UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM
10-K





x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 or 15(d) OFTHE
      SECURITIES EXCHANGE ACT OF 1934




For
the Fiscal Year Ended December 31, 2009





OR





o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
      SECURITIES EXCHANGE ACT OF 1934




Commission
File Number333-141191





PRO
FINANCIAL HOLDINGS, INC.


(Exact
name of registrant as specified in its charter)





Florida
            20-4625845(State
      or other jurisdiction
            (I.R.S.
      Employerof
      incorporation or organization)
            Identification
      No.)





536
      North Monroe St. Tallahassee, Florida
            32301(Address
      of principal executive offices)
            (Zip
      Code)




Registrant’s
telephone number, including area code: (850) 383-8107





Securities
registered pursuant to Section 12(b) of the Exchange Act: None




Securities
registered pursuant to Section 12(g) of the Exchange Act: None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


o Yes    x No





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


x Yes    o No





Note–Checking the box above
will not relieve any registrant required to file reports pursuant to Section 13
or 15(d) of the Exchange Act from their obligations under those
Sections.





Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 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.


x Yes    o No





Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files).


o Yes    o No   *
This registrant has not yet been phased into the interactive data
requirements





Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this
chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.


o 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 definitions of “large accelerated
filer,” “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 (Do not check if
      smaller reporting company)
            Smaller reporting
      company x




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


o Yes   
x No





State the aggregate market value of the
voting and non-voting common equity held by non-affiliates computed by reference
to the price at which the common equity was last sold, or the average bid and
asked price of such common equity, as of the last business day of the
registrant’s most recently completed second fiscal quarter:
$7,001,288  at June 30, 2009.





Note – If a determination as
to whether a particular person or entity is an affiliate cannot be made without
involving unreasonable effort and expense, the aggregate market value of the
common stock held by non-affiliates may be calculated on the basis of
assumptions reasonable under the circumstances, provided that the assumptions
are set forth in this Form.





Indicate the number of shares
outstanding of each of the registrant's classes of common stock, as of the
latest practicable date:  Common stock, par value $.01 per share,
1,396,116 shares outstanding as of March 31, 2010.





DOCUMENTS
INCORPORATED BY REFERENCE





None







TABLE
OF CONTENTS





PagePART
      I
            
            
            
            1Item
      1.
            Business
            
            
            1Forward-Looking
      Statements
            
            
            1General
            
            
            2Critical
      Accounting Policies
            
            
            3Lending
      Activities
            
            
            3Loan
      Loss Allowance
            
            
            4Deposit
      Activities
            
            
            4Investments
            
            
            5Correspondent
      Banking
            
            
            5Effect
      of Governmental Policies
            
            
            5Interest
      and Usury
            
            
            5Supervision
      and Regulation
            
            
            5USA
      Patriot Act
            
            
            11Other
      Laws
            
            
            11Liquidity
            
            
            12Competition
            
            
            12Employees
            
            
            12Item
      1A. Risk Factors
            
            
            12Item
      1B. Unresolved Staff Comments
            
            
            12Item
      2. Description of Properties
            
            
            12Item
      3. Legal Proceedings
            
            
            13Item
      4. (Removed and Reserved)
            
            
            13PART
      II
            
            
            
            14Item
      5.
            Market
      for the Registrant’s Common Equity, Related Stockholder
      Mattersand
      Issuer Purchases of Liquidity Securities
            
            
            14Item
      6.
            Selected
      Financial Data
            
            
            14Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            
            16General
            
            
            16Lending
      Activities
            
            
            17Liquidity
            
            
            17Capital
      Resources, Commitments and Capital Requirements
            
            
            18Loan
      Portfolio
            
            
            19Loan
      Quality
            
            
            20Classification
      of Assets and Potential Problem Loans
            
            
            21Investment
      Securities
            
            
            24Deposit
      Activities
            
            
            24Results
      of Consolidated Operations
            
            
            26Asset/Liability
      Management
            
            
            30Impact
      of Inflation and Changing Prices
            
            
            32Item
      7A. Quantitative and Qualitative Discussion About Market
    Risk
            
            
            33Item
      8. Financial Statements and Supplementary Data
            
            
            33Item
      9. Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
            
            
            33Item
      9A. Controls and Procedures
            
            
            33Item
      9B. Other Information
            
            
            34





i





PART
      III
            
            
            34Item
      10.  Directors, Executive Officers, and Corporate
      Governance;Compliance
      with Section 16(a) of the Exchange Act
            
            
            34Code
      of Ethics
            
            
            38Director
      Independence
            
            
            38Nominating
      Committee
            
            
            39Financial
      Experts
            
            
            39Item
      11. Executive Compensation
            
            
            39Item
      12. Security Ownership of Certain Beneficial Owners and Management
      andRelated
      Stockholder Matters
            
            
            40Item
      13. Certain Relationships and Related Transactions, and Director
      Independence
            
            
            41Item
      14. Principal Accounting Fees and Services
            
            
            42Item
      15. Exhibits, Financial Statement Schedules
            
            
            43SIGNATURES
            
            
            44EXHIBIT
      INDEX
            
            
            46





ii


PART
I





Item
1. Business





Forward-Looking
Statements





Some of the statements in this Form
10-K discuss future expectations. There may also be statements regarding
projections of results of operations or financial condition or state other
“forward-looking” information. Those statements are subject to known and unknown
risks, uncertainties and other factors that could cause the actual results to
differ materially from those contemplated by the statements. We based the
forward-looking information on various factors and numerous assumptions, which
may or may not turn out to be correct.





Our actual results may differ
materially from the results anticipated in forward-looking statements due to a
variety of factors.  Such factors are described below and include,
without limitation:





·
            Losses
      in our loan portfolio are greater than estimated or expected;·
            Unanticipated
      deterioration in the financial condition of borrowers may result in
      significant increases in loan losses and provisions for those
      losses.


·
            If
      real estate values in our target markets continue to decline, our loan
      portfolio could become impaired and losses from loan defaults may exceed
      our allowance for loan and lease losses established for that
      purpose.


·
            Economic
      conditions affecting real estate values and transactions in Pro
      Financial’s market and/or general economic conditions, either nationally
      or regionally, that are less favorable or take longer to recover than
      expected;


·
            An
      inability to raise additional capital on terms and conditions that are
      satisfactory;


·
            The
      impact of current economic conditions and the impact of our results of
      operations on our ability to borrow additional funds to meet our liquidity
      needs;


·
            Changes
      in the interest rate environment which expand or reduce margins or
      adversely affect critical estimates as applied and projected returns on
      investments and fair values of
assets;


·
            Deposit
      attrition, customer loss or revenue loss in the ordinary course of
      business;


·
            Increased
      competition with other financial institutions may affect our results of
      operations and liquidity.


·
            If
      our securities portfolio fails to perform, our securities may lose
      value.


·
            Changes
      in the legislative and regulatory environment may increase the cost of
      operations or limit our growth.


·
            Our
      common stock is not an insured bank deposit and is subject to market
      risk.


·
            Although
      publicly traded, our common stock has substantially less liquidity than
      the average trading market for a stock quoted on the NASDAQ Capital
      Market, and our stock price can be
volatile.


·
            The
      inability of Pro Financial to realize elements of its strategic and
      operating plans for 2009 and
beyond;


·
            Natural
      disasters in Pro Financial’s primary market areas result in prolonged
      business disruption or materially impair the value of collateral securing
      loans;


·
            Management’s
      assumptions and estimates underlying critical accounting policies prove to
      be inadequate or materially incorrect or are not borne out by subsequent
      events;


·
            The
      impact of recent and future federal and state regulatory
      changes;


·
            Current
      or future litigation, regulatory investigations, proceedings or
      inquiries;


·
            Strategies
      to manage interest rate risk may yield results other than those
      anticipated;


·
            A
      significant rate of inflation
(deflation);


·
            Unanticipated
      litigation or claims;


·
            Changes
      in the securities markets;


·
            Acts
      of terrorism or war; and


·
            Details
      of the recently enacted Emergency Economic Stabilization Act of 2008, the
      American Recovery and Reinvestment Act of 2009 and various announced and
      unannounced programs implemented by the U.S. Treasury Department and bank
      regulators to address capital and liquidity concerns in the banking
      system, are still being finalized and may have a significant effect on the
      financial services industry and Pro
Financial.




1


Many of such factors are beyond our
ability to control or predict.  Readers should not place undue
reliance on any such forward-looking statements, which speak only as to the date
made.  Readers are advised that the factors listed above could affect
our financial performance and could cause our actual results for future periods
to differ materially from any opinions or statements expressed with respect to
future periods in any current statements.  We do not undertake, and
specifically disclaim any obligation, to publicly release the result of any
revisions that may be made to any forward-looking statements to reflect events
or circumstances after the date of such statements or to reflect the occurrence
of anticipated or unanticipated events.





We do not promise to update
forward-looking information to reflect actual results or changes in assumptions
or other factors that could affect those statements other than material changes
to such information.





General





Pro Financial Holdings, Inc. (“Pro
Financial”) was incorporated by the organizers of Pro Bank under the laws of the
State of Florida on March 29, 2006, for the purpose of becoming a bank holding
company by acquiring ProBank (the “Bank”) (Pro Financial and the Bank are
collectively referred to as the “Company”). The Bank is a Florida state
chartered commercial bank and is a full service commercial bank, providing a
wide range of business and consumer financial services in our target
marketplace, which is comprised primarily of Leon, Gadsden, Wakulla and
Jefferson Counties in Florida.  The Bank was formed by a group of
business leaders, who believed that there was a significant demand for a
locally-owned community bank.





Under Federal Reserve Board
regulations, Pro Financial is expected to be a source of financial strength to
the Bank. Banking regulations require that the Bank maintain a minimum ratio of
capital to assets. In the event that the Bank’s growth is such that this minimum
ratio is not maintained, Pro Financial may borrow funds, subject to the capital
adequacy guidelines of the Federal Reserve, and contribute them to the capital
of the Bank and otherwise raise capital in a manner which is unavailable to the
Bank under existing banking regulations.





The Bank commenced business operations
on September 5, 2007 in Tallahassee, Florida. The Bank opened a branch office at
1812 North Martin Luther King Blvd., in Tallahassee on October 25, 2007, and a
second branch office on Killearn Plaza Circle in the Killearn Lakes Plaza, in
Tallahassee on June 1, 2009.





The Bank's deposits are insured by the
Federal Deposit Insurance Corporation up to applicable limits.  The
operations of the Bank are subject to the supervision and regulation of the FDIC
and the Florida Office of Financial Regulation ("Florida Office").





The Bank provides a range of consumer
and commercial banking services to individuals, businesses and
industries.  The basic services offered by the Bank
include:  demand interest-bearing and non-interest-bearing accounts,
money market deposit accounts, NOW accounts, time deposits, credit cards, direct
deposits, notary services, night depository, cashier’s checks, savings bonds,
bank drafts, automated teller services, bill pay, internet banking and drive-in
tellers.  In addition, the Bank makes secured and unsecured
commercial, consumer, and real estate loans and issues stand-by letters of
credit.  The Bank provides automated teller machine (ATM) cards and is
a member of the Plus, Presto, Pulse, and Star ATM networks, thereby permitting
customers to utilize the convenience of larger ATM networks. In addition to the
foregoing services, the offices of the Bank provide customers with extended
banking hours.  The Bank does not have trust powers and, accordingly,
no trust services are provided.





The revenues of the Bank are primarily
derived from interest on, and fees received in connection with, real estate and
other loans, and from interest and dividends from investment and mortgage-backed
securities, and short-term investments.  The principal sources of
funds for the Bank’s lending activities are its deposits, repayment of loans,
and the sale and maturity of investment securities.  The principal
expenses of the Bank are the interest paid on deposits, and operating and
general administrative expenses.





As is the case with banking
institutions generally, the Bank’s operations are materially and significantly
influenced by general economic conditions and by related monetary and fiscal
policies of financial institution regulatory agencies, including the Board of
Governors of the Federal Reserve System (the “Federal Reserve”) and the Federal
Deposit Insurance Corporation (“FDIC”).  Deposit flows and costs of
funds are influenced by interest rates on competing investments and general
market rates of interest.  Lending activities are affected by the
demand for financing of real estate and other types of loans, which in turn is
affected by the interest rates at which such financing may be offered and other
factors affecting local demand and availability of funds.  The Bank
faces strong competition in the attraction of deposits (its primary source of
lendable funds) and in the origination of loans.  See
“Competition.”




2





The
Company’s fiscal year ends December 31. This Form 10-K is also being used as the
Bank’s Annual Disclosure Statement under Federal Deposit Insurance Corporation
(“FDIC”) Regulations. This Form 10-K has not been reviewed or confirmed for
accuracy or relevance by the FDIC or the Securities and Exchange
Commission.





Critical
Accounting Policies





The Company’s financial condition and
results of operations are sensitive to accounting measurements and estimates of
matters that are inherently uncertain. When applying accounting policies in
areas that are subjective in nature, the Company must use its best judgment to
arrive at the carrying value of certain assets. The most critical accounting
policy applied is related to the valuation of the loan portfolio.





A variety of estimates impact carrying
value of the loan portfolio including the calculation of the allowance for loan
losses, valuation of underlying collateral, the timing of loan charge-offs and
the amount and amortization of loan fees and deferred origination
costs.





The allowance for loan losses is the
most difficult and subjective judgment.  The allowance is established
and maintained at a level that the Company believes is adequate to cover losses
resulting from the inability of borrowers to make required payments on
loans.  Estimates for loan losses are arrived at by analyzing risks
associated with specific loans and the loan portfolio, current trends in
delinquencies and charge-offs, the views of regulators, changes in the size and
composition of the loan portfolio and peer comparisons.  The analysis
also requires consideration of the economic climate and direction, change in the
interest rate environment, which may impact a borrower’s ability to pay,
legislation impacting the banking industry and economic conditions specific to
its service area.  Because the calculation of the allowance for loan
losses relies on estimates and judgments relating to inherently uncertain
events, results may differ from the Company’s estimates.





The allowance for loan losses is also
discussed as part of “Management's Discussion and Analysis – Classification of
Assets & Potential Loan Problems” and in Note 3 to the consolidated
financial statements.





Lending
Activities





The Bank offers a range of lending
services, including real estate, consumer and commercial loans, to individuals
and small businesses and other organizations that are located in or conduct a
substantial portion of their business in the Bank’s market area.  The
Bank’s net loans at December 31, 2009 were $47.0 million, or 59.87% of total
assets compared to $27.1 million or 57.91% of total assets at December 31,
2008.  The interest rates charged on loans vary with the degree of
risk, maturity, and amount of the loan, and are further subject to competitive
pressures, money market rates, availability of funds, and government
regulations.  The Bank has no foreign loans or loans for highly
leveraged transactions.





The Bank’s loans are concentrated in
five major areas: commercial real estate loans, residential real estate loans,
construction, commercial loans (for equipment purchases, working capital and
various other business purposes) and consumer loans.  A majority of
the Bank’s loans are made on a secured basis.  As of December 31,
2009, approximately 83.79% of the Bank’s loan portfolio consisted of loans
secured by real estate, of which approximately 72.21% of the total loan
portfolio is secured by commercial properties compared to December 31, 2008
where approximately 77.1% of the Bank’s loan portfolio consisted of loans
secured by real estate, of which approximately 59.08% of the total loan
portfolio was secured by commercial properties.  Risks of these types
of loans include the general business conditions of the local economy and
borrowers’ ability to conduct their businesses to generate sufficient profits to
repay their loans under the agreed upon terms and
conditions.  Personal guarantees will be obtained from the principals
of business borrowers and third parties to support the borrowers’ ability to
service the debt and reduce the risk of non-payment.  Commercial loans
may be made at variable or fixed rates of interest.  Commercial lines
of credit are typically granted on a one-year basis, with loan covenants and
monetary thresholds.  Other commercial loans with terms or
amortization schedules of longer than one year may carry interest rates which
vary with the prime lending rate and will become payable in full and are
generally refinanced in five years.  Commercial loans not secured by
real estate amounted to approximately 11.36% of the Bank’s total loan portfolio
as of December 31, 2009 compared to approximately 14.63% of total loans at
December 31, 2008.




3





The Bank’s real estate loans are
secured by mortgages and consist primarily of loans to individuals and
businesses for the purchase, improvement of or investment in real estate and for
the construction of single-family residential units or the development of
single-family residential building lots.  These real estate loans may
be made at fixed or variable interest rates.  The Bank generally does
not make fixed-rate commercial real estate loans for terms exceeding five
years.





The Bank’s consumer loan portfolio
consists primarily of loans to individuals for various consumer purposes, but
includes some business purpose loans which are payable on an interest only or
installment basis.  Consumer loans generally involve more risk than
mortgage loans because the collateral for a defaulted loan may not provide an
adequate source of repayment of the principal.  This risk is due to
the potential for damage to the collateral or other loss of value, and the fact
that any remaining deficiency often does not warrant further collection
efforts.  The majority of these loans is for terms of less than five
years and is secured by liens on various personal assets of the borrowers, but
consumer loans may also be made on an unsecured basis.  Consumer loans
are made at fixed and variable interest rates, and are rarely based on more than
a five-year amortization schedule.





Loan originations are derived from a
number of sources. Loan originations can be attributed to direct solicitation by
the Bank’s board of directors referrals, loan officers, existing customers and
borrowers, advertising, walk-in customers and, in some instances, referrals from
brokers.





Certain credit risks are inherent in
making loans. These include prepayment risks, risks resulting from uncertainties
in the future value of collateral, risks resulting from changes in economic and
industry conditions, and risks inherent in dealing with individual
borrowers.  In particular, longer maturities increase the risk that
economic conditions will change and adversely affect
collectibility.  The Bank attempts to minimize credit losses through
various means.  In particular, on larger credits, the Bank relies on
the cash flow of a debtor as the primary source of repayment and secondarily on
the value of the underlying collateral and cash flow of the
guarantors.  In addition, the Bank attempts to utilize shorter loan
terms, between three to five years, in order to reduce the risk of a decline in
the value of such collateral.





Loan
Loss Allowance





In considering the adequacy of our
allowance for loan losses, the Bank has considered that as of December 31, 2009,
approximately 72.21% of outstanding loans are in the commercial real estate loan
category.  At December 31, 2009, commercial loans including commercial
real estate represented 83.58% of our loan portfolio.  We believe that
the real estate collateral securing our commercial real estate loans reduces the
risk of loss inherently present in commercial loans.





At December 31, 2009, our consumer loan
portfolio consisted primarily of lines of credit and installment loans secured
by automobiles and other consumer goods. We believe that the risk associated
with these types of loans has been adequately provided for in the loan loss
allowance.





The Bank’s Board of Directors monitors
the loan portfolio monthly in order to evaluate the adequacy of the allowance
for loan losses.  In addition to reviews by regulatory agencies, the
Bank engages the services of outside consultants to assist in the evaluation of
credit quality and loan administration.  These professionals
complement our internal system, which identifies potential problem credits as
early as possible, categorizes the credits as to risk and includes a reporting
process to monitor the progress of the credits.





The allowance for loan losses is
established through a provision for loan losses charged to
expenses.  Loans are to be charged off against the allowance when
management believes the collectibility of principal is unlikely. The monthly
provision for loan losses is based on the Bank’s historical losses, past due
numbers, peer group comparison, and any amounts reserved for specific
loans.  During the year ended December 31, 2009, a net amount of
$830,000 was charged off against the allowance for loan losses compared to a net
amount of $20,000 for the year ended December 31, 2008.





Deposit
Activities





Deposits are the major source of the
Bank’s funds for lending and other investment activities.  The Bank
considers the majority of its regular savings, demand, NOW, certificates of
deposit less than $100,000 and money market deposit accounts to be core
deposits.  These accounts comprised approximately 50.18% of the Bank’s
total deposits at December 31, 2009 compared to 59.08% at December 31,
2008.  Generally, the Bank attempts to maintain the rates paid on its
deposits at a competitive level.  Time deposits of $100,000 and over
made up approximately 49.82% of the Bank’s total deposits at December 31, 2009
compared to 40.92% at December 31, 2008.  The majority of the deposits
of the Bank are generated from Leon County.




4





Investments





The Bank invests a portion of its
assets in U.S. Government agency obligations, mortgage-backed securities, and
federal funds sold.  The Bank’s investments are managed in relation to
loan demand and deposit growth, and are generally used to provide for the
investment of excess funds at minimal risks while providing liquidity to fund
increases in loan demand or to offset fluctuations in deposits.





With respect to the Bank’s investment
portfolio, the Bank’s total portfolio may be invested in U.S. Treasury and
general obligations of its agencies and bank-qualified municipal securities
because such securities generally represent a minimal investment
risk.  Occasionally, the Bank may purchase certificates of deposit of
national and state banks.  Mortgage-backed securities generally have a
shorter life than the stated maturity.  Federal funds sold is the
excess cash the Bank has available over and above daily cash
needs.  This money is invested on an overnight basis with approved
correspondent banks.





The Bank monitors changes in financial
markets.  In addition to investments for its portfolio, the Bank
monitors its daily cash position to ensure that all available funds earn
interest at the earliest possible date.  A portion of the investment
account is designated as secondary reserves and invested in liquid securities
that can be readily converted to cash with minimum risk of market
loss.  These investments usually consist of U.S. Treasury obligations,
U.S. government agencies and federal funds.  The remainder of the
investment account may be placed in investment securities of different type and
longer maturity.  Daily surplus funds are sold in the federal funds
market for one business day.  The Bank attempts to stagger the
maturities of its securities so as to produce a steady cash-flow in the event
the Bank needs cash, or economic conditions change to a more favorable rate
environment.





Correspondent
Banking





Correspondent banking involves one bank
providing services to another bank which cannot provide that service for itself
from an economic or practical standpoint.  The Bank is required to
purchase correspondent services offered by larger banks, including check
collections, purchase of federal funds, security safekeeping, investment
services, coin and currency supplies, overline and liquidity loan participations
and sales of loans to or participation with correspondent banks.





The Bank sells loan participations to
correspondent banks with respect to loans which exceed the Bank’s lending
limit.





Effect
of Governmental Policies





The earnings and business of the Bank
are and will be affected by the policies of various regulatory authorities of
the United States, especially the Federal Reserve.  The Federal
Reserve, among other things, regulates the supply of credit and deals with
general economic conditions within the United States.  The instruments
of monetary policy employed by the Federal Reserve for these purposes influence
in various ways the overall level of investments, loans, other extensions of
credit and deposits, and the interest rates paid on liabilities and received on
assets.





Interest
and Usury





The Bank is subject to numerous state
and federal statutes that affect the interest rates that may be charged on
loans.  These laws do not, under present market conditions, deter the
Bank from continuing the process of originating loans.





Supervision
and Regulation





Banks and their holding companies, and
many of their affiliates, are extensively regulated under both federal and state
law.  The following is a brief summary of certain statutes, rules, and
regulations affecting the Company and the Bank.  This summary is
qualified in its entirety by reference to the particular statutory and
regulatory provisions referred to below and is not intended to be an exhaustive
description of the statutes or regulations applicable to the business of the
Company and the Bank. Supervision, regulation, and examination of banks by
regulatory agencies are intended primarily for the protection of depositors,
rather than shareholders.




5





Bank
Holding Company Regulation.  The Holding Company is a bank
holding company, registered with the Federal Reserve under the BHC
Act.  As such, the Company is subject to the supervision, examination
and reporting requirements of the BHC Act and the regulations of the Federal
Reserve.  The BHC Act requires that a bank holding company obtain the
prior approval of the Federal Reserve before (i) acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any bank, (ii)
taking any action that causes a bank to become a subsidiary of the bank holding
company, or (iii) merging or consolidating with any other bank holding
company.





The BHC Act further provides that the
Federal Reserve may not approve any transaction that would result in a monopoly
or would be in furtherance of any combination or conspiracy to monopolize or
attempt to monopolize the business of banking in any section of the United
States, or the effect of which may be substantially to lessen competition or to
tend to create a monopoly in any section of the country, or that in any other
manner would be in restraint of trade, unless the anticompetitive effects of the
proposed transaction are clearly outweighed by the public interest in meeting
the convenience and needs of the community to be served.  The Federal
Reserve is also required to consider the financial and managerial resources and
future prospects of the bank holding companies and banks concerned and the
convenience, and needs of the community to be served.  Consideration
of financial resources generally focuses on capital adequacy and consideration
of convenience and needs issues includes the parties’ performance under the
Community Reinvestment Act of 1977 (the “CRA”), both of which are discussed
below.





Banks are subject to the provisions of
the CRA.  Under the terms of the CRA, the appropriate federal bank
regulatory agency is required, in connection with its examination of a bank, to
assess such bank’s record in meeting the credit needs of the community served by
that bank, including low- and moderate-income neighborhoods.  The
regulatory agency’s assessment of the bank’s record is made available to the
public.  Further, such assessment is required of any bank which has
applied to:





·
            charter
      a bank,


·
            obtain
      deposit insurance coverage for a newly chartered
    institution,


·
            establish
      a new branch office that will accept
deposits,


·
            relocate
      an office, or·
            merge
      or consolidate with, or acquire the assets or assume the liabilities of, a
      federally regulated financial
institution.




In the case of a bank holding company
applying for approval to acquire a bank or other bank holding company, the
Federal Reserve will assess the record of each subsidiary bank of the applicant
bank holding company, and such records may be the basis for denying the
application.





The BHC Act generally prohibits a bank
holding company from engaging in activities other than banking, or managing or
controlling banks or other permissible subsidiaries, and from acquiring or
retaining direct or indirect control of any company engaged in any activities
other than those activities determined by the Federal Reserve to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto.  In determining whether a particular activity is permissible,
the Federal Reserve must consider whether the performance of such an activity
can reasonably be expected to produce benefits to the public, such as greater
convenience, increased competition, or gains in efficiency that outweigh
possible adverse effects, such as undue concentration of resources, decreased or
unfair competition, conflicts of interest, or unsound banking
practices.  For example, factoring accounts receivable, acquiring or
servicing loans, leasing personal property, conducting securities brokerage
activities, performing certain data processing services, acting as agent or
broker in selling credit life insurance and certain other types of insurance in
connection with credit transactions, and certain insurance underwriting
activities have all been determined by regulations of the Federal Reserve to be
permissible activities of bank holding companies.  Despite prior
approval, the Federal Reserve has the power to order a holding company or its
subsidiaries to terminate any activity or terminate its ownership or control of
any subsidiary, when it has reasonable cause to believe that continuation of
such activity or such ownership or control constitutes a serious risk to the
financial safety, soundness, or stability of any bank subsidiary of that bank
holding company.





Gramm-Leach-Bliley
Act.  In 1999, the Gramm-Leach-Bliley Act was enacted which
reforms and modernizes certain areas of financial services
regulation.  The law permits the creation of new financial services
holding companies that can offer a full range of financial products under a
regulatory structure based on the principle of functional
regulation.  The legislation eliminates the legal barriers to
affiliations among banks and securities firms, insurance companies, and other
financial services companies.  The law also provides financial
organizations with the opportunity to structure these new financial affiliations
through a holding company structure or a financial subsidiary.  The
new law reserves the role of the Federal Reserve Board as the supervisor for
bank holding companies.  At the same time, the law also provides a
system of functional regulation which is designed to utilize the various
existing federal and state regulatory bodies.  The law also sets up a
process for coordination between the Federal Reserve Board and the Secretary of
the Treasury regarding the approval of new financial activities for both bank
holding companies and national bank financial subsidiaries.




6





The law also includes a minimum federal
standard of financial privacy.  Financial institutions are required to
have written privacy policies that must be disclosed to
customers.  The disclosure of a financial institution’s privacy policy
must take place at the time a customer relationship is established and not less
than annually during the continuation of the relationship.  The act
also provides for the functional regulation of bank securities
activities.  The law repeals the exemption that banks were afforded
from the definition of “broker,” and replaces it with a set of limited
exemptions that allow the continuation of some historical activities performed
by banks.  In addition, the act amends the securities laws to include
banks within the general definition of dealer.  Regarding new bank
products, the law provides a procedure for handling products sold by banks that
have securities elements.  In the area of the Community Reinvestment
Act activities, the law generally requires that financial institutions address
the credit needs of low-to-moderate income individuals and neighborhoods in the
communities in which they operate.  Bank regulators are required to
take the Community Reinvestment Act ratings of a bank or of the bank
subsidiaries of a holding company into account when acting upon certain branch
and bank merger and acquisition applications filed by the
institution.  Under the law, financial holding companies and banks
that desire to engage in new financial activities are required to have
satisfactory or better Community Reinvestment Act ratings when they commence the
new activity.





Bank
Regulation.  The Bank is chartered under the laws of Florida
and their deposits are insured by the FDIC to the extent provided by
law.  The Bank is subject to comprehensive regulation, examination and
supervision by the FDIC and the Florida Office and to other laws and regulations
applicable to banks.  Such regulations include limitations on loans to
a single borrower and to its directors, officers and employees; restrictions on
the opening and closing of branch offices; the maintenance of required capital
ratios; the granting of credit under equal and fair conditions; and the
disclosure of the costs and terms of such credit.  The Bank is
examined periodically by the FDIC and the Florida Office, to whom it submits
periodic reports regarding its financial condition and other
matters.  The FDIC and the Florida Office have a broad range of powers
to enforce regulations under their jurisdiction, and to take discretionary
actions determined to be for the protection and safety and soundness of banks,
including the institution of cease and desist orders and the removal of
directors and officers.  The FDIC and the Florida Office also have the
authority to approve or disapprove mergers, consolidations, and similar
corporate actions.





There are various statutory limitations
on the ability of the Bank to pay dividends.  The FDIC also has the
general authority to limit the dividend payment by banks if such payment may be
deemed to constitute an unsafe and unsound practice.





Under federal law, federally insured
banks are subject, with certain exceptions, to certain restrictions on any
extension of credit to their parent holding companies or other affiliates, on
investment in the stock or other securities of affiliates, and on the taking of
such stock or securities as collateral from any borrower.  In
addition, banks are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit or the providing of any property or
service.





The
Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”)
imposed major regulatory reforms, stronger capital standards for savings and
loan associations and stronger civil and criminal enforcement
provisions.  FIRREA also provides that a depository institution
insured by the FDIC can be held liable for any loss incurred by, or reasonably
expected to be incurred by, the FDIC in connection with:




·
            the
      default of a commonly controlled FDIC insured depository institution;
      or·
            any
      assistance provided by the FDIC to a commonly controlled FDIC insured
      institution in danger of default





The FDIC Improvement Act of 1991
(“FDICIA”) made a number of reforms addressing the safety and soundness of
deposit insurance funds, supervision, accounting, and prompt regulatory action,
and also implemented other regulatory improvements.  Annual
full-scope, on-site examinations are required of all insured depository
institutions.  The cost for conducting an examination of an
institution may be assessed to that institution, with special consideration
given to affiliates and any penalties imposed for failure to provide information
requested.  Insured state banks also are precluded from engaging as
principal in any type of activity that is impermissible for a national bank,
including activities relating to insurance and equity
investments.  The Act also recodified current law restricting
extensions of credit to insiders under the Federal Reserve Act.




7





Also important in terms of its effect
on banks has been the deregulation of interest rates paid by banks on deposits
and the types of deposit accounts that may be offered by banks.  Most
regulatory limits on permissible deposit interest rates and minimum deposit
amounts expired several years ago.  The effect of the deregulation of
deposit interest rates generally has been to increase the costs of funds to
banks and to make their costs of funds more sensitive to fluctuations in money
market rates.  A result of the pressure on banks interest margins due
to deregulation has been a trend toward expansion of services offered by banks
and an increase in the emphasis placed on fee or noninterest
income.





Capital
Requirements.  Bank regulatory
agencies require financial institutions to maintain capital at adequate levels
based on a percentage of assets and off balance sheet exposures, adjusted for
risk weights ranging from 0% to 100%.  Under the risk-based standard,
capital is classified into two tiers.  Tier 1 capital consists of
common shareholders’ equity, excluding the unrealized gain (loss) on
available-for-sale securities, minus certain intangible assets.  Tier
2 capital consists of the general allowance for credit losses except for certain
limitations.  An institution’s qualifying capital base for purposes of
its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2
capital.  The regulatory minimum requirements are 4% for Tier 1 and 8%
for total risk-based capital. Bank holding companies and banks are also required
to maintain capital at a minimum level based on total assets, which is known as
the leverage ratio.  The minimum requirement for the leverage ratio is
3%, but all but the highest rated institutions are required to maintain ratios
100 to 200 basis points above the minimum.  At December 31, 2009 the
Bank met all capital requirements to which they were subject.





For additional information regarding
the Company's capital ratios and requirements, see "Management's Discussion and
Analysis - Capital Resources, Commitments and Capital Requirements" and notes to
the consolidated financial statements.





FDICIA contains “prompt corrective
action” provisions pursuant to which banks are to be classified into one of five
categories based upon capital adequacy, ranging from “well capitalized” to
“critically undercapitalized” and which require (subject to certain exceptions)
the appropriate federal banking agency to take prompt corrective action with
respect to an institution which becomes “significantly undercapitalized” or
“critically undercapitalized.”





The FDIC has issued regulations to
implement the “prompt corrective action” provisions of FDICIA. In general, the
regulations define the five capital categories as follows:





·
            an
      institution is “well capitalized” if it has a total risk-based capital
      ratio of 10% or greater, has a Tier 1 risk-based capital ratio of 6% or
      greater, has a leverage ratio of 5% or greater and is not subject to any
      written capital order or directive to meet and maintain a specific capital
      level for any capital measures;


·
            an
      institution is “adequately capitalized” if it has a total risk-based
      capital ratio of 8% or greater, has a Tier 1 risk-based capital ratio of
      4% or greater, and has a leverage ratio of 4% or
  greater;


·
            an
      institution is “undercapitalized” if it has a total risk-based capital
      ratio of less than 8%, has a Tier 1 risk-based capital ratio that is less
      than 4% or has a leverage ratio that is less than
  4%;


·
            an
      institution is “significantly undercapitalized” if it has a total
      risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital
      ratio that is less than 3% or a leverage ratio that is less than 3%;
      and


·
            an
      institution is “critically undercapitalized” if its “tangible equity” is
      equal to or less than 2% of its total
assets.





The FDIC also, after an opportunity for
a hearing, has authority to downgrade an institution from “well capitalized” to
“adequately capitalized” or to subject an “adequately capitalized” or
“undercapitalized” institution to the supervisory actions applicable to the next
lower category, for supervisory concerns.




8





Generally, FDICIA requires that an
“undercapitalized” institution must submit an acceptable capital restoration
plan to the appropriate federal banking agency within 45 days after the
institution becomes “undercapitalized” and the agency must take action on the
plan within 60 days.  The appropriate federal banking agency may not
accept a capital restoration plan unless, among other requirements, each company
having control of the institution has guaranteed that the institution will
comply with the plan until the institution has been adequately capitalized on
average during each of the three consecutive calendar quarters and has provided
adequate assurances of performance.  The aggregate liability under
this provision of all companies having control of an institution is limited to
the lesser of:





·
            5%
      of the institution’s total assets at the time the institution becomes
      “undercapitalized” or


·
            the
      amount which is necessary, or would have been necessary, to bring the
      institution into compliance with all capital standards applicable to the
      institution as of the time the institution fails to comply with the plan
      filed pursuant to FDICIA.





An
“undercapitalized” institution may not acquire an interest in any company or any
other insured depository institution, establish or acquire additional branch
offices or engage in any new business unless the appropriate federal banking
agency has accepted its capital restoration plan, the institution is
implementing the plan, and the agency determines that the proposed action is
consistent with and will further the achievement of the plan, or the appropriate
Federal banking agency determines the proposed action will further the purpose
of the “prompt corrective action” sections of FDICIA.





If an
institution is “critically undercapitalized,” it must comply with the
restrictions described above.  In addition, the appropriate Federal
banking agency is authorized to restrict the activities of any “critically
undercapitalized” institution and to prohibit such an institution, without the
appropriate Federal banking agency’s prior written approval, from:





·
            entering
      into any material transaction other than in the usual course of
      business;


·
            engaging
      in any covered transaction with affiliates (as defined in Section 23A(b)
      of the Federal Reserve Act);


·
            paying
      excessive compensation or bonuses;
and


·
            paying
      interest on new or renewed liabilities at a rate that would increase the
      institution’s weighted average costs of funds to a level significantly
      exceeding the prevailing rates of interest on insured deposits in the
      institution’s normal market areas.





The
“prompt corrective action” provisions of FDICIA also provide that in general no
institution may make a capital distribution if it would cause the institution to
become “undercapitalized.”  Capital distributions include cash (but
not stock) dividends, stock purchases, redemptions, and other distributions of
capital to the owners of an institution.





Additionally, FDICIA requires, among
other things, that:





·
            only
      a “well capitalized” depository institution may accept brokered deposits
      without prior regulatory approval and


·
            the
      appropriate federal banking agency annually examine all insured depository
      institutions, with some exceptions for small, “well capitalized”
      institutions and state-chartered institutions examined by state
      regulators. FDICIA also contains a number of consumer banking provisions,
      including disclosure requirements and substantive contractual limitations
      with respect to deposit accounts.





As of December 31, 2009, the Bank met
the capital requirements of a “well capitalized” institution. Bank holding
companies are not subject to "prompt corrective action" of FDICIA.





The FDIC has proposed revising its
risk-based capital requirements to ensure that such requirements provide for
explicit consideration by commercial banks of interest rate
risk.  Under the proposed rule, a bank’s interest rate risk exposure
would be quantified using either the measurement system set forth in the
proposal or the bank’s internal model for measuring such exposure, if such model
is determined to be adequate by the bank’s examiner.  If the dollar
amount of a bank’s interest rate risk exposure, as measured by either
measurement system, exceeds 1% of the bank’s total assets, the bank would be
required under the proposed rule to hold additional capital equal to the dollar
amount of the excess.  It is anticipated that the regulatory agencies
will issue a revised proposed rule for further public
comment.  Pending issuance of such revised proposal, the Bank’s
management cannot determine what effect, if any, an interest rate risk component
would have on the capital of the Bank.




9





Enforcement
Powers.  Congress has provided the federal bank regulatory
agencies with an array of powers to enforce laws, rules, regulations and
orders.  Among other things, the agencies may require that
institutions cease and desist from certain activities, may preclude persons from
participating in the affairs of insured depository institutions, may suspend or
remove deposit insurance, and may impose civil money penalties against
institution-affiliated parties for certain violations.





Maximum Legal Interest
Rates.  Like the laws of many states, Florida law contains
provisions on interest rates that may be charged by banks and other lenders on
certain types of loans. Numerous exceptions exist to the general interest
limitations imposed by Florida law.  The relative importance of these
interest limitation laws to the financial operations of the Bank will vary from
time to time, depending on a number of factors, including conditions in the
money markets, the costs and availability of funds, and prevailing interest
rates.





Bank
Branching.  Banks in Florida are permitted to branch state
wide.  Such branch banking, however, is subject to prior approval by
the FDIC and the Florida Office.  Any such approval would take into
consideration several factors, including the bank’s level of capital, the
prospects and economics of the proposed branch office, and other conditions
deemed relevant by the FDIC and the Florida Office for purposes of determining
whether approval should be granted to open a branch office.





Change of
Control.  Federal law restricts the amount of voting stock of a
bank holding company and a bank that a person may acquire without the prior
approval of banking regulators. The overall effect of such laws is to make it
more difficult to acquire a bank holding company and a bank by tender offer or
similar means than it might be to acquire control of another type of
corporation.  Consequently, shareholders of the Bank may be less
likely to benefit from the rapid increases in stock prices that may result from
tender offers or similar efforts to acquire control of other
companies.  Federal law also imposes restrictions on acquisitions of
stock in a bank holding company and a state bank.  Under the federal
Change in Bank Control Act and the regulations thereunder, a person or group
must give advance notice to the Federal Reserve before acquiring control of any
bank holding company (such as the Company).  Upon receipt of such
notice, the Federal Reserve may approve or disapprove the
acquisition.  The Change in Bank Control Act creates a rebuttable
presumption of control if a member or group acquires a certain percentage or
more of a bank holding company’s or state bank’s voting stock, or if one or more
other control factors set forth in the Act are present.





Interstate
Banking.  The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1996, provides for nationwide interstate banking and
branching.  Under the law, interstate acquisitions of banks or bank
holding companies in any state by bank holding companies in any other state will
be permissible one year after enactment.  Interstate branching and
consolidation of existing bank subsidiaries in different states is
permissible.  Florida has a law that allows out-of-state bank holding
companies (located in states that allow Florida bank holding companies to
acquire banks and bank holding companies in that state) to acquire Florida banks
and Florida bank holding companies.  The law essentially provides for
out-of-state entry by acquisition only (and not by interstate branching) and
requires the acquired Florida bank to have been in existence for at least two
years.





Sarbanes-Oxley Act of
2002.  In 2002, the Sarbanes-Oxley Act of 2002 was
enacted.  The Securities and Exchange Commission (the “SEC”) has
promulgated certain regulations pursuant to the Act that will continue to impose
additional implementing or clarifying regulations as necessary in furtherance of
the Act.  The passage of the Act and the regulations implemented by
the SEC subject publicly-traded companies to additional and more extensive
reporting regulations and disclosure.  Compliance with the Act and
corresponding regulations will increase the Company’s expenses.





Effect of Governmental
Policies.  The earnings and businesses of the Bank are affected
by the policies of various regulatory authorities of the United States,
especially the Federal Reserve.  The Federal Reserve, among other
things, regulates the supply of credit and deals with general economic
conditions within the United States.  The instruments of monetary
policy employed by the Federal Reserve for those purposes influence in various
ways the overall level of investments, loans, other extensions of credit, and
deposits, and the interest rates paid on liabilities and received on
assets.





10


USA
Patriot Act





The terrorist attacks in September
2001, have led to the adoption of the Providing Appropriate Tools Required
to Intercept and Obstruct Terrorism Act of 2001, commonly known as the
USA Patriot Act. Part
of the USA Patriot Act
is the International Money
Laundering Abatement and financial Anti-Terrorism Act of
2001.  This act requires the Secretary of the Treasury, in
consultation with the heads of other government agencies, to adopt special
measures applicable to financial institutions.  These measures include
enhanced recordkeeping and reporting requirements for certain financial
transactions that are of primary money laundering concern, due diligence
requirements concerning the beneficial ownership of certain types of accounts,
and restrictions or prohibitions on certain types of accounts with foreign
financial institutions.  Among its other provision, this law requires
each financial institution to: (i) establish an anti-laundering program;
(ii) establish due diligence policies, procedures and controls with respect
to private banking accounts and correspondent banking accounts involving foreign
individuals and certain foreign banks; and (iii) avoid establishing,
maintaining, administering, or managing correspondent accounts in the United
States for, or on behalf of, a foreign bank that does not have a physical
presence in this country.  In addition, the law contains a provision
encouraging cooperation among financial institutions, regulatory authorities and
law enforcement authorities with respect to individuals, entities and
organizations engaged in, or reasonably suspected of engaging in, terrorist acts
or money laundering activities.  The law expands the circumstances
under which funds in a bank account may be forfeited and requires covered
financial institutions to respond under certain circumstances to requests for
information from federal banking agencies within 120 hours.





Emergency
Economic Stabilization Act





In response to the financial crisis
affecting the banking system and financial markets, the Emergency Economic
Stabilization Act (“EESA”) was signed into law on October 3, 2008, and
established the Troubled Asset Relief Program (“TARP”).  As part of
TARP, the U.S. Treasury established the Capital Purchase Program (“CPP”) to
provide up to $700 billion of funding to eligible financial institutions through
the purchase of capital stock and other financial instruments for the purpose of
stabilizing and providing liquidity to the U.S. financial markets. On January
23, 2009, AFSI issued $6.514 million in preferred stock to the U.S.
Treasury.  In connection with EESA, there have been numerous actions
by the Federal Reserve Board, Congress, the U.S. Treasury, the FDIC, the SEC and
others to further the economic and banking industry stabilization efforts under
EESA. It remains unclear at this time what further legislative and regulatory
measures will be implemented under EESA affecting AFSI.





American
Recovery and Reinvestment Act of 2009





On February 17, 2009 President Obama
signed into law the American Recovery and Reinvestment Act of 2009 (“ARRA”),
more commonly known as the economic stimulus or economic recovery package. ARRA
includes a wide variety of programs intended to stimulate the economy and
provide for extensive infrastructure, energy, health, and education needs. In
addition, ARRA imposes certain new executive compensation and corporate
expenditure limits on all current and future CPP recipients that are in addition
to those previously announced by the U.S. Treasury, until the institution has
repaid the U.S. Treasury, which is now permitted under ARRA without penalty and
without the need to raise new capital, subject to the U.S. Treasury’s
consultation with the recipient’s appropriate regulatory agency.





Other
Laws





The Bank’s loans will also be subject
to federal laws applicable to credit transactions, such as the following
(including the rules and regulations of various federal agencies charged with
the responsibility of implementing such federal laws):





·
            Federal Truth-in-Lending
      Act – governs disclosures of credit terms to consumer
      borrowers;




·
            Home Mortgage Disclosure
      Act – requires financial institutions to provide information to
      enable public officials to determine whether a financial institution is
      fulfilling its obligations to meet the housing needs of the community it
      serves;




·
            Equal Credit Opportunity
      Act – prohibits discrimination on the basis of race, creed or other
      prohibitive factors in extending
credit;




·
            Real Estate Settlement
      Procedures Act – requires lenders to disclose certain information
      regarding the nature and cost of real estate settlements, and prohibits
      certain lending practices, as well as limits escrow account amounts in
      real estate transactions; and




·
            Fair Credit Reporting
      Act – governs the manner in which consumer debts may be collected
      by collection agencies.




11





The
Company and the Bank’s operations are also subject to the:





·
            Right to Financial Privacy
      Act – imposes a duty to maintain confidentiality of consumer
      financial records and prescribes procedures for complying with
      administrative subpoenas of financial record;
  and




·
            Electronic Funds Transfer Act
      and Regulation E – governs automatic deposits to, and withdrawals
      from, deposit accounts and customer’s rights and liabilities arising from
      the use of debit cards, automated teller machines and other electronic
      banking services.




Liquidity





A Florida-chartered commercial bank is
expected to maintain an adequate liquidity reserve.  The liquidity
reserve may consist of cash on hand, cash on demand deposit with correspondent
banks and other investments and short-term marketable securities, such as
federal funds sold and United States securities or securities guaranteed by the
United States.





Competition





The Company encounters strong
competition both in making loans and in attracting deposits.  The
deregulation of the banking industry and the widespread enactment of state laws
which permit multi-bank holding companies as well as an increasing level of
interstate banking have created a highly competitive environment for commercial
banking.  In one or more aspects of its business, the Company competes
with other commercial banks, savings and loan associations, credit unions,
finance companies, mutual funds, insurance companies, brokerage and investment
banking companies, and other financial intermediaries.  Most of these
competitors, some of which are affiliated with bank holding companies, have
substantially greater resources and lending limits, and may offer certain
services that the Company does not currently provide.  In addition,
many of the Company’s non-bank competitors are not subject to the same extensive
federal regulations that govern bank holding companies and federally insured
banks.  Recent federal and state legislation has heightened the
competitive environment in which financial institutions must conduct their
business, and the potential for competition among financial institutions of all
types has increased significantly.





To compete, the Company relies upon
specialized services, responsive handling of customer needs, and personal
contacts by its officers, directors, and staff.  Large multi-branch
banking competitors tend to compete primarily by rate and the number and
location of branches while smaller, independent financial institutions tend to
compete primarily by rate and personal service.





Employees





As of December 31, 2009, the Company
and the Bank collectively had 28 full-time employees (including executive
officers) and 2 part-time employees.  The employees are not
represented by a collective bargaining unit.  The Company considers
relations with employees to be good.





Item 1A. Risk Factors.





Not
applicable.





Item 1B.  Unresolved Staff Comments.





Not
applicable.





Item
2. Properties





The
Bank’s main office is  located at 536 N. Monroe St. in an existing
20,000 sq. ft. building in Tallahassee, Florida formerly known locally as the
“Moon Jewelers Building.”  The Bank initially leased 5,000 sq. ft. for
a term of 5-years, of which 2,500 sq. ft. is for lobby space and 2,500 sq. ft.
is for office quarters and back room operations.  The location has a
full service lobby, walk up ATM in front of the building, and one drive-through
lane located in the rear of the building. The Bank has an option to renew the
lease for another 5-year term.  The Bank also has an option to expand
its operations into as much as 11,000 sq. ft. over the initial 5-year term, and
the option to purchase the building during the third year for $2.9 million,
during the fourth year for $3.2 million, and during the fifth year for $3.5
million.




12





The Bank
opened its first branch office at 1812 North Martin Luther King Blvd. shortly
after the opening of the main office.  The Bank also leases this
location for 5-years with options to renew the lease for two additional 5-year
periods.  The Bank does not have an option to buy this facility. This
location includes a 1,377 sq. ft lobby and six drive-thru lanes including a
drive-up ATM in one of the six drive–through lanes.





The Bank opened its second branch
office on Killearn Plaza Circle in the Killearn Lakes Plaza, in Tallahassee on
June 1, 2009 which is approximately 1617 square feet, with four teller stations
and two drive through lanes. The Bank also leases this location for 5 years with
options to renew the lease for two additional 5-year periods.  This
lease also has a purchase option under which the property can be purchased for
$1.2 million during the 1st through
13th
month of the lease; $1.3 million during the 14th through
the 24th month;
1.4 million during the 25th through
the 36th month
of the lease; $1.5 million during the 37th through
the 48th month
of the lease and $1.6 million during the 49th through
the 60th month
of the lease.  If the Company does not exercise the option to purchase
within lease months 1 to 60, the purchase option expires.





Item
3. Legal Proceedings





As of December 31, 2009, neither the
Company nor the Bank was a party to any legal proceedings which would have a
material affect on the Company’s or Bank’s operations.





Item
4. Removed and Reserved





13


PART
II





Item
5. Market
for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities





There is no public market for the
Common Stock and only isolated, privately negotiated sales of Common Stock have
occurred since the Bank opened for business in September 2007, and Pro Financial
became a bank holding company by acquiring the Bank on that same
date.  There is no established public trading market for the Common
Stock and, historically, the shares of Common Stock have been inactively
traded.  Management of the Company is aware of certain transactions in
its Common Stock, although the trading prices and number of shares transferred
in all transactions are not known.  The last known sale of stock
occurred at $7.50 per share.  On December 31 2009, Pro Financial had
approximately 261 shareholders of record.





Neither the Bank nor Pro Financial has
paid any cash dividends on the shares of Common Stock.  Pro Financial
does not intend to pay dividends for the foreseeable future.  If at
any time the Board of Directors of Pro Financial determines to pay dividends,
such payment will depend upon several factors including Pro Financial’s
earnings, financial condition and capital needs, the impact of legislation and
regulations as then in effect or as may be proposed, economic conditions, and
such other factors as the Board may deem relevant.  Further, dividend
payments by Pro Financial are restricted by statute.  Pro Financial’s
ability to make dividend payments also is subject to Pro Financial and the Bank
meeting on a continuing basis all of their capital requirements and achieving
and continuing profitable operations.  There can be no assurance that
future capital or earnings of the Bank will support dividend
payments.  No assurance can be given that dividends will be paid or,
if paid, what the amount of dividends will be or whether such dividends, once
paid, will continue.





The primary source of funds for payment
of dividends by Pro Financial will be dividends received from the
Bank.  Payments by the Bank to Pro Financial are limited by law and
regulations of the bank regulatory authorities.  There are various
statutory and contractual limitations on the ability of the Bank to pay
dividends to Pro Financial.  The FDIC and the Florida Office also have
the general authority to limit the dividends paid by banks if such payment may
be deemed to constitute an unsafe and unsound practice.  Under Florida
law applicable to banks and subject to certain limitations, after charging off
bad debts, depreciation and other worthless assets, if any, the board of
directors of a bank may declare a dividend of up to the bank’s aggregate net
income for the current year combined with any retained earnings for the
preceding two years as the board shall deem to be appropriate and, with the
approval of the Florida Office, may declare a dividend from retained earnings
for prior years.  No dividends may be paid at a time when a bank’s net
earnings from the preceding two years is a loss, or which would cause the
capital accounts of the bank to fall below the minimum amount required by law,
regulation, order, or any written agreement with the Florida Office or a federal
regulatory agency.





Florida law applicable to companies
(including the Company) provides that dividends may be declared and paid only
if, after giving it effect, (i) the company is able to pay its debts as they
become due in the usual course of business, and (ii) the company’s total assets
would be greater than the sum of its total liabilities plus the amount that
would be needed if the company were to be dissolved at the time of the dividend
to satisfy the preferential rights upon dissolution of shareholders whose
preferential rights are superior to those receiving the dividend.





The Bank did not repurchase any of its
shares in 2009.





As of
February 29, 2010:





·
            200,000
      shares of Company stock were reserved for issuance upon the exercise of
      outstanding stock options and 920,534 shares of Company stock were
      reserved for issuance upon the exercise of outstanding stock purchase
      warrants.





·
            The
      Company had no present intention of making any public offering of Company
      stock.





Item
6. Selected Financial Data





The following table presents selected
financial data for the Company.  The data for the fiscal year 2009 and
2008 is derived from audited financial statements of the Company. The selected
financial data should be read in conjunction with, and are qualified in their
entirety by, the financial statements and the notes thereto and the other
information included elsewhere herein.




14




SELECTED
CONSOLIDATED FINANCIAL DATA AT DECEMBER 31,


2009,
2008 and 2007 OR FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 and
2007


($
in thousands, except per share amounts)





2009
            
            
            2008
            
            
            2007Total
      assets
            
            $
            79,413
            
            
            $
            47,889
            
            
            $
            24,170Loans,
      net
            
            
            47,487
            
            
            
            27,593
            
            
            
            3,810Cash
      and cash equivalents
            
            
            9,836
            
            
            
            4,435
            
            
            
            11,509Securities
            
            
            16,410
            
            
            
            12,378
            
            
            
            6,364Deposits
            
            
            63,001
            
            
            
            30,457
            
            
            
            11,620Borrowed
      funds
            
            
            6,342
            
            
            
            6,055
            
            
            
            101Stockholders’
      equity
            
            
            9,947
            
            
            
            11,275
            
            
            
            12,399Interest
      income
            
            
            2,886
            
            
            
            1,715
            
            
            
            390Interest
      expense
            
            
            1,285
            
            
            
            547
            
            
            
            94Net
      interest income
            
            
            1,601
            
            
            
            1,168
            
            
            
            296Provision
      for loan losses
            
            
            (1,612
            )
            
            
            (794
            )
            
            
            (72
            )Net
      interest income after provision for loan losses
            
            
            (11
            )
            
            
            374
            
            
            
            224Noninterest
      income
            
            
            710
            
            
            
            143
            
            
            
            21Noninterest
      expense
            
            
            3,373
            
            
            
            2,730
            
            
            
            1,450Loss
      before income tax benefit
            
            
            (2,674
            )
            
            
            (2,213
            )
            
            
            (1,205
            )Income
      tax benefit
            
            
            1,005
            
            
            
            820
            
            
            
            534Net
      loss
            
            
            (1,669
            )
            
            
            (1,393
            )
            
            
            (671
            )Basic
      and diluted loss per share
            
            
            (1.25
            )
            
            
            (1.04
            )
            
            
            (0.50
            )Weighted
      average number of common shares outstanding,
              basic
      and diluted
            
            
            1,339,105
            
            
            
            1,334,840
            
            
            
            1,334,840





SELECTED
CONSOLIDATED FINANCIAL RATIOS


AND
OTHER DATA AS OF DECEMBER 31, 2009, 2008 and 2007:





2009
            
            
            2008
            
            
            2007Return
      on average assets
            
            
            (2.62
            )%
            
            
            (3.10
            )%
            
            
            (8.67
            )%Return
      on average equity
            
            
            (15.73
            )%
            
            
            (11.92
            )%
            
            
            (12.78
            )%Dividend
      payout ratio
            
            
            N/A
            
            
            
            N/A
            
            
            
            N/AAverage
      equity to total assets
            
            
            16.67
            %
            
            
            24.64
            %
            
            
            67.87
            %Total
      equity to total assets
            
            
            12.53
            %
            
            
            23.54
            %
            
            
            51.30
            %Yield
      on average earning assets(1)
            
            
            4.98
            %
            
            
            5.41
            %
            
            
            5.52
            %Net
      interest margin
            
            
            2.77
            %
            
            
            3.44
            %
            
            
            4.10
            %Nonperforming
      assets to total assets(2)
            
            
            2.93
            %
            
            
            1.12
            %
            
            
            0.24
            %Nonperforming
      loans to total loans
            
            
            4.14
            %
            
            
            1.88
            %
            
            
            0.16
            %Allowance
      for loan losses to gross loans
            
            
            3.37
            %
            
            
            2.97
            %
            
            
            1.85
            %Noninterest
      expenses to average assets
            
            
            5.30
            %
            
            
            7.54
            %
            
            
            18.67
            %Operating
      efficiency ratio(3)
            
            
            145.95
            %
            
            
            208.24
            %
            
            
            464.31
            %Net
      interest income to noninterest expenses
            
            
            47.47
            %
            
            
            42.78
            %
            
            
            19.88
            %Total
      shares outstanding
            
            
            1,379,566
            
            
            
            1,334,840
            
            
            
            1,334,840Book
      value per common share outstanding
            
            $
            7.21
            
            
            $
            8.42
            
            
            $
            9.29Number
      of banking offices (all full-service)
            
            
            3
            
            
            
            2
            
            
            
            2







(1)
            Reflects
      interest income as a percent of average interest earning
      assets.


(2)
            Non-performing
      loans consist of nonaccrual loans and accruing loans contractually past
      due ninety days or more.


(3)
            Noninterest
      expense divided by the sum of net interest income plus noninterest
      income.





15




Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations.





General





Pro Financial was incorporated on March
29, 2006 for the purpose of operating as a one-bank holding company. Pro
Financial currently owns 100% of the outstanding shares of the Bank
(collectively, the “Company”).  Pro Financial’s only business is the
ownership and operation of the Bank. The Bank is a Florida-chartered commercial
bank which opened for business on September 5, 2007.  The Bank’s
deposits are insured by the Federal Deposit Insurance Corporation. The Bank
provides community banking services to business and individuals from its banking
offices located in Tallahassee, Florida and the surrounding area.





The Bank's deposits are insured by the
Bank Insurance Fund of the Federal Deposit Insurance Corporation up to
applicable limits.  The operations of the Bank are subject to the
supervision and regulation of the FDIC and the Florida Office of Financial
Regulation.





Historically, the Bank's market area
has been served both by large banks headquartered out of state as well as a
number of community banks offering a higher level of personal attention,
recognition and service.  The large banks have generally applied a
transactional business approach, based upon volume considerations, to the market
while community banks have traditionally offered a more service relationship
approach.  Recent mergers and acquisitions have created an opportunity
for the Bank.  The Bank’s strategic focus is to exploit this
opportunity by catering to the “displaced bank customer” in this
marketplace.





The Bank provides a range of consumer
and commercial banking services to individuals, businesses and
industries.  The basic services offered by the Bank include: demand
interest bearing and noninterest bearing accounts, money market deposit
accounts, NOW accounts, time deposits, safe deposit services, credit cards,
debit cards, direct deposits, notary services, night depository, cashier’s
checks, savings bonds, bank drafts, automated teller services, drive-in tellers,
bill pay, internet banking and the full range of consumer loans, both
collateralized and uncollateralized.  In addition, the Bank makes
secured and unsecured commercial and real estate loans and issues stand-by
letters of credit.  The Bank provides automated teller machine (ATM)
cards and is a member of the Plus, Presto, Pulse and Star ATM network thereby
permitting customers to utilize the convenience of the Bank’s ATM network and
Star member machines both nationwide and internationally. The Bank does not have
trust powers and, accordingly, no trust services are provided.





The Bank’s target market is owner
occupied and non owner occupied commercial real estate, small businesses,
developers, consumers and professionals.  The small business customer
(typically a commercial entity with sales of $5 million or less) has the
opportunity to generate significant revenue for banks yet is generally
underserved by large bank competitors.  These customers generally can
afford profitability opportunities more than the average retail
customer.





The Bank
has actively pursued its targeted market for deposits, particularly the small
businesses and professionals.  In today’s environment, the product of
every system itself becomes a sales tool.  Recognizing that fact, the
Bank endeavors to offer current technology to the marketplace.  Such
technology includes debit cards, internet banking and voice response account
information systems.  The goal is to provide a “high tech - high
touch” experience.





The Bank has capitalized upon its
market strategy to grow in its 28-months of operation.  As of December
31, 2009, the Bank had grown to approximately $78.5 million in total assets,
$63.7 million in deposits, and $47.0 million in net loans since opening in
September 2007.  The Bank attributes its successful growth to its
location in a dynamic growth area and its focus on its targeted
market.





The revenues of the Bank are primarily
derived from interest on, and fees received in connection with, real estate and
other loans, from interest and dividends from investment securities, service
charge income generated from demand accounts and ATM fees, and other
services.  The principal sources of funds for the Bank’s lending
activities are its deposits, loan repayments, and proceeds from investment
securities.  The principal expenses of the Bank are the interest paid
on deposits, and operating and general administrative expenses.





16


Lending
Activities





The Bank’s loans are concentrated in
commercial and real estate loans.  A majority of the Bank’s loans are
made on a secured basis, and, as of December 31, 2009, approximately 83.79% of
the loan portfolio consisted of loans secured by first or second mortgages on
residential or commercial real estate compared to 77.1% as of December 31,
2008.





The Bank’s real estate loans are
secured by mortgages and consist primarily of loans to individuals and
businesses for the purchase, construction of, improvement of or investment in
real estate, or for various other consumer and business purposes (whether or not
related to the real estate securing them).  The Bank also engages in
lending to individuals and builders for the construction of single-family
residences.  These real estate loans may be made at fixed or variable
interest rates.  The Bank generally makes commercial real estate loans
repayable in monthly installments based on up to a 20-year amortization schedule
which become payable in full for terms generally five years or
less.  The Bank’s residential real estate loans generally are
repayable in monthly installments based on up to a 30-year amortization schedule
with variable interest rates.  Fixed rate residential loans are
available and are subsequently sold on the secondary market.





The Bank
also makes non-real estate commercial loans which include loans to individuals
and small-to-medium sized businesses and professionals located primarily in
Leon, Gadsden, Wakulla and Jefferson Counties for working capital, equipment
purchases, and various other business purposes.  A majority of these
commercial loans are secured by inventory, equipment or similar assets, but
these loans may also be made on an unsecured basis.  Commercial loans
may be made at variable or fixed rates of interest; typically, those loans which
will have terms or amortization schedules of longer than one year will carry
interest rates which vary with the prime lending rate and are generally
refinanced or become payable in full in three to five years.





The Bank’s installment loan portfolio
consists primarily of loans to individuals for various consumer purposes, but
includes some business purpose loans made to individuals which are payable on an
interest only or installment basis.  The majority of these loans are
for terms of less than five years and are secured by liens on various personal
assets of the borrowers, but installment loans also may be made on an unsecured
basis.  Installment loans are made at fixed and variable interest
rates, and may be made based on up to a ten-year amortization schedule,
depending on the collateral provided.





For additional information regarding
the Bank’s loan portfolio, see“Page 25 Loan Portfolio” and “Page 26 Lending Activities" and footnote 3
to the consolidated financial statements.





Liquidity





Liquidity management involves the
ability to meet the cash flow requirements of customers who may be either
depositors wanting to withdraw their funds or borrowers needing assurance that
sufficient funds will be available to meet their credit needs.  In the
ordinary course of business, the Bank’s cash flows are generated from interest
and fee income, as well as from loan repayments, the sale, repayments or
maturity of securities available-for-sale.  In addition to cash and
due from banks, the Bank considers all securities available-for-sale and federal
funds sold as primary sources of asset liquidity.  Many factors affect
the ability to accomplish these liquidity objectives successfully, including the
economic environment, the asset/liability mix within the balance sheet, as well
as the Bank’s reputation in the community.  The Bank’s principal
sources of funds are net increases in deposits, principal and interest payments
on loans and proceeds from sales, calls and maturities of
securities.  The Bank used its capital resources primarily to fund
existing and continuing loan commitments and to purchase securities. At December
31, 2009, the Bank had commitments to originate loans totaling $5.7 million,
compared to $432,000 as of December 31, 2008 and had $100,000 of standby letters
of credit.  At December 31, 2009, the Bank also had commitments to
extend credit under the undisbursed portion of outstanding lines of credit of
$9.5 million compared to $2.7 million as of December 31,
2008.  Scheduled maturities of certificates of deposit during the
twelve months following December 31, 2009 totaled $36.7 million compared to
$12.2 million for the twelve months following December 31,
2008.  Management believes that the Bank has adequate resources to
fund all its commitments, that substantially all of its existing commitments
will be funded in the subsequent twelve months and, if so desired, that it can
adjust the rates on certificates of deposit and other deposit accounts to retain
deposits in a changing interest rate environment.




17


Capital
Resources, Commitments and Capital Requirements





The
Company’s principal sources of funds are those generated by the Bank, including
net increases in deposits and other borrowings, principal and interest payments
on loans, and proceeds from maturities of investment securities.





The Company uses its capital resources
principally to fund existing and continuing loan commitments and to purchase
investment securities.  Off-balance sheet commitments to extend
credit, which amounted to $15.3 at December 31, 2009, represent legally binding
agreements to lend to customers with fixed expiration dates or other termination
clauses.  Since many commitments are expected to expire without being
funded, committed amounts do not necessarily represent future cash
requirements.





The
following table summarizes the Company’s contractual obligations, including
certain on-balance sheet and off-balance sheet obligations, at December 31, 2009
(in thousands):





Payments
      Due by PeriodContractual
      Obligations
            
            Total
            
            
            Less
              Than
      1
              Year
            
            
            1-3
              Years
            
            
            3-5
              Years
            
            
            More
              Than
      5
              YearsTime
      deposit maturities
            
            $
            39,212
            
            
            $
            36,682
            
            
            $
            2,530
            
            
            
            -0-
            
            
            
            -0-Other
      borrowings
            
            
            6,342
            
            
            
            342
            
            
            
            6,000
            
            
            
            -0-
            
            
            
            -0-Loan
      commitments
            
            
            5,671
            
            
            
            5,671
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-Standby
      letters of credit
            
            
            100
            
            
            
            100
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-Undisbursed
      line of credit loans
            
            
            9,486
            
            
            
            9,486
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-Total
            
            $
            60,811
            
            
            $
            52,281
            
            
            $
            8,530
            
            
            
            -0-
            
            
            
            -0-





Management
believes that the Company has adequate resources to fund all its commitments,
that substantially all of its existing commitments will be funded within 12
months and, if so desired, that the Company can adjust the rates and terms on
time deposits and other deposit accounts to retain or obtain new deposits in a
changing interest rate environment.





The Company’s stockholders’ equity was
$9.9 million at December 31, 2009, representing 12.47% of total assets as
compared to $11.3 million at December 31, 2008 representing 23.59% of total
assets.





The federal banking regulatory
authorities have adopted certain “prompt corrective action” rules with respect
to depository institutions. The rules establish five capital tiers: “well
capitalized,” “adequately capitalized,” “undercapitalized,” “significantly
undercapitalized,” and “critically undercapitalized.” The various federal
banking regulatory agencies have adopted regulations to implement the capital
rules by, among other things, defining the relevant capital measures for the
five capital categories.  An institution is deemed to be “well
capitalized” if it has a total risk-based capital ratio of 10% or greater, a
Tier 1 risk-based capital ratio of 6% or greater, and a Tier 1 leverage ratio of
5% or greater and is not subject to a regulatory order, agreement, or directive
to meet and maintain a specific capital level.  At December 31, 2009,
the Bank met the capital ratios of a “well capitalized” financial institution
with a total risk-based capital ratio of 17.55% Tier 1 risk-based capital ratio
of 14.66%, and a Tier 1 leverage ratio of 10.42%.  Depository
institutions which fall below the “adequately capitalized” category generally
are prohibited from making any capital distribution, are subject to growth
limitations, and are required to submit a capital restoration
plan.  There are a number of requirements and restrictions that may be
imposed on institutions treated as “significantly undercapitalized” and, if the
institution is “critically undercapitalized,” the banking regulatory agencies
have the right to appoint a receiver or conservator.




18


The following table summarizes the
regulatory capital levels and ratios for the Bank:





Actual
              Bank Ratios
            
            
            Regulatory
              Requirement
      for
              Well
      Capitalized
              BankAt
      December 31, 2009:Total
      capital to risk-weighted assets
            
            
            17.55
            %
            
            
            10.0
            %Tier
      I capital to risk-weighted assets
            
            
            14.66
            %
            
            
            6.0
            %Tier
      I capital to average assets – leverage ratio
            
            
            10.42
            %
            
            
            5.0
            %





Loan
Portfolio





A significant source of the Bank’s
income is the interest earned on its loan portfolio.  At December 31,
2009, the Bank’s total assets were $78.5 million and its net loans receivable
were $47 million or 59.87% of total assets and 73.78% of total
deposits.  This compares to December 31, 2008, when the Bank’s total
assets were $46.8 million and its net loans receivable were $27.1 million or
57.91% of total assets and 88.78% of total deposits.





The Bank’s primary market area consists
of Tallahassee, Florida and the surrounding counties (consisting primarily of
Leon, Gadsden, Wakulla and Jefferson Counties).  The Bank’s market
area’s economic base is diversified.  Significant industries include 3
universities, state and city government, agribusiness and manufacturing, service
enterprises, technology and information concerns.  Adverse conditions
in any one or more of the industries operating in such markets or a slow-down in
general economic conditions could have an adverse effect on the
Bank.





Lending activities are conducted
pursuant to a written policy which has been adopted by the Bank.  Each
loan officer has defined lending authority beyond which loans, depending upon
their type and size, must be reviewed and approved by a loan committee comprised
of certain officers and directors of the Bank.





The composition of the Bank’s loan
portfolio as of December 31, 2009, 2008 and 2007 was as follows ($ in
thousands):





Amount
            
            
            %
      of
            
            
            Amount
            
            
            %
      of
            
            
            Amount
            
            
            %
      of2009
            
            
            Total
            
            
            2008
            
            
            Total
            
            
            2007
            
            
            TotalCommercial
      Real Estate
            
            $
            35,123
            
            
            
            72.06
            
            
            $
            16,258
            
            
            
            59.04
            
            
            $
            2,200
            
            
            
            64.76Residential
      real estate and home equity
            
            
            5,634
            
            
            
            11.56
            
            
            
            4,949
            
            
            
            17.97
            
            
            
            144
            
            
            
            4.24Commercial
      other that real estate
            
            
            5,528
            
            
            
            11.34
            
            
            
            4,019
            
            
            
            14.59
            
            
            
            669
            
            
            
            19.69Consumer
            
            
            2,459
            
            
            
            5.04
            
            
            
            2,312
            
            
            
            8.40
            
            
            
            384
            
            
            
            11.31Total
      Loans
            
            
            48,744
            
            
            
            100.00
            
            
            
            27,538
            
            
            
            100.00
            
            
            
            3,397
            
            
            
            100.00Less
      allowance for loan losses
            
            
            1,628
            
            
            
            3.34
            
            
            
            .371
            
            
            
            1.35
            
            
            
            .71
            
            
            
            2.09Less
      deferred loan costs
            
            
            .101
            
            
            
            .21
            
            
            
            0.64
            
            
            
            .23
            
            
            
            .14
            
            
            
            .41Loans
      receivable-net
            
            
            47,015
            
            
            
            96.42
            
            
            
            27,103
            
            
            
            98.42
            
            
            
            3,312
            
            
            
            97.50





Maturities of
Loans.The following table shows the contractual maturities of
the Bank's loan portfolio at December 31, 2009. Loans with scheduled maturities
(based on only contract term) are reported in the maturity category in which the
payment is due.  Demand loans with no stated maturity and overdrafts,
if any, are reported in the "due one year or less" category.  Loans
that have adjustable rates are shown as amortizing to final maturity rather than
when the interest rates are next subject to change.  The table does
not include prepayment or scheduled principal repayments. ($ in
thousands).





Type of Loan
            
            Due
      in
              1
      Year
              or Less
            
            
            Due
      After
              1
      to
              5 Years
            
            
            Due
              After
              5 Years
            
            
            TotalCommercial
            
            $
            3,303
            
            
            $
            1,640
            
            
            $
            586
            
            
            $
            5.5Consumer
            
            
            1,607
            
            
            
            816
            
            
            
            22
            
            
            
            2.5Real
      estate
            
            
            16,633
            
            
            
            20,952
            
            
            
            3,185
            
            
            
            40.7Total
            
            $
            21,543
            
            
            $
            23,408
            
            
            $
            3,793
            
            
            $
            48.7




19




For
the above loans due after one year or more, the following is a presentation of
an analysis of sensitivities to changes in interest rates at December 31,
2009:





Type of Loan
            
            Fixed
              Interest
              Rate
            
            
            Floating
              Interest
              Rate
            
            
            TotalCommercial
            
            
            7.11
            %
            
            
            6.33
            %
            
            
            6.76
            %Consumer
            
            
            7.71
            %
            
            
            5.24
            %
            
            
            6.06
            %Real
      estate
            
            
            6.74
            %
            
            
            6.21
            %
            
            
            6.53
            %Total
            
            
            6.81
            %
            
            
            6.15
            %
            
            
            6.51
            %





Loan
Quality





Management seeks to maintain a high
quality of loans through sound underwriting and lending practices.  As
of December 31, 2009 approximately 83.62%, of the total loan portfolio was
collateralized by commercial and residential real estate mortgages compared to
77.01% at December 31 2008.  The level of non-performing loans and
real estate owned also is relevant to the credit quality of a loan
portfolio.  As of December 31, 2009 there were $1,328 in
non-performing loans (those 90 days or more past due).





The commercial real estate mortgage
loans in the Bank’s portfolio consist of fixed and adjustable-interest rate
loans which were originated at prevailing market interest rates.  The
Bank’s policy has been to originate commercial real estate mortgage loans
predominantly in its primary market area.  Commercial real estate
mortgage loans are generally made in amounts up to 80% of the appraised value of
the property securing the loan and entail significant additional risks compared
to residential mortgage loans.  In making commercial real estate
loans, the Bank primarily considers the net operating income generated by the
real estate to support the debt service, the financial resources and income
level and managerial expertise of the borrower and/or guarantor, the
marketability and inventory value of the collateral and the Bank’s lending
experience with the borrower.





Unlike residential mortgage loans,
which generally are made on the basis of the borrower’s ability to make
repayment from his employment and other income and which are collateralized by
real property whose value tends to be more readily ascertainable, commercial
loans typically are underwritten on the basis of the borrower’s ability to make
repayment from the cash flow of his business and generally are collateralized by
business assets, such as accounts receivable, equipment and
inventory.  As a result, the availability of funds for the repayment
of commercial loans may be substantially dependent on the success of the
business itself, which is subject to adverse conditions in the
economy.  The collateral underlying the loans may depreciate over
time, cannot be appraised with as much precision as residential real estate, and
may fluctuate in value based on the success of the business.





The Bank makes consumer and personal
loans on a collateralized and noncollateralized basis.  These loans
are often collateralized by automobiles, recreational vehicles and mobile homes.
Consumer and personal loans also are generated by the Bank.  Such
loans generally have a term of 60 months or less.





Loan concentrations are defined as
amounts loaned to a number of borrowers engaged in similar activities which
would cause them to be similarly impacted by economic or other
conditions.  The Bank, on a routine basis, monitors these
concentrations in order to consider adjustments in its lending practices to
reflect economic conditions, loan to deposit ratios, and industry
trends.  As of December 31, 2009 loans collateralized with mortgages
on real estate represented 83.62% of the loan portfolio and were to borrowers in
varying activities and businesses.  This compared to 77.01% of loans
collateralized with mortgages on real estate at December 31, 2008.





The Loan Committee of the Board of
Directors of the Bank concentrates its efforts and resources, and that of its
senior management and lending officers, on loan review and underwriting
procedures.  Internal controls include ongoing reviews of loans made
to monitor documentation and the existence and valuations of
collateral.  In addition, management of the Bank has established a
review process with the objective of identifying, evaluating, and initiating
necessary corrective action for marginal loans.  The goal of the
portfolio maintenance process is to address classified and non-performing loans
as early as possible.




20


Classification
of Assets and Potential Problem Loans





Generally, interest on loans accrues
and is credited to income based upon the principal balance
outstanding.  It is management’s policy to discontinue the accrual of
interest income and classify a loan as non-accrual when principal or interest is
past due 90 days or more unless, in the determination of management, the
principal and interest on the loan are well collateralized and in the process of
collection, or when in the opinion of management, principal or interest is not
likely to be paid in accordance with the terms of the
obligation.  Consumer installment loans are generally charged-off
after 90 days of delinquency unless adequately collateralized and in the process
of collection.  Loans are not returned to accrual status until
principal and interest payments are brought current and future payments appear
reasonably certain.  Interest accrued and unpaid at the time a loan is
placed on nonaccrual status is charged against interest income.





Real estate acquired by the Bank as
a result of foreclosure or by deed in lieu of foreclosure is classified as other
real estate owned (“OREO”).  OREO properties are recorded at the lower
of cost or fair value less estimated selling costs, and the estimated loss, if
any, is charged to the allowance for credit losses at the time it is transferred
to OREO.  Further write-downs in OREO are recorded at the time
management believes additional deterioration in value has occurred and are
charged to noninterest expense.  As of December 31, 2009 the Company
had $315,000 in OREO.





The Bank has adopted Statements of
Financial Accounting Standards No. 114 and 118.  These Statements
address the accounting by creditors for impairment of certain loans and
generally require the Bank to identify loans, for which the Bank probably will
not receive full repayment of principal and interest, as impaired
loans.  The Statements require that impaired loans be valued at the
present value of expected future cash flows, discounted at the loan’s effective
interest rate, or at the observable market price of the loan, or the fair value
of the underlying collateral if the loan is collateral dependent.  The
Bank has implemented the Statements by including in its quarterly review of the
adequacy of the allowance for credit losses, to also identify and value impaired
loans in accordance with guidance in the Statements. Seventeen (17) loans, in
the amount of $4,603,000 were deemed to be impaired under the Bank’s policy at
December 31, 2009 compared to one loan in the amount of $35,000 which was
impaired at December 31, 2008.





Classified
Assets.  Federal regulations and the Bank's policy require the
classification of loans and other assets, such as debt and equity securities,
considered to be of lesser quality as "substandard", "doubtful" or "loss"
assets.  An asset would be considered "substandard" if it is
inadequately protected by the current net worth and paying capacity of the
obligator or of the collateral pledged, if any.  "Substandard" assets
include those characterized by the "distinct possibility" that the institution
will sustain "some loss" if the deficiencies are not
corrected.  Assets that would be classified as "doubtful" have all of
the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full", on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable."  Assets that would be classified as
"loss" are those considered "uncollectible" and of such little value that their
continuance as assets without the establishment of a specific loss reserve is
not warranted.  In addition, the Bank's policies require that assets
which do not currently expose the insured institution to sufficient risk to
warrant classification as substandard but possess other weaknesses are
designated "special mention" by management.





If an asset is classified, the
estimated fair value of the asset would be determined and if that value is loss
than the then carrying value of the asset, the difference would be established
as a specific reserve.  If an asset is classified as loss, the amount
of the asset classified as loss would be reserved.  General reserves
or general valuation allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities
but, unlike specific reserves, are not allocated to particular
assets.





At December 31, 2009, there were five
loans, totaling $1,029,423, classified as "special mention" compared to one (1)
loan totaling $643,000 classified “special mention” at December 31,
2008.  There were thirteen (13) loans classified as “substandard”
totaling $3,639,312, no loans classified "doubtful" and no classified "loss" at
December 31, 2009.  This compared to six (6) loans classified as
“substandard” totaling $1,234,000, no loans classified "doubtful" and two (2)
classified "loss" totaling $535,000 at December 31, 2008.  There were
no concentration of loans exceeding 10% of total loans which has not been
disclosed as a category of loans.




21


Nonperforming
Assets (dollars in thousands)





At December 31,2009
            
            
            2008
            
            
            2007Nonperforming
      loansNonaccrual loans
            
            $
            1,328
            
            
            $
            0
            
            
            $
            0Loans past due 90 days still
      accruing
            
            
            0
            
            
            
            0
            
            
            
            0Total nonperforming
      loans
            
            $
            1,328
            
            
            $
            0
            
            
            $
            0Other
      nonperforming assets
              Other real estate
      owned
            
            $
            315
            
            
            $
            0
            
            
            $
            0Repossessed
assets
            
            
            0
            
            
            
            0
            
            
            
            0$
            315
            
            
            $
            0
            
            
            $
            0Total nonperforming
      assets
            
            $
            1,643
            
            
            $
            0
            
            
            $
            0





Highly leveraged transactions generally
include loans and commitments made in connection with recapitalizations,
acquisitions, and leveraged buyouts, and result in the borrower’s debt-to-total
assets ratio exceeding 75%.  At December 31, 2009, 2008, and 2007,
there were no loans qualified as highly leveraged transactions.





Loans restructured and in compliance
with modified terms are commonly referred to as “troubled debt restructurings.”
A restructuring of debt constitutes a Troubled Debt Restructuring (“TDR”) if a
creditor for economic or legal reasons related to the debtor’s financial
difficulties grants a concession to the debtor it would not otherwise consider.
A summary of loans we classified TDR at December 31 follows (dollars in
thousands) to be collateral dependent:





2009
            
            
            2008
            
            
            2007Loans
      restructured and in compliance with modified terms
            
            $
            1,106
            
            
            $
            0
            
            
            $
            0Loans
      restructured and past due 30-89 days
            
            
            871
            
            
            
            0
            
            
            
            0Loans
      restructured and in nonaccrual status
            
            
            496
            
            
            
            0
            
            
            
            0Total
            
            $
            2,473
            
            
            $
            0
            
            
            $
            0





Allowance for Loan Losses.We
must maintain an adequate allowance for loan losses (“ALLL”) based on a
comprehensive methodology that assesses the probable losses inherent in our loan
portfolio. We maintain an ALLL based on a number of quantitative and qualitative
factors, including levels and trends of past due and non-accrual loans, asset
classifications, loan grades, change in volume and mix of loans, collateral
value, historical loss experience, size and complexity of individual credits and
economic conditions. Provisions for loan losses are provided on both a specific
and general basis. Specific allowances are provided for impaired credits for
which the expected/anticipated loss is measurable. General valuation allowances
are based on a portfolio segmentation based on risk grading with a further
evaluation of various quantitative and qualitative factors noted
above.





We
periodically review the assumptions and formulas by which additions are made to
the specific and general valuation allowances for losses in an effort to refine
such allowances in light of the current status of the factors described above.
The methodology is presented to and approved by the Board of Directors. Future
additional provisions to the loan loss reserves may be made as appropriate as
new loans are identified or as existing loans may deteriorate.





All
adversely classified loans are carefully evaluated for losses or potential loss
exposure. The evaluation occurs at the time the loan is classified and on a
regular basis thereafter (at least quarterly). This evaluation is documented in
a problem asset status report relating to a specific loan or relationship.
Specific allocation of reserves considers the value of the collateral, the
financial condition of the borrower, and industry and current economic trends.
We review the collateral value, cash flow, and tertiary support on each
classified credit. Any deficiency outlined by a real estate collateral
evaluation liquidation analysis, or cash flow shortfall is accounted for through
a specific allocation reserve calculation for the loan.




22


We also
perform a portfolio segmentation based on risk grading. Loans are rated into
different categories, with a percentage of the portfolio, based on grade,
allocated to the allowance. The loss factors for each risk grade are determined
by management based on management’s overall assessment of the overall credit
quality at month end taking into account various quantitative and qualitative
factors such as trends of past due and non-accrual loans, asset classifications,
loan grades, collateral value, historical loss experience and economic
conditions.





The following table sets forth
information with respect to activity in the allowance for loan losses for the
years ended December 31, 2009, December 31, 2008 December 31, 2007 (dollars in
thousands).





Year
      Ended
              December 31,
              2009
            
            
            Year
      Ended
              December 31,
              2008
            
            
            Year
      Ended
              December 31,
              2007Average
      loans outstanding
            
            $
            37,070
            
            
            $
            16,224
            
            
            $
            651Allowance
      at beginning of period
            
            
            846
            
            
            
            72
            
            
            
            0Provision
      for loan losses
            
            
            1,612
            
            
            
            794
            
            
            
            72Charge
      offs
            
            
            (860
            )
            
            
            (35
            )
            
            
            (0
            )Recoveries
            
            
            30
            
            
            
            15
            
            
            
            0Allowance
      at end of period
            
            
            1,628
            
            
            
            846
            
            
            
            72Allowance
      as a percent of total loans
            
            
            3.31
            %
            
            
            2.97
            %
            
            
            1.85
            %Total
      loans at end of period
            
            $
            49,216
            
            
            $
            28,503
            
            
            $
            3,896





While
management believes our allowance for loan losses is adequate as of December 31,
2009, future adjustments to our allowance may be necessary if economic
conditions differ substantially from the assumptions used in making the
determination.





At December 31, 2009 the Bank's
general allowance for possible loan losses by type of loan was allocated by
using peer group averages and actual loss experiences of peers, as follows: (in
thousands)


Amount
              
              
              %
      of Loans to Total LoansAt
      the end of year allocated to:Commercial
              
              $
              63
              
              
              
              9.37
              %Commercial
      real estate
              
              
              366
              
              
              
              72.46
              %Residential
      real estate
              
              
              15
              
              
              
              3.57
              %Home
      equity
              
              
              25
              
              
              
              5.79
              %Construction
              
              
              32
              
              
              
              4.19
              %Consumer
              
              
              33
              
              
              
              4.62
              %Total
              
              $
              534
              
              
              
              100.00
              %





[Intentionally
left blank]




23




Investment
Securities





The Bank’s investment portfolio has
been classified as Available for Sale with no securities classified as Held to
Maturity.  The following table sets forth the book value of the Bank’s
investment portfolio at December 31, 2009 ($ in thousands):





At
              December 31,
              2009
            
            
            At
              December 31,
              2008
            
            
            At
              December 31,
              2007Securities
      available for saleMortgage-backed
      securities
            
            $
            9,295
            
            
            $
            10,596
            
            
            $
            5,366U.S. Government agency
      securities
            
            
            3,000
            
            
            
            1,500
            
            
            
            1,000Corporate
      securities
            
            
            4,144
            
            
            
            0
            
            
            
            0Total securities available for
      sale
            
            $
            16,439
            
            
            $
            12,096
            
            
            $
            6,356





The Bank's mortgage-backed
securities consist of 14 securities issued either by the Federal National
Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation
(“FHLMC”).





The book value and weighted average
yields for investments at December 31, 2009 are shown below ($ in
thousands):





Corporate
            
            
            Mortgage
              Backed
            
            
            U.S.
              Government
              Agency
              Securities
            
            
            Total
            
            
            Weighted
              Average
              Yields(1)Maturing
      InAfter
      1 through 5 years
            
            $
            4,144
            
            
            $
            856
            
            
            $
            0
            
            
            $
            5,000
            
            
            
            4.39
            %After
      5 through 10 years
            
            
            0
            
            
            
            0
            
            
            
            3,000
            
            
            
            3,000
            
            
            
            3.33After
      10 years
            
            
            0
            
            
            
            8,439
            
            
            
            0
            
            
            
            8,439
            
            
            
            3.56Total
            
            $
            4,144
            
            
            $
            9,295
            
            
            $
            3,000
            
            
            $
            16,439
            
            
            
            3.77
            %





(1) All
securities are listed at actual yield and not on a tax equivalent
basis.  No securities are tax exempt.





The Bank has adopted Statement of
Financial Accounting Standards No. 115 (“FAS 115"), which requires companies to
classify investments securities, including mortgage-backed securities as either
held-to-maturity or available-for-sale.  Securities classified as
held-to-maturity are carried at amortized cost.  Securities classified
as available-for-sale are reported at fair value, with unrealized gains and
losses, net of tax effect, reported as a separate component of stockholders’
equity.  As of December 31, 2009, none of the Bank’s securities were
classified as available-for-sale.





Deposit
Activities





Deposits are the major source of the
Bank’s funds for lending and other investment purposes.  Deposits are
attracted principally from within the Bank’s primary market area through the
offering of a broad variety of deposit instruments including checking accounts,
money market accounts, regular savings accounts, term certificate accounts
(including “jumbo” certificates in denominations of $100,000 or more) and
retirement savings plans. The distribution by type of the Bank’s deposit
accounts as of December 31, 2009, 2008 and 2007, was as follows ($ in
thousands):







[Table
follows this page]




24


Distribution
of Deposit Accounts by Type (dollars in thousands):


At
      December 31,2009
              
              
              2008
              
              
              2007%
      of
              
              
              
              
              
              %
      of
              
              
              
              
              
              %
      ofAmount
              
              
              Deposits
              
              
              Amount
              
              
              Deposits
              
              
              Amount
              
              
              DepositsDemand
      deposits
              
              
              $
              8,427
              
              
              
              13.24
              %
              
              $
              6,916
              
              
              
              22.66
              %
              
              $
              3,402
              
              
              
              29.25
              %NOW
      deposits
              
              
              
              3,105
              
              
              
              4.88
              
              
              
              2,186
              
              
              
              7.16
              
              
              
              683
              
              
              
              5.87Money
      market deposits
              
              
              
              12,509
              
              
              
              19.65
              
              
              
              6,093
              
              
              
              19.96
              
              
              
              5,423
              
              
              
              46.63Savings
      deposits
              
              
              
              400
              
              
              
              0.63
              
              
              
              237
              
              
              
              0.77
              
              
              
              93
              
              
              
              0.80Subtotal
              
              
              $
              24,441
              
              
              
              38.40
              %
              
              $
              15,432
              
              
              
              50.55
              %
              
              $
              9,601
              
              
              
              82.55
              %Certificates
      of deposit:1.00%
      - 1.99%
              
              
              
              4,154
              
              
              
              6.52
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              02.00%
      - 2.99%
              
              
              
              21,114
              
              
              
              33.17
              
              
              
              3,065
              
              
              
              10.04
              
              
              
              0
              
              
              
              03.00%
      - 3.99%
              
              
              
              11,605
              
              
              
              18.23
              
              
              
              11,855
              
              
              
              38.84
              
              
              
              0
              
              
              
              04.00%
      - 4.99%
              
              
              
              2,339
              
              
              
              3.69
              
              
              
              175
              
              
              
              0.57
              
              
              
              2,209
              
              
              
              17.455.00%
      - 5.99%
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0Less
      fees on brokered deposits
              
              
              
              9
              
              
              
              (0.01
              )
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0Total
      certificates of deposit (1)
              
              
              $
              39,212
              
              
              
              61.60
              
              
              
              15,095
              
              
              
              49.45
              
              
              
              2,209
              
              
              
              17.45Total
      deposits
              
              
              $
              63,653
              
              
              
              100.00
              %
              
              $
              30,527
              
              
              
              100.00
              %
              
              $
              11,810
              
              
              
              100.00
              %








(1)
            Includes
      retirement accounts (in thousands) totaling $1,108,000, $82,000, and
      $16,000, in 2009, 2008, and 2007, respectively, all of which were in the
      form of certificates of deposit.




Average
Deposits and Average Rates (dollars in thousands):




At
      December 31,2009
              
              
              2008
              
              
              2007Average
              
              
              Average
              
              
              Average
              
              
              Average
              
              
              Average
              
              
              AverageBalance
              
              
              Rate
              
              
              Balance
              
              
              Rate
              
              
              Balance
              
              
              RateDemand,
      money market and NOW deposits
              
              $
              17,181
              
              
              
              0.83
              %
              
              $
              15,104
              
              
              
              1.32
              %
              
              $
              2,366
              
              
              
              2.20
              %Savings
      deposits
              
              
              335
              
              
              
              0.66
              
              
              
              209
              
              
              
              2.00
              
              
              
              17
              
              
              
              2.59Certificates
      of deposit
              
              
              30,248
              
              
              
              2.70
              
              
              
              7,439
              
              
              
              3.86
              
              
              
              497
              
              
              
              4.60Total
      deposits
              
              $
              47,764
              
              
              
              2.39
              %
              
              $
              22,752
              
              
              
              2.15
              %
              
              $
              2,880
              
              
              
              2.71
              %





Time deposits of $100,000 and over,
public fund deposits and other large deposit accounts tend to be short-term in
nature and more sensitive to changes in interest rates than other types of
deposits and, therefore, may be a less stable source of funds.  In the
event that existing short-term deposits are not renewed, the resulting loss of
the deposited funds could adversely affect the Bank’s liquidity.  In a
rising interest rate market, such short-term deposits may prove to be a costly
source of funds because their short-term nature facilitates renewal at
increasingly higher interest rates, which may adversely affect the Bank’s
earnings.  However, the converse is true in a falling interest-rate
market where such short-term deposits are more favorable to the
Bank.





Time
Deposits of $100,000 or more with remaining maturities of (dollars in
thousands):




December
      31,2009
              
              
              2008
              
              
              2007Due
      in three months or less
              
              $
              10,916
              
              
              $
              4,477
              
              
              $
              0Over
      three through twelve months
              
              
              20,797
              
              
              
              7,668
              
              
              
              1,365Over
      twelve months through three years
              
              
              0
              
              
              
              352
              
              
              
              0Over
      three years
              
              
              0
              
              
              
              0
              
              
              
              0$
              31,713
              
              
              $
              12,497
              
              
              $
              1,365
  25


Maturity terms, service fees and
withdrawal penalties are established by the Bank on a periodic
basis.  The determination of rates and terms is predicated on funds
acquisition and liquidity requirements, rates paid by competitors, growth goals
and federal regulations.





FDIC regulations limit the ability of
certain insured depository institutions to accept, renew, or rollover deposits
by offering rates of interest which are significantly higher than the prevailing
rates of interest on deposits offered by other insured depository institutions
having the same type of charter in such depository institutions’ normal market
area.  Under these regulations, “well capitalized” depository
institutions may accept, renew, or roll over deposits at such rates without
restriction, “adequately capitalized” depository institutions may accept, renew
or roll over deposits at such rates with a waiver from the FDIC (subject to
certain restrictions on payments of rates), and “undercapitalized” depository
institutions may not accept, renew or roll over deposits at such
rates.  The regulations contemplate that the definitions of “well
capitalized,” “adequately capitalized” and “undercapitalized” will be the same
as the definitions adopted by the agencies to implement the prompt corrective
action provisions of applicable law.  See “Supervision and
Regulation -- Capital Requirements.”  As of December 31, 2009, the
Bank met the definition of a “well capitalized” depository
institution.





The Bank
does not have a concentration of deposits from any one source, the loss of which
would have a material adverse effect on the Bank.  Management believes
that substantially all of the Bank’s depositors are residents in its primary
market area.





Borrowings





During 2009, the Company entered into
short-term borrowing arrangements with customers consisting of securities sold
under repurchase agreements.  The agreements are on a demand basis and
call for the payment of interest based on the federal funds rate.





The following summarizes these
borrowings as of December 31, 2009:




Balance
      outstanding at year-end
                
                $
                342,000Average
      balance outstanding during the year
                
                $
                721,000Maximum
      amount outstanding at any month-end during year
                
                $
                1,038,000Average
      interest rate paid
                
                
                0.31
                %




The Bank
also had an agreement with the Independent Bankers Bank of Florida to borrow
funds under a line of credit but had not drawn any advances as of December 31,
2009.





Results
of Consolidated Operations





COMPARISON OF YEARS ENDED DECEMBER 31, 2009 and 2008





Highlights.  As of
December 31, 2009, we had grown to approximately $79.4 million in total assets,
with $49.2 million in total loans, $63 million in deposits, and $9.9 million in
stockholders’ equity.





The net loss in 2009 was $1,669,000
versus net loss of $1,393,000 in 2008.  The primary reasons for the
change of $276,000 in 2009 over 2008 were as follows:





·
            Interest
      and fees on loans totaled $2,373,000 in 2009 compared with $1,108,000 in
      2008, an increase of $1,265,000 or 114.17%.  Other interest
      income also decreased by $(88,000) in 2009 over 2008, or
      (15.49)%.


·
            Our
      income from average interest-earning assets increased
    68.28%.


·
            Our
      total interest expense increased $738,000 or
  134.92%.


·
            Net
      interest income increased by $433,000 in 2009 from
  2008.


·
            Noninterest
      income grew $567,000, or 396.51% in 2009 over
  2008.


·
            Noninterest
      expenses grew $643,000 or 23.55%.





26


Interest
Income.  Interest income was $2,886,000 and $1,715,000 in 2009
and 2008, respectively.  The  increase of $1.2 million
resulted from an increase in the yield on interest-earning assets in 2009, which
was partially offset by growth in our most significant interest-earning asset,
loans, which grew 72.1% from average levels in 2008 to 2009.  Average
loans accounted for 63.52% of our average interest-earning assets in 2009 versus
52.71% in 2008.  Our overall yield on interest-earning assets of 4.95%
was down from the 2008 level of 5.41% due to a lower interest rate environment
throughout 2009.





Interest
Expense.  Interest expense was $1,285,000 and $547,000 in 2009
and 2008, respectively.  As a result of the lower interest rate
environment during 2009 which was offset by our growth in average
interest-bearing liabilities of $27.5 million, or 106.59%, during this period,
interest expense increased 134.92%.  Our cost of funds increased to
2.41% in 2009 compared with 2.20% in 2008.  Substantially all of the
increase in interest expense was attributable to an increase in average
certificates of deposit of $7.6 million, or 33.48%.





Net Interest
Income.  Net interest income (before provision for loan losses)
was $1,601,000 and $1,168,000 for 2009 and 2008, respectively, an increase of
37.07% from 2008 to 2009.  The average balances, interest income and
expense, and the average rates earned and paid for assets and liabilities are
found in the tables that follow.





Our net interest margin was lower
(2.77% in 2009 compared with 3.44% in 2008), which reflects the increase in our
cost of funds (21 basis points) versus the decrease in our yield on
interest-earning assets (46 basis points).  The increase in net
interest income of $433,000 was a result of a 72.19 increase in average loans
while the net interest margin was most impacted by the increase in certificates
of deposit of 110.09%.  Certificates of deposit account for 50.33% of
all interest-bearing deposits in 2009 as compared with 49.56% in
2008.





Provision for Loan
Losses.  A provision for loan losses of $1,612,000 was recorded
in 2009, reflecting our assessment of the needed level of the allowance for loan
losses.  This assessment is based on management’s evaluation of
probable loan losses and considers the overall quality of the loan
portfolio.  The increase in the provision for loan losses in 2009
versus the 2008 level of $794,000 was due to unfavorable trends in most measures
of loan portfolio quality, including the growth in impaired and nonaccrual loans
and other nonperforming assets, which increased $1.8 million in 2009, or
334.14%.  Net charge-offs in 2009 were $830,000 as compared with
$20,000 in 2008, an increase of $810,000.





Noninterest
Income.  Noninterest income increased $567,000, or 396.50%, to
$710,000 in 2009 from $143,000 in 2008 primarily as a result of gain on sale of
available for sale securities.





Noninterest
Expenses.  Total noninterest expenses increased to $3,373,000
in 2009 compared to $2,730,000 for 2008, an increase of $643,000, or
23.55%.  The more significant increases during 2009 over 2008
follow:





·
            Expenses
      related to other real estate owned totaled $2,500 in 2009 versus $0 in
      2008, as a result of losses and ongoing expenses on properties that
      ProBank obtained title in 2009.


·
            Professional,
      legal, and audit fees were $72,000 in 2009 versus $72,000 in 2008, an
      increase of $0, or 0%.


·
            Regulatory
      assessments increased by $67,000, or 352.63%, from 2008 to 2009 due to
      increased cost of maintaining the FDIC insurance
  fund.





Provision for Income
Taxes.  The income tax benefit was $1,005,000 for 2009, an
effective rate of 37.58%.  This compares with an effective rate of
37.05% for 2008.





COMPARISON
OF YEARS ENDED DECEMBER 31, 2008 AND 2007





Highlights.  As of
December 31, 2008, we had grown to approximately $47.9 million in total assets,
with $27.6 million in net loans, $30.5 million in deposits, and $11.3 million in
stockholders’ equity.





The net loss in 2008 was $1,393,000
versus net loss of $671,000 in 2007.  The primary reasons for the
change of $722,000 in 2008 over 2007 were as follows:




·
            Interest
      and fees on loans totaled $1,108,000 in 2008 compared with $54,000 in
      2007, an increase of $1,054,000, or 1,951.85%.  Other interest
      income also increased by $122,000 in 2008 over 2007, or
      495.83%.·
            Our
      income from average interest-earning assets increased
    107.60%.




27




·
            Our
      total interest expense increased $453,000, or 441.58%.·
            Net
      interest income increased by $872,000 in 2008 from 2007.·
            Noninterest
      income grew $122,000, or 495.83% in 2008 over 2007.·
            Noninterest
      expenses grew $1,280,000, or 89.06%.





Interest
Income.  Interest income was $1,715,000 and $390,000 in 2008
and 2007, respectively.  The  increase of $1.3 million
resulted from a decrease in the yield on interest-earning assets in 2008, which
was offset by growth in our most significant interest-earning asset, loans,
which grew 624.23% from average levels in 2008 to 2007.  Average loans
accounted for 52.71% of our average interest-earning assets in 2008 versus
14.54% in 2007.  Our overall yield on interest-earning assets of 5.41%
was down from the 2007 level of 5.52% due to a lower interest rate environment
throughout 2007.





Interest
Expense.  Interest expense was $547,000 and $94,000 in 2008 and
2007, respectively.  As a result of the lower interest rate
environment during 2008 which was offset by our growth in average
interest-bearing liabilities of $18.4 million, or 248.99%, during this period,
interest expense increased 441.58%.  Our cost of funds dropped to
2.20% in 2008 compared with 3.42% in 2007.  Substantially all of the
increase in interest expense was attributable to an increase in average
certificates of deposit of $5.7 million, or 336.85%.





Net Interest
Income.  Net interest income (before provision for loan losses)
was $1,168,000 and $296,000 for 2008 and 2007, respectively, an increase of
343.15% from 2008 to 2007.  The average balances, interest income and
expense, and the average rates earned and paid for assets and liabilities are
found in the tables that follow.





Our net interest margin was lower
(3.44% in 2008 compared with 4.10% in 2007), which reflects the smaller decrease
in our cost of funds (122 basis points) versus the decrease in our yield on
interest-earning assets (11 basis points).  The increase in net
interest income of $872,000 was a result of a 624.23% increase in average loans,
while the net interest margin was most impacted by the increase in certificates
of deposit of 336.85%.  Certificates of deposit account for 49.56% of
all interest-bearing deposits in 2008 as compared with 22.70% in
2007.





Provision for Loan
Losses.  A provision for loan losses of $794,000 was recorded
in 2008, reflecting our assessment of the needed level of the allowance for loan
losses.  This assessment is based on management’s evaluation of
probable loan losses and considers the overall quality of the loan
portfolio.  The increase in the provision for loan losses in 2008
versus the 2007 level of $72,000 was due to unfavorable trends in most measures
of loan portfolio quality, including the growth in impaired and nonaccrual loans
and other nonperforming assets, which increased $0.5 million in 2008, or
824.14%.  Net charge-offs in 2008 were $20,000 as compared with $0 in
2007, an increase of $20,000.





Noninterest
Income.  Noninterest income increased $122,000, or 495.83%, to
$143,000 in 2008 from $21,000 in 2007 primarily as a result of an extra eight
months of operation.





Noninterest
Expenses.  Total noninterest expenses increased to $2,730,000
in 2008 compared to $1,450,000 for 2007, an increase of $1,280,000, or
89.06%.  The more significant increases during 2008 over 2007
follow:





·
            Expenses
      related to other real estate owned totaled $0 in 2008 versus $-0- in 2007,
      as a result of losses and ongoing expenses on properties that ProBank
      obtained title in 2008.


·
            Professional,
      legal, and audit fees were $72,000 in 2008 versus $26,000 in 2007, an
      increase of $46,000, or 176.92%, as a result of increased costs of
      internal and external audit costs.


·
            Regulatory
      assessments increased by $19,000, or 1,900.00%, from 2008 to 2007 due to
      increased cost of maintaining the FDIC insurance
  fund.





Provision for Income
Taxes.  The income tax benefit was $820,000 for 2008, an
effective rate of 37.05%.  This compares with an effective rate of
44.32% for 2007.




28





The
following table sets forth, at December 31, 2009, information regarding (i) the
total dollar amount of interest and dividend income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average costs; (iii) net interest income; (iv) interest-rate spread; and (v) net
interest margin; and (vi) weighted average yields and rates at December 31,
2009. Yields and costs were derived by dividing annualized income or expense by
the average balance of assets or liabilities. There were no non-accrual loans,
out of period items or tax exempt income for the period indicated. The yields
and costs include fees which are considered to constitute adjustments to yields
($ in thousands):




Month
      Ended December 31, 2009
              Increase
      (Decrease) Due toAverage
      Balance
            
            
            Annualized
              Income/Expense
            
            
            Annualized
      YieldInterest-earning:Loans (1)
            
            $
            37,070
            
            
            $
            2,373
            
            
            
            6.40
            %Securities and other
      deposits
            
            
            12,088
            
            
            
            495
            
            
            
            4.09Other interest-earning
      assets(2)
            
            
            9,191
            
            
            
            18
            
            
            
            0.20Total interest-earning
      assets
            
            $
            58,349
            
            
            $
            2,886
            
            
            
            4.95
            %Interest-bearing
      liabilities:Deposit
accounts
            
            $
            40,739
            
            
            $
            1,137
            
            
            
            2.79
            %Other
borrowings
            
            
            5,562
            
            
            
            148
            
            
            
            2.66Total Interest-bearing
      liabilities
            
            $
            46,301
            
            
            $
            1,285
            
            
            
            2.77
            %Net
      interest income
            
            
            
            
            
            $
            1,601Net
      interest margin
            
            
            
            
            
            
            
            
            
            
            2.18
            %




Month
      Ended December 31, 2008
              Increase
      (Decrease) Due toAverage
      Balance
            
            
            Annualized
              Income/Expense
            
            
            Annualized
      YieldInterest-earning:Loans (1)
            
            $
            16,224
            
            
            $
            1,108
            
            
            
            6.83
            %Securities and other
      deposits
            
            
            9,258
            
            
            
            437
            
            
            
            4.72Other interest-earning
      assets(2)
            
            
            5,717
            
            
            
            170
            
            
            
            2.97Total interest-earning
      assets
            
            $
            31,199
            
            
            $
            1,715
            
            
            
            5.50
            %Interest-bearing
      liabilities:Deposit
accounts
            
            $
            16,820
            
            
            $
            467
            
            
            
            2.78
            %Other
borrowings
            
            
            3,173
            
            
            
            80
            
            
            
            2.52Total Interest-bearing
      liabilities
            
            $
            19,993
            
            
            $
            547
            
            
            
            2.74
            %Net
      interest income
            
            
            
            
            
            $
            1,168Net
      interest margin
            
            
            
            
            
            
            
            
            
            
            2.76
            %





Month
      Ended December 31, 2007
              Increase
      (Decrease) Due toAverage
      Balance
            
            
            Annualized
              Income/Expense
            
            
            Annualized
      YieldInterest-earning:Loans (1)
            
            $
            650
            
            
            $
            54
            
            
            
            8.31
            %Securities and other
      deposits
            
            
            1,004
            
            
            
            51
            
            
            
            5.08Other interest-earning
      assets(2)
            
            
            4,578
            
            
            
            285
            
            
            
            6.23Total interest-earning
      assets
            
            $
            6,232
            
            
            $
            390
            
            
            
            6.26
            %Interest-bearing
      liabilities:Deposit
accounts
            
            $
            1,920
            
            
            $
            74
            
            
            
            3.85
            %Other
borrowings
            
            
            566
            
            
            
            20
            
            
            
            3.53Total Interest-bearing
      liabilities
            
            $
            2,486
            
            
            $
            94
            
            
            
            3.78
            %Net
      interest income
            
            
            
            
            
            $
            296Net
      interest margin
            
            
            
            
            
            
            
            
            
            
            2.48
            %







(1)
      Average loan balances include nonaccrual
loans.


(2)
      Includes federal funds sold.




29


Weighted
Average Yield or Rate:




For the Years Ended December
      31,2009
            
            
            2008
            
            
            2007Interest-earning
      assets:Loans, net
            
            
            6.40
            %
            
            
            6.83
            %
            
            
            8.31
            %Investment
      securities
            
            
            4.09
            %
            
            
            4.72
            %
            
            
            5.08
            %Other interest-earning
      assets
            
            
            0.20
            %
            
            
            2.97
            %
            
            
            6.23
            %All interest-earning
      assets
            
            
            4.95
            %
            
            
            5.50
            %
            
            
            6.26
            %Interest-bearing
      liabilities:Deposit
accounts
            
            
            2.79
            %
            
            
            2.78
            %
            
            
            3.85
            %Other
borrowings
            
            
            2.66
            %
            
            
            2.52
            %
            
            
            3.53
            %All interest-bearing
      liabilities
            
            
            2.77
            %
            
            
            2.74
            %
            
            
            3.78
            %Interest-rate
      spread
            
            
            2.74
            %
            
            
            3.74
            %
            
            
            4.75
            %Net
      interest margin
            
            
            2.18
            %
            
            
            2.76
            %
            
            
            2.48
            %





Change
in Mix of Interest-Earning Assets and Interest-Bearing Deposits and Other
Borrowings (dollars in thousands):




At
      December 31,2009
              
              
              2008
              
              
              2007Percent
              
              
              
              
              
              Percent
              
              
              
              
              
              PercentAverage
              
              
              to
              
              
              Average
              
              
              to
              
              
              Average
              
              
              toBalance
              
              
              Total
              
              
              Balance
              
              
              Total
              
              
              Balance
              
              
              TotalInterest-earning
      assets:Loans,
      net
              
              $
              37,070
              
              
              
              63.53
              %
              
              $
              16,224
              
              
              
              52.00
              %
              
              $
              650
              
              
              
              10.43
              %Investment
      securities
              
              
              12,088
              
              
              
              20.72
              
              
              
              9,258
              
              
              
              29.67
              
              
              
              1,004
              
              
              
              16.11Other
              
              
              9,191
              
              
              
              15.75
              
              
              
              5,717
              
              
              
              18.33
              
              
              
              4,578
              
              
              
              73.46Total
      interest-earning assets
              
              $
              58,349
              
              
              
              100.00
              %
              
              $
              31,199
              
              
              
              100.00
              %
              
              $
              6,232
              
              
              
              100.00
              %Interest-bearing
      deposits
              
              $
              40,739
              
              
              
              76.40
              %
              
              $
              16,820
              
              
              
              65.13
              %
              
              $
              1,920
              
              
              
              57.38
              %Noninterest-bearing
      deposits
              
              
              7,025
              
              
              
              13.17
              
              
              
              5,831
              
              
              
              22.58
              
              
              
              860
              
              
              
              25.70Total
      deposits
              
              
              47,764
              
              
              
              89.57
              
              
              
              22,651
              
              
              
              87.71
              
              
              
              2,780
              
              
              
              83.08Other
      borrowings
              
              
              5,562
              
              
              
              10.43
              
              
              
              3,173
              
              
              
              12.29
              
              
              
              566
              
              
              
              16.92Total
      deposits and other borrowings
              
              $
              53,326
              
              
              
              100.00
              %
              
              $
              25,824
              
              
              
              100.00
              %
              
              $
              3,346
              
              
              
              100.00
              %


Asset/Liability
Management





A principal objective of the Company’s
asset/liability management strategy is to minimize its exposure to changes in
interest rates by matching the maturity and repricing horizons of
interest-earning assets and interest-bearing liabilities.  This
strategy is overseen in part through the direction of the Bank's Asset and
Liability Committee ("ALCO") which establishes policies and monitors results to
control interest rate sensitivity.





Management evaluates interest rate risk
and then formulates guidelines regarding asset generation and repricing, funding
sources and pricing, and off-balance sheet commitments in order to maintain
interest rate risk within target levels for the appropriate level of risk which
are determined by the ALCO.  The ALCO uses internally generated
reports to measure the Bank’s interest rate sensitivity.  From these
reports, the ALCO can estimate the net earnings effect of various interest rate
scenarios.





As a part of the Company’s interest
rate risk management policy, the ALCO examines the extent to which its assets
and liabilities are “interest rate sensitive” and monitors the Bank’s interest
rate sensitivity “gap.” An asset or liability is considered to be interest rate
sensitive if it will reprice or mature within the time period analyzed, usually
one year or less. The interest rate sensitivity gap is the difference between
interest-earning assets and interest-bearing liabilities scheduled to mature or
reprice within such time period.  A gap is considered positive when
the amount of interest rate sensitive assets exceeds the amount of interest rate
sensitive liabilities.  A gap is considered negative when the amount
of interest rate sensitive liabilities exceeds interest rate sensitive
assets.  During a period of rising interest rates, a negative gap
would tend to adversely affect net interest income, while a positive gap would
tend to result in an increase in net interest income.  During a period
of falling interest rates, a negative gap would tend to result in an increase in
net interest income, while a positive gap would tend to adversely affect net
interest income.  If the repricing of each bank’s assets and
liabilities were equally flexible and moved concurrently, the impact of any
increase or decrease in interest rates on net interest income would be
minimal.




30





A simple
interest rate “gap” analysis by itself may not be an accurate indicator of how
net interest income will be affected by changes in interest
rates.  Accordingly, the ALCO also evaluates how the repayment of
particular assets and liabilities is impacted by changes in interest rates.
Income associated with interest-earning assets and costs associated with
interest-bearing liabilities may not be affected uniformly by changes in
interest rates.  In addition, the magnitude and duration of changes in
interest rates may have a significant impact on net interest
income.  For example, although certain assets and liabilities may have
similar maturities or period of repricing, they may react in different degrees
to changes in market interest rates.  Interest rates on certain types
of assets and liabilities fluctuate in advance of changes in general market
interest rates, while interest rates on other types may lag behind changes in
general market rates.  In addition, certain assets, such as adjustable
rate mortgage loans, have features (generally referred to as “interest rate
caps”) which limit changes in interest rates on a short-term basis and over the
life of the asset.  In the event of a change in interest rates,
prepayment (on loans) and early withdrawal (of deposit accounts) levels also
could deviate significantly from those assumed in calculating the interest rate
gap.  The ability of many borrowers to service their debts also may
decrease in the event of an interest rate increase.





Currently
the Company has not entered into any interest rate swaps or similar hedging
instruments in connection with its asset/liability management and the Company
does not expect to use interest rate swaps in its operations.  Further
discussion on off-balance-sheet arrangements can be found in Note 11 of the
Notes to Consolidated Financial Statements.  The Company's exposure to
credit loss in the event of nonperformance by the other party to the financial
instrument for commitments to extend credit, unused lines of credit and standby
letters of credit is represented by the contractual amount of those
instruments.  The Company uses the same credit policies in making
commitments as it does for on-balance sheet instruments. The Company also did
not have any significant interest rate lock commitments at December 31,
2009.





Management’s
strategy is to maintain a balanced interest rate risk position to protect its
net interest margin from market fluctuations.





Principal
among the Company’s asset/liability management strategies has been the emphasis
on managing its interest rate sensitive liabilities in a manner designed to
attempt to reduce the Company’s exposure during periods of fluctuating interest
rates.  Management believes that the type and amount of the Company’s
interest rate sensitive liabilities may reduce the potential impact that a rise
in interest rates might have on the Company’s net interest
income.  The Company seeks to maintain a core deposit base by
providing quality services to its customers without significantly increasing its
cost of funds or operating expenses. Management anticipates that these accounts
will continue to comprise a significant portion of the Company’s total deposit
base.  The Company also maintains a portfolio of liquid assets in
order to reduce its overall exposure to changes in market interest rates. The
Company also maintains a “floor,” or minimum rate, on certain of its floating or
prime based loans.  These floors allow the Company to continue to earn
a higher rate when the floating rate falls below the established floor
rate.  All interest rate caps and floors are clearly and closely
related to the loan agreement and therefore not bifurcated and valued
separately.





31


The following table sets forth certain
information relating to the Company’s interest-earning assets and
interest-bearing liabilities at December 31, 2009 that are estimated to mature
or are scheduled to reprice within the period shown.





($ in
thousands):


OverUnder
      3
                
                
                3
      to 12
                
                
                
                1-5
                
                
                FiveMonths
                
                
                Months
                
                
                Years
                
                
                Years
                
                
                TotalInterest-earning
      assets:Federal
      funds sold
                
                $
                9,065
                
                
                $
                9,065
                
                
                $
                9,065
                
                
                $
                9,065
                
                
                $
                9,065Loans
      (1)
                
                
                22,777
                
                
                
                28,697
                
                
                
                46,646
                
                
                
                49,216
                
                
                
                49,216Securities
      (2)
                
                
                1,109
                
                
                
                2,975
                
                
                
                12,355
                
                
                
                16,439
                
                
                
                16,439Total
      rate-sensitive assets (earning assets)
                
                $
                32,951
                
                
                $
                40,737
                
                
                $
                68,066
                
                
                $
                74,720
                
                
                $
                74,720Money
      market (3)Savings
      and NOW deposits (3)
                
                
                15,362
                
                
                
                15,362
                
                
                
                15,362
                
                
                
                15,362
                
                
                
                15,362Time
      deposits (3)
                
                
                12,566
                
                
                
                37,120
                
                
                
                39,212
                
                
                
                39,212
                
                
                
                39,212Other
      borrowings
                
                
                342
                
                
                
                342
                
                
                
                6,342
                
                
                
                6,342
                
                
                
                6,342Total
      rate-sensitive liabilities
                
                $
                28,270
                
                
                $
                52,824
                
                
                $
                60,916
                
                
                $
                60,916
                
                
                $
                60,916Gap
      (repricing differences)Cumulative
      Gap
                
                $
                4,681
                
                
                $
                (12,087
                )
                
                $
                7,150
                
                
                $
                13,804
                
                
                $
                13,804Cumulative
      Gap/total assets
                
                
                5.89
                %
                
                
                (15.22
                )%
                
                
                9.00
                %
                
                
                17.38
                %
                
                
                17.38
                %Cumulative
      Gap/total earning assets
                
                
                6.26
                %
                
                
                (16.18
                )%
                
                
                9.57
                %
                
                
                18.47
                %
                
                
                18.47
                %Total
      assets
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                79,413Total
      earning assets
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                74,720


(1)
            In
      preparing the table above, adjustable-rate loans were included in the
      period in which the interest rates are next scheduled to adjust rather
      than in the period in which the loans mature.  Fixed-rate loans
      were scheduled according to their contractual
  maturities.


(2)
            Securities
      were scheduled based on their remaining maturity or repricing
      frequency.  Fixed-rate mortgage-backed securities are scheduled
      ratably over five years.  Includes FHLB stock grouped in over
      five years.


(3)
            Excludes
      noninterest-bearing deposit accounts.  Money-market, NOW, and
      savings deposits are scheduled based on FDICIA studies on nonmaturity
      deposits.  All other time deposits were scheduled through the
      maturity dates.





Impact
of Inflation and Changing Prices





The financial statements and related
financial data concerning the Company presented in this 10-K have been prepared
in accordance with accounting principles generally accepted in the United States
of America, which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation.  The
primary impact of inflation on the operations of the Company is reflected in
increased operating costs.  Unlike most industrial companies,
virtually all of the assets and liabilities of a financial institution are
monetary in nature.  As a result, changes in interest rates have a
more significant impact on the performance of a financial institution than do
the effects of changes in the general rate of inflation and changes in
prices.  Interest rates do not necessarily move in the same direction
or in the same magnitude as the prices of goods and services.





32


Item 7a. Quantitative and
Qualitative Disclosures About Market Risk





Not
Applicable





Item 8. Financial
Statements





The financial statements of the
Company at December 31, 2009 and for the year ended December 31, 2008 are set
forth in this Form 10-K as Exhibit 13.1.





Item 9. Changes in and Disagreements
with Accountants on Accounting and Financial
Disclosure





Changes in Company’s
Certifying Accountant.





Previous Independent
Accountants





On August 5, 2009 James D.A. Holley
& Co. (“Holley & Co.”) resigned as the Company’s independent
auditors.  Holley’s decision to resign was not recommended or approved
by the Company’s board of directors or any committee thereof.  Holley
resigned because the firm had elected to de-register with the Public Company
Accounting Oversight Board (the “PCAOB”) in that the Company was its only client
subject to certain Securities Exchange reporting requirements.





The reports of Holley & Co. on the
Company’s consolidated financial statements for the past two fiscal years did
not contain an adverse opinion or a disclaimer of opinion, and were not
qualified or modified as to audit scope or accounting principles.





In connection with the audits of the
Company’s financial statements for the past two fiscal years ended December 31,
2008 and in the subsequent interim periods, there were no disagreements with
Holley & Co. on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope and procedures which, if not resolved to
Holley & Co.’s satisfaction, would have caused Holley & Co. to make
reference to the matter in their report. There were no “reportable events” as
that term is described in Item 304(a)(1)(v) of Regulation S-K.





New Independent
Accountants





On December 16, 2009, Hacker, Johnson
& Smith, P.A. (“New Accountant”) was retained as the Company’s independent
auditors.  Hacker, Johnson & Smith, P.A. is registered with the
PCAOB, and is located in Tampa, Florida.





During the Company’s two most recent
fiscal years and the subsequent interim period(s) prior to engaging the New
Accountant, neither the Company nor anyone acting on behalf of the Company
consulted the New Accountant regarding (i) either (a) the application of
accounting principles to a specified transaction, either completed or proposed,
or (b) the type of audit opinion that might be rendered on the Company’s
financial statements; or (ii) any matter that was either the subject of a
disagreement (as defined in paragraph 304(a)(1)(iv) of Regulation S-K and the
related instructions to Item 304 of Regulation S-K) or a reportable event (as
described in paragraph 304(A)(1)(v) of Regulation S-K). In addition, during the
Company’s two most recent fiscal years and the subsequent interim period(s)
prior to engaging the New Accountant, no written report was provided by the New
Accountant to the Company and no oral advice was provided that the New
Accountant concluded was an important factor considered by the Corporation in
reaching a decision as to any accounting, auditing, or financial reporting
issue.





Item
9A. Controls And
Procedures




(a)Disclosure Controls and
Procedures




The Company was not required to file an
annual report with the Securities and Exchange Commission pursuant to section
13(a) or 15(d) of the Exchange Act for the prior fiscal
year.  Therefore this annual report does not include a report of
management’s assessment regarding internal control over financial reporting or
an attestation report of the company’s registered public accounting firm due to
a transition period established by rules of the Securities and Exchange
Commission for newly reporting companies.




33





(b)  Changes in internal
controls.





The Company made no changes in its
internal control over financial reporting that occurred during the Company’s
fourth fiscal quarter that has materially affected, or which is reasonably
likely to materially affect the Company’s internal control over financial
reporting.





Item 9B.  Other
Information





Not applicable.





PART
III





Item
10. Directors,
Executive Officers, Promoters and Control Persons;
 Compliance with Section
16(a) of the Exchange Act





Directors
of the Company and the Bank serve one-year terms and therefore stand for
re-election each year.  There are no known family relationships
between any of the director nominees.  Each of the following persons
have been nominated to serve as directors of the Company for the fiscal year
2010.  Each of our directors satisfies the criteria for director
independence under the listing standards applicable to companies listed on The
Nasdaq.





Kathleen
B. Atkins-Gunter.Mrs.
Atkins-Gunter is 64 years old, and lives in Tallahassee with her husband Bill
Gunter. She has been President of Atkins Management & Consulting, Inc.,
Tallahassee, Florida since 1998. and is employed by Rogers, Gunter, Vaughn
Insurance, Inc., Tallahassee, Florida as the Senior Consulting Specialist. Prior
to forming Atkins Management & Consulting in 1998, she served as Chief
Operating Officer of Gulf Atlantic Insurance Company, Gulf Premium Finance
Company, and Gulf Atlantic Insurance Services, Inc., all of Tallahassee,
Florida.  From 1970 to 1991 she was employed by Rogers-Atkins
Insurance, Inc. serving as Executive Vice President of
Operations.  She served on the Board of Directors of First Bank of
Tallahassee from 1995 to 1999 and as Vice Chairman of the Board in 1999, She
also served on the Regional Advisory Board of SouthTrust Bank,
Tallahassee.  She currently serves as an officer, director or member
of a number of local and statewide organizations, including the Florida State
University Seminole Boosters Board of Directors, the Florida State University
Athletics Committee, the Westcott Lakes At SouthWood Board of Directors, the
Florida Association of Insurance Agents, The Florida House on Capitol Hill in
Washington, D.C. Board of Directors, Normandy Harbor Insurance Company Board of
Directors and the Florida Medical Malpractice Joint Underwriting Association
Board of Directors.  Mrs. Atkins-Gunter’s
career as a successful businesswoman, her experience and knowledge in the
insurance business, her well recognized involvement in the Tallahassee
community, her prior experience as a director of a local Tallahassee community
bank and her leadership as a Director of ProBank has led the Board to conclude
that she is valuable as a director and that she should continue to serve as a
director of the Company.





Christopher
E. Diamantis.  Mr.
Diamantis is 41 years old and lives in Tallahassee with his wife and two
children. He has served as Chairman and Chief Executive Officer of Integrated
Financial Settlements, Inc. (“IFS”) since 1992. IFS generates more than $100
million in annual revenue. IFS is the holding company for four structured
settlement consulting firms which collectively originate approximately $2.1
billion in annual sales representing approximately 32% of market share in the
structured settlement industry. He also serves as a director of the Gabor
Agency, Inc., a 62-year-old Tallahassee company specializing in retirement and
insurance planning for public employers and universities. Mr. Diamantis
graduated Cum Laude from Florida State University in 1990 with a B.S. degree in
Finance. He is a Chartered Life Underwriter and a Certified Structured
Settlement Consultant. He is a member of the Board of Governors of the FSU
College of Business, a member of the Board of Directors and the Immediate Past
President of the National Structured Settlements Trade Association. Mr.
Diamantis’ career as a successful businessman, his experience and knowledge in
the structured settlement business, his well recognized involvement in the
retirement and insurance planning for public employers and universities sector,
and his involvement with FSU College of Business has led the Board to conclude
that he should continue to serve as a director of the Company.





Edward
W. Dougherty, Jr.
 Mr. Dougherty is 53 years old.  He has served a Chairman of the Audit
Committees of Pro Bank and Pro Financial and a member of the Loan Committee for
Pro Bank since its opening.  He has been a resident of Tallahassee for more
than thirty years. He has been married to his wife, Audrey, for more than twenty
five of those years and they have three children. Mr. Dougherty has been a
shareholder in the Igler & Dougherty law firm located in Tallahassee,
Florida since 1992. He has represented financial institutions in complex
financial transactions and regulatory matters and in the litigation of those
issues arising out of those complex transactions and matters in court and in the
administrative forum. He graduated from the University of Notre Dame with a
Bachelor of Arts degree in 1978 and from Florida State University College of Law
with a Juris Doctor degree (with honors) in 1981. He has practiced law in
Tallahassee since being admitted to the Florida Bar in 1982.  Mr.
Dougherty’s professional legal experience, his experience dealing with financial
institution matters, his service on the Board of the Company and the Bank,
combined with his involvement in various community organizations led the Board
to conclude that Mr. Dougherty should continue to serve as a director of the
Company.




34





Javier
I. Escobar, II, M.D.Dr.  Escobar,
is 41 years old, and lives in Tallahassee with his wife and four children.
He has been the Medical Director Emergency Services at Tallahassee Memorial
Hospital and the TMH Chest Pain Center since 2003. Prior to that he was an
attending physician at the Bixler Emergency Center at the Tallahassee Memorial
Hospital from 1999 to 2003.  He is a Clinical Associate Professor
at the Florida State University College of Medicine and the Medical Director of
LifeNet Air Ambulance.  He currently serves on several medical boards and
committees in the state. He graduated from The University of California at Los
Angeles in 1991 with a B.S. degree and from the University of Connecticut School
of Medicine in 1995. He interned and completed his residency in Emergency
Medicine and fellowship in Pediatric Emergency Medicine at the
University of Florida Shands/Jacksonville, Florida.  Dr.
Escobar’s educational background, his service as the Medical Director of
Emergency Services and the Chest pain Center, and his knowledge of and
involvement in the medical community has led the Board to conclude that Dr.
Escobar is valuable to ProBank as a director and should continue to serve as a
director of the Company.





Michael
W. Forsthoefel, M.D.  Dr.  Forsthoefel is 55 years
old, and lives in Tallahassee with his wife Jana Forsthoefel, M.D. and their
eight children.  He currently practices Internal Medicine with
Southern Medical Group, P.A. where he has been a shareholder since 1983. He is
Clinical Coordinator for the Internal Medicine Clerkship for the Florida State
University College of Medicine, where he received the Class of 2006 Outstanding
Clinical Professor Award. He is a former member and past chairman of the
Tallahassee Memorial HealthCare Board of Directors. He graduated from the
University of Louisville in 1975 with Highest Distinction, and with a Bachelor
of Arts in Chemistry. He received his Doctorate of Medicine, and his Master’s of
Science in Biochemistry from the University of Louisville, School of Medicine in
1979. He completed his residency in Internal Medicine at the VA Medical Center,
Emory University Affiliated Hospitals in Atlanta, Georgia in 1982. He received
his Diplomat, Internal Medicine from the American Board of Internal Medicine in
1982, and added Qualifications in Geriatric Medicine in 2000. He has been a
member of the Rotary Club of Tallahassee since 1986, where he has co-chaired the
Rotary Ethics and Business Award committee for the last ten years since its
inception. He has also served on several boards and committees in the
Tallahassee medical community. Dr. Forsthoefel’s educational background, his
involvement with the University’s College of Medicine, his activities associated
with Tallahassee Memorial HealthCare Board of Directors and his knowledge of and
involvement in the community with many boards and committees in the Tallahassee
medical community has led the Board to conclude that Dr. Forsthoefel is valuable
to ProBank as a director and should continue to serve as a director of the
Company.





Roger
K. Hobbs.Mr. Hobbs is 41 years
old and has lived in Tallahassee since 1993 with his wife Denise and son Trevor.
He has served as President and COO of The Twin Action Group since moving to
Tallahassee in 1993. Twin Action owns the Cabot Lodge at Thomasville Road and a
large amount of commercial and residential property in Northeast Tallahassee. He
also is the President and Owner of RK Development of Tallahassee, Inc., which
has and continues to play a major role in the final developments of
Killearn Lakes and Golden Eagle. He enjoys working hard in all his business
ventures and vacationing when his time allows for it. He is a co-owner of Twin
Action Realty, Inc., a Tallahassee area real estate brokerage
firm.  Roger is extremely proud to be a Co-Founder and Chairman of
ProBank as well as Vice Chairman of Pro Financial Holdings, Inc.  He
is a current member of the Board of Directors of Seminole Boosters, Inc., and
graduated from The University of Utah with a B.S. Degree in Economics in 1991.
 Mr. Hobbs’ career as a successful businessman, his experience and
knowledge in the real estate business, his well recognized involvement in the
Tallahassee community and his leadership as a Director of ProBank has led the
Board to conclude that he is valuable as a director of the Bank and that he
should continue to serve as a director of the Company.




Joseph
P. Jones  Mr. Jones is 41 years old and lives with his wife and
son in Tallahassee. He is a Partner in the statewide law firm of Broad and
Cassel and is a member of the firm’s real estate development and finance,
banking and institutional lending, and special assets practice groups. Since
joining Broad and Cassel, Mr. Jones has practiced in the areas of commercial
real estate development and finance, securitized financing, institutional
lending, commercial leasing, real property acquisitions and dispositions and
condominium development. Mr. Jones represents local, regional and national
developers of office, multifamily, commercial, condominium, retail and
residential projects in transactions, development projects and
complex financing.  In addition, Mr. Jones also represents
clients in portfolio and scattered site sales involving defeasance, assumption,
corporate acquisition and debt restructuring issues involving takeovers,
foreclosures and workouts. Prior to joining Broad and Cassel, Mr. Jones worked
as a deputy sheriff and served in the United States Marine Corps. In his spare
time, Mr. Jones is enjoys spending time with his family, is active in his church
and coaches youth athletics.  Mr. Jones’ professional legal
experience, his experience dealing with financial institution matters, his
service on the Board of the Company and the Bank, combined with his involvement
in various community organizations led the Board to conclude that Mr. Jones
should continue to serve as a director of the Company.




35





Allen
R. Moayad.Mr. Moayad is 47 years
old and was born in Tehran, Iran. He lives in Tallahassee with his wife Patricia
and their two children. Mr. Moayad left Iran when he was 12 years old to study
in England. After attending boarding schools in England and graduating from
Shiplake College Henley-On Thames, he came to the United States in 1981 to visit
family, and decided to stay in Tallahassee to continue his education. He
graduated from Tallahassee Community College with an AA degree in 1983 and from
Florida State University in 1985 with a BS degree in communications. He
graduated from the Thomas M. Cooley Law School, in 1989 with a Juris Doctor
degree and was admitted to the Florida Bar in 1990. Mr. Moayad practiced law
full time in Tallahassee from 1990 until 2002, when he elected to take
sabbatical and attend to family and other personal business, which includes both
real estate investments and international trading activities in the middle east.
In September 2005 he formed the Genesis International Group, LLC of which he
currently serves as President. He has maintained an “of counsel” relationship
with the law firm of Igler & Dougherty, P.A. since June 2006.  Mr.
Moayad’s career as a successful lawyer, importer, and businessman, his
experience and knowledge in the real estate business, his involvement in the
Tallahassee sports community and his leadership as a Director of ProBank has led
the Board to conclude that he is valuable as a director and that he should
continue to serve as a director of the Company.





Anuj
“AJ” Patel   Mr. Patel is 27 years old and is a native of
Tallahassee.  He is the Chief Executive Officer of the PAT Group of
Companies. The company manufactures tobacco products in 3 countries; imports and
manufactures marble and granite for commercial use; and exports agricultural
products, such as teakwood, from South America to the Middle
East.  Also, he and his family are in the hospitality industry and own
various full-service hotels in FL, NY and NJ.  He is a part of a
strong business network in the North Florida and South Georgia
regions.  He graduated from the University of Florida in 2003, with a
B.S. Degree in Accounting.  He has served on the ProBank Business
Advisory Board since it inception, and serves on various charitable organization
boards.  Mr. Patel’s career as a successful businessman, his
experience and knowledge in the various companies with which he is associated,
and his involvement in the Tallahassee community has led the Board to conclude
that he is valuable as a director and that he should continue to serve as a
director of the Company.





Peter
S. Rosen. Mr.
Rosen is 41 years old and has lived in Tallahassee since 1986. He has owned and
operated Benchmark Construction Company since 1989. During that time the company
built more than 100 homes ranging in price from $100,000 to $1.5 Million, as
well as built and or renovated over 1,000,000 sq. ft. of commercial office
space. He formed Cornerstone Realty in 1994 and currently serves as President
and Broker of the company. He is currently the owner and developer of nine
Tallahassee apartment and/or shopping center properties with a total value in
excess of $75 Million. He was an organizing board member of ProBank and Pro
Financial Holding Company.  He is a Florida Certified Building
Contractor and a Licensed Florida Real Estate Broker. He graduated from Florida
State University in 1990 with a Bachelor of Science degree with a major in Real
Estate and Business Administration and a minor in Finance. Mr. Rosen’s career as
a successful businessman, his experience and knowledge in the real estate
business, his well recognized involvement in the Tallahassee community and his
leadership as a Director of ProBank has led the Board to conclude that he is
valuable as a director and that he should continue to serve as a director of the
Company.





James
S. Sauls.
Mr.  Sauls is 41 years old and lives in Tallahassee with his wife
Shannon and their two children. Mr. Sauls is a native of Tallahassee. He has
served as the Managing Member of Benchmark Asset Management, LLC., d.b.a.
Benchmark Property Management, LLC since July 2003.  He previously
served as a Managing Member of Benchmark Property Management, LLC from May 1999
to July 2003. He served as Vice-President and Chief Operating Officer of Coastal
Property Services, Inc. in Tallahassee from 1990 to 1998.  He is
currently the Managing Member of SHS Maintenance, LLC, SHS Realty, LLC, and SHS
Management, LLC.  The main purpose of these companies is the operation
of multi-family housing and real estate sales in Tallahassee,
Florida.  In addition, he is an owner and developer of several
multi-family and other real estate projects located in the Tallahassee area. He
graduated from Florida State University in 1994 with a B.S. degree in
Accounting. He is a Florida Real Estate Broker, and he received his Community
Association Managers License from the Florida Department of Professional
Regulation in 2005.  Mr. Sauls career as a successful businessman, his
experience and knowledge in the real estate business, his well recognized
involvement in the Tallahassee community and his leadership as a Director of
ProBank has led the Board to conclude that he is valuable as a director and that
he should continue serve as a director of the Company.




36





Josh
R.  Simmons, M.D.  Dr. Simmons is 35 years old, and
lives in Tallahassee, where he was born, with his wife Dr. Kate Simmons, M.D.
and two children. He has been employed by Bixler Emergency Center as an
Emergency Medicine Physician at Tallahassee Memorial Hospital since 2004,
following the completion of his residency in Emergency Medicine at the Carolinas
Medical Center. He also serves as a Clinical Professor of Emergency Medicine at
the Florida State University College of Medicine. He graduated from Stanford
University with a B.S. Degree in 1997 and the University of Virginia School of
Medicine in 2001. Dr. Simmons’ educational background, his connection to the
Tallahassee and surrounding area’s medical community and the University’s
College of Medicine has led the Board to conclude that Dr. Simmons is valuable
to ProBank as a director and should continue serve as a director of the
Company.





Ernest
Sims, III. Mr.
Sims is 24 years old and is a resident of Tallahassee.He has served
on our Board of Directors since April 2008. He is a strong-side
linebacker for the Detroit Lions. Mr. Sims attended North Florida Christian High
School in Tallahassee, beginning his football career there by earning a varsity
letter on the high school football team while only in the eighth grade. He led
his team to four state championships from 1998-2001. Coming out of North Florida
Christian High School Sims was considered by most college football publications
to be one of the best high school football players, and the best linebacker, in
the country. Rivals.com, a high school football recruiting service named Sims
the number one overall high school football player in the country ahead of
Reggie Bush. Sims chose to play for Florida State over Auburn, Florida, Georgia,
Miami, Michigan, Oklahoma, Oregon, Tennessee, and Southern California. In 2003,
as a true freshman at Florida State, Sims played in every single game. He
finished ninth on the team in tackles and was one of the team’s top special
team’s performers. In 2004, his sophomore year, Sims played in all 12 games. In
2004, Sims was named to the second All-ACC team and ESPN named Sims to their
first team All-American team. Sims' had a productive junior year season,
starting all 13 games, including the Orange Bowl. In January of 2006, Sims
announced that he would forgo his senior season in lieu of entering the
professional football draft. Sims was selected as ninth overall in the first
round of the 2006 NFL Draft by the Detroit Lions.  Mr. Simms
connection to Florida State University and his connection to members of the
National Football League who attended FSU, as well as his involvement with
various local sports activities has led the Board to conclude that Mr. Simms
should continue to serve as a director of the Company.





David
L. Tedrick, M.D.  Dr. Tedrick is 63 years old, and lives in
Tallahassee with his wife Margaret Tedrick.  They have two children;
Daniel age 34, a corporate attorney in Charlotte and Jessica age 31, a homemaker
in Jupiter Florida.  They also have three grandchildren.  His
undergraduate degree is from Ohio University where he was elected to Phi Beta
Kappa and Phi Kappa Psi honorary societies and was on the golf team for 3
years.  He attended medical school at the University of Cincinnati College
of Medicine and was elected to the Alpha Omega Alpha honorary society. 
Following that, he was at Emory University as an intern and resident in internal
medicine, followed by a fellowship in cardiology.  He has been a practicing
cardiologist in Tallahassee since 1977 and is practices with Southern Medical
Group.  He is a diplomat of the American Boards of Internal Medicine,
Cardiovascular Diseases, and Interventional Cardiology.  He also is a
fellow of the American College of cardiology.  He currently practices
interventional Cardiology and is a member of the Tallahassee Research Institute,
currently involved in multiple clinical cardiovascular research
trials.  Dr. Tedrick’s educational background, his connection to the
Tallahassee and surrounding area’s medical community has led the Board to
conclude that Dr. Tedrick is a valuable asset and should continue to serve as a
director of the Company.





M.
Stephen Turner.  Mr.
Turner is 68 years old, and lives with his wife in Tallahassee.  He is
the Managing Partner in the Tallahassee office of Broad and Cassel and has
served on the Firm’s Executive Committee for 20 years. He serves on the Firm’s
Appellate Practice and Governmental Relations Practice Groups. He graduated from
Duke University in 1963 and from the University of Florida, College of Law in
1965. Before entering private practice, Mr. Turner served as a federal district
court law clerk, an Air Force JAG officer, a Florida Special Assistant Attorney
General, and an agency general counsel. Since entering private practice in 1972,
Mr. Turner has represented corporate and local clients in state and federal
trial courts, administrative proceedings, appellate courts, and arbitrations,
and is a Master member of the Stafford American Inns of Court and the First
District Court of Appeal Inns of Court. As appellate counsel, Mr. Turner has
made numerous appearances before the Florida Supreme Court, Florida’s District
Courts of Appeal, and the Eleventh Circuit U.S. Court of Appeals.  Mr.
Turner’s professional legal experience, his experience through service on the
Board of the Company and Bank combined with his involvement in various community
organizations led the Board to conclude that Mr. Turner is valuable to ProBank
as a director and should continue to serve as a director of the
Company.




37




Stephen
R. Winn. 
Mr. Winn is 63 years old and lives in Tallahassee with his wife. He has three
children and six grandchildren. He currently serves as Executive Director of the
Florida Osteopathic Medical Association, a position he has held since 1984. He
is President of Stephen R. Winn & Associates, a Tallahassee-based
governmental and public relations company. He currently serves as a legislative
and governmental consultant to the Florida Society of Hearing & Healthcare
Professionals, GlaxoSmithKline Pharmaceutical Company, KeProSouth, and
University Community Health Systems. He is a member of the Florida Health
Insurance Study Advisory Council, the Republican Presidential Task
Force, the Board of Governors for the Florida Medical Malpractice Joint
Underwriting Association, the American Osteopathic Association and the
Association of Osteopathic State Executive Directors. He is also a member of the
University Club, FSU Golden Chiefs, and the FSU Alumni Association. He was one
of the founding members of the First Bank of Tallahassee, and served as Chairman
of the Board of Directors from 1993-1994. He is a Past Chairman of the Board of
Directors of the Tallahassee Community College Foundation. He graduated from
Florida State University in 1967 with a B.S. Degree in Hotel and Restaurant
Management. He served in the U.S. Army as a First Lieutenant.  Mr.
Winn’s professional experience, his years of banking experience through service
on the Boards of other financial institutions, as well as the Company and
ProBank, combined with his involvement in various community organizations led
the Board to conclude that Mr. Wiinn is a valuable asset to ProBank as a
director and he should continue to serve as a director of the
Company.





Non-Director
Executive Officer





B.
Bryan Robinson. Mr.
Robinson is 54 years old, and lives in Tallahassee with his youngest son Brody.
Mr. Robinson has served in various positions in the banking industry during the
past 30 years and from 2005 to 2006 he served as Senior Vice President and Chief
Financial Officer of First Capital Bank in Marianna, Florida.  Prior
to that, he served as Executive Vice President and Chief Financial Officer of
Premier Bank in Tallahassee, Florida from 1995 to 2005. He currently serves as
the President and Chief Executive Officer of Pro Financial Holdings, Inc. as
well as the President and Chief Executive Officer of ProBank. He is a graduate
of Florida State University and holds a Bachelor of Science degree with a major
in Accounting.  He also received his Masters Degree in Banking from
the LSU Masters School of Banking in November 2004.  He has been a
past member of the Tallahassee Builders Association and the Tallahassee Lions
Club. Currently he is a member of the Tallahassee Elks Club, NEBA the North East
Business Association in Tallahassee and the Chamber of Commerce of
Tallahassee.





Erin
B. Sjostrom. Mrs.
Sjostrom is 44 years old, and lives in Tallahassee with her husband and two
sons. She has been in the banking and the financial services fields for 17
years. Her experience has ranged from commercial and corporate lending to Credit
Administration and Risk Management. She currently serves as the Executive Vice
President for ProBank as the Senior Lender and Credit Administrator, where she
is responsible for all aspects of lending and asset quality within the Bank. She
previously served as the Director of the Florida Retirement System in the
Department of Management Services, where she was responsible for the
administration of the $100 billion trust fund and the fourth largest public
pension plan in the United States. She earned her bachelor’s degree in
management with a concentration in finance from Tulane University. She has been
appointed by both Governors Jeb Bush and Charlie Crist for terms on the Florida
Prepaid College Board, where she served until June 30, 2009.  She is
also a member of Leadership Tallahassee and Sunrise Rotary.





Compliance with Section
16(a) of the Securities Exchange Act of 1934





The Company does not have securities
registered pursuant to Section 12 of the Securities Exchange Act of
1934.  Therefore its directors, officers and beneficial owners of 10%
or more of the Company’s securities were not required to file Section 16(a)
forms.




Code of
Ethics




The Company has a Code of Ethics that
applies to its principal executive officer and principal financial officer, a
copy of which is included with this Form 10-K as Exhibit 14.1.





Director
Independence




The Board of Directors has determined
that each member of the Board is an “independent director” within the meaning of
the Nasdaq Marketplace Rule 4200(a)(15).




38




Nominating
Committee




The Board of Directors as a whole
serves as the Nominating Committee.  The Board has not adopted any
procedures by which security holders may recommend nominees to the Company’s
Board of Directors.




Financial
Expert




The Company does not have an audit
committee financial expert serving on its Audit Committee.





Item
11.  Executive Compensation




2009
Summary Compensation Table




Name
      and
              
              
              
              
              
              
              
              
              
              Option
              
              
              All
      Other(1)Principal
      Position
              
              Year
              
              Salary
              
              
              Bonus
              
              
              Awards
              
              
              Compensation
              
              
              TotalB.
      Bryan Robinson
              
              2009
              
              $
              130,000
              
              
              
              -0-
              
              
              None
              
              
              $
              14,966
              
              
              $
              143,966Pro
      Financial/Bank
              
              2008
              
              $
              129,808
              
              
              
              -0-
              
              
              $
              59,000
              
              
              $
              16,737
              
              
              $
              205,545CEO/President
              
              2007
              
              $
              120,069
              
              
              
              -0-
              
              
              None
              
              
              $
              18,359
              
              
              $
              138,428Erin
      B. Sjostrom(2)
              
              2009
              
              $
              115,000
              
              
              
              -0-
              
              
              None
              
              
              $
              14,966
              
              
              $
              129,967Pro
      Financial/ Bank EVP
              
              2008
              
              $
              114,231
              
              
              
              -0-
              
              
              $
              23,600
              
              
              $
              19,119
              
              
              $
              156,9502007
              
              $
              88,846
              
              
              
              -0-
              
              
              None
              
              
              $
              14,587
              
              
              $
              103,433





(1) Includes
club dues, health and dental insurance, and car allowance.


(2) Mrs.
Sjostrom joined Pro Financial and the Bank organizers in March, 2007, therefore
the compensation reported is only for a portion of 2007.





Outstanding
Equity Awards at 2009 Fiscal Year-End





Option
      AwardsName
            
            Number
              of
      Securities
              Underlying
              Unexercised
              Options
              (#)
      Exercisable
            
            
            Number
      of
              Securities
              Underlying
              Unexercised
              Options
              (#)
      Unexercisable
            
            
            Equity
              Incentive
              Plan
              Awards:
              Number
      of
              Securities
              Underlying
              Unexercised
              Unearned
              Options
              (#)
            
            
            Option
              Exercise
              Price
              ($)
            
            Option
              Expiration
              DateB.
      Bryan Robinson
            
            
            10,000
            
            
            
            15,000
            
            
            
            —
            
            
            $
            10.00
            
            10/16/18Erin
      B. Sjostrom
            
            
            5,000
            
            
            
            5,000
            
            
            
            —
            
            
            $
            10.00
            
            10/16/18




There are
no Stock Awards outstanding.





Director Compensation





The Company did not pay its directors
any cash or other compensation or grant stock options to directors during the
2009 fiscal year, except that Director Joseph Jones was granted an option to
purchase common stock shares which option was valued at $13,920.





39




Item
12.   Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters






Name
              
              Number
      of
                Shares(1)
              
              
              Right
      to
                Acquire(2)
              
              
              Percent
      of
                Ownership(3)Kathleen
      B. Atkins-Gunter
              
              
              5,500
              
              
              
              13,500
              
              
              
              1.36Christopher
      E. Diamantis
              
              
              40,000
              
              
              
              41,000
              
              
              
              5.70Edward
      W. Dougherty, Jr.
              
              
              23,000
              
              
              
              31,000
              
              
              
              3.83Javier
      I. Escobar, II M.D.
              
              
              51,000
              
              
              
              59,000
              
              
              
              7.65Michael
      W. Forsthoefel, M.D.
              
              
              22,500
              
              
              
              25,500
              
              
              
              3.42Roger
      K. Hobbs
              
              
              25,000
              
              
              
              35,000
              
              
              
              4.24Allen
      R. Moayad
              
              
              34,267
              
              
              
              42,267
              
              
              
              5.38Joseph
      P. Jones
              
              
              11,300
              
              
              
              19,300
              
              
              
              2.19Anuj
      P. Patel
              
              
              25,000
              
              
              
              25,000
              
              
              
              3.56B.
      Bryan Robinson
              
              
              10,000
              
              
              
              35,000
              
              
              
              3.18Peter
      S. Rosen
              
              
              45,840
              
              
              
              55,840
              
              
              
              7.08James
      S. Sauls
              
              
              50,000
              
              
              
              58,000
              
              
              
              7.51Erin
      Sjostrom
              
              
              3,250
              
              
              
              39,500
              
              
              
              3.01Joshua
      R. Simmons, M.D.
              
              
              31,500
              
              
              
              26,000
              
              
              
              4.09Ernest
      Sims, III
              
              
              25,000
              
              
              
              25,000
              
              
              
              3.56David
      L. Tedrick, M.D.
              
              
              25,000
              
              
              
              28,000
              
              
              
              3.77M.
      Stephen Turner
              
              
              20,000
              
              
              
              12,012
              
              
              
              2.30Steven
      Winn
              
              
              20,454
              
              
              
              11,750
              
              
              
              2.32Total
      (18 people)
              
              
              468,611
              
              
              
              582,669
              
              
              
              53.58
              %








(1)   Includes
      shares for which the named person:


·
            Has
      sole voting and investment power;


·
            Has
      shared voting and investment power;
or


·
            Holds
      in an IRA or other retirement plan.


(2)   Includes
      warrants issued in the initial stock offering and stock options which may
      be exercised within 90 days of December 31,
  2009.


(3)  Based
      on 1,379,566shares outstanding
      and only the listed beneficial owner exercising his or her warrants and/or
      options.





[Intentionally
left blank]




40


Item
13. Certain Relationships and Related Transactions and Director
Independence





The Bank had the following
outstanding loans to Pro Financial’s and the Bank’s directors and executive
officers in amounts in excess of $60,000 in the aggregate for each director or
executive officer:





Borrower
            
            Date
      Matures
            
            Largest
      Amount in 2009
            
            
            Amount
      Outstanding
              12/31/2009
            
            Loan Type
            
            Interest RateAFN
      Mahan, LLC(1)
            
            6/26/2010
            
            $
            299,981
            
            
            $
            299,981
            
            Coml
            
            P+1,
      fl 6.25%Forsthoefel
      and Williams
            
            10/6/2011
            
            $
            10,978
            
            
            $
            7,221
            
            Coml
      Term
            
            P,
      fl 6.0%Michael
      and Jana Forsthoefel
            
            9/13/2010
            
            $
            100,438
            
            
            $
            100,406
            
            PLOC
            
            P,
      fl 6.0%Total
            
            $
            411,397
            
            
            $
            407,608Aerie
      Holdings, LLC(2)
            
            10/3/2010
            
            $
            100,000
            
            
            $
            100,000
            
            Coml
      LOC
            
            
            5.92%Waterbrook,
      LLC(2)
            
            10/6/2014
            
            $
            562,500
            
            
            $
            138,750
            
            Coml
            
            
            6.5%Waterbrook,
      LLC(2)
            
            5/6/2010
            
            $
            448,000
            
            
            $
            348,470
            
            Construction
            
            P+!,
      fl 6.25%Total
            
            $
            1,110,500
            
            
            $
            587,220Villa
      Lucia LLC(3)
            
            3/7/2010
            
            $
            125,000
            
            
            $
            124,521
            
            Coml
      LOC
            
            P,
      fl 6.0%James
      Sauls
            
            3/7/2010
            
            $
            45,103
            
            
            $
            0
            
            PLOC
            
            P,
      fl 6.0%Total
            
            $
            170,103
            
            
            $
            124,521Ernie
      Sims, III
            
            7/2/2014
            
            $
            139,900
            
            
            $
            129,995
            
            Cons
      Term
            
            
            7%Fat
      Orange Cat LLC(4)
            
            12/27/2010
            
            $
            171,748
            
            
            $
            170,398
            
            Coml
      LOC
            
            MMA+2%Javier
      Escobar
            
            3/14/2010
            
            $
            55,049
            
            
            $
            55,049
            
            PLOC
            
            P,
      fl 6.0%JEM
      Properties(5)
            
            3/14/2010
            
            $
            129,211
            
            
            $
            69,211
            
            Coml
      LOC
            
            P,
      fl 6.5%Total
            
            $
            184,260
            
            
            $
            124,259Josh
      and Kate Simmons
            
            11/10/2018
            
            $
            140,857
            
            
            $
            137,483
            
            HELOC
            
            P,
      fl 6.0%Josh
      Simmons
            
            7/9/2010
            
            $
            75,199
            
            
            $
            50,763
            
            PLOC
            
            P,
      fl 6.0%Total
            
            $
            216,056
            
            
            $
            188,247Peter
      Rosen
            
            4/25/2010
            
            $
            99,605
            
            
            $
            99,526
            
            PLOC
            
            P,
      fl 6.0%Peter
      Rosen
            
            10/31/2013
            
            $
            25,860
            
            
            $
            21,915
            
            Cons
      Term
            
            
            7%Total
            
            $
            125,465
            
            
            $
            121,441








(1) Dr.
Forsthoefel


(2) Mr.
Hobbs


(3) Mr.
Sauls


(4) Mr.
Turner


(5) Dr.
Escobar





41


Item
14. Principal
Accounting Fees and Services





James D.A. Holley & Co. P.A.,
audited the Company’s financial statements from inception to December 31, 2006
and for the fiscal year ended December 31, 2007.  They also performed
the reviews for the quarters ended June 30, and September 30, 2007 as well as
for the fiscal year ended December 31, 2008.  Hacker, Johnson, Smith
P.A., audited the Company’s financial statements for the fiscal year ended
December 31, 2009.





Fees
related to services performed by James D.A. Holley & Co. in 2008 and 2007
were as follows:





2009
            
            
            2008
            
            
            2007Audit
      Fees (1)
            
            $
            27,500
            
            
            $
            22,000
            
            
            $
            7,355Audit-Related
      Fees
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-Tax
      Fees (2)
            
            
            3,000
            
            
            
            3,000
            
            
            
            -0-Total
            
            $
            30,500
            
            
            $
            25,000
            
            
            $
            7,355





Fees
related to services performed by Hacker, Johnson, Smith PA in 2009 were as
follows: (3)





2009Audit
      Fees (1)
            
            
            -0-Audit-Related
      Fees
            
            
            -0-Tax
      Fees (2)
            
            
            -0-Total
            
            $
            -0-








(1)
            Audit
      fees represent fees for professional services provided in connection with
      the audit of our financial statements and review of our quarterly
      financial statements.  The Audit Committee must pre-approve
      audit related and non-audit services not prohibited by law to be performed
      by the Companies independent auditors.  The Audit Committee
      pre-approved all audit related and non-audit services in 2008 and
      2009.The
      Audit Committee has reviewed Pro Financial’s audited financial statements
      as of, and for, the fiscal years ended December 31, 2008 and 2009, and met
      with management to discuss those financial statements. Management has
      represented to the Audit Committee that the financial statements were
      prepared in accordance with accounting principles generally accepted in
      the United States of America.The
      Audit Committee has received from, and discussed with James D.A. Holley
      & Co. P.A., the written disclosure and the letter required by
      Independence Standards Board Standard No. 1 (Independence Discussions with
      Audit Committees). These items relate to that firm’s independence
      from Pro Financial. The Audit Committee has also discussed with James D.A.
      Holley & Co. P.A., any matters required to be discussed by Statement
      on Auditing Standards No. 61 (Communication with Audit
      Committees).The
      Pro Financial Audit Committee has received from Hacker, Johnson &
      Smith, P.A. the written disclosure and the letter required by Independence
      Standards Board Standard No. I (Independence Discussions with Audit
      Committees). These items relate to the auditing firm's independence from
      Pro Financial and the Bank. The Chairman of Pro Financial's Audit
      Committee was advised by Hacker Johnson & Smith that there were no
      matters required to be discussed by the Statement on Auditing Standards
      No. 114 at present and this information was presented to the Audit
      Committee. (Communication with Audit Committees).Based
      on the reviews and discussions referred to above, the Audit Committee
      recommended to the Board that Pro Financial’s audited financial statements
      be included in the Company’s Annual Report on Form 10-K for the fiscal
      years ended December 31, 2008 and 2009, and filed with the Securities and
      Exchange Commission.




(2)
            Tax
      fees principally included tax advice, tax planning and tax return
      preparation.





(3)
            There
      were no audit fees billed or accrued for Hacker, Johnson & Smith
      during 2009.  Such fees were billed and paid in
      2010.





42


Item
15. Exhibits





Exhibits
marked with an (a) were filed with the Form SB-2 filed with the Securities and
Exchange Commission March 9, 2007 File No. 333-141191.  Exhibits
marked with an (b) were filed with Amendment No. 2 to Form S-1 (formerly Form
SB-2) filed with the Securities and Exchange Commission September 16,
2009




(a)
              3.1
              Articles
      of Incorporation(a)
              3.2
              Bylaws(a)
              4.1
              Specimen
      Common Stock Certificate(a)
              4.2
              Warrant
      Plan(a)
              4.3
              Warrant
      Certificates(a)
              10.1
              Employment
      Agreement with B. Bryan Robinson(a)
              10.2
              Employee
      Stock Option Plan(a)
              10.3
              Director
      Stock Option Plan(a)
              10.4
              Lease
      for Main Office(a)
              10.5
              Escrow
      Agreement(b)
              10.6
              Employment
      Agreement with Erin B. Sjostrom13.1
              Financial
      Statements14.1
              Code
      of Ethics(a)
              21.1
              Schedule
      of Subsidiaries31.1
              Certification
      of Chief Executive and Principal Accounting Officer required by Rule 13a-
      14(a)/15d-14(a) under the Exchange Act32.1
              Certification
      of Chief Executive and Principal Accounting Officer, pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002.
  43


SIGNATURES





Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has
caused this report to be duly signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Tallahassee, State of Florida, on the 13th
day of April, 2010.






PRO
      FINANCIAL HOLDING, INC./s/ B. Bryan
      RobinsonB.
      Bryan RobinsonPresident
      and Chief Executive andPrincipal
      Accounting Officer




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in their
capacities onApril
13th,
2010.





Signature/s/
      Stephen R. Winn
              
              Chairman
      & DirectorStephen
      R. WinnDirectorChristopher
      E. Diamantis/s/
      Edward W. Dougherty Jr.
              
              DirectorEdward
      W. Dougherty, Jr./s/
      Kathleen B. Atkins-Gunter
              
              DirectorKathleen
      B. Atkins-GunterDirectorJavier
      I. Escobar, II MD/s/
      Michael W. Forsthoefel, MD
              
              DirectorMichael
      W. Forsthoefel, MD/s/
      Roger K. Hobbs
              
              DirectorRoger
      K. HobbsDirectorJoseph
      P. Jones/s/
      Allen R. Moayad
              
              DirectorAllen
      R. Moayad/s/
      Anuj P. Patel
              
              DirectorAnuj
      P. Patel/s/
      Peter S. Rosen
              
              DirectorPeter
      S. RosenDirectorJames
      S. Sauls/s/
      Joshua R. Simmons, MD
              
              DirectorJoshua
      R. Simmons, MD
  44
  DirectorErnest
      Sims, IIIDirectorDavid
      L. Tedrick, M.D.DirectorM.
      Stephen Turner




45


Pro
Financial Services, Inc.


Form
10-K


For
Fiscal Year Ending December 31, 2009





EXHIBIT
INDEX





Exhibit
      No.
            
            Exhibit13.1
            
            Financial
      Statements14.1
            
            Code
      of Ethics21.1
            
            Schedule
      of Subsidiaries31.1
            
            Certification
      of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a) under the
      Exchange Act32.1
            
            Certification
      of Chief Executive and Principal Accounting Officer, pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002.




46