from operating activitiesNet
      cash provided by operating activities
                
                $
                (7,463,190
                )
                
                $
                (3,345,254
                )Cash
      flows from investing activitiesProceeds
      from sale of other assets
                
                
                97,769
                
                
                
                162,969Proceeds
      from sale of loans
                
                
                7,748,673
                
                
                
                6,324,169Purchase
      of securities held to maturity
                
                
                -0-
                
                
                
                (1,019,875
                )Purchase
      of securities available for sale
                
                
                -0-
                
                
                
                -0-Proceeds
      from sale of securities
                
                
                551,115
                
                
                
                -0-Proceeds
      from maturities and principal repayments of securities available for
      sale
                
                
                1,864,353
                
                
                
                1,709,521Repayment
      of Federal Home Loan Bank Stock
                
                
                46,000
                
                
                
                125,750(Increase)/decrease
      in Other real estate owned
                
                
                (6,388,620
                )
                
                
                185,896Loan
      originations, net
                
                
                12,615,809
                
                
                
                (3,455,064
                )Property
      and equipment expenditures, net
                
                
                (43,619
                )
                
                
                (348,045
                )Net
      cash provided (used) by investing activities
                
                
                16,491,480
                
                
                
                3,685,321Cash
      flows from financing activitiesExercise
      of warrants and options
                
                
                -0-
                
                
                
                9,312Increase/(decrease)  in
      deposits
                
                
                (10,000,279
                )
                
                
                6,205,746Increase/(decrease)
      in fed funds purchased
                
                
                -0-
                
                
                
                -0-Increase/(decrease)
      in borrowings, net
                
                
                -0-
                
                
                
                (3,000,000
                )Increase/(decrease)  in
      Note Payable by Parent
                
                
                (100,000
                )
                
                
                225,000Net
      cash provided by financing activities
                
                
                (10,100,279
                )
                
                
                3,440,058Net
      change in cash and cash equivalents
                
                
                (1,071,989
                )
                
                
                3,780,125Cash
      and cash equivalents at beginning of period
                
                
                9,719,612
                
                
                
                2,383,783Cash
      and cash equivalents at end of period
                
                $
                8,647,623
                
                
                $
                6,163,908





See
accompanying notes to the financial statements


5


HORIZON
BANCORPORATION, INC.


Consolidated
Statements of Changes in Shareholders' Equity (Unaudited)


for the
six-month periods ended June 30, 2010 and 2009





AccumulatedCommon Stock
                            
                            
                            Treasury
                            
                            
                            Paid in
                            
                            
                            Retained
                            
                            
                            OtherShares
                            
                            
                            Par Value
                            
                            
                            Stock
                            
                            
                            Capital
                            
                            
                            Earnings
                            
                            
                            Income
                            
                            
                            TotalBalance,
      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, six-month period ended June 30, 2009
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            
                            
                            
                            
                            —
                            
                            
                            $
                            (6,761,571
                            )
                            
                            
                            —
                            
                            
                            
                            (6,761,571
                            )Net
      unrealized gains on securities, six-month period ended June 30,
      2009
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            
                            
                            
                            
                            —
                            
                            
                            
                            
                            
                            
                            
                            700,203
                            
                            
                            
                            700,203Total
      comprehensive income/(loss),net of tax
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            
                            
                            
                            
                            (6,061,368
                            )Warrant
      Exercise
                            
                            
                            1,693
                            
                            
                            
                            17
                            
                            
                            
                            
                            
                            
                            
                            9,295
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            9,312Stock
      based Compensation
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            30,000
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            30,000Balance,
      June 30, 2009
                            
                            
                            1,770,139
                            
                            
                            $
                            18,099
                            
                            
                            $
                            (479,393
                            )
                            
                            $
                            10,398,214
                            
                            
                            $
                            (2,644,969
                            )
                            
                            $
                            (519,477
                            )
                            
                            $
                            6,772,474Balance,
      December 31, 2009
                            
                            
                            1,770,139
                            
                            
                            $
                            18,099
                            
                            
                            $
                            (479,393
                            )
                            
                            $
                            10,428,214
                            
                            
                            $
                            (4,006,176
                            )
                            
                            $
                            (293,583
                            )
                            
                            $
                            5,667,161Comprehensive
      Income:Net
      income/(loss), six-month period ended June 30, 2010
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            
                            
                            
                            
                            —
                            
                            
                            
                            (1,753,945
                            )
                            
                            
                            —
                            
                            
                            
                            (1,753,945
                            )Net
      unrealized gains on securities, six-month period ended June 30,
      2010
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            
                            
                            
                            
                            —
                            
                            
                            
                            
                            
                            
                            
                            152,016
                            
                            
                            
                            152,016Total
      comprehensive income/(loss),net of tax
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            
                            
                            
                            
                            (1,601,929
                            )Stock
      based Compensation
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            25,362
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            25,362Balance,
      June 30, 2010
                            
                            
                            1,770,139
                            
                            
                            $
                            18,099
                            
                            
                            $
                            (479,393
                            )
                            
                            $
                            10,453,576
                            
                            
                            $
                            (5,760,121
                            )
                            
                            $
                            (141,567
                            )
                            
                            $
                            4,090,594


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 June 30, 2010, are not necessarily indicative of the results which
may be expected for the entire fiscal year or for any other
period.  For further information, refer to the consolidated financial
statements and footnotes thereto for the year ended December 31, 2009 included
in Horizon Bancorporation, Inc.'s Form 10-K.





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





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





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





NOTE
2 – SUMMARY OF ORGANIZATION





Horizon
Bancorporation, Inc., Bradenton, Florida (the "Company"), is a one-bank holding
company with respect to Horizon Bank, Bradenton, Florida (the "Bank"). The
Company commenced banking operations on October 25, 1999 when the Bank commenced
operations. The Bank is primarily engaged in the business of obtaining deposits
and providing commercial, consumer and real estate loans to the general public.
The Bank's depositors are each insured up to $250,000 by the Federal Deposit
Insurance Corporation (the "FDIC") subject to certain limitations imposed by the
FDIC. This $250,000 limit has been extended 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.





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 June 30, 2010, and December 31, 2009,
there were 1,809,912 shares issued respectively and 1,770,139 shares
outstanding, respectively. Additionally, the Company has authorized the issuance
of up to 1.0 million shares of its $.01 par value per share preferred stock. The
Company's Board of Directors may, without further action by the shareholders,
direct the issuance of preferred stock for any proper corporate purpose with
preferences, voting powers, conversion rights, qualifications, special or
relative rights and privileges which could adversely affect the voting power or
other rights of shareholders of common stock. Effective October 23, 2009, the
Board of Directors did designate, by amending the Company’s Articles of
Incorporation, a series of preferred stock.


7


NOTE
3 – LOANS RECEIVABLE





Loans
receivable consist of the following:





June 30,
                      2010
                    
                    
                    December 31,
                      2009Real
      estate – commercial
                    
                    $
                    90,665,441
                    
                    
                    $
                    97,783,166Real
      estate – construction
                    
                    
                    1,029,883
                    
                    
                    
                    1,369,987Real
      estate – residential
                    
                    
                    36,332,149
                    
                    
                    
                    37,438,678Commercial
                    
                    
                    10,825,024
                    
                    
                    
                    17,217,611Consumer
                    
                    
                    1,959,697
                    
                    
                    
                    2,049,597Loans,
      gross
                    
                    
                    140,812,194
                    
                    
                    
                    155,859,039Deduct
      allowance for loan losses
                    
                    
                    (4,998,217
                    )
                    
                    
                    (4,731,280
                    )Loans,
      net
                    
                    $
                    135,813,977
                    
                    
                    $
                    151,127,759





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




2010
                  
                  
                  2009Balance
      at beginning of period
                  
                  $
                  5,318,554
                  
                  
                  $
                  1,652,301Provision
      for loan losses
                  
                  
                  -0-
                  
                  
                  
                  8,571,842Loans
      charged-off
                  
                  
                  (364,591
                  )
                  
                  
                  (5,116,678
                  )Recoveries
                  
                  
                  44,254
                  
                  
                  
                  -0-Balance
      at end of period
                  
                  $
                  4,998,217
                  
                  
                  $
                  5,107,465





Activity
in the allowance for loan losses for the six months ended June 30, are as
follows





2010
                  
                  
                  2009Balance
      at beginning of period
                  
                  $
                  4,731,280
                  
                  
                  $
                  1,502,823Provision
      for loan losses
                  
                  
                  2,697,973
                  
                  
                  
                  8,791,842Loans
      charged-off
                  
                  
                  (2,502,636
                  )
                  
                  
                  (5,187,200
                  )Recoveries
                  
                  
                  71,600
                  
                  
                  
                  -0-Balance
      at end of period
                  
                  $
                  4,998,217
                  
                  
                  $
                  5,107,465





NOTE
4 – SECURITIES HELD-TO-MATURITY





Information
pertaining to securities with gross unrealized losses at June 30, 2010,
aggregated by investment category and further segregated by length of time (less
than or over twelve months) that the securities have been in a continuous loss
position follows:





Less Than
                    
                    
                    OverTwelve Months
                    
                    
                    Twelve Months
                    
                    
                    TotalFair
                      Value
                    
                    
                    Unrealized
                      Loss
                    
                    
                    Fair
                      Value
                    
                    
                    Unrealized
                      Loss
                    
                    
                    Fair
                      Value
                    
                    
                    Unrealized
                      LossState,
      County and Municipal
                    
                    $
                    -0-
                    
                    
                    $
                    (-0-
                    )
                    
                    $
                    6,304,433
                    
                    
                    $
                    (709,916
                    )
                    
                    $
                    6,304,433
                    
                    
                    $
                    (709,916
                    )Corporate
      Securities
                    
                    
                    -0-
                    
                    
                    
                    (-0-
                    )
                    
                    
                    800,000
                    
                    
                    
                    (130,000
                    )
                    
                    
                    800,000
                    
                    
                    
                    (130,000
                    )Total
                    
                    $
                    -0-
                    
                    
                    $
                    (-0-
                    )
                    
                    $
                    7,104,443
                    
                    
                    $
                    (839,916
                    )
                    
                    $
                    7,104,433
                    
                    
                    $
                    (839,916
                    )


8


At June
30, 2010 unrealized losses on held-to-maturity securities amounted to $839,916
representing 7.7% 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 June 30, 2010,
aggregated by investment category and further segregated by the length of time
(less than or over twelve months) that the securities have been in a continuous
loss position follows:





Less than
                          Twelve Months
                        
                        
                        Greater than
                          Twelve Months
                        
                        
                        TotalFair
                          Value
                        
                        
                        Unrealized
                          Loss
                        
                        
                        Fair
                          Value
                        
                        
                        Unrealized
                          Loss
                        
                        
                        Fair
                          Value
                        
                        
                        Unrealized
                          LossU.S.
      Agency
                        
                        $
                        -0-
                        
                        
                        $
                        (-0-
                        )
                        
                        $
                        -0-
                        
                        
                        $
                        -0-
                        
                        
                        $
                        -0-
                        
                        
                        $
                        (-0-
                        )Mortgage
      backed securities
                        
                        
                        676,793
                        
                        
                        
                        (10,534
                        )
                        
                        
                        49,278
                        
                        
                        
                        (92,842
                        )
                        
                        
                        726,071
                        
                        
                        
                        (103,376
                        )Collateralized
      mortgage securities
                        
                        
                        250,856
                        
                        
                        
                        (3,261
                        )
                        
                        
                        -0-
                        
                        
                        
                        -0-
                        
                        
                        
                        250,856
                        
                        
                        
                        (3,261
                        )Trust
      preferred securities & other corporate notes
                        
                        
                        -0-
                        
                        
                        
                        -0-
                        
                        
                        
                        174,968
                        
                        
                        
                        (277,012
                        )
                        
                        
                        174,968
                        
                        
                        
                        (277,012
                        )Total
                        
                        $
                        927,649
                        
                        
                        $
                        (13,795
                        )
                        
                        $
                        224,246
                        
                        
                        $
                        (369,854
                        )
                        
                        $
                        1,151,895
                        
                        
                        $
                        (383,649
                        )





At June
30, 2010, unrealized losses in the securities portfolio amounted to $383,649
representing 3.3 % of the total available for sale
portfolio.  Management evaluates securities for other-than-temporary
impairment on a quarterly basis, or more frequently when economic or market
concerns warrant such evaluation.  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


NOTE
6 - EARNINGS PER SHARE





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





Three Months Ended June 30, 2010
                      
                      
                      Three Months Ended June 30, 2009Basic
      earnings/(loss) per shareNet
      income/(loss) applicable to common stock
                      
                      $
                      116,967
                      
                      
                      $
                      (6,904,826
                      )Weighted
      average shares outstanding
                      
                      
                      1,770,139
                      
                      
                      
                      1,770,139Basic
      earnings/(loss) per share
                      
                      $
                      .07
                      
                      
                      $
                      (3.90
                      )Diluted
      earnings/(loss) per shareNet
      income/(loss) applicable to common stock
                      
                      $
                      116,967
                      
                      
                      $
                      (6,904,826
                      )Weighted
      average shares outstanding
                      
                      
                      1,770,139
                      
                      
                      
                      1,770,139Dilutive
      effect of assumed exercise of stock options/warrants
                      
                      
                      -0-
                      
                      
                      
                      18,200Diluted
      average shares outstanding
                      
                      
                      1,770,139
                      
                      
                      
                      1,788,339Diluted
      earnings/(loss) per share
                      
                      $
                      .07
                      
                      
                      $
                      (3.86
                      )





Six Months Ended June 30, 2010
                      
                      
                      Six Months Ended June 30, 2009Basic
      earnings/(loss) per shareNet
      income/(loss) applicable to common stock
                      
                      $
                      (1,753,945
                      )
                      
                      $
                      (6,761,571
                      )Weighted
      average shares outstanding
                      
                      
                      1,770,139
                      
                      
                      
                      1,770,092Basic
      earnings/(loss) per share
                      
                      $
                      (0.99
                      )
                      
                      $
                      (3.82
                      )Diluted
      earnings per shareNet
      income/(loss) applicable to common stock
                      
                      $
                      (1,753,945
                      )
                      
                      $
                      (6,761,571
                      )Weighted
      average shares outstanding
                      
                      
                      1,770,139
                      
                      
                      
                      1,770,092Dilutive
      effect of assumed exercise of stock options/warrants
                      
                      
                      -0-
                      
                      
                      
                      24,961Diluted
      average shares outstanding
                      
                      
                      1,770,139
                      
                      
                      
                      1,795,053Diluted
      earnings/(loss) per share
                      
                      $
                      (0.99
                      )
                      
                      $
                      (3.77
                      )




NOTE
7 - FAIR VALUE OF FINANCIAL INSTRUMENTS




Assets
and liabilities are grouped for fair value in three 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


The
following table summarizes fair value measurements as of June 30, 2010: (in
thousands)





Fair Value Measurements UsingQuoted Prices in
                                          Active Markets
                                          for Identical
                                          Assets
                                        
                                        
                                        Significant Other
                                          Observable Input
                                        
                                        
                                        Significant
                                          Unobservable
                                          InputsDescriptions
                                        
                                        6/30/2010
                                        
                                        
                                        (Level 1)
                                        
                                        
                                        (Level 2)
                                        
                                        
                                        (Level 3)Held
      to maturity securities
                                        
                                        $
                                        10,097
                                        
                                        
                                        $
                                        800
                                        
                                        
                                        $
                                        9,297Available-for-sale
      securities
                                        
                                        $
                                        11,346
                                        
                                        
                                        
                                        
                                        
                                        
                                        $
                                        3,801
                                        
                                        
                                        $
                                        7,545Impaired
      Loans
                                        
                                        $
                                        31,695
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        $
                                        31,695Total
                                        
                                        $
                                        53,138
                                        
                                        
                                        $
                                        800
                                        
                                        
                                        $
                                        13,098
                                        
                                        
                                        $
                                        39,240





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




Effective
July 1, 2009, the Company adopted a new accounting guidance related to U.S. GAAP
[FASB Accounting Standards Codification (“ASC”) 105, Generally Accepted Accounting
Principles].  This guidance establishes FASB ASC as the source
of authoritative U.S. GAAP recognized by FASB to be applied by nongovernmental
entities.  Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under authority of federal securities laws are also
sources of authoritative U.S. GAAP for SEC registrants.  FASB ASC
supersedes all existing non-SEC accounting and reporting
standards.  All other non-grandfathered, non-SEC accounting literature
not included in the ASC has become non-authoritative.  FASB will no
longer issue new standards in the form of Statements, FASB Staff Positions, or
Emerging Issues Task Force Abstracts. Instead, it will issue Accounting
Standards Updates (“ASU”), which will serve to update the ASC, provide
background information about the guidance, and provide the basis for conclusions
on the changes to the ASC.  The ASC is not intended to change U.S.
GAAP or any requirements of the SEC.  This guidance is effective for
the Company as of December 31, 2009.




In April
2009, the FASB issued the following three FASB Staff Position (“FSPs”) intended
to provide additional application guidance and enhance disclosures regarding
fair value measurements and impairments of securities.


11


1)  FSP
SFAS No. 157-4,  “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and identifying Transactions That Are Not Orderly,”
codification standard ASC 820-10-65-4 (“ASC 820”), transition related to FSP
SFAS No. 157-4, provides additional guidance for estimating fair value in
accordance with ASC 820 when the volume and level of activity for the asset or
liability have decreased significantly.  This ASC also provides
guidance on identifying circumstances that indicate a transaction is not
orderly.  The provisions of this ASC are effective for the Company’s
interim period ending on June 30, 2009.  The adoption of ASC 820 at
June 30, 2009 did not have a material impact on this Company’s financial
condition or results of operations.





2)  FSP
SFAS No. 107-1 and APB 28-1,  “Interim Disclosures about Fair
Value of Financial Instruments,” codification standard ASC 825-10-65-1,
transition related to FSP SFAS No. 107-1 and APB 28-1, requires disclosures
about fair value of financial instruments in interim reporting periods of
publicly traded companies that were  previously only required to be
disclosed in annual financial statements.  The provisions of this ASC
are effective for the Company’s interim period ending on June 30, 2009, and only
amend the disclosure requirements about fair value of financial instruments in
interim periods.





3)  FSP
SFAS No. 115-2 and SFAS No. 124-2,  “Recognition and Presentation of
Other-Than-Temporary Impairments,”codification standard ASC 320-10-65-1,
transition related to FSP SFAS No 115-2 and SFAS No. 124-2, amends current
other-than-temporary impairment guidance in GAAP for debt securities to make the
guidance more operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements.  This ASC does not amend existing recognition and
measurement guidance related to other-than-temporary impairments of equity
securities.  The provisions of this ASC are effective for the
Company’s interim period ending on June 30, 2009.  Adoption of this
provision had a material impact on the Company’s financial condition or results
of operations.





In May
2009, the FASB issued SFAS no. 165, “Subsequent Events,”
codification standard ASC 855.  ASC 855 establishes general standards
of accounting for and disclosures of events that occur after the balance sheet
date but before financial statements are issued or are available to be
issued.  In particular, this statement sets forth:  (1) the
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements, (2) the circumstances
under which an entity should recognize events or transactions occurring after
the balance sheet date in its financial statements, and (3) the disclosures that
an entity should make about events or transactions that occurred after the
balance sheet date.  The Company adopted this standard effective for
the quarterly period ended June 30, 2009, and its adoption had no material
impact on the Company’s financial condition or results of
operations.





In August
2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, “Fair Value Measurements and
Disclosures,”codification standard ASC 820.  This ASU provides
amendments for fair value measurements of liabilities.  It provides
clarification that in circumstances in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required to
measure fair value using one or more techniques.  ASU 2009-05 also
clarifies that when estimating a fair value of a liability, a reporting entity
is not required to include a separate input or adjustment to other inputs
relating to the existence of a restriction that prevents the transfer of the
liability.  ASU 2009-05 is effective for the first reporting period
(including interim periods) beginning after issuance of fourth quarter 2009
financial statement information.  The Company is assessing the impact
of ASU 2009-05 on its financial condition, results of operations, and
disclosures.





Other
accounting standards that have been issued or proposed by the FASB or other
standard-setting bodies are not expected to have a material impact on the
Company’s financial statements.


12


NOTE
9 – REGULATORY MATTERS, COMPANY LOAN, EQUITY OFFERING AND GOING CONCERN
CONSIDERATION





Regulatory
Matters





(a)  Written
Agreement





On
November 10, 2009, the Federal Reserve Bank of Atlanta (the “Atlanta Fed”), the
State of Florida Office of Financial Regulation (the “OFR”) and the Bank have
entered into a Written Agreement (“the Agreement”).  The Agreement
requires the Bank to:





·
            Submit
      a written plan to strengthen Board oversight of the management and
      operations of the Bank.


·
            Submit
      a written plan to strengthen the Bank’s management of commercial real
      estate concentrations, including steps to reduce the risk of
      concentrations.


·
            Submit
      a written plan to strengthen credit risk management
    practices.


·
            Submit
      a written plan to strengthen lending and credit administration policies,
      procedures, and practices.


·
            Retain
      an independent consultant acceptable to the regulators to assess the level
      of risk or exposure in the portion of the Bank’s loan portfolio not
      reviewed at the most recent regulatory
  examination.


·
            Submit
      a written plan to provide for the ongoing review and grading of the Bank’s
      loan portfolio by a qualified independent
party.


·
            The
      Bank shall not, directly or indirectly, extend or renew any credit to or
      for the benefit of any borrower, including related interest of the
      borrower, who is obligated to the Bank on any extension of credit that
      have been charged off by the Bank, or classified “loss” in the most recent
      report of examination or in any subsequent report of examination so long
      as such credit remains uncollected.


·
            The
      Bank shall not, directly or indirectly, extend or renew any credit to or
      for the benefit of any borrower, including related interest of the
      borrower, whose extension of credit has been classified as “doubtful” or
      “substandard” in the most recent report of examination or in any
      subsequent report of examination without the prior approval of the Bank’s
      Board of Directors.


·
            Submit
      a written plan for each problem loan and for other real estate exceeding
      $250,000 that is designed to improve the Bank’s position with respect to
      the above assets.


·
            Provide
      a written report after each calendar quarter updating each asset
      improvement plan; in addition, provide the problem loan list, a listing of
      past due/non-accrual loans, and a list of all loan renewals and extensions
      for which the Bank did not collect the full
  interest.


·
            Eliminate
      from the Bank’s balance sheet all assets or portions of assets classified
      “loss” in the most recent report of examination as well as in future
      reports of examination.


·
            Review
      and revise the methodology used to construct the allowance for loan and
      lease losses (“the ALLL”).  Upon completion, submit the ALLL
      methodology to the regulators for their
review.


·
            Submit
      a written plan for the maintenance of an adequate ALLL, with periodic
      updates incorporating all changes.


·
            Submit
      a written plan for maintaining sufficient capital at the Bank, including
      an analysis of current and future capital needs as well as compliance with
      capital adequacy guidelines and ratios, where measuring capital adequacy,
      consideration of the volume and severity of classified credits, portfolio
      concentration, adequacy of the ALLL, projected growth in assets and
      earnings, among others, should be taken into
  account.


·
            Notify
      the regulators, in writing, shortly after the end of each calendar quarter
      if any of the Bank’s capital ratios (total risk-based, Tier 1, or
      leverage) had fallen below the approved capital plan’s minimum ratios and,
      contemporaneously, provide a plan that details steps to be taken by the
      Bank to increase the affected capital ratios to or above the approved
      capital plan’s minimums.


·
            Provide
      a written plan to strengthen the oversight of the Bank’s audit program by
      the Audit Committee.


·
            Submit
      a written plan to improve management of the Bank’s liquidity position and
      funds management practices.


·
            Submit
      written policies and procedures to strengthen the management of the Bank’s
      investment portfolio.


·
            Submit
      a business plan for calendar year 2010 to improve the Bank’s earnings and
      overall condition, such plan to include a realistic and comprehensive
      operational budget and balance sheet
  projections.


13


·
            Not
      declare or pay dividends without the prior approval of the
      regulators.


·
            Ascertain
      full compliance with respect to appointments of new directors, and new
      executive officers, including the assumption of new responsibilities by an
      existing executive officer and compliance with restrictions on
      indemnification and severance
payments.


·
            Form
      a new Board Committee, the Compliance Committee, to monitor and coordinate
      the Bank’s compliance with the provisions of the Agreement.  The
      Compliance Committee shall include a majority of outside directors who are
      not executive officers or principal shareholders.  Shortly after
      the end of each calendar quarter, the Bank shall submit a written progress
      report detailing the form and manner of all actions taken to secure
      compliance with the Agreement.





All
written plans, programs, policies and procedures that are submitted by the Bank
pursuant to the Agreement must be acceptable to the regulators, and submitted
within the prescribed time period.  Once approved by the regulators,
the Bank must adopt the approved plans, programs, policies and procedures within
ten days and implement them promptly.  As of the date of this report,
management believes that the Bank is in compliance with all but one of the items
in the Agreement, i.e. increasing the capital accounts, primarily through a
capital injection from the Company, to an acceptable level.





(b)  Prompt
Corrective Action Directive





On May
27, 2010, the Board of Governors of the Federal Reserve System (the “Board of
Governors”) issued to the Bank a Prompt Corrective Action Directive Issued
Pursuant to Section 38 of the Federal Deposit Insurance (“FDI”) Act, as Amended
(the “PCA Directive”).  The PCA Directive was issued in response to
and in replacement of the Bank’s appeal of a similar directive from the Federal
Reserve dated March 4, 2010.  The PCA Directive states that the Bank
has been significantly undercapitalized and directs the Bank and the Company
to:





·
            Not
      later than 7 days from May 27, 2010, increase the Bank’s equity through
      the sale of shares or contribution to surplus sufficient to make the Bank
      adequately capitalized, enter into and close a contract to be acquired or
      combine with another depository institution, or take other necessary
      measures to make the Bank adequately
  capitalized.





·
            Comply
      fully with the provisions of Section 38 of the FDI Act restricting the
      Bank from making any capital
distributions.





·
            Refrain,
      without prior written approval of the Atlanta Fed, from soliciting,
      accepting or renewing time deposits bearing an interest rate exceeding the
      prevailing interest rates in the Bank’s market area, and, within 7 days,
      submit an acceptable plan and timetable to the Atlanta Fed for conforming
      such interest rates to the prevailing interest
  rates.





·
            Comply
      with the provisions of Section 38 of the FDI Act requiring that all
      transactions between the Bank and any affiliate comply with Section 23A of
      the Federal Reserve Act.





·
            Comply
      with the provisions of Section 38 of the FDI Act restricting the payment
      of bonuses to senior executive officers and increases in compensation of
      such officers, and





·
            Comply
      with the provisions of Section 38 of the FDI Act restricting asset growth,
      acquisitions, branching and new lines of
  business.





As of the
date of this report, the Bank has complied with all but the first of the
directives quoted above.





(c)  Notice
from the Atlanta Fed





On June
16, 2010, the Atlanta Fed delivered to the Bank and the Company a letter (the
“Notice”) notifying the Bank that, based on the Bank’s Call Report for the
quarter ended March 31, 2010, the Bank’s tangible equity ratio being less than
2.0%, the Bank is considered critically undercapitalized.  The Notice
states that unless the Bank is no longer critically undercapitalized, the Board
of Governors may, pursuant to Section 38 of the FDI Act, within 90 days of the
date of the letter, i.e. on or about September 16, 2010., take such action that
the Board of Governors determines, with the concurrence of the FDIC, would
achieve the purposes of the FDI Act, which could include the appointment of a
receiver for the Bank.


14


Any
material failure to comply with the provisions of the Agreement, the PCA
Directive or the Notice is very likely to result in further enforcement actions
by the regulators.





Company
Loan





The
Company has been unable to pay back a $1.1 million loan secured by all of the
outstanding shares of Bank’s common stock (the “Company Loan”).  This
loan matured on December 31, 2009, but was eventually extended through a
forbearance agreement until August 15, 2010, with the provision that if the Bank
were to receive a directive, on or before June 15, 2010, from the Atlanta Fed or
the OFR requiring the Bank to raise additional capital, the forbearance period
would be automatically extended for the period of time the Bank is given to
raise the required capital.  In the event the Company Loan is not
repaid, the lender could sell the common stock of the Bank at a public
sale.  The purchaser in such sale would, subject to approval by the
banking regulators, become the sole shareholder of the Bank.





Equity
Offering





On July
15, 2010, the Company commenced an offering of its common stock (the
“Offering”), where it is offering to sell to accredited investors in a private
placement a minimum of 5,567,000 shares and a maximum of 13,334,000 shares, at
$1.50 per share, for gross proceeds of a minimum of $8,500,500, and a maximum of
$20,001,000.  The term of the Offering ends on September 15, 2010, but
may be extended until November 15, 2010.  The Offering replaced the
offering by the Company of shares of 7% Series A Cumulative Convertible
Preferred Stock, which was terminated on June 30, 2010.  In connection
with the Offering, the Company engaged Cappello Capital Corp., a Santa Monica,
California-based investment banking firm, to provide financial advisory
services.





Going
Concern





As
discussed above, the Company faces a number of challenges that may be difficult
to overcome in a timely manner.  These challenges include, but are not
limited to, the achievement of full compliance with the requirements of the
Written Agreement, the PCA Directive and the Notice, as well as the repayment or
further extension of the Company Loan.  To satisfy these requirements,
including the projected costs associated with a capital raise,, a minimum of
approximately $8.5 million in additional capital will be necessary.





The
Company’s ability to raise the necessary capital by means of the Offering or
otherwise will depend on conditions in the capital markets at this time, which
are outside the Company’s control.  Accordingly, the Company cannot be
certain of its ability to raise such additional capital on terms acceptable to
the Company.  Inability to raise such capital and
thus  comply with the terms of the Written Agreement, the PCA
Directive and the Notice and to repay the Company Loan raise substantial doubt
about the Company’s ability to continue as a going concern.





The
accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the discharge of
liabilities in the normal course of business for the foreseeable future, and do
not include any adjustments to reflect the possible future effects on the
recoverability or classification of assets, and the amounts of classification of
liabilities that may result from the outcome of any regulatory action including
being placed into receivership or conservatorship.


15


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;


16




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




·
            unexpected outcomes of existing
      or new litigation;




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




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




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




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




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





Overview





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




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




Recent
Developments




As
previously reported, during the last three quarters of 2009 and the first
quarter of 2010, 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.  These actions negatively affected the
Bank’s three key capital ratios and the Bank became classified as “significantly
undercapitalized,” as of December 31, 2009 and “critically undercapitalized,” as
of March 31, 2010, respectively.  These classifications triggered the
issuance of the PCA Directive and Notice described in Note 9 to the financial
statements set forth in Part I of this report.




As
reported in detail immediately below, in the second quarter of 2010 the Company
reversed the recent negative trend and recorded no write downs in value of
investment securities or additions to the ALLL, resulting in net income of
$117,000 and slight improvements in the three key capital ratios for the
Bank.  Management anticipates these positive trends to continue for
the rest of 2010.  Nevertheless, whether the Bank’s capital ratios
allow it to be classified at least as ‘adequately capitalized,’ and thus whether
it ultimately survives as an independent entity, will depend entirely on whether
subscriptions to the Offering equal to the $8.5 million minimum are received by
us during the term of the Offering, i.e. as it may be extended until November
15, 2010.  There is no complete assurance that the Offering will
succeed to a degree and within the time frame which would boost the Bank’s
capital ratios sufficiently to ensure its survival.


17




Results
of Operations





Overall Net
Income





The
Company reported net income of $117,000 for the quarter ended June 30, 2010,
compared to a net loss of $6,905,000 for the quarter ended June 30,
2009.  Basic and diluted earnings per share were $0.07 for the three
months ended June 30, 2010. By comparison, basic and diluted losses per share
for the three months ended June 30, 2009 were $3.90 and $3.86,
respectively.





For the
six months ended June 30, 2010, the Company reported a net loss of $1,754,000,
compared to a net loss of $6,762,000 for the same period in
2009.  Basic and diluted losses per share were identical at $0.99 for
the six months ended June 30, 2010, compared to losses of $3.82 and $3.77,
respectively, for the six months ended June 30, 2009.





Net Interest
Income.





Net
interest income was $1.27 million and $1.55 million for the three months ended
June 30, 2010 and 2009, respectively.  Decreasing rates and volumes
led to this decrease of $281,000 between these two periods.  For the
six months ended June 30, 2010 and 2009 net interest income rounded was $2.77
million and $3.07 million, respectively.  Slightly increasing rates
offset by decreased volumes led to this decrease of $298,000 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 June 30, 2010
                                    Compared with
                                    Three months ended June 30, 2009
                                  
                                  
                                  Six months ended June 30, 2010
                                    Compared with
                                    Sixmonths ended June 30, 2009(in thousands)
                                  
                                  
                                  (in thousands)Increase (decrease) due to:
                                  
                                  
                                  Increase (decrease) due to:Volume
                                  
                                  
                                  Rate
                                  
                                  
                                  Total
                                  
                                  
                                  Volume
                                  
                                  
                                  Rate
                                  
                                  
                                  TotalInterest
      earned on:Taxable/Nontaxable
      securities
                                  
                                  
                                  (93
                                  )
                                  
                                  
                                  (91
                                  )
                                  
                                  
                                  (184
                                  )
                                  
                                  
                                  (184
                                  )
                                  
                                  
                                  (139
                                  )
                                  
                                  
                                  (323
                                  )Federal
      funds sold
                                  
                                  
                                  1
                                  
                                  
                                  
                                  (0
                                  )
                                  
                                  
                                  1
                                  
                                  
                                  
                                  3
                                  
                                  
                                  
                                  (0
                                  )
                                  
                                  
                                  3Net
      loans
                                  
                                  
                                  (288
                                  )
                                  
                                  
                                  (344
                                  )
                                  
                                  
                                  (632
                                  )
                                  
                                  
                                  (543
                                  )
                                  
                                  
                                  (514
                                  )
                                  
                                  
                                  (1,057
                                  )Total
      Interest Income
                                  
                                  
                                  (380
                                  )
                                  
                                  
                                  (435
                                  )
                                  
                                  
                                  (815
                                  )
                                  
                                  
                                  (724
                                  )
                                  
                                  
                                  (653
                                  )
                                  
                                  
                                  (1,377
                                  )Interest
      paid on:NOW
      and money market deposits
                                  
                                  
                                  (5
                                  )
                                  
                                  
                                  (26
                                  )
                                  
                                  
                                  (31
                                  )
                                  
                                  
                                  (3
                                  )
                                  
                                  
                                  (38
                                  )
                                  
                                  
                                  (41
                                  )Savings
      deposits
                                  
                                  
                                  (5
                                  )
                                  
                                  
                                  (36
                                  )
                                  
                                  
                                  (41
                                  )
                                  
                                  
                                  5
                                  
                                  
                                  
                                  (42
                                  )
                                  
                                  
                                  (37
                                  )Time
      deposits
                                  
                                  
                                  (67
                                  )
                                  
                                  
                                  (325
                                  )
                                  
                                  
                                  (392
                                  )
                                  
                                  
                                  (137
                                  )
                                  
                                  
                                  (726
                                  )
                                  
                                  
                                  (863
                                  )Other
      borrowings
                                  
                                  
                                  (95
                                  )
                                  
                                  
                                  25
                                  
                                  
                                  
                                  (70
                                  )
                                  
                                  
                                  (205
                                  )
                                  
                                  
                                  67
                                  
                                  
                                  
                                  (138
                                  )Total
      interest Expense
                                  
                                  
                                  (172
                                  )
                                  
                                  
                                  (362
                                  )
                                  
                                  
                                  (534
                                  )
                                  
                                  
                                  (340
                                  )
                                  
                                  
                                  (739
                                  )
                                  
                                  
                                  (1,079
                                  )Change
      in net interest income
                                  
                                  $
                                  (208
                                  )
                                  
                                  $
                                  (73
                                  )
                                  
                                  $
                                  (281
                                  )
                                  
                                  $
                                  (384
                                  )
                                  
                                  $
                                  86
                                  
                                  
                                  $
                                  (298
                                  )


18




Average Balance
Sheet





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





Three months ended June 30,2010
                  
                  
                  2009Average
                    Volume
                  
                  
                  Interest
                  
                  
                  Yield/Cost
                  
                  
                  Average
                    Volume
                  
                  
                  Interest
                  
                  
                  Yield/CostASSETSInterest-earning
      assets:Federal
      funds sold
                  
                  $
                  3,112
                  
                  
                  $
                  2
                  
                  
                  
                  0.26
                  %
                  
                  $
                  1,477
                  
                  
                  $
                  1
                  
                  
                  
                  0.27
                  %Securities
                  
                  
                  22,763
                  
                  
                  
                  212
                  
                  
                  
                  3.73
                  
                  
                  
                  31,258
                  
                  
                  
                  396
                  
                  
                  
                  5.07Loans
      receivable
                  
                  
                  148,260
                  
                  
                  
                  2,025
                  
                  
                  
                  5.46
                  
                  
                  
                  167,634
                  
                  
                  
                  2,657
                  
                  
                  
                  6.34Total
      interest-earning assets
                  
                  $
                  174,135
                  
                  
                  
                  2,239
                  
                  
                  
                  5.14
                  
                  
                  $
                  200,369
                  
                  
                  
                  3,054
                  
                  
                  
                  6.10LIABILITIESInterest-bearing
      liabilities:Transactional
      accounts
                  
                  $
                  23,408
                  
                  
                  
                  50
                  
                  
                  
                  0.85
                  
                  
                  $
                  25,034
                  
                  
                  
                  81
                  
                  
                  
                  1.29Savings
      deposits
                  
                  
                  13,511
                  
                  
                  
                  23
                  
                  
                  
                  0.68
                  
                  
                  
                  14,690
                  
                  
                  
                  64
                  
                  
                  
                  1.74Time
      deposits
                  
                  
                  120,890
                  
                  
                  
                  690
                  
                  
                  
                  2.28
                  
                  
                  
                  129,311
                  
                  
                  
                  1,082
                  
                  
                  
                  3.35Other
      borrowings
                  
                  
                  18,965
                  
                  
                  
                  209
                  
                  
                  
                  4.41
                  
                  
                  
                  26,000
                  
                  
                  
                  279
                  
                  
                  
                  4.29Total
      interest-bearing liabilities
                  
                  $
                  176,774
                  
                  
                  
                  972
                  
                  
                  
                  2.20
                  
                  
                  $
                  195,035
                  
                  
                  
                  1,506
                  
                  
                  
                  3.09Interest
      rate spread
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.94
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.01
                  %Net
      interest income and net interest Margin
                  
                  
                  
                  
                  
                  $
                  1,267
                  
                  
                  
                  2.91
                  %
                  
                  
                  
                  
                  
                  $
                  1,548
                  
                  
                  
                  3.09
                  %




Six months ended June 30,2010
                  
                  
                  2009Average
                    Volume
                  
                  
                  Interest
                  
                  
                  Yield/Cost
                  
                  
                  Average
                    Volume
                  
                  
                  Interest
                  
                  
                  Yield/CostASSETSInterest-earning
      assets:Federal
      funds sold
                  
                  $
                  4,541
                  
                  
                  $
                  5
                  
                  
                  
                  0.22
                  %
                  
                  $
                  1,850
                  
                  
                  $
                  2
                  
                  
                  
                  0.22
                  %Securities
                  
                  
                  23,369
                  
                  
                  
                  489
                  
                  
                  
                  4.19
                  
                  
                  
                  31,371
                  
                  
                  
                  812
                  
                  
                  
                  5.18Loans
      receivable
                  
                  
                  151,044
                  
                  
                  
                  4,311
                  
                  
                  
                  5.71
                  
                  
                  
                  169,066
                  
                  
                  
                  5,368
                  
                  
                  
                  6.35Total
      interest-earning assets
                  
                  $
                  178,954
                  
                  
                  
                  4,805
                  
                  
                  
                  5.37
                  
                  
                  $
                  202,287
                  
                  
                  
                  6,182
                  
                  
                  
                  6.11LIABILITIESInterest-bearing
      liabilities:Transactional
      accounts
                  
                  $
                  24,342
                  
                  
                  
                  120
                  
                  
                  
                  0.99
                  
                  
                  $
                  24,749
                  
                  
                  
                  161
                  
                  
                  
                  1.30Savings
      deposits
                  
                  
                  14,584
                  
                  
                  
                  88
                  
                  
                  
                  1.21
                  
                  
                  
                  14,093
                  
                  
                  
                  125
                  
                  
                  
                  1.77Time
      deposits
                  
                  
                  121,754
                  
                  
                  
                  1,407
                  
                  
                  
                  2.31
                  
                  
                  
                  130,076
                  
                  
                  
                  2,270
                  
                  
                  
                  3.49Other
      borrowings
                  
                  
                  18,965
                  
                  
                  
                  419
                  
                  
                  
                  4.42
                  
                  
                  
                  26,413
                  
                  
                  
                  557
                  
                  
                  
                  4.22Total
      interest-bearing liabilities
                  
                  $
                  179,645
                  
                  
                  
                  2,034
                  
                  
                  
                  2.26
                  
                  
                  $
                  195,331
                  
                  
                  
                  3,113
                  
                  
                  
                  3.19Interest
      rate spread
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.11
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.92
                  %Net
      interest income and net interest Margin
                  
                  
                  
                  
                  
                  $
                  2,771
                  
                  
                  
                  3.10
                  %
                  
                  
                  
                  
                  
                  $
                  3,069
                  
                  
                  
                  3.03
                  %





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.


19




Noninterest
Income.





Noninterest
income of $449,000 was recorded for the three months ended June 30,
2010.  This income compares to a $904,000 loss for the same period in
2009, for an increase of $1,353,000.  For the three months ended June
30, 2010, the Bank recognized gains on the sale of loans of $212,000, other real
estate owned of $26,000, and on land taken by Manatee County for road expansion
of $49,000.  The Bank also recognized $64,000 in loan servicing income
for the period.  By comparison, during the three months ended June 30,
2009, the Bank realized security losses of $1,015,000 and impairment of other
real estate owned of $365,000, which losses were partially offset by a gain on
sale of loans of $124,000 and a gain on sale of servicing of loans of
$200,000.  Also during the three months ended June 30, 2009, as a
result of the FDIC's closing of Silverton Bank (the Bank's correspondent bank),
the Company realized a loss of $425,000 in connection with a Silverton holding
company trust preferred security it owned and had to write off $87,000 in
Silverton's common stock it held.  In addition, during that period,
the Bank realized a loss of $503,000 in value of a private issue mortgage backed
security it owns.





Noninterest
income for the six months ended June 30, 2010, was $465,000.  This
income compares to $844,000 of loss for the same period in 2009, a net increase
of $1,309,000.  The items identified in the preceding paragraph
account for the majority of this period-to-period change, although in 2010 the
Bank experienced an increase in gains on the sale of loans of $228,000 and a
decrease in other real estate owned impairments of $124,000.  The Bank
also recorded year to date loan servicing income of $113,000, while no such
income was realized in 2009.  The year to date impairment on
securities has declined by $954,000, when compared to the corresponding period
in 2009.





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 guaranteed portion of a large loan for the guaranteed
portion of several smaller loans we are, in effect, spreading the risk of an
early pay-off.





Noninterest
Expense.





Total
noninterest expense for the three months ended June 30, 2010, was $1,652,000,
compared to $1,330,000 for the same period in 2009, an increase of approximately
$322,000.  The majority of this increase was attributable to increased
legal expenses of $194,000 and a $65,000 increase in the FDIC assessment as well
as increases in other real owned property expenses.





Total
noninterest expense for the six months ended June 30, 2010, was $3,222,000,
compared to $2,527,000 for the same period in 2009, an increase of approximately
$695,000.  Legal expenses increased in 2010 by $286,000 as costs were
incurred for foreclosures.  The expenses for other real estate owned
properties increased by $200,000 in 2010 as properties were improved for sale or
rent.  An increase of $220,000 for the year to date FDIC assessment
was also experienced during this period.





Balance
Sheet Analysis





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





Total
Assets





As of
June 30, 2010, total assets of the Company were $187,825,153, compared to
$199,499,006 at December 31, 2009, a decrease of $11.7 million.  The
decrease is primarily attributable to a $15 million decrease in the loan
portfolio, as $7 million in loans were sold during the period, approximately $2
million was charged off and approximately $6 million moved to other real estate
owned as a result of foreclosures.   During this six month period
deposits decreased by $10 million.


20




Investment
Securities




As of
June 30, 2010, the available-for-sale and held-to-maturity securities comprised
approximately 12% of the Company's assets. The Bank invests primarily in
obligations of the United States, or obligations guaranteed as to principal and
interest by the United States, and other taxable securities.  In
addition, the Bank enters into Federal Funds transactions with its principal
correspondent banks, and acts as a net seller of such funds.  The sale
of Federal Funds amounts to a short-term loan from the Bank to another
bank.




The
following table presents, for the periods ended June 30, 2010 and December 31,
2009, the approximate market value of the Company's investments, classified by
category and by whether they are considered available-for-sale or
held-to-maturity (in thousands):





Investment
Category





June 30, 2010
                      
                      
                      December 31, 2009Available-for-Sale:U.S.
      agency bonds
                      
                      $
                      2,005
                      
                      
                      $
                      2,457Collateralized
      mortgage obligations
                      
                      
                      1,356
                      
                      
                      
                      1,644Mortgage-backed
      securities
                      
                      
                      215
                      
                      
                      
                      228Trust
      preferred & other corporate securities
                      
                      
                      5,957
                      
                      
                      
                      6,893Equity
      securities
                      
                      
                      1,813
                      
                      
                      
                      1,859Total
      Available-for-Sale Securities
                      
                      $
                      11,346
                      
                      
                      $
                      13,081Held-to-Maturity
Securities:Corporate
      Securities
                      
                      $
                      800
                      
                      
                      $
                      775General
      obligation bonds of municipalities
                      
                      
                      5,059
                      
                      
                      
                      5,595Revenue
      bonds of municipalities
                      
                      
                      4,238
                      
                      
                      
                      4,147Total
      Held-to-Maturity Securities
                      
                      $
                      10,097
                      
                      
                      $
                      10,517Total Portfolio
                      
                      $
                      21,443
                      
                      
                      $
                      23,598





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 or
corporate borrowers.  The Bank places particular emphasis on loans to
small and medium-sized businesses.




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




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


21




The
following table presents various categories of loans contained in the Bank's
loan portfolio as of June 30, 2010 and December 31, 2009 and the total amount of
all loans for such periods (in thousands):




Type of Loan
                    
                    June 30, 2010
                    
                    
                    December 31, 2009Commercial
      real estate
                    
                    $
                    90,665
                    
                    
                    $
                    97,783Residential
      real estate
                    
                    
                    36,332
                    
                    
                    
                    37,439Construction
      loans
                    
                    
                    1,030
                    
                    
                    
                    1,370Commercial
      loans
                    
                    
                    10,825
                    
                    
                    
                    17,218Consumer
      loans
                    
                    
                    1,960
                    
                    
                    
                    2,049Subtotal
                    
                    
                    140,812
                    
                    
                    
                    155,859Allowance
      for loan losses
                    
                    
                    (4,998
                    )
                    
                    
                    (4,731
                    )Total
      (net of allowance)
                    
                    $
                    135,814
                    
                    
                    $
                    151,128




Asset
Quality





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





Asset
Classification.





Commercial
banks are required to review and, when appropriate, classify their assets on a
regular basis.  The State of Florida and the Federal Reserve 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.


22




The
following table presents information regarding non-accrual, past due and
restructured loans as of June 30, 2010 and December 31, 2009 (dollars in
thousands):




June 30, 2010
                
                
                December 31, 2009Loans
      accounted for on a non-accrual basis:Number:
                
                Fifty
                
                
                Thirty-threeAmount:
                
                $
                13,296
                
                
                $
                15,685Accruing
      loans which are contractually past due 90 days or more as to principal and
      interest payments:Number:
                
                FiveAmount:
                
                $
                937
                
                
                NoneLoans
      which were renegotiated to provide a reduction or deferral of interest or
      principal because of deterioration in the financial position of the
      borrower:Number:
                
                
                
                
                
                NoneAmount:
                
                NoneLoans
      for which there are serious doubts as to the borrower's ability to comply
      with existing terms:Number:
                
                Thirty-four
                
                
                Forty-fourAmount:
                
                $
                17,326
                
                
                $
                24,210




At June
30, 2010, there were no loans classified for regulatory purposes as doubtful,
substandard or special mention that have not been disclosed in the above table,
which (i) represent or result from trends or uncertainties which management
reasonably expects will materially impact future operating results, liquidity,
or capital resources, or (ii) represent material credits about which management
is aware of any information which causes management to have serious doubts as to
the ability of such borrowers to comply with the loan repayment
terms.





Allowance for Loan
Losses (ALLL).





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 ALLL may be necessary based on
changes in economic conditions.


23


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




For the Six
                  
                  
                  For the TwelveMonths Ended
                  
                  
                  Months EndedJune 30,
                  
                  
                  December, 312010
                  
                  
                  2009
                  
                  
                  2009End
      of period loans (net of deferred fees)
                  
                  $
                  142,229
                  
                  
                  $
                  165,798
                  
                  
                  $
                  157,122End
      of period allowance for loan losses
                  
                  $
                  4,998
                  
                  
                  $
                  5,107
                  
                  
                  $
                  4,731Percentage
      of ALLL to total loans
                  
                  
                  3.51
                  %
                  
                  
                  3.08
                  %
                  
                  
                  3.01
                  %Average
      loans for the period
                  
                  $
                  151,044
                  
                  
                  $
                  173,166
                  
                  
                  $
                  168,569Net
      charge-offs as a percentage of average loans for the
period
                  
                  
                  1.61
                  %
                  
                  
                  3.00
                  %
                  
                  
                  4.73
                  %Nonperforming
      assetsNonaccrual
      loans
                  
                  $
                  13,296
                  
                  
                  $
                  15,470
                  
                  
                  $
                  15,685Loans
      past due 90 days or more and still accruing
                  
                  $
                  937
                  
                  
                  $
                  394
                  
                  
                  $
                  0Other
      real estate
                  
                  $
                  8,649
                  
                  
                  $
                  2,121
                  
                  
                  $
                  2,580$
                  22,882
                  
                  
                  $
                  17,985
                  
                  
                  $
                  18,265Nonperforming
      assets to period end loans
                  
                  
                  16.09
                  %
                  
                  
                  10.85
                  %
                  
                  
                  11.62
                  %Nonperforming
      assets to period end total assets
                  
                  
                  12.18
                  %
                  
                  
                  8.71
                  %
                  
                  
                  9.16
                  %





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 June 30, 2010, financial
statements evidence a marginally satisfactory liquidity position, as total cash
and cash equivalents amounted to $8.6 million, representing 5% of total assets.
Investment securities, which amounted to $22.3 million or 11.9% of total assets,
provide a secondary source of liquidity because they can be converted into cash
in a timely manner. The Bank is a member of the Federal Reserve System and
maintains relationships with several correspondent banks and, thus, could obtain
funds from those banks on short notice. The Company's management closely
monitors and maintains appropriate levels of interest earning assets and
interest bearing liabilities, so that maturities of assets can provide adequate
funds to meet customer withdrawals and loan demand.





The
Bank’s capital ratios as of June 30, 2010, compared to the minimum regulatory
requirements were as follows:





Bank's
                  
                  
                  Minimum RegulatoryJune30,2010
                  
                  
                  RequirementLeverage
      Ratio
                  
                  
                  1.4
                  %
                  
                  
                  4.0
                  %Total
      Risk Weighted ratio
                  
                  
                  3.2
                  %
                  
                  
                  8.0
                  %Tier
      1 Risk Weighted ratio
                  
                  
                  1.9
                  %
                  
                  
                  4.0
                  %





As stated
above, these ratios have caused the Bank to be classified as “critically
undercapitalized.”


24


As
discussed above, the Company is currently conducting a private placement of its
common stock, i.e. the Offering.  Based on certain assumptions
regarding transaction fees payable to Cappello Capital and other expenses of the
Offering, the Company’s uses of proceeds from the Offering are projected to be
as follows:





(Dollars in Thousands)Minimum Offering
                
                
                Maximum OfferingGross
      Proceeds
                
                $
                8,500,500
                
                
                $
                20,001,000Less:
      Advisory Transaction Fees
                
                
                263,662
                
                
                
                1,106,625Net
      Proceeds
                
                
                8,263,838
                
                
                
                18,894,375Less:
      Expenses of the Offering
                
                
                350,000
                
                
                
                350,000Available
      Net Proceeds
                
                
                7,886,838
                
                
                
                18,544,375Payoff
      of Company Loan
                
                
                1,082,660
                
                
                
                1,082,600Capital
      Contribution to the Bank
                
                
                6,804,178
                
                
                
                16,461,715Working
      Capital for the Company
                
                
                -0-
                
                
                $
                1,000,000





The
projected minimum capital contribution to the Bank of $6,804,178 and the
projected maximum capital contribution to the Bank of $16,461,715, respectively,
when added to the Bank’s existing capital would cause the Bank’s three key
regulatory capital ratios to be as follows:





After
                    Minimum
                    Offering
                  
                  
                  Regulatory
                    Requirements
                    for Adequately
                    Capitalized
                  
                  
                  Regulatory
                    Requirements
                    for Well
                    Capitalized
                  
                  
                  After
                    Maximum
                    OfferingLeverage
      Ratio
                  
                  
                  5.25
                  %
                  
                  
                  4.0
                  %
                  
                  
                  5.0
                  %
                  
                  
                  10.43
                  %Total
      Risk-Based Assets Ratio
                  
                  
                  8.13
                  %
                  
                  
                  8.0
                  %
                  
                  
                  10
                  %
                  
                  
                  14.89
                  %Tier
      1 Risk-Based Assets Ratio
                  
                  
                  6.85
                  %
                  
                  
                  4.0
                  %
                  
                  
                  6.0
                  %
                  
                  
                  13.61
                  %




Accordingly,
based on the foregoing, a successful minimum Offering will restore the Bank’s
status as “adequately capitalized” and a successful maximum Offering will
classify the Bank as “well capitalized.”





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
June 30, 2010, the Bank had outstanding loan commitments of approximately
$846,000.  Various assets collateralize the majority of these
commitments.  The Bank does not anticipate that it will suffer any
material losses as a result of these transactions.





Item
3:  Quantitative and Qualitative Disclosure About Market
Risk





Not
applicable.


25




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 quarter of 2010 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.


26


PART
II. OTHER INFORMATION





Item
1.   Legal Proceedings





There
have been no material changes to the pending legal proceedings to which the
Company or the Bank is a party since the filing of the Registrant’s Form 10-K
for the year ended December 31, 2009.





Item 1A.  Risk
Factors





Not
applicable.





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




Not
Applicable.




Item
3.   Defaults Upon Senior Securities





Not
Applicable.





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





The
Company held its 2010 Annual Meeting of Shareholders on June 23,
2010.  The following directors were elected at the annual meeting to
serve a three year term:





For
                              
                              
                              Withheld/AbstentionsC.
      Donald Miller
                              
                              1,055,089
                              
                              
                              85,388Charles
      S. Conoley
                              
                              1,054,439
                              
                              
                              86,038Clarence
      R. Urban
                              
                              1,055,689
                              
                              
                              84,788





The
following directors did not stand for reelection at the 2010 Annual Meeting of
Shareholders as their term of office continued after the Annual Meeting: David
K. Scherer, Elizabeth Thomason, DMD, Mary Ann Turner, Michael S. Glasgow,
Barclay Kirkland, DDS, and Bruce E. Shackelford.





A vote
was taken to ratify the appointment of Francis & Co., CPA's as independent
auditors for the fiscal year ending December 31, 2010.  The
appointment was ratified by the following votes:  1,371,919 for and
84,678 against/abstentions.





Item
5.   Other Information


None





Item
6.   Exhibits





31.1
                    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


27


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:
      August 20, 2010


28