FLORIDIAN FINANCIAL GROUP INC - FORM 10-Q

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EX-31.2 - FLORIDIAN FINANCIAL GROUP INC	i00232_ex31-2.htm
EX-31.1 - FLORIDIAN FINANCIAL GROUP INC	i00232_ex31-1.htm
EX-32.1 - FLORIDIAN FINANCIAL GROUP INC	i00232_ex32-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2011

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

For the transition period from ____________ to ____________

Commission File Number: 000-53589

FLORIDIAN FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)


Florida		20-4539279
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

175 Timacuan Boulevard, Lake Mary, Florida		32746
(Address of principal executive office)		(Zip Code)

(407) 321-3233
(Registrant’s telephone number, including area code)

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. Yes x No o

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).
Yes o No o

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.


Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company x
		(Do not check if smaller
		reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

At April 30, 2011, 6,205,571 shares of the Registrant’s Common Stock, $5.00 par value, were outstanding.

FLORIDIAN FINANCIAL GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2011

TABLE OF CONTENTS


		Page
PART I – Financial Information

Item 1.	Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets – March 31, 2011 and December 31, 2010	5
	Condensed Consolidated Statements of Operations – Three Months Ended March 31, 2011 and 2010	6
	Condensed Consolidated Statements of in Shareholders’ Equity – Three Months Ended March 31, 2011 and 2010	7
	Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2011 and 2010	8
	Notes to Condensed Consolidated Financial Statements (Unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	41

Item 4.	Controls and Procedures	42

PART II – Other Information

Item 1.	Legal Proceedings	42

Item 1A.	Risk Factors	42

Item 6.	Exhibits	43

Signatures		44

INTRODUCTORY NOTE

Caution Concerning Forward-Looking Statements

The SEC encourages companies to disclose forward-looking information so investors can better understand a company’s future prospects and make informed investment decisions. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among others, statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “target,” “goal,” and similar expressions are intended to identify forward-looking statements.

All forward-looking statements, by their nature, are subject to risks and uncertainties. Our actual future results may differ materially from those set forth in our forward-looking statements.

Our ability to achieve our financial objectives could be adversely affected by the factors discussed in detail in Part I, Item 2., “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and Part II, Item 1A., “Risk Factors” in this Quarterly Report on Form 10-Q, the following sections of our Annual Report on Form 10-K for the year ended December 31, 2010 (the “Annual Report”): (a) “Introductory Note” in Part I, Item 1. “Business,” (b) “Risk Factors” in Part I, Item 1A. as updated in our subsequent quarterly reports on Form 10-Q; and (c) “Introduction” in Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Part II, Item 7, as well as:


	§	our need and our ability to incur additional debt or equity financing;

	§	legislative or regulatory changes, including the Dodd-Frank Act;

	§	the strength of the United States economy in general and the strength of the local economies in which we conduct operations;

	§	the accuracy of our financial statement estimates and assumptions, including our allowance for loan losses;

	§	the frequency and magnitude of foreclosure of our loans;

	§	the effects of the health and soundness of other financial institutions, including the FDIC’s need to increase Deposit Insurance Fund assessments;

	§	the loss of our key personnel;

	§	inflation, interest rate, market and monetary fluctuations;

	§	the effects of our lack of a diversified loan portfolio, including the risk of geographic concentration;

	§	our customers’ willingness and ability to make timely payments on their loans;

	§	fluctuations in collateral values;

	§	effect of changes in the stock market and other capital markets;

	§	the effects of harsh weather conditions, including hurricanes;

	§	the effects of man-made disaster;

	§	our ability to comply with the extensive laws and regulations to which we are subject;

	§	our ability to execute our growth strategy through expansion;

	§	our customers’ perception of the safety of their deposits at the banks;

	§	changes in the securities and real estate markets;

	§	increased competition and its effect on pricing;

	§	technological changes;

	§	changes in monetary and fiscal policies of the U.S. Government;

	§	the effects of security breaches and computer viruses that may affect our computer systems;

	§	changes in consumer spending and saving habits;

	§	changes in accounting principles, policies, practices or guidelines;

	§	anti-takeover provisions under Federal and state law as well as our Articles of Incorporation and our bylaws;

	§	other risks described from time to time in our filings with the SEC; and

	§	our ability to manage the risks involved in the foregoing.

However, other factors besides those listed above and in the section captioned “Risk Factors” or discussed elsewhere in this Report also could adversely affect our results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. These forward-looking statements are not guarantees of future performance, but reflect the present expectations of future events by our management and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Any forward-looking statements made by us or on our behalf speak only as of the date they are made. We do not undertake to update any forward-looking statement, except as required by applicable law.


PART I.	FINANCIAL INFORMATION

Item 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Floridian Financial Group, Inc., and Subsidiaries

Condensed Consolidated Balance Sheets
March 31, 2011 and December 31, 2010 (Unaudited)
(Dollars in Thousands)


	March 31, 2011			December 31, 2010

Assets
Cash and due from banks	$	12,010		$	9,399
Federal funds sold		46,881			52,473

Total cash and cash equivalents		58,891			61,872
Securities available for sale		40,121			42,658
Securities held to maturity (Fair value of $10,181 at March 31, 2011 and $10,281 at December 31, 2010)		10,044			10,082
Other investments		100			100
Loans, net of allowance for loan losses of $8,723 and $8,010 at March 31, 2011 and December 31, 2010, respectively		297,968			309,555
Property and equipment, net		16,498			14,283
Intangible assets		1,845			1,893
Deferred income taxes		187			187
Other real estate owned		8,287			3,864
Other assets		16,977			17,137

Total assets	$	450,918		$	461,631


Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest-bearing demand	$	100,165		$	78,385
Savings, NOW and money market		160,991			181,657
Time deposits under $100		86,608			90,749
Time deposits of $100 or more		53,529			61,396

Total deposits		401,293			412,187

Other borrowings		7,963			6,762
Other liabilities		2,475			2,579

Total liabilities		411,731			421,528

Shareholders’ Equity
Preferred stock, $5 par value, 1,000,000 shares authorized; none outstanding		—			—
Common stock, $5 par value, 100,000,000 shares authorized; 6,205,571 and 6,199,849 shares issued and outstanding in 2011 and 2010, respectively		31,024			30,995
Additional paid-in capital		38,248			38,148
Retained deficit		(29,020	)		(27,835	)
Accumulated other comprehensive income (loss)		(1,065	)		(1,205	)

Total shareholders’ equity		39,187			40,103

Total liabilities and shareholders’ equity	$	450,918		$	461,631

See Notes to Unaudited Condensed Consolidated Financial Statements.

Floridian Financial Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations (Unaudited)
For the Three Months Ended March 31, 2011 and 2010
(Dollars in Thousands, Except Per Share Data)


	For the three months ended March 31,

	2011			2010

Interest income:
Interest and fees on loans	$	3,887		$	4,464
Interest on securities		360			677
Interest on federal funds sold		21			7
Other interest		4			—

Total interest income		4,272			5,148


Interest expense:
Interest on deposits		1,001			1,581
Other interest		65			53

Total interest expense		1,066			1,634


Net interest income		3,206			3,514

Provision for loan losses		1,167			189

Net interest income after provision for loan losses		2,039			3,325


Noninterest income:
Other noninterest income		316			290
Gain on sale of securities		—			3

Total noninterest income		316			293


Noninterest expense:
Salaries and employee benefits		1,674			1,742
Occupancy and equipment expenses		725			842
FDIC insurance		224			215
Data processing		295			227
Other real estate expense		40			165
Professional fees		242			134
Credit and collection expense		91			75
Telephone and communications		80			55
Core deposit intangible amortization		48			48
Operating recovery		—			(380	)
Other operating expenses		121			206

Total noninterest expense		3,540			3,329


Income (loss) before income taxes		(1,185	)		289


Income tax benefit		—			—

Net income (loss)	$	(1,185	)	$	289


Basic net income (loss) per share	$	(.19	)	$	.05
Diluted net income (loss) per share		(.19	)		.05

Average basic shares outstanding		6,202,313			6,195,347
Average diluted shares outstanding		6,202,313			6,195,347

See Notes to Unaudited Condensed Consolidated Financial Statements.

Floridian Financial Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity
For the Three Months Ended March 31, 2011 and 2010 (Unaudited)
(Dollars in Thousands)


	Common Stock Par Value		Additional Paid-in Capital		Retained Deficit			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity


Balance at December 31, 2009	$	30,969	$	37,793	$	(18,133	)	$	(146	)	$	50,483
Comprehensive income (loss):
Net income		—		—		289			—			289
Change in unrealized gain on securities available for sale, net of income tax		—		—		—			(120	)
Less reclassification adjustment for gains included in net income, net of taxes of $0									3

Net unrealized loss									(117	)		(117	)

Total comprehensive income												172
Sale of 2,512 shares of common stock to employee benefit plan and 4,727 shares for employee stock purchase plan		37		41		—			—			78
Issuance of 2,300 shares of common stock in lieu of director fees		11		18		—			—			29
Share-based compensation		—		75		—			—			75

Balance at March 31, 2010	$	31,017	$	37,927	$	(17,844	)	$	(263	)	$	50,837


Balance at December 31, 2010	$	30,995	$	38,148	$	(27,835	)	$	(1,205	)		40,103
Comprehensive income(loss):
Net loss		—		—		(1,185	)		—			(1,185	)
Change in unrealized loss on securities available for sale, net of income tax		—		—		—			140
Less reclassification adjustment for gains included in net loss, net of taxes of $0									—

Net unrealized gain/(loss)									140			140

Total comprehensive loss												(1,045	)
Sale of 1,123 shares of common stock to employee benefit plan and 1,319 shares for employee stock purchase plan		12		11		—			—			23
Issuance of 3,280 shares of common stock issued in lieu of director fees		17		13		—			—			30
Share-based compensation		—		76		—			—			76

Balance at March 31, 2011	$	31,024	$	38,248	$	(29,020	)	$	(1,065	)	$	39,187

See Notes to Unaudited Condensed Consolidated Financial Statements.

Floridian Financial Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, 2011 and 2010
(Dollars in Thousands)


	For the three months ended
	March 31, 2011			March 31, 2010


Cash Flows From Operating Activities
Net income (loss)	$	(1,185	)	$	289
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for loan losses		1,167			189
Impairment of other real estate owned, net		—			100
Depreciation expense		270			277
Amortization expense		48			45
Net accretion of securities		49			45
Share-based compensation and director fees		106			104
Realized gain on sales of available-for-sale securities		—			(3	)
Increase in cash surrender value		(86	)		(107	)
Increase in accrued interest receivable		(74	)		(5	)
Increase (decrease) in accrued interest payable		18			(4	)
Other		158			(336	)

Net cash provided by operating activities		471			594

Cash Flows From Investing Activities
Purchases of securities available for sale		—			(38,191	)
Maturities and calls on securities available for sale		2,666			41,785
Net (increase) decrease in loans		5,958			(6,499	)
Purchases of property and equipment, net		(2,485	)		(8	)
Net (increase) decrease in other investments		—			(37	)
Proceeds from sale of other real estate owned		79			553

Net cash provided by (used in) investing activities		6,218			(2,397	)

Cash Flows From Financing Activities
Net increase (decrease) in deposits		(10,894	)		16,320
Net increase (decrease) in other borrowings		1,201			(1,038	)
Proceeds from sale of stock		23			78

Net cash provided by (used in) by financing activities		(9,670	)		15,360

Net increase (decrease) in cash and cash equivalents		(2,981	)		13,557
Cash and cash equivalents
Beginning of period		61,872			8,293

End of period	$	58,891		$	21,850


Supplemental Disclosures of Cash Flow Information and noncash transactions

	For the three months ended
	March 31, 2011			March 31, 2010

Interest paid	$	3,868		$	1,635


Income taxes paid	$	—		$	—


Loans transferred to other real estate owned	$	4,502		$	72


See Notes to Unaudited Condensed Consolidated Financial Statements.

Floridian Financial Group, Inc. and Subsidiaries


Note 1.	Nature of Business and Summary of Significant Accounting Policies

Nature of business: Floridian Financial Group, Inc. (the “Company”) is a registered bank holding company formed to organize and own 100% of its subsidiary banks, Floridian Bank and Orange Bank of Florida (collectively referred to as the “Banks”). The Company was incorporated in 2005, and became operational as a bank holding company once Floridian Bank opened. Floridian Bank is a state-chartered, federally-insured full service commercial banking institution and presently conducts business from its headquarters and main office in Daytona Beach and branch offices in Ormond Beach, Palm Coast and Port Orange, Florida. Orange Bank of Florida is a state-chartered, federally-insured full service commercial banking institution with its headquarters in Orlando, Florida. The Company operates from its main office and branch offices in the Orange, Seminole, Lake and Citrus Counties, Florida.

Basis of Financial Statement Presentation: The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its Banks. Significant intercompany accounts and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and general practices within the financial services industry. The accompanying interim period adjustments, which are necessary for a fair presentation of the consolidated financial statements, have been included. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results which may be expected for the year as a whole or any other interim period. The interim period consolidated financial statements and financial information included in this Form 10-Q should be read in conjunction with the notes to the consolidated financial statements included in the Company’s 2010 Form 10-K.

Use of estimates: In preparing the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, deferred tax assets and the fair value of financial instruments.

A summary of the Company’s significant accounting policies follows:

Comprehensive income (loss): Comprehensive income or loss is comprised of the net income or loss from the consolidated statement of operations and any items of “other comprehensive income.” The only item of other comprehensive income for the Banks is the unrealized gain or loss on the available-for-sale investment securities portfolio, net of tax.

Cash and cash equivalents: For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks (including cash items in process of clearing) and federal funds sold. Cash flows from loans originated by the Company and deposits are reported net. The Company maintains amounts due from banks, which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts.

Securities: Certain securities which management has the positive intent and ability to hold until their maturity are classified as held to maturity. Such securities are carried at cost, adjusted for related amortization of premium and accretion of discounts through interest income from securities.

Loans: Loans are stated at the amount of unpaid principal balances, reduced by an allowance for loan losses and unearned fees and costs. Interest on loans is calculated by using the simple interest method on daily balances of the principal amounts outstanding unless loans are classified as nonaccrual loans. The accrual of interest is discontinued when future collection of principal or interest in accordance with the contractual terms becomes doubtful. When interest accrual is discontinued, all unpaid accrued interest is reversed against interest income. Accrual of interest is generally resumed when the customer is current on all principal and interest payments and has been paying on a timely basis for at least six months.

Floridian Financial Group, Inc. and Subsidiaries


Note 1.	Nature of Business and Summary of Significant Accounting Policies (continued)

Accounting standards require the presentation of certain disclosure information at the portfolio segment level, which represents the level at which the Company determines its allowance for credit losses. The Company has four reportable loan segments: Commercial, Commercial Real Estate (CRE), Residential Real Estate (RRE), and Consumer and home equity. Segments are determined based on the products and services provided and the type of customer served. Commercial loans represent all business purpose loans not collateralized by real estate. CRE represents all business purpose loans collateralized by any type of real estate. RRE represents all consumer purpose loans collateralized by one to four family residences. Home equity represents all consumer open end lines of credit secured by one to four family lines of credit. Consumer loans represent any consumer purpose loans not secured by real estate. See Note 4 for a breakdown of loans by segment.

Within each segment, the Company monitors and assesses the credit risk in the following classes, based on the risk characteristic of each loan segment: Pass, Special Mention, Substandard, Doubtful, and Loss. See Note 4 for a breakdown of loans by class. Within the Commercial and CRE portfolio risk grades are assigned based on an assessment of conditions that affect the borrower’s ability to meet obligations as outlined in the loan agreement. This process includes reviewing financial information of the borrower, credit documentation, public information, past experience with the borrower, and other information that may be available specific to each borrower. Risk grades are reviewed annually on all large credit relationships or on any credit where management becomes aware of information that may affect the borrower’s ability to fulfill contractual obligations.

Troubled Debt Restructuring: Loans classified as Troubled Debt Restructurings (“TDR”) include loans on nonaccrual, loans moving to nonaccrual, and loans in an accruing status. The Company evaluates each individual borrower’s financial condition and prospects for repayment under the modified terms prior to restructuring. The evaluation includes but is not limited to the borrower’s capacity and willingness to pay, past payment history, and any secondary sources of payment. There were no defaults on any of the Company’s TDRs in the first quarter of 2011.

Nonaccrual and Impaired loans: Borrowers who have not made scheduled payments within 30 days of their due date are considered past due. The Company has a formal review process for all past due loans which includes a review of previous performance, collateral and future cash flows. The Company’s policy is to place all loans where interest and principal has been delinquent for 90 days or more on nonaccrual status unless the loan is well secured and in the process of collection. Loans operating on a cash basis because of deterioration in financial condition of the debtor as well as loans were the full collection of recorded interest or principal is not expected are also placed on nonaccrual status regardless of delinquency status. When loans are placed on nonaccrual status, future interest accruals are discontinued and all unpaid accrued interest is reversed against interest income.

Cash collections on nonaccrual loans are credited to the loan receivable balance and no interest income is recognized on those loans until the principal balance is current. Nonaccrual loans, after a reasonable period of sustained repayment performance (generally minimum of six months), are re-evaluated for possible return to an accrual status. See Note 4 for a breakdown of the Company’s loan portfolio based on aging.

Impaired loans are measured for impairment based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral, net of selling costs, if the loan is collateral dependent. A loan is impaired when it is probable the creditor will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. On at least a quarterly basis, the Company reviews impaired loans for any changes in the borrower’s ability to repay the loan. Based on this review, the Company may consider making modifications to the original loan agreement.

Allowance for loan losses: The allowance for loan losses is established through a provision for loan losses charged against operations. All commercial loans risk rated substandard or doubtful are considered impaired and are reviewed on a quarterly basis to determine if a specific reserve needs to be allocated.

Floridian Financial Group, Inc. and Subsidiaries


Note 1.	Nature of Business and Summary of Significant Accounting Policies (continued)

Loans are charged against the allowance for loan losses when management believes that the loss is confirmed. The allowance is an amount that management believes is adequate to absorb losses inherent in the loan portfolio, based on evaluations of the collectability of loans, industry historical loss experience, current economic conditions, portfolio mix, and other factors. There have been no changes to the Company’s methodology from the prior period for evaluating and allocating loan losses in regard to the provision.

While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions.

Loan Charge-Offs: All loan segments except consumer are charged off within 30 days from the date the loan is deemed uncollectible. The recognition of the loss of loans or portions of loans occurs as soon as there is a reasonable probability of loss. When the amount of loss can be readily calculated, then the loss is recognized. In cases where an amount cannot be calculated, a specific allowance for loan losses is estimated and provided for.

Losses on consumer credit card loans are taken as soon as possible and no later than when the loan is 90 days delinquent. All other consumer loan losses are taken as soon as possible and no later than when delinquency exceeds 120 days.

As a policy, the bank reverses accrued interest on loans placed on non-accrual. If the accrued interest being reversed was recorded in a previous calendar year and the amount is material, the accrued interest associated with the previous calendar year is charged off.

Credit related financial instruments: In the ordinary course of business the Banks enter into off-balance-sheet financial instruments consisting of commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded.

Transfers of financial assets: Transfers of financial assets are accounted for as sales only when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been legally isolated from the Company and any of its affiliates, (2) the transferee has the ability to sell or pledge the transferred assets and, (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or maintain effective control through a third-party beneficial interest in the transferred assets, the ability to unilaterally cause the holder to return specific assets, or have an in-the-money option held by a transferor when probable that the transferor will repurchase the assets.

Other Real Estate Owned: Other real estate owned (“OREO”) consists of property acquired through, or in lieu of, loan foreclosures or other proceedings and is initially recorded at the fair value less estimated selling costs at the date of foreclosure, which establishes a new cost basis. Subsequent to foreclosure, the properties are held for sale and are carried at the lower of cost or fair value less estimated costs of disposal. Any write-down to fair value at the time of acquisition is charged to the allowance for loan losses. Properties are evaluated regularly to ensure the recorded amounts are supported by current fair values, and a charge to operations is recorded as necessary to reduce the carrying amount to fair value less estimated costs to dispose.

Income taxes: The Company accounts for income taxes according to the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.

Deferred tax assets and liabilities are measured using the enacted tax rates applicable to taxable income for the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation reserves are established against certain deferred tax assets when it is more likely than not that the deferred tax assets will not be realized. Increases or decreases in the valuation reserve are charged or credited to the income tax provision.

Floridian Financial Group, Inc. and Subsidiaries


Note 1.	Nature of Business and Summary of Significant Accounting Policies (continued)

The Company recognizes a benefit from its tax positions only if it is more-likely-than-not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information.

The periods subject to examination for the Company’s federal returns are the tax years subsequent to 2007. The periods subject to examination for the Company’s significant state return, which is Florida, are the tax years subsequent to 2007. The Company believes that its income tax filing positions and deductions will be sustained upon examination and does not anticipate any adjustments that will result in a material change in its financial statements. As a result, no reserve for uncertain income tax positions has been recorded.

The Company’s policy for recording interest and penalties related to uncertain tax positions is to record such items as part of its provision for federal and state income taxes.

Earnings per share: Basic earnings per share is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding for each period presented. Diluted earnings per common share include the dilutive effect of stock options granted using the treasury stock method.

Share-based compensation: The Company has a stock option plan for its employees and for its directors, as more fully described in Note 14 of our Annual Report. The Company is required to recognize compensation cost relating to share-based payment transactions, based on the fair value of the equity or liability instruments issued, in its financial statements. Compensation cost has been measured using the fair value of an award on the grant dates and is recognized over the service period, which is usually the vesting period.

Reclassifications: Certain amounts in the 2010 financial statements have been reclassified for comparative purposes to conform with the presentation in the 2011 financial statements. The results of these classifications had no effect on net operations or shareholders’ equity.


Note 2.	Cash and Due From Banks

The Banks are required to maintain vault cash and reserve balances with the Federal Reserve Bank based upon a percentage of deposits. These requirements were $1.9 million at March 31, 2011 and $1.6 million at December 31, 2010.

Floridian Financial Group, Inc. and Subsidiaries


Note 3.	Securities

The amortized cost and estimated fair value of securities with gross unrealized gains and losses follows:


	As of March 31, 2011
(Dollars in Thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value


Securities Available for Sale
Debt Securities:
U.S. Government and federal agencies	$	27,630	$	15	$	871	$	26,774
States & political subdivisions		1,705		—		16		1,689
Government sponsored mortgage backed		11,851		—		193		11,658

Total securities available for sale	$	41,186	$	15	$	1,080	$	40,121

Securities Held to Maturity
Debt Securities:
U.S. Government and federal agencies	$	10,044	$	137	$	—	$	10,181

Total securities held to maturity	$	10,044	$	137	$	—	$	10,181


	As of December 31, 2010

Securities Available for Sale
Debt Securities:
U.S. Government and federal agencies	$	30,133	$	24	$	933	$	29,224
States & political subdivisions		1,706		—		48		1,658
Government sponsored mortgage backed		12,024		1		249		11,776

Total securities available for sale	$	43,863	$	25	$	1,230	$	42,658


Securities Held to Maturity

Debt Securities:
U.S. Government and federal agencies	$	10,082	$	199	$	—	$	10,281

Total securities held to maturity	$	10,082	$	199	$	—	$	10,281

Floridian Financial Group, Inc. and Subsidiaries


Note 3.	Securities (continued)

At March 31, 2011 and December 31, 2010, government obligations with a carrying value of $23.5 million and $16.6 million, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. At March 31, 2011 and December 31, 2010, the carrying amount of securities pledged to secure repurchase agreements was $6.2 million and $6.7 million, respectively.

The carrying amount of debt securities by contractual maturity at March 31, 2011 follows:

(Dollars in Thousands)

Within
1 year

After 1
year through
5 years

After 5 years
through
10 years

Over
10 years

Total

Available for Sale, at fair value

U.S. Government and federal agencies

—

6,855

14,768

5,151

26,774

States & political subdivisions

—

713

976

—

1,689

Mortgage-backed

—

11,658

Total

—

7,568

15,744

16,809

40,121

Securities Held to Maturity, at cost

U.S. Government and federal agencies

—

10,044

Total

—

10,044

For the three months ended March 31, 2011 and 2010, proceeds from sales, maturities, and calls of securities available for sale amounted to $2.7 million and $41.8 million, respectively. Gross realized gains amounted to $0 and $3 thousand, respectively. There were no gross losses for the three months ended March 31, 2011 and 2010.

Information pertaining to securities with gross unrealized losses at March 31, 2011 and December 31, 2010 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:


	March 31, 2011
	Less Than Twelve Months				Over Twelve Months

(Dollars in Thousands)	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Total Unrealized Losses

Securities Available for Sale
Debt Securities:
U.S. Government and federal agencies	$	871	$	22,761	$	—	$	—	$	871
States & political subdivisions		16		1,689		—		—		1,689
Mortgage-backed		193		11,658		—		—		193

Total securities available for sale	$	1,080	$	36,108	$	—	$	—	$	1,080


Securities Held to Maturity
Debt Securities:
U.S. Government and federal agencies	$	—	$	—	$	—	$	—	$	—

Total securities held to maturity	$	—	$	—	$	—	$	—	$	—

Floridian Financial Group, Inc. and Subsidiaries


Note 3.	Securities (continued)


	December 31, 2010
	Less Than Twelve Months				Over Twelve Months

(Dollars in Thousands)	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Total Unrealized Losses

Securities Available for Sale
Debt Securities:
U.S. Government and federal agencies	$	933	$	22,702	$	—	$	—	$	933
States & political subdivisions		48		1,658		—		—		48
Mortgage-backed		249		6,704		—		—		249

Total securities available for sale	$	1,230	$	31,064	$	—	$	—	$	1,230


Securities Held to Maturity
Debt Securities:
U.S. Government and federal agencies	$	—	$	—	$	—	$	—	$	—

Total securities held to maturity	$	—	$	—	$	—	$	—	$	—

As of March 31, 2011, the Company’s security portfolio consisted of 18 securities, 12 of which were in an unrealized loss position. Approximately $48.5 million, or 97% of the debt securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae, Freddie Mac and Ginnie Mae, institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2011.


Note 4.	Loans and Allowance for Loan Losses

Loans were comprised of the following:


(Dollars in Thousands)	March 31, 2011		December 31, 2010


Commercial	$	42,144	$	45,202
Commercial real estate		235,231		240,151
Residential real estate		10,016		12,580
Consumer loans		19,465		19,837

Total loans		306,856		317,770
Less: Allowance for loan losses		8,723		8,010
Less: Unearned fees		165		205

Net loans	$	297,968	$	309,555

Floridian Financial Group, Inc. and Subsidiaries


Note 4.	Loans and Allowance for Loan Losses (continued)

Activity in the allowance for loan losses is as follows:


	For the Three Months Ended March 31,
(Dollars in Thousands)	2011			2010

Beginning balance	$	8,010		$	9,038
Loan charge offs:
Commercial		—			112
Commercial real estate		272			—
Residential mortgage		141			—
Consumer and home equity		179			—

Total charge-offs		592			112


Recoveries:
Commercial		1			4
Commercial real estate		135			—
Residential mortgage		—			—
Consumer and home equity		2			—

Total recoveries		138			4


Provision for loan losses:
Commercial		420			60
Commercial real estate		350			—
Residential mortgage		—			52
Consumer and home equity		377			—
Unallocated		20			77

Total provision		1,167			189



Ending balance	$	8,723		$	9,119


Allowance / Total Loans		2.8	%		2.7	%
Net Charge-Offs / Average Loans		0.1	%		NM
Allowance / Non-Performing Loans		69.3	%		253	%

Floridian Financial Group, Inc. and Subsidiaries


Note 4.	Loans and Allowance for Loan Losses (continued)

The following presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2011 and December 31, 2010:


	As of March 31, 2011

(Dollars in Thousands)		Commercial		Commercial Real Estate		Residential Real Estate		Home Equity		Consumer		Unallocated		Total

Ending allowance for loan losses:
Individually evaluated for impairment		$	202	$	925	$	—	$	—	$	—	$	—	$	1,127
Collectively evaluated for impairment			918		5,030		423		929		19		277		7,596

Total ending allowance balance		$	1,120	$	5,955	$	423	$	929	$	19	$	277	$	8,723


Loans:
Individually evaluated for impairment		$	852	$	29,018	$	—	$	—	$	—	$	—	$	29,870
Collectively evaluated for impairment			41,292		206,213		10,016		17,375		2,090		—		276,986

Total ending loan balance		$	42,144	$	235,231	$	10,016	$	17,375	$	2,090	$	—	$	306,856


	As of December 31, 2010

(Dollars in Thousands)		Commercial		Commercial Real Estate		Residential Real Estate		Home Equity		Consumer		Unallocated		Total

Ending allowance for loan losses:
Individually evaluated for impairment		$	308	$	877	$	—	$	—	$	—	$	—	$	1,185
Collectively evaluated for impairment			973		4,598		460		708		21		65		6,825

Total ending allowance balance		$	1,281	$	5,475	$	460	$	708	$	21	$	65	$	8,010


Loans:
Individually evaluated for impairment		$	896	$	33,920	$	—	$	—	$	—	$	—	$	34,816
Collectively evaluated for impairment			44,306		206,231		12,580		17,078		2,759		—		282,954


Total ending loan balance		$	45,202	$	240,151	$	12,580	$	17,078	$	2,759	$	—	$	317,770

Floridian Financial Group, Inc. and Subsidiaries


Note 4.	Loans and Allowance for Loan Losses (continued)

The following presents loans individually evaluated for impairment by class of loans as of March 31, 2011 and December 31, 2010:


	As of March 31, 2011

(Dollars in Thousands)	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized

With no related allowance recorded:
Commercial	$	501	$	501	$	—		349		—
Commercial real estate
Construction and land		4,531		4,531		—		7055		13
Non-owner occupied		7,120		7,120		—		13,625		44
Owner occupied		3,945		3,945		—		2,696		5
Residential		—		—		—		—		—
Home equity		—		—		—		—		—
Consumer		—		—		—		—		—

Total		16,097		16,097		—		23,725	$	62


With an allowance recorded:
Commercial		351		149		202		354		3
Commercial real estate
Construction and land		1,928		1,908		20		107		—
Non-owner occupied		9,317		8,452		865		8,096		—
Owner occupied		2,177		2,137		40		2,191		32
Residential		—		—		—		—		—
Home equity		—		—		—		—		—
Consumer		—		—		—		—		—

Total		13,773		12,646		1,127		10,748		35


Total	$	29,870	$	28,743	$	1,127	$	34,474	$	97

Floridian Financial Group, Inc. and Subsidiaries


Note 4.	Loans and Allowance for Loan Losses (continued)


	As of December 31, 2010

(Dollars in Thousands)	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated

With no related allowance recorded:
Commercial	$	335	$	335	$	—
Commercial real estate
Construction and land		6,962		6,962		—
Non-owner occupied		9,946		9,946		—
Owner occupied		5,262		5,262		—
Residential		1,423		1,423		—
Home equity		—		—		—
Consumer		—		—		—

Total		23,929		23,929		—


With an allowance recorded:

Commercial		561		253		308
Commercial real estate

Construction and land		109		86		23
Non-owner occupied

Owner occupied		10,217		9,363		854

Residential		—		—		—
Home equity		—		—		—
Consumer		—		—		—


Total		10,887		9,702		1,185


Total		34,816	$	33,631	$	1,185

Floridian Financial Group, Inc. and Subsidiaries


Note 4.	Loans and Allowance for Loan Losses (continued)


(Dollars in Thousands)	March 31, 2011		March 31, 2010

Average investment in impaired loans	$	32,886	$	25,220
Interest income recognized on impaired loans	$	97	$	327
Interest income recognized on a cash basis on impaired loans	$	—	$	—

No additional funds are committed to be advanced in connection with impaired loans.

Impaired loans include troubled debt restructurings of $21.7 million and $21.8 million at March 31, 2011 and December 31, 2010, respectively. All TDRs were performing at March 31, 2011. As of December 31, 2010 there was one nonperforming TDR with an outstanding principal balance of $1.4 million.

The following presents the recorded investment in non-accrual loans and loans past due over 90 days past due and still accruing by class of loans as of March 31, 2011 and December 31, 2010:


(Dollars in Thousands)	March 31, 2011				December 31, 2010


	Nonaccrual		Loans Past Due Over 90 Days Still Accruing		Nonaccrual		Loans Past Due Over 90 Days Still Accruing


Commercial	$	672	$	—	$	718	$	—
Commercial real estate
Construction and land		4,639		—		1,393		—
Non-owner occupied		2,952		1,620		10,774		63
Owner occupied		3,339		—		2,781		—
Residential		1,283		—		—		—
Home equity		71		—		—		—
Consumer		—		—		—		—

Total	$	12,595	$	1,620	$	15,665	$	63

Non-accruing loans amounted to $12.6 million and $15.7 million at March 31, 2011 and December 31, 2010, respectively. Interest income on nonaccrual loans is recognized on a cash basis when the ultimate collectability is no longer considered doubtful. Cash collected on nonaccrual loans is applied against the principal balance or recognized as interest income based upon management’s expectations as to the ultimate collectability of principal and interest in full. If interest on non-accruing loans had been recognized on a fully accruing basis, interest income recorded would have been $425 thousand and $287 thousand higher for the periods ending March 31, 2011 and December 31, 2010, respectively. As of March 31, 2011, there was one loan totaling $1.6 million that was past due 90 days or more and still accruing interest income. The loan had matured and was in the process of being renewed.

Floridian Financial Group, Inc. and Subsidiaries


Note 4.	Loans and Allowance for Loan Losses (continued)

The following presents the aging of the recorded investment in past due loans as of March 31, 2011 and December 31, 2010 by class of loans:

March 31, 2011

(Dollars in Thousands)

30 – 59
Days
Past Due

60 – 89
Days
Past Due

90 Days
or Greater
Past Due

Total
Past Due

Loans Not
Past Due

Commercial

162

329

533

41,611

Commercial real estate

Construction and land

5,004

—

1,148

6,152

48,143

Non-owner occupied

—

2,804

161,901

Owner occupied

—

3,339

12,892

Residential

—

1,282

—

1,282

8,734

Home equity

—

17,304

Consumer

—

2,083

Total

5,166

1,331

7,691

14,188

292,668


	December 31, 2010

(Dollars in Thousands)	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due


Commercial	$	181	$	193	$	150	$	524	$	44,678
Commercial real estate
Construction and land		272		—		1,141		1,413		56,090
Non-owner occupied		469		328		4,010		4,807		62,190
Owner occupied		2,560		—		1,642		4,202		111,449
Residential		—		—		—		—		12,580
Home equity		—		—		52		52		17,026
Consumer		13		—		—		13		2,746

Total	$	3,495	$	521	$	6,995	$	11,011	$	306,759

The Company assigns a risk rating to all business purpose loans and periodically performs reviews to identify credit risks and to assess the overall collectability of the portfolio. During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign a risk rating to each individual loan. The risk ratings can be grouped into five major categories, defined as follows:

Pass – A pass loan is a strong credit with no existing or known potential weaknesses deserving of management’s close attention.

Special Mention – A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Floridian Financial Group, Inc. and Subsidiaries


Note 4.	Loans and Allowance for Loan Losses (continued)

Substandard – A substandard loan is not adequately protected by the current financial condition and paying capacity of the borrower or the value of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well-defined weaknesses include a project’s lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project’s failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable or improbable.

Loss – Loans classified as loss are considered uncollectible. Once a loan becomes delinquent and repayment becomes questionable, the Company will address collateral shortfalls with the borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Bank will estimate its probable loss and immediately charge-off some or all of the balance.

As of March 31, 2011 and December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:


	March 31, 2011

(Dollars in Thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Not Rated

Commercial	$	41,149	$	—	$	683	$	312	$	—	$	—
Commercial real estate
Construction and land		45,925		1,908		6,322		139		—		—
Non-owner occupied		138,203		9,787		16,716		—		—		—
Owner occupied		11,393		—		3,091		1,748		—		—
Residential		8,732		—		1,283		—		—		—
Home equity		16,313		—		1,042		20		—		—
Consumer		2,090		—		—		—		—		—

Total	$	263,805	$	11,695	$	29,137	$	2,219	$	—	$	—


	December 31, 2010

(Dollars in Thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Not Rated

Commercial	$	44,257	$	—	$	448	$	497	$	—	$	—
Commercial real estate:

Construction and land		44,342		5,000		8,018		143		—		—

Non-owner occupied		52,635		6,744		7,618		—		—		—

Owner occupied		101,495		—		11,845		2,311		—		—

Residential		11,157		—		1,423		—		—		—
Home equity
		17,078		—		—		—		—		—
Consumer		2,749		10		—		—		—		—

Total	$	273,713	$	11,754	$	29,352	$	2,951	$	—	$	—

Floridian Financial Group, Inc. and Subsidiaries

Note 4. Loans and Allowance for Loan Losses (continued)

The following presents the recorded investment in residential and consumer loans based on payment activity as of March 31, 2011 and December 31, 2010:


	March 31, 2011

(Dollars in Thousands)	Residential		Home Equity		Consumer

Performing	$	8,732	$	16,313	$	2,090
Non-performing		1,283		1,062		—

Total	$	10,015	$	17,375	$	2,090


	December 31, 2010

(Dollars in Thousands)	Residential		Home Equity		Consumer

Performing	$	11,157	$	17,078	$	2,759
Nonperforming		1,423		—		—

Total	$	12,580	$	17,078	$	2,759


Note 5.	Commitments and Contingencies

Financial instruments with off-balance-sheet risk: The financial statements do not reflect various commitments and contingent liabilities that arise in the normal course of business to meet the financing needs of customers. These include commitments to extend credit and honor stand-by letters of credit. These instruments involve, to varying degrees, elements of credit, interest rate and liquidity risks in excess of amounts reflected in the balance sheets. The extent of the Banks’ involvement in these commitments or contingent liabilities is expressed by the contractual, or notional, amounts of the instruments. Commitments to extend credit, which amount to $62.5 million and $59.0 million at March 31, 2011 and December 31, 2010, respectively, represent 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 liquidity requirements. The amount of collateral obtained, if any, is based on management’s credit evaluation in the same manner as though an immediate credit extension were to be granted.

Stand-by letters of credit are conditional commitments issued by the Banks guaranteeing the performance of a customer to a third party. The decision whether to guarantee such performance and the extent of collateral requirements are made considering the same factors as are considered in credit extensions. Stand-by letters of credit totaling $3.1 million and $3.0 million are outstanding as of March 31, 2011 and December 31, 2010, respectively.

Lines of credit: At March 31, 2011 and December 31, 2010, the Banks had federal funds lines of credit of $26.1 million available from their correspondent banks. At these dates, there were no outstanding draws under these lines. The highest single day borrowing under these lines was $0 during the three months ended March 31, 2011.

We are periodically a party to or otherwise involved in legal proceedings arising in the normal course of business, such as claims to enforce liens, claims involving the making and servicing of real property loans, and other issues incident to our business. Management does not believe that there is any pending or threatened proceeding against us which, if determined adversely, would have a material adverse effect on our financial position, liquidity, or results of operations.

Floridian Financial Group, Inc. and Subsidiaries


Note 6.	Regulatory Capital Matters

The Company Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company’s

financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Banks must meet specific capital guidelines that involve quantitative measures of the Banks’ assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Banks to maintain minimum amounts and ratios (set forth in the table on the following page) of total and Tier 1 capital (as defined in the regulations), to risk-weighted assets (as defined), and Tier 1 capital (as defined), to average assets (as defined). Management believes, as of March 31, 2011 and December 31, 2010, that the Banks meet all capital adequacy requirements to which they are subject.

At March 31, 2011, the Company’s banking subsidiaries exceeded all regulatory capital measures to be adequately capitalized. Further, the banking subsidiaries satisfied all the criteria to be well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Banks must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table.

Floridian Financial Group, Inc. and Subsidiaries


Note 6.	Regulatory Capital Matters (continued)


(Dollars in Thousands)	Actual					Minimum Amount and Ratio to Remain Well Capitalized


	Amount		Ratio			Amount		Ratio

As of March 31, 2011:
Total capital (to risk-weighted assets)
Consolidated	$	42,656		12.2	%		N/A	N/A
Floridian Bank	$	13,596		12.3	%	$	11,055	10.0	%
Orange Bank of Florida	$	24,303		10.4	%	$	23,479	10.0	%

Tier 1 capital (to risk-weighted assets)
Consolidated	$	38,220		10.9	%		N/A	N/A
Floridian Bank	$	12,202		11.0	%	$	6,633	6.0	%
Orange Bank of Florida	$	21,330		9.1	%	$	14,088	6.0	%

Tier 1 capital (to average assets)
Consolidated	$	38,220		8.6	%		N/A	N/A
Floridian Bank	$	12,202		8.3	%	$	7,375	5.0	%
Orange Bank of Florida	$	21,330		7.3	%	$	14,561	5.0	%

As of December 31, 2010:
Total capital (to risk-weighted assets)
Consolidated	$	43,736		12.3	%		N/A	N/A
Floridian Bank	$	13,479		11.7	%	$	11,486	10.0	%
Orange Bank of Florida	$	25,337		10.7	%	$	23,657	10.0	%

Tier 1 capital (to risk-weighted assets)
Consolidated	$	39,228		11.0	%		N/A	N/A
Floridian Bank	$	12,033		10.5	%	$	6,891	6.0	%
Orange Bank of Florida	$	22,345		9.5	%	$	14,194	6.0	%

Tier 1 capital (to average assets)
Consolidated	$	39,228		8.4	%		N/A	N/A
Floridian Bank	$	12,033		8.0	%	$	7,570	5.0	%
Orange Bank of Florida	$	22,345		7.3	%	$	15,404	5.0	%

The payment of dividends by a Florida state bank is subject to various restrictions set forth in the Florida Financial Institutions Code. Such restrictions generally limit dividends to an amount not exceeding net income for the current and two preceding years, less any dividends paid during that period. Accordingly, management does not expect the payment of dividends at any time in the near future. Since the Company is dependent upon the Bank’s ability to pay dividends, the Company is, in effect, similarly restricted as to its ability to pay dividends.


Note 7.	Fair Values of Financial Instruments

Financial Accounting Standards Board (“FASB”) guidance for Fair Value Measurements for financial assets and financial liabilities defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The application of this standard in situations where the market for a financial asset is not active was clarified by the issuance of and interpretation by the FASB in Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. This interpretation became effective immediately and did not significantly impact the methods by which the Company determines the fair values of its financial assets.

Floridian Financial Group, Inc. and Subsidiaries


Note 7.	Fair Values of Financial Instruments (continued)

The original standard defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

This guidance requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert expected future amounts, such as cash flows or earnings, to a single present value amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:


	Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

	Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

	Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation

Floridian Financial Group, Inc. and Subsidiaries


Note 7.	Fair Values of Financial Instruments (continued)

methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:

Cash and due from banks, interest-bearing demand deposits in other banks, and federal funds sold: Due to the short-term nature of these instruments, fair values approximate their carrying amounts. Federal funds sold was $46.9 million at March 31, 2011.

Investment Securities: The fair values of investment securities are determined by quoted prices in active markets, when available. If quoted market prices are not available, the fair value is determined by a matrix pricing, which is a mathematical technique, widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.

Loans: For variable-rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for all other loans (for example, commercial, commercial real estate, residential real estate, and consumer loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Impaired Loans: Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with the FASB guidance “accounting by creditors for impairment of a loan,” and the fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. In accordance with accounting literature, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. Collateral values are estimated using level 3 inputs based on customized discounting criteria.

Other Real Estate Owned: Other real estate owned consists of property acquired through, or in lieu of, loan foreclosures or other proceedings and is initially recorded at the lower of the related loan balances less any specific allowance for loss, or fair value at the date of foreclosure, which establishes a new cost basis. Subsequent to foreclosure, the properties are held for sale and are carried at the net fair value at the time of acquisition is charged to the allowance for loan losses. Properties are evaluated regularly to ensure the recorded amounts are supported by current fair values, and a charge to operations is recorded as necessary to reduce the carrying amount to fair value less estimated costs to dispose.

Accrued interest receivable and accrued interest payable: The fair values of accrued interest receivable and accrued interest payable approximate their carrying amounts.

Deposits: The fair value of demand deposits, including non-interest-bearing demand deposits, savings accounts, NOW accounts and money market demand accounts, is equal to their carrying value. Fixed rate term deposits are valued using discounted cash flows. The discount rate used is based on interest rates currently being offered on comparable deposits as to amount and term.

Other borrowings: The carrying amounts of borrowings under repurchase agreements in the amount of $6.3 and $6.8 million approximate their fair values.

Off-balance-sheet instruments: Loan commitments and letters of credit are negotiated at current market rates and are relatively short-term in nature. Therefore, their estimated fair value approximates the fees charged and is nominal at March 31, 2011 and December 31, 2010.

Floridian Financial Group, Inc. and Subsidiaries


Note 7.	Fair Values of Financial Instruments (continued)

Financial Instruments Recorded at Fair Value on a Recurring Basis

The following table sets forth the Company’s assets and liabilities which are carried at fair value on a recurring basis as of March 31, 2011 and December 31, 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

(Dollars in Thousands)

March 31, 2011

Quoted Prices in
Active Markets
for Identical
Assets
Level 1

Significant Other
Observable
Inputs
Level 2

Significant
Unobservable
Inputs
Level 3

Total at
Fair
Value

Securities available for sale Debt securities:

U.S. Government and federal agencies

—

26,774

—

26,774

States & political subdivisions

—

1,689

—

1,689

Mortgage backed

—

11,658

—

11,658

Total securities available for sale

—

40,121

—

40,121


	December 31, 2010

	Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Total at Fair Value

Securities available for sale Debt securities:	$	—	$	29,224	$	—	$	29,224
U.S. Government and federal agencies		—		1,658		—		1,658
States & political subdivisions		—		11,776		—		11,776
Mortgage backed		—		—		—		—

Total securities available for sale	$	—	$	42,658	$	_—	$	42,658

Floridian Financial Group, Inc. and Subsidiaries


Note 7.	Fair Values of Financial Instruments (continued)

Financial Instruments Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain financial assets and financial liabilities at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period.

The fair values of assets measured at fair value on a nonrecurring basis are as follows at March 31, 2011 and December 31, 2010:


(Dollars in Thousands)	March 31, 2011

	Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3

Impaired loans	$	—	$	—	$	12,040
Other real estate owned	$	—	$	—	$	8,287


	December 31, 2010

	Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3

Impaired loans	$	—	$	—	$	13,355
Other real estate owned	$	—	$	—	$	3,864

Provisions for loan losses of $573 thousand and $0 were recorded on impaired loans during the three months ended March 31, 2011 and 2010, respectively. Write-downs of $594 thousand and $189 thousand were recorded on other real estate owned during the three months ended March 31, 2011 and 2010, respectively.

Floridian Financial Group, Inc. and Subsidiaries


Note 7.	Fair Values of Financial Instruments (continued)

Following is a summary of the carrying amounts and approximate fair values of the Company’s financial instruments at March 31, 2011 and December 31, 2010. The fair value estimates presented are based on pertinent information available to management as of March 31, 2011 and December 31, 2010. Although management is not aware of any factors that would significantly affect the estimated fair values, they have not been comprehensively revalued for purposes of these financial statements since the statement of financial condition date and therefore, current estimates of fair value may differ significantly from the amounts disclosed.


(Dollars in Thousands)	March 31, 2011				December 31, 2010

	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value

Financial assets:
Cash and due from banks	$	12,010	$	12,010	$	9,399	$	9,399
Federal funds sold		46,881		46,881		52,473		52,473
Securities held to maturity		10,044		10,181		10,082		10,281
Available-for-sale securities		40,121		40,121		42,658		42,658
Other investments		100		100		100		100
Loans, net		297,968		294,721		309,555		306,114
Accrued interest receivable		1,396		1,396		1,322		1,322

Financial liabilities:
Deposits	$	401,293	$	402,494	$	412,187	$	413,555
Other borrowings		7,963		7,963		6,762		6,762
Accrued interest payable		132		132		114		114


Note 8.	New Accounting Pronouncements

On July 21, 2010, the FASB issued new guidance regarding disclosures about the credit quality of financing receivables and the allowance for credit losses. The Company adopted the disclosures provisions of the new authoritative guidance about activity that occurs during a reporting period on January 1, 2011.

The FASB provided additional guidance in Accounting for and Disclosure of Troubled Assets, clarifying when a loan modification or restructuring is considered a TDR. Loans identified as a TDR require a bank to perform an impairment measurement analysis different from non-TDRs and provide additional financial statement disclosures. The guidance is intended to provide a more consistent identification of TDRs by lenders. The guidance is effective for the first interim or annual period beginning after June 15, 2011 and is applied retrospectively to modifications occurring on or after the beginning of the annual period of adoption.


Note 9.	Related Party

On January 4, 2011 Orange Bank purchased the land, building, and furniture and fixtures associated with the Clermont Branch location from First Team Clermont OB, LLC, a Florida limited liability company (First Team). First Team is controlled by W. Warner Peacock, a director of the Company. First Team holds a note on the land, building, and furniture and fixtures of $1.7 million. The note requires monthly interest payments at 6.5% per annum and a principal reduction of $850 thousand on January 3, 2012. All outstanding principal and interest is due on January 3, 2013.


Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management’s discussion and analysis provides supplemental information, which sets forth the major factors that have affected our financial condition and results of operations during the periods included in the accompanying consolidated financial statements and should be read in conjunction with the Consolidated Financial Statements and related notes. The analysis is divided into subsections entitled “Business Overview,” “Results of Operations,” “Market Risk,” “Financial Condition,” “Liquidity,” “Capital Resources,” “Off-Balance Sheet Arrangements,” and “Critical Accounting Policies.” Throughout this section, Floridian Financial Group, Inc., and subsidiaries, collectively, are referred to as “Company,” “we,” “us,” or “our.”

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including this management’s discussion and analysis section, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among others, statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “target,” “goal,” and similar expressions are intended to identify forward-looking statements.

All forward-looking statements, by their nature, are subject to risks and uncertainties. Our actual future results may differ materially from those set forth in our forward-looking statements. Please see the Introductory Note and Item 1A. Risk Factors of our Annual Report on Form 10-K, as updated from time to time, and in our other filings made from time to time with the SEC after the date of this report.

However, other factors besides those listed in our Quarterly Report or in our Annual Report also could adversely affect our results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Any forward-looking statements made by us or on our behalf speak only as of the date they are made. We do not undertake to update any forward-looking statement, except as required by applicable law.

Business Overview

About Our Business

We are a multi-bank holding company headquartered in Lake Mary, Florida, a community situated between Orlando and Daytona Beach, Florida. We were incorporated on September 8, 2005 as the bank holding company of Floridian Bank, a Florida chartered commercial bank. We commenced operations, along with Floridian Bank, on March 20, 2006.

On March 31, 2008, we closed a merger transaction in which Orange Bank of Florida, a Florida chartered commercial bank, became our wholly-owned subsidiary. The transaction was treated as a merger of equals where each shareholder of Orange Bank received 1.04 shares of our common stock. At the time of the merger, Orange Bank had approximately $196 million in assets, including approximately $121 million in loans, and approximately $176 million in deposits.

Both Floridian Bank and Orange Bank are full service commercial banks, providing a wide range of business and consumer financial services in our target marketplace, which is comprised primarily of Orange, Seminole, Citrus, Lake, Flagler, and Volusia Counties in Florida. Floridian Bank is headquartered in Daytona Beach, Florida, with a primary service area in Flagler and Volusia Counties. Orange Bank is headquartered in Orlando, Florida, with a primary service area in Orange, Seminole, Lake and Citrus Counties. Collectively, our Banks operate 11 banking offices; however, in December 2010, Orange Bank entered into an agreement to sell one branch, which is expected to close on July 15, 2011.

The Banks offer commercial and retail banking services with an emphasis on commercial and commercial real estate lending, particularly to the medical services industry. As of March 31, 2011, we had total assets of $450.9 million, deposits of $401.3 million, total gross loans of $306.9 million and total shareholders’ equity of $39.2 million. At March 31, 2011, our consolidated capital ratios all surpassed regulatory “well capitalized measures” as shown in the following table. Also see Note 6 for a breakdown by subsidiary Banks, which also surpass all regulatory “well capitalized measures”.


	As of March 31, 2011			Minimum to be “Well Capitalized”

Risk Based Capital		12.2	%		10.0	%
Tier 1 Capital		10.9	%		6.0	%
Leverage Capital		8.6	%		5.0	%

Our principal executive offices are located at 175 Timacuan Boulevard, Lake Mary, Florida 32746. The telephone number at that office is (407) 321-3233.

Results of Operations

CONDENSED SUMMARY OF EARNINGS


	For The Three Months Ended March 31,

(Dollars in Thousands, Except Per Share Data)	2011			2010

Interest Income	$	4,272		$	5,148
Interest Expense		1,066			1,634

Net Interest Income		3,206			3,514
Provision For Loan Losses		1,167			189
Noninterest Income		316			293
Noninterest Expense		3,540			3,329

Income (Loss) Before Income Taxes		(1,185	)		289
Income Tax Benefit		—			—

Net Income (loss)	$	(1,185	)	$	289

Basic net income (loss) per share	$	(0.19	)	$	0.05

Diluted net income (loss) per share	$	(0.19	)	$	0.05


Selected Operating Ratios
Return on Assets		(2.88	)%		0.25	%
Return on Equity		(33.14	)%		2.30	%
Dividend Payout Ratio		N/A			N/A
Equity to Assets Ratio		9.0	%		10.54	%

The net loss for the three months ended March 31, 2011 was $1.2 million compared to a net profit of $289 thousand for the same period in 2010. The loss experienced in the first quarter of 2011 was principally due to the impact of additional provisions to the loan loss allowance of $1.2 million. In contrast, the slight net profit reported the same period last year, was not heavily impacted by the loan loss provision which totaled only $189 thousand.

Net Interest Income

Our profitability is dependent to a large extent on net interest income which is the difference between the interest received on earning assets such as loans and securities and the interest paid on interest bearing liabilities principally deposits and borrowings. Our principal interest earning assets are loans, investment securities, and federal funds sold. Interest-bearing liabilities primarily consist of certificates of deposit, NOW accounts, savings deposits, and money market accounts. Funds attracted by these interest-bearing liabilities are invested in interest-earning assets. Accordingly, net interest income depends upon the volume of average interest-earning assets and average interest-bearing liabilities and the interest rates earned or paid on them.

The significance of net interest income is largely enhanced as our size grows and the impact of market rates of interest as influenced by the Federal Reserve’s monetary policy.

The following table reflects the components of net interest income, setting forth for the three month periods ended March 31, 2011 and 2010 presented, (1) average assets, liabilities and shareholders’ equity, (2) interest income earned on interest-earning assets and interest paid on interest-bearing liabilities, (3) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (4) our net interest spread (i.e., the average yield on interest-earning assets less the average rate on interest-bearing liabilities) and (5) our net interest margin (i.e., the net yield on interest earning assets):

AVERAGE BALANCES AND INTEREST RATES


(Dollars in Thousands)	Three Months Ended March 31,

	2011							2010

	Average Balance		Interest		Rate			Average Balance		Interest		Rate

ASSETS
Loans, Net⁽¹⁾⁽²⁾	$	314,335	$	3,887		5.02	%	$	334,912	$	4,464		5.41	%
Investment Securities		53,901		360		2.67			91,381		677		2.97
Federal Funds Sold		34,661		21		0.25			12,544		7		0.24
Deposits at Interest with Banks		2,914		4		0.60			100		—		0.35

Total Earning Assets		405,811		4,272		4.27	%		438,937		5,148		4.70	%

Other Assets		39,349							39,102

Total Assets	$	445,160						$	478,039

LIABILITIES
Savings, NOW and Money Market	$	167,558	$	360		0.87	%	$	175,599	$	596		1.38	%
Time Deposits		136,397		641		1.91			173,412		985		2.31

Total Interest Bearing Deposits		303,955		1,001		1.34			349,011		1,581		1.84
Other Borrowings		8,290		65		3.18			7,332		53		2.91

Total Interest Bearing Liabilities		312,245		1,066		1.39	%		356,343		1,634		1.86	%

Noninterest Bearing Deposits		90,159							68,558
Other Liabilities		2,612							2,116

Total Liabilities		405,016							427,017

Total Shareholders’ Equity		40,144							51,022


Total Liabilities and Equity	$	445,160						$	478,039


Interest Rate Spread						2.88	%						2.86	%

Net Interest Income			$	3,206						$	3,514

Net Interest Margin						3.20	%						3.25	%


(1)	Average balances include non-accrual loans, and are net of unearned loan fees of $165 and $260 at March 31, 2011 and 2010, respectively.

(2)	Interest income includes fees on loans of $13 and $17 in the three months ended March 31, 2011 and 2010, respectively.

Net interest income decreased $308 thousand, 8.8%, from $3.5 million in 2010 to $3.2 million in 2011 principally due to lower loan and deposit growth over the 12 month period. The Banks have emphasized originating loans with interest rate floors of approximately six percent. Further, the Banks have aggressively reduced their costs of funds and continue to lengthen deposit maturities at these lower rates. If interest rates begin to rise, net interest income should increase modestly.

The following table sets forth certain information regarding changes in our interest income and interest expense for the quarter ended March 31, 2011 compared to the quarter ended March 31, 2010. For each category of interest earning assets and interest-bearing liabilities, information is provided on changes attributable to changes in interest rate and changes in the volume. Changes in both volume and rate have been allocated based on the proportionate absolute changes in each category.

RATE VOLUME ANALYSIS


(Dollars in Thousands)	March 31, 2011 and 2010

				Due To Average
	Total Change
	Total Change			Volume			Rate

Interest Earning Assets
Loans, Net	$	(578	)	$	(274	)	$	(304	)
Investment Securities		(317	)		(278	)		(39	)
Federal Funds Sold		14			12			2
Other		4			—			4

Total	$	(877	)	$	(540	)	$	(337	)


Interest Bearing Liabilities
Savings, NOW, Money Market Accounts	$	(236	)	$	(27	)	$	(209	)
Time Deposits		(344	)		(210	)		(134	)
Short Term Borrowings		12			7			5

Total	$	(568	)	$	(230	)	$	(338	)


Changes In Net Interest Income	$	(309	)	$	(310	)	$	1

Provision for Loan Losses

The allowance for loan losses is established through a provision for loan losses charged against net interest income. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. The allowance is an amount that management believes is adequate to absorb losses inherent in the loan portfolio, based on evaluations of the collectability of loans, industry historical loss experience, current economic conditions, portfolio mix, and other factors. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions.

Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. A loan is impaired when it is probable the creditor will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement.

As a direct result of these factors and analyses, the loan loss provision was $1.2 million for the three months ended March 31, 2011 compared to $189 thousand for the same period in 2010.

Non Interest Income

Following is a schedule of non interest income:


	Three months ended March 31,

(Dollars in Thousands)	2011		2010


Loan fee income	$	13	$	17
Service charges on deposit accounts		158		107
Cash surrender value – life insurance		85		112
Other		60		54
Gain on sale of securities		—		3

Totals	$	316	$	293

Noninterest income, increased in 2011 because of increased service charges of $51 thousand reflecting growth in noninterest bearing demand deposit accounts. Noninterest income includes bank owned life insurance which decreased to $85 thousand for the three months ended March 31, 2011 from $112 thousand in the same period of 2010.

Non Interest Expense

Following is a schedule of non interest expense:


	Three months ended March 31,

(Dollars in Thousands)	2011		2010


Salaries and employee benefits	$	1,674	$	1,742
Occupancy and equipment expense		725		842
FDIC insurance		224		215
Data processing		295		227
Other real estate expense		40		165
Professional fees		242		134
Credit and collection expenses		91		75
Telephone and communications		80		55
Core deposit intangible amortization		48		48
Operating recovery		—		(380	)
Other		121		206

Totals	$	3,540	$	3,329

Total noninterest expense of $3.5 million for the three months ended March 31, 2011 increased $211 thousand or 6.3% from the same period in 2010. The increase was due to the recognition during the first quarter of 2010, of an operating recovery of $380 thousand related to a legal settlement on an operating loss recorded in the second quarter of 2009. Adjusting for the operating recovery, total noninterest expenses decreased by $169 thousand or 4.6%.

For the three months ended March 31, 2011, personnel costs decreased $68 thousand due to reductions in our workforce in 2010. With the closing of two branches and the relocation of our operations center in 2010 we were able to reduce occupancy and equipment expense by 13.9% or $117 thousand. First quarter 2011 other real estate expenses decreased $125 thousand primarily due to write downs of properties to fair value (less cost to sell) in 2010.

Income Taxes

We file consolidated tax returns. Having incurred annual operating losses since our inception in 2006, we have accumulated a net tax benefit over the past four years. We have recorded a valuation allowance to partially offset the deferred tax assets associated with the net operating loss carry forwards generated by our net losses.

Management will continue to monitor the deferred tax assets, and will determine whether we will require an additional valuation allowance, or if we experience net income, whether we will need to reverse any remaining valuation allowance. We did not recognize an income tax benefit for the quarters ended March 31, 2011 and 2010.

Market Risk

Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices and commodity prices. We are primarily exposed to interest rate risk inherent in our lending and deposit taking activities as a financial intermediary. To succeed in our capacity as a financial intermediary, we offer an extensive variety of financial products to meet the diverse needs of our customers. These products sometimes contribute to interest rate risk for us when product groups do not complement one another. For example, depositors may want short-term deposits while borrowers desire long-term loans. Changes in market interest rates may also result in changes in the fair value of our financial instruments, cash flows, and net interest income.

Interest rate risk is comprised of repricing risk, basis risk, yield curve risk, and options risk. Repricing risk arises from differences in the cash flow or repricing between asset and liability portfolios. Basis risk arises when asset and liability portfolios are related to different market rate indexes, which do not always change by the same amount. Yield curve risk arises when asset and liability portfolios are related to different maturities on a given yield curve; when the yield curve changes shape, the risk position is altered. Options risk arises from “embedded options” within asset and liability products as certain borrowers have the option to prepay their loans when rates fall while certain depositors can redeem their certificates of deposit early when rates rise.

We have established an Asset/Liability Committee (“ALCO”) for each Bank, which are responsible for each Bank’s interest rate risk management. We have implemented a sophisticated asset/liability model at both Banks to measure its interest rate risk. Interest rate risk measures used by us include earnings simulation, economic value of equity (“EVE”) and gap analysis. We do not use derivative financial instruments for market risk management purposes.

Gap analysis and EVE are static measures that do not incorporate assumptions regarding future business. Gap analysis, while a helpful diagnostic tool, displays cash flows for only a single rate environment. EVE’s long-term horizon helps identify changes in optionality and longer-term positions. However, EVE’s liquidation perspective does not translate into the earnings-based measures that are the focus of managing and valuing a going concern. Net interest income simulations explicitly measure the exposure to earnings from changes in market rates of interest. Our current financial position is combined with assumptions regarding future business to calculate net interest income under various hypothetical rate scenarios. The Banks’ ALCO review earnings simulations over the ensuing 12 months under various interest rate scenarios. Reviewing these various measures provides us with a reasonably comprehensive view of our interest rate risk profile.

The following gap analysis compares the difference between the amount of interest earning assets (“IEA”) and interest bearing liabilities (“IBL”) subject to repricing over a period of time. A ratio of more than one indicates a higher level of repricing assets over repricing liabilities for the time period. Conversely, a ratio of less than one indicates a higher level of repricing liabilities over repricing assets for the time period. It is the Banks’ policy to maintain a cumulative one year gap of +/- 10% and a ratio of cumulative IEA/IBL of 80 to 120%.

GAP ANALYSIS

(Dollars in Thousands)

Within
3 Months

4 To 6
Months

7 To 12
Months

Total
1 Year

Interest Earning Assets (IEA)

Loans

164,622

6,729

12,652

184,003

Investment Securities

11,887

11,785

5,000

28,672

Federal funds sold

5,975

—

5,975

Other investments

42,845

—

42,845

Total

225,329

18,514

17,652

261,495

Interest Bearing Liabilities (IBL)

Savings, NOW, Money Market

160,991

—

Time deposits

17,298

28,748

35,603

158,653

Other borrowings

7,963

—

Total

184,552

28,748

35,603

158,653

Period Gap

40,777

(10,234

)

(19,651

)

10,892

Cumulative Gap

40,777

30,543

10,892

Cumulative Gap / Total Assets

9.04

6.77

2.42

IEA / IBL (Cumulative)

122

114

104

Financial Condition

Lending Activity

The loan portfolio consists principally of loans to individuals and small- and medium-sized businesses within our primary market area of Central Florida. The table below shows our loan portfolio composition:

LOAN PORTFOLIO COMPOSITION


(Dollars in Thousands)	March 31, 2011		December 31, 2010

Commercial	$	42,144	$	45,202
Commercial real estate		235,231		240,151
Residential real estate		10,016		12,580
Consumer and home equity		19,465		19,450

Total loans		306,856		317,770
Less: Allowance for loan losses		8,723		8,010
Less: Net deferred fees		165		205

Loans, Net	$	297,968	$	309,555

Total loans decreased by $10.9 million during the first three months of 2011 due to the reclassification of $4.5 million to other real estate owned, write downs of $0.6 million, and $5.8 million in net pay downs and payoffs. There were approximately $12.6 million in non-performing loans at March 31, 2011. The allowance for loan loss has remained fairly consistent at 2.8% and 2.7% of total loans at March 31, 2011 and 2010, respectively.

Real estate and related activities have slowed significantly in our market area, local unemployment rates remain above the national average, and real estate and other asset prices have declined appreciably. This has resulted in a weak loan demand in 2010 and 2011. Although the Company has seen an increase in loan demand in 2011it has been offset by pay downs in the portfolio.

Investment Activity

Investment activities serve to enhance the overall yield on interest earning assets while supporting interest rate sensitivity and liquidity positions. Securities purchased with the intent and ability to retain until maturity are categorized as securities held to maturity and carried at amortized cost. All other securities are categorized as securities available for sale and are recorded at fair value. Securities, like loans, are subject to similar interest rate and credit risk. In addition, by their nature, securities classified as available for sale are also subject to market value risks that could negatively affect the level of liquidity available to us, as well as shareholders’ equity. A change in the value of securities held to maturity could also negatively affect the level of shareholders’ equity if there was a decline in the underlying creditworthiness of the issuers and an other-than-temporary impairment is deemed or a change in our intent and ability to hold the securities to maturity.

As of March 31, 2011, securities totaling $40.1 million and $10.0 million were classified as available for sale and held to maturity, respectively. During the three months ended March 31, 2011, securities available for sale decreased by $2.5 million as we used proceeds from called securities to offset declines in high cost deposits. Securities held to maturity decreased $38 thousand from December 31, 2010 due to premium amortization.

Deposits and Other Borrowings

As a bank holding company, our primary source of funds is deposits. Those deposits are provided by businesses, municipalities, and individuals located within the markets served by our subsidiaries. In addition, we accept a limited amount of brokered deposits.

Total deposits decreased $10.9 million to $401.3 million at March 31, 2011, compared to December 31, 2010, due to our decision not to renew maturing brokered deposits and the planned runoff of high rate certificates of deposits. Core deposits, which exclude time certificates of deposit, increased by $1.2 million to $261.2 million at March 31, 2011 from $260.0 million at December 31, 2010 while time certificates of deposits decreased to $140.1 million from $152.1 million during the same period. The Company continues to focus on building and expanding relationships with our customers to build deposits, which provide a stable funding source for our loan portfolio.

Other borrowings, made up of short and long term borrowings, increased by $1.2 million to $8.0 million at March 31, 2011 compared to a balance of $6.8 million at December 31, 2010. The increase was a result of the purchase of our Clermont branch land, building, and furniture and fixtures. As of March 31, 2011, other borrowings were approximately 20.3% of our total shareholders’ equity.

Liquidity

Our goal in liquidity management is to satisfy the cash flow requirements of depositors and borrowers as well as our operating cash needs with cost-effective funding. Our Board of Directors has established an Asset/Liability Policy in order to achieve and maintain earnings performance consistent with long-term goals while maintaining acceptable levels of interest rate risk, a “well-capitalized” balance sheet, and adequate levels of liquidity. This policy designates each Bank’s ALCO as the body responsible for meeting these objectives. The ALCO, which includes members of executive management, reviews liquidity on a periodic basis and approves significant changes in strategies that affect balance sheet or cash flow positions.

The primary source of liquidity is deposits provided by commercial and retail customers. The Banks attract these deposits by offering an array of products designed to match customer needs and priced in the middle of our competitors. Deposits can be very price sensitive; therefore, we believe that fluctuating deposit offering rates to the top of the market would generate a larger inflow of funds. In addition to local market deposits, the Banks have access to national brokered certificates of deposit markets as well as deposit subscription services. The Banks use these alternative sources of deposits to supplement deposits particularly when the rates are lower than the local market. These sources of deposit are limited by our policies to 25% of assets. Further, access to these brokered deposits is limited by regulation to banks that meet or exceed “well capitalized” definitions. In the event that the company would fall below “well capitalized” levels, regulators will not permit any additional brokered deposits and would impose deposit rate restrictions not to exceed published national rates. Overall deposit levels are monitored on a constant basis as are liquidity policy levels, which must be maintained at a minimum of 14% of total deposits. Sources of these liquidity levels include cash and due from banks, short-term investments such as federal funds sold, and our investment portfolio, which can also be used as collateral for short-term borrowings. Alternative sources of funds include unsecured federal funds lines of credit through correspondent banks. The Banks have established contingency plans in the event of extraordinary fluctuations in cash resources.

Operating Activities

Cash flows from operating activities primarily include net income (loss), adjusted for items that did not impact cash. Net cash provided by operating activities was $470 thousand for the three months ended March 31, 2011 a decrease of $124 thousand from $594 thousand for the same period last year. The decrease was primarily due to our net loss for the three months ended March 31, 2011.

Investing Activities

Cash used in investing activities reflects the impact of loans and investments acquired for our interest-earning asset portfolios, as well as cash flows from asset sales and the impact of acquisitions. For the three months ended March 31, 2011, we had net cash flows provided from investing activities of $6.2 million, compared to the use of funds of $2.4 million for the same period in 2010. The change in cash flows from investing activities was primarily due to a $6.0 million decrease in loans offset by the purchase of the Clermont office.

Financing Activities

Cash flows from financing activities include transactions and events whereby cash is obtained from depositors, creditors or investors. For the three months ended March 31, 2011, we had net cash flows provided by financing activities of $9.7 million, compared to $15.4 million for the three months ended March 31, 2010. The change in cash flows from financing activities was primarily due to lower deposit growth.

Capital Resources

The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, changing competitive conditions and economic forces. We seek to maintain a strong capital base to support our growth and expansion activities, to provide stability to current operations and to promote public confidence. We successfully completed a $30 million secondary capital offering in June 2008 at a price of $12.50

per share. However, over the past two years, poor loan portfolio performance and the related impact on earnings have deteriorated our capital position. As of March 31, 2011, the Banks exceeded the requirements contained in the applicable regulations, policies and directives pertaining to capital adequacy to be classified as “well capitalized”, and are unaware of any material violation or alleged violation of these regulations, policies or directives. Our intent is to maintain a strong capital position, and management and the Board of Directors have had exploratory discussions to determine the availability and cost of additional capital. Based on these discussions and further investigations, it may be prudent that the Company pursue another capital offering in the next 12 months.

Key to our efforts to maintain existing capital adequacy is the need for the banks to become profitable by focusing on increasing core earnings and decreasing the levels of adversely classified and non-performing assets. Management is pursuing a number of strategic alternatives to improve the core earnings of the Banks and to reduce the level of classified assets. Current market conditions for banking institutions, the overall uncertainty in financial markets and the Banks’ high level of non-performing assets are barriers to the success of these strategies. If current adverse market factors continue for a prolonged period of time, new adverse market factors emerge, and/or the Banks are unable to successfully execute its plans in a sufficient and timely manner, it could have a material adverse effect on the Banks’ business, results of operations and financial position.

We offer a stock purchase plan to our employees and directors to purchase shares of our common stock at fair market value. In 2010, employees purchased 1,319 shares valued at $10.00, which were issued in March 2011. In 2009, employees purchased 4,727 shares valued at $12.50, which were issued in January 2010.

Holders of our common stock are entitled to receive dividends when, as and if declared by our Board of Directors out of funds legally available for that purpose. We have not paid any dividends to our holders of common stock in the past and we currently do not intend to pay dividends on our common stock in the near future. In the event that we decide to pay dividends, there are a number of restrictions on our ability to do so.

For a foreseeable period of time, our principal source of cash revenues will be dividends paid by the Banks to us with respect to their common stock. There are certain restrictions on the payment of these dividends imposed by federal banking laws, regulations and authorities. See the sections of this Annual Report captioned “Item 1. Business - Regulatory Considerations – The Banks – Dividends”.

The declaration and payment of dividends on our common stock will depend upon our earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate, our ability to service any equity or debt obligations senior to the common stock and other factors deemed relevant by our Board of Directors. Regulatory authorities in their discretion could impose administratively stricter limitations on the ability of the Banks to pay dividends to us if such limits were deemed appropriate to preserve certain capital adequacy requirements.

Off-Balance Sheet Arrangements

We do not currently engage in the use of derivative instruments to hedge interest rate risks. However, we are a party to financial instruments with off-balance sheet risks in the normal course of business to meet the financing needs of our customers.

At March 31, 2011, we had approximately $62.5 million in commitments to extend credit and $3.1 million in standby letters of credit. Commitments to extend credit are agreements to lend to a customer so long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. We use the same credit policies in establishing commitments and issuing letters of credit as we do for on-balance sheet instruments.

If commitments arising from these financial instruments continue to require funding at historical levels, management does not anticipate that such funding will adversely impact our ability to meet on-going obligations. In the event these commitments require funding in excess of historical levels, management believes current liquidity, available lines of credit from the Federal Home Loan Bank, investment security maturities and our revolving credit facility provide a sufficient source of funds to meet these commitments.

Critical Accounting Policies

Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors.

A loan is impaired when full payment under the loan terms is not expected. Commercial and commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans are collectively evaluated for impairment, and, accordingly, they are not separately identified for impairment disclosures.

Income Taxes

The Company accounts for income taxes according to the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates applicable to taxable income for the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation reserves are established against certain deferred tax assets when it is more likely than not that the deferred tax assets will not be realized. Increases or decreases in the valuation reserve are charged or credited to the income tax provision.

The Company’s policy for recording interest and penalties related to uncertain tax positions is to record such items as part of its provision for federal and state income taxes.


Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See Market Risk in Management’s Discussion and Analysis of Financial Condition and Results of Operations, above, which is incorporated herein by reference. Management has determined that no additional disclosures are necessary to assess changes in information about market risk that have occurred since December 31, 2010.


Item 4.	CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of March 31, 2011, the end of the period covered by this Form 10-Q, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer each concluded that as of March 31, 2011, the end of the period covered by this Form 10-Q, we maintained effective disclosure controls and procedures.

Changes in Internal Control

Our management, including the Chief Executive Officer and Chief Financial Officer, has reviewed our internal control. There have been no significant changes in our internal control during our most recently completed fiscal quarter that could significantly affect our internal control over financial reporting.


PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings

We are party to lawsuits and claims arising out of the normal course of business. In management’s opinion, there are no known pending claims or litigation, the outcome of which would, individually or in the aggregate, have a material effect on our consolidated results of operations, financial position, or cash flows.


Item 1A.	Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report, as updated in our subsequent quarterly reports, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.


Item 6.	Exhibits


(A)	Exhibits


10.1	Purchase and Assumption Agreement by and between Orange Bank of Florida and Old Florida National Bank, dated January 4, 2011 – incorporated by reference to Exhibit 10.2 of the Registrant’s Annual Report on Form 10-K (filed 03/25/11) (No. 000-53589)

31.1	Certification of Charlie W. Brinkley, Jr., Chairman, Chief Executive Officer of Floridian Financial Group, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

31.2	Certification of John D. Waters, Executive Vice President and Chief Financial Officer of Floridian Financial Group, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

32.1	Certification pursuant to 18 U.S.C. Section 1350.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned Chief Financial Officer hereunto duly authorized.


FLORIDIAN FINANCIAL GROUP, INC. (Registrant)

By:	/s/ John D. Waters

	John D. Waters
	Executive Vice President and Chief Financial Officer
	(Mr. Waters is the Principal Financial Officer and has been duly authorized to sign on behalf of the Registrant)

Date: May 16, 2011

Exhibit Index


10.1	Purchase and Assumption Agreement by and between Orange Bank of Florida and Old Florida National Bank, dated January 4, 2011 – incorporated by reference to Exhibit 10.2 of the Registrant’s Annual Report on Form 10-K (filed 03/25/11) (No. 000-53589).

31.1	Certification of Charlie W. Brinkley, Jr., Chairman, Chief Executive Officer of Floridian Financial Group, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

31.2	Certification of John D. Waters, Executive Vice President and Chief Financial Officer of Floridian Financial Group, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

32.1	Certification pursuant to 18 U.S.C. Section 1350.

FLORIDIAN FINANCIAL GROUP INC - FORM 10-Q - May 16, 2011

Attached files

FLORIDIAN FINANCIAL GROUP INC Reports