UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2011

OR

£ 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 S No £ 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes S No £ 

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

 

Large accelerated filer £	Accelerated filer £	Non-accelerated filer £	Smaller reporting company S
		(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 £ No S

At July 31, 2011, 6,189,076 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 JUNE 30, 2011

TABLE OF CONTENTS

 

PART I – Financial Information			Page
Item 1.	Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets – June 30, 2011 and December 31, 2010		5
	Condensed Consolidated Statements of Operations – Three and Six Months Ended June 30, 2011 and 2010		6
	Condensed Consolidated Statements of Shareholders’ Equity – Six Months Ended June 30, 2011 and 2010		7
	Condensed Consolidated Statements of Cash Flows –Six Months Ended June 30, 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		33
Item 3.	Quantitative and Qualitative Disclosure About Market Risk		48
Item 4.	Controls and Procedures		48
PART II – Other Information
Item 1.	Legal Proceedings		48
Item 1A.	Risk Factors		48
Item 2	Purchase of Equity Securities by the Issuer and Affiliated Purchasers		49
Item 6.	Exhibits		50
Signatures

  

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 Wall Street Reform and Consumer Protection 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 loss of our key personnel;

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

§  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;

§  increased competition and its effect on pricing, including the effect of the repeal of the prohibition on paying interest on demand deposits, on our net interest margin;

§  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 disasters;

§  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;

§  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
June 30, 2011 and December 31, 2010 (Unaudited)
(Dollars in Thousands)

		June 30, 2011				December 31, 2010
Assets
Cash and due from banks		$	14,248			$	9,399
Federal funds sold			81,033				52,473
Total cash and cash equivalents			95,281				61,872
Securities available for sale			42,190				42,658
Securities held to maturity (Fair value of $6,076 at June 30, 2011 and $10,281 at December 31, 2010)			6,018				10,082
Other investments			100				100
Loans, net of allowance for loan losses of $7,715 and $8,010 at June 30, 2011 and December 31, 2010, respectively			301,933				309,555
Property and equipment, net			16,158				14,283
Goodwill			500				500
Intangible assets, net			1,297				1,393
Deferred income taxes			12				187
Other real estate owned			10,372				3,864
Other assets			16,602				17,137
Total assets		$	490,463			$	461,631
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest-bearing demand		$	100,949			$	78,385
Savings, NOW and money market			170,024				181,657
Time deposits under $100			101,547				90,749
Time deposits of $100 or more			67,105				61,396
Total deposits			439,625				412,187
Other borrowings			7,963				6,762
Other liabilities			2,611				2,579
Total liabilities			450,199				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; 6,189,076 and 6,199,849 shares issued and outstanding in 2011 and 2010, respectively			30,945				30,999
Additional paid-in capital			38,304				38,146
Retained deficit			(29,195	)			(27,837	)
Accumulated other comprehensive income (loss)			210				(1,205	)
Total shareholders’ equity			40,264				40,103
Total liabilities and shareholders’ equity		$	490,463			$	461,631

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

Floridian Financial Group, Inc. and Subsidiaries

Consolidated Statement of Operations (Unaudited)
For the Periods Ended June 30, 2011 and 2010
(Dollars in Thousands)

 

		For the three months ended June 30,								For the six months ended June 30,
		2011				2010				2011				2010
Interest income:
Interest and fees on loans		$	3,867			$	4,555			$	7,754			$	9,019
Interest on securities			345				591				705				1,268
Interest on federal funds sold			30				10				51				17
Other interest			5				—				9				—
Total interest income			4,247				5,156				8,519				10,304
Interest expense:
Interest on deposits			1,002				1,491				2,003				3,072
Other interest			65				50				130				103
Total interest expense			1,067				1,541				2,133				3,175
Net interest income			3,180				3,615				6,386				7,129
Provision for loan losses			30				3,634				1,197				3,823
Net interest income (expense) after provision for loan losses			3,150				(19	)			5,189				3,306
Noninterest income:
Other noninterest income			370				272				686				562
Gain on sale of securities			—				10				—				13
Total noninterest income			370				282				686				575
Noninterest expense:
Salaries and employee benefits			1,654				1,761				3,328				3,490
Occupancy and equipment expenses			681				828				1,406				1,631
FDIC insurance			158				212				382				427
Data processing			295				259				590				472
Other real estate expense			177				78				217				243
Professional fees			253				249				495				347
Credit and collection expense			82				66				173				141
Telephone and communications			64				58				144				113
Core deposit intangible amortization			48				48				96				96
Operating loss (recovery)			—				(70	)			—				(450	)
Other operating expenses			106				136				227				444
Total noninterest expense			3,518				3,625				7,058				6,954
Income (loss) before income taxes			2				(3,362	)			(1,183	)			(3,073	)
Provision for income taxes			175				—				175				—
Net income (loss)		$	(173	)		$	(3,362	)		$	(1,358	)		$	(3,073	)
Basic net income (loss) per share		$	(0.03	)		$	(0.54	)		$	(0.22	)		$	(0.50	)
Diluted net income (loss) per share		$	(0.03	)		$	(0.54	)		$	(0.22	)		$	(0.50	)
Average basic shares outstanding			6,201,256				6,204,365				6,201,782				6,200,384
Average diluted shares outstanding			6,201,256				6,204,365				6,201,782				6,200,384

 

See Notes to Unaudited Consolidated Financial Statements

Floridian Financial Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity
For the Six Months Ended June 30, 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			—				—				(3,073	)			—				(3,073	)
Change in unrealized gain on securities available for sale, net of income tax			—				—				—				555
Less reclassification adjustment for gains included in net income, net of taxes of $0															13
Net unrealized loss															542				542
Total comprehensive income																			(2,531	)
Sale of 5,717 shares of common stock to employee benefit plan and 4,727 shares for employee stock purchase plan			53				54				—				—				107
Issuance of 2,300 shares of common stock in lieu of director fees			11				18				—				—				29
Share-based compensation			—				158				—				—				158
Retirement of 6,000 shares of common stock			(30	)			(24	)			—				—				(54	)
Balance at June 30, 2010		$	31,003			$	37,999			$	(21,206	)		$	396			$	48,192
Balance at December 31, 2010		$	30,999			$	38,146			$	(27,837	)		$	(1,205	)			40,103
Comprehensive income (loss): Net loss			—				—				(1,358	)			—				(1,358	)
Change in unrealized loss on securities available for sale, net of income tax			—				—				—				1,415
Less reclassification adjustment for gains included in net loss, net of taxes of $0															—
Net unrealized gain/(loss)															1,415				1,415
Total comprehensive income/(loss)																			57
Sale of 3,522 shares of common stock to employee benefit plan and 1,319 shares for employee stock purchase plan			25				13				—				—				38
Issuance of 3,280 shares of common stock issued in lieu of director fees			16				14				—				—				30
Retirement of 19,000 shares of common stock			(95	)			(9	)			—				—				(104	)
Share-based compensation			—				140				—				—				140
Balance at June 30, 2011		$	30,945			$	38,304			$	(29,195	)		$	210			$	40,264

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

Floridian Financial Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2011 and 2010
(Dollars in Thousands)

 

		For the six months ended
		June 30, 2011				June 30, 2010
Cash Flows From Operating Activities
Net loss		$	(1,358	)		$	(3,073	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for loan losses			1,197				3,823
Impairment of other real estate owned, net			112				93
Depreciation expense			520				544
Amortization expense			96				96
Net accretion of securities			82				91
Share-based compensation and director fees			171				156
Realized gain on sales of available-for-sale securities			—				(13	)
Increase in cash surrender value			(170	)			(204	)
Decrease in deferred tax asset			175				—
Increase in accrued interest receivable			218				175
Increase in accrued interest payable			33				—
Other			427				47
Net cash provided by operating activities			1,503				1,735
Cash Flows From Investing Activities
Purchases of securities available for sale			(5,000	)			(62,430	)
Sales, maturities and calls on securities available for sale			6,865				78,967
Sales, maturities and calls on securities held to maturity			4,000				2,000
Net increase in loans			(581	)			(3,543	)
Purchases of property and equipment, net			(2,402	)			(38	)
Net increase in other investments			—				(78	)
Proceeds from sale of other real estate owned			451				1,078
Net cash provided by investing activities			3,333				15,956
Cash Flows From Financing Activities
Net increase in deposits			27,438				24,439
Net increase (decrease) in borrowings			1,201				(1,038	)
Proceeds from sale of stock			38				136
Retirement of stock			(104	)			(54	)
Net cash provided by financing activities			28,573				23,483
Net increase in cash and cash equivalents			33,409				41,174
Cash and cash equivalents
Beginning of period			61,872				8,293
End of period		$	95,281			$	49,467
Supplemental Disclosures of Cash Flow Information and noncash transactions
		For the six months ended
			June 30, 2011				June 30, 2010
Interest paid		$	2,100			$	1,635
Income taxes paid		$	—			$	—
Loans transferred to other real estate owned		$	7,071			$	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 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 six months ended June 30, 2011 are not necessarily indicative of the results which may be expected for the year as a whole or any 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 five reportable loan segments: Commercial, Commercial Real Estate (CRE), Residential Real Estate (RRE), 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. Commercial loans are generally approved for financing equipment, business expansion, working capital and other general business purposes and have a term of five years or less. Most of the commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee.

CRE represents business purpose loans that are real estate related and secured by real estate. CRE loans are reviewed primarily as cash flow loans and secondarily as loans secured by real estate. CRE loans typically involve higher loan principal amounts and the repayment is generally largely dependent on the successful operations of the real property securing the loan or the business conducted on the property securing the loan. CRE loans may be adversely affected by conditions in the real estate markets or in the general economy than other loan types. A majority of our loan portfolio is concentrated in the CRE portfolio.

All non-business purpose loans are considered consumer loans. Consumer loans consist of residential real estate, home equity lines of credit, automobile loans, overdraft loans, loans secured by deposits and securities, and unsecured personal loans. 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 an in depth review prior to loan approval and throughout the life of the loan. The analysis of the borrower includes a review of financial information, credit documentation, public information, past experience with the borrower, and other information that may be available specific to each borrower. The review also includes debt service capabilities, actual and projected cash flows, and industry and economic risks. Underwriting of RRE, consumer, and home equity loans and lines include an assessment of the borrower’s credit history and the ability to meet existing debt obligations, as well as payments of principal and interest on the proposed loan. 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 second 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 where 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.

Floridian Financial Group, Inc. and Subsidiaries

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

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 (“ALL”) 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.

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.

The allowance includes an unallocated component. The unallocated reserve represents the uncertainty in inherent factors that cannot be practically assigned to individual loan categories including the local economy and the uncertainty related to historical loss rates applied against loan risk-ratings. We believe the unallocated amount is warranted.

 

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 nonaccrual. 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.

Floridian Financial Group, Inc. and Subsidiaries

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

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.

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 $2.1 million at June 30, 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 June 30, 2011
						Gross				Gross
(Dollars in Thousands)		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Securities Available for Sale
Debt Securities:
U.S. Government and federal agencies		$	28,633			$	79			$	75			$	28,637
States & political subdivisions			1,704				62				—				1,766
Government sponsored mortgage-backed			11,643				181				37				11,787
Total securities available for sale		$	41,980			$	322			$	112			$	42,190
Securities Held to Maturity
Debt Securities:
U.S. Government and federal agencies		$	6,018			$	58			$	—			$	6,076
Total securities held to maturity		$	6,018			$	58			$	—			$	6,076
		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 June 30, 2011 and December 31, 2010, government obligations with a carrying value of $24.0 million and $16.6 million, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. At June 30, 2011 and December 31, 2010, the carrying amount of securities pledged to secure repurchase agreements was $6.4 million and $6.7 million, respectively.

 The carrying amount of debt securities by contractual maturity at June 30, 2011 follows:

						After 1				After 5 years
(Dollars in Thousands)		Within				year through				Through				Over
		1 year				5 years				10 years				10 years				Total
Available for Sale, at fair value
U.S. Government and federal agencies		$	—			$	10,573			$	12,703			$	5,361			$	28,637
States & political subdivisions			—				743				1,023				—				1,766
Government sponsored mortgage-backed			—				—				—				11,787				11,787
Total		$	—			$	11,316			$	13,726			$	17,148			$	42,190
Securities Held to Maturity, at cost
U.S. Government and federal agencies		$	—			$	—			$	—			$	6,018			$	6,018
Total		$	—			$	—			$	—			$	6,018			$	6,018

 For the periods ended June 30, 2011 and 2010, proceeds from sales, maturities, and calls of securities available for sale amounted to $10.9 million and $81.0 million, respectively. Gross realized gains amounted to $0 and $13 thousand, respectively. There were no gross losses for the six months ended June 30, 2011 and 2010.

Floridian Financial Group, Inc. and Subsidiaries

Note 3.           Securities (continued)

Information pertaining to securities with gross unrealized losses at June 30, 2011 and December 31, 2010 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

		June 30, 2011
		Less Than Twelve Months								Over Twelve Months
(Dollars in Thousands)		Gross								Gross								Total
		Unrealized								Unrealized								Unrealized
		Losses				Fair Value				Losses				Fair Value				Losses
Securities Available for Sale
Debt Securities:
U.S. Government and federal agencies		$	75			$	10,310			$	—			$	—			$	75
States & political subdivisions			—				—				—				—				—
Government sponsored mortgage-backed			37				1,820				—				—				37
Total securities available for sale		$	112			$	12,130			$	—			$	—			$	112
Securities Held to Maturity
Debt Securities:
U.S. Government and federal agencies		$	—			$	—			$	—			$	—			$	—
Total securities held to maturity		$	—			$	—			$	—			$	—			$	—

 

		December 31, 2010
		Less Than Twelve Months								Over Twelve Months
(Dollars in Thousands)		Gross								Gross								Total
		Unrealized								Unrealized								Unrealized
		Losses				Fair Value				Losses				Fair Value				Losses
Securities Available for Sale
Debt Securities:
U.S. Government and federal agencies		$	933			$	22,702			$	—			$	—			$	933
States & political subdivisions			48				1,658				—				—				48
Government sponsored 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		$	—			$	—			$	—			$	—			$	—

Floridian Financial Group, Inc. and Subsidiaries

Note 3.           Securities (continued)

As of June 30, 2011, the Company’s security portfolio consisted of 16 securities, 4 of which were in an unrealized loss position. Approximately $46.4 million, or 96% 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 June 30, 2011.

Note 4.           Loans and Allowance for Loan Losses

Loans were comprised of the following:

(Dollars in Thousands)		June 30, 2011				December 31, 2010
Commercial		$	45,578			$	45,202
Commercial real estate			237,688				240,151
Residential real estate			6,944				12,580
Consumer loans			19,578				19,837
Total loans			309,788				317,770
Less: Allowance for loan losses			7,715				8,010
Less: Unearned fees			140				205
Net loans		$	301,933			$	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:

(Dollars in Thousands)		For the Six Months Ended June 30,
		2011				2010
Beginning balance		$	8,010			$	9,038
Loan charge offs:
Commercial			125				1,076
Commercial real estate			1,024				3,815
Residential mortgage			391				—
Consumer and home equity			206				99
Total charge-offs			1,746				4,990
Recoveries:
Commercial			91				1
Commercial real estate			160				68
Residential mortgage			—				—
Consumer and home equity			3				4
Total recoveries			254				73
Provision for loan losses:
Commercial			—				—
Commercial real estate			491				3,067
Residential mortgage			396				756
Consumer and home equity			280				—
Unallocated			30				—
Total provision			1,197				3,823
Ending balance		$	7,715			$	7,944
Allowance / Total Loans			2.5	%			2.4	%
Net Charge-Offs / Average Loans			1.0	%			2.9	%
Allowance / Nonperforming Loans			87.5	%			45.7	%

 

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 is based on impairment method as of June 30, 2011 and December 31, 2010:

		As of June 30, 2011
(Dollars in Thousands)						Commercial				Residential
						Real				Real				Home
		Commercial				Estate				Estate				Equity				Consumer				Unallocated				Total
Ending allowance for loan losses:
Individually evaluated for impairment		$	69			$	718			$	—			$	—			$	—			$	—			$	787
Collectively evaluated for impairment			1,316				4,518				138				450				75				431				6,928
Total ending allowance balance		$	1,385			$	5,236			$	138			$	450			$	75			$	431			$	7,715
Loans:
Individually evaluated for impairment		$	394			$	25,827			$	—			$	—			$	—			$	—			$	26,221
Collectively evaluated for impairment			45,184				211,861				6,944				16,941				2,637				—				283,567
Total ending loan balance		$	45,578			$	237,688			$	6,944			$	16,941			$	2,637			$	—			$	309,788

 

		As of December 31, 2010
(Dollars in Thousands)						Commercial				Residential
						Real				Real				Home
		Commercial				Estate				Estate				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 June 30, 2011 and December 31, 2010:

 

		As of June 30, 2011
(Dollars in Thousands)		Unpaid								Allowance for				Average				Interest
		Principal				Recorded				Loan Losses				Recorded				Income
		Balance				Investment				Allocated				Investment				Recognized
With no related allowance recorded:
Commercial		$	235			$	235			$	—			$	364			$	3
Commercial real estate
Construction and land			6,267				6,267				—				10,809				30
Non-owner occupied			7,910				7,910				—				10,323				98
Owner occupied			1,251				1,251				—				1,951				25
Residential			—				—				—				—				—
Home equity			—				—				—				—				—
Consumer			—				—				—				—				—
Total			15,663				15,663				—				23,447				156
With an allowance recorded:
Commercial			158				89				69				169				4
Commercial real estate
Construction and land			106				87				19				107				—
Non-owner occupied			2,427				2,348				79				2,330				27
Owner occupied			7,867				7,248				619				7,856				75
Residential			—				—				—				—				—
Home equity			—				—				—				—				—
Consumer			—				—				—				—				—
Total			10,558				9,772				786				10,462				106
Total		$	26,221			$	25,435			$	786			$	33,909			$	262

 

Floridian Financial Group, Inc. and Subsidiaries

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

 

		As of December 31, 2010
(Dollars in Thousands)		Unpaid								Allowance for
		Principal				Recorded				Loan Losses
		Balance				Investment				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)
		June 30, 2011				December 31, 2010
Average investment in impaired loans		$	33,909			$	34,837
Interest income recognized on impaired loans		$	262			$	867
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 $17.3 million and $21.8 million at June 30, 2011 and December 31, 2010, respectively. All TDRs were performing at June 30, 2011. As of December 31, 2010, there was one nonperforming TDR with an outstanding balance of $1.4 million.

 

The following presents the recorded investment in nonaccrual loans and loans past due over 90 days and still accruing by class of loans as of June 30, 2011 and December 31, 2010:

 

(Dollars in Thousands)		June 30, 2011								December 31, 2010
						Loans Past								Loans Past
						Due Over 90								Due Over 90
						Days Still								Days Still
		Nonaccrual				Accruing				Nonaccrual				Accruing
Commercial		$	394			$	—			$	718			$	—
Commercial real estate
Construction and land			4,558				—				1,393				—
Non-owner occupied			2,836				—				10,774				63
Owner occupied			978				—				2,781				—
Residential			—				—				—				—
Home equity			50				—				—				—
Consumer			—				—				—				—
Total		$	8,816			$	—			$	15,665			$	63

Non-accruing loans amounted to $8.8 million and $15.7 million at June 30, 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 $377 thousand and $287 thousand higher for the periods ending June 30, 2011 and December 31, 2010, respectively. As of June 30, 2011, there were no loans past due 90 days or more and still accruing interest income.

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 June 30, 2011 and December 31, 2010 by class of loans:

 

		June 30, 2011
(Dollars in Thousands)			30 – 59				60 – 89				90 Days
			Days				Days				or Greater				Total				Loans Not
			Past Due				Past Due				Past Due				Past Due				Past Due
Commercial		$	1,663			$	—			$	—			$	1,663			$	43,915
Commercial real estate
Construction and land			—				—				3,747				3,747				53,349
Non-owner occupied			—				558				2,837				3,395				81,810
Owner occupied			—				184				794				978				94,409
Residential			—				—				—				—				6,944
Home equity			—				—				50				50				16,891
Consumer			14				—				—				14				2,623
Total		$	1,677			$	742			$	7,428			$	9,847			$	299,941

 

		December 31, 2010
(Dollars in Thousands)			30 - 59				60 - 89				90 Days
			Days				Days				or Greater				Total				Loans Not
			Past Due				Past Due				Past Due				Past Due				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 June 30, 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:

		June 30, 2011
(Dollars in Thousands)						Special																Not
		Pass				Mention				Substandard				Doubtful				Loss				Rated
Commercial		$	44,957			$	—			$	470			$	151			$	—			$	—
Commercial real estate
Construction and land			50,723				—				6,373				—				—				—
Non-owner occupied			74,869				—				10,336				—				—				—
Owner occupied			78,799				5,165				11,423				—				—				—
Residential			6,944				—				—				—				—				—
Home equity			15,895				—				1,046				—				—				—
Consumer			2,637				—				—				—				—				—
Total		$	274,824			$	5,165			$	29,648			$	151			$	—			$	—

 

		December 31, 2010
(Dollars in Thousands)						Special																Not
		Pass				Mention				Substandard				Doubtful				Loss				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 June 30, 2011 and December 31, 2010:

		June 30, 2011
(Dollars in Thousands)						Home
		Residential				Equity				Consumer
Performing		$	6,944			$	16,891			$	2,637
Nonperforming			—				50				—
Total		$	6,944			$	16,941			$	2,637

 

		December 31, 2010
(Dollars in Thousands)						Home
		Residential				Equity				Consumer
Performing		$	12,580			$	17,026			$	2,759
Nonperforming			—				52				—
Total		$	12,580			$	17,078			$	2,759

Note 5.          Commitments and Contingencies

Financial instruments with off-balance-sheet risk: In accordance with GAAP, 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 $57.4 million and $59.0 million at June 30, 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 June 30, 2011 and December 31, 2010, respectively.

Lines of credit: At June 30, 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 $500 thousand during the three months ended June 30, 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’s 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 June 30, 2011 and December 31, 2010, that the Banks meet all capital adequacy requirements to which they are subject.

At June 30, 2011, the Company’s banking subsidiaries exceeded all regulatory capital measures to be adequately capitalized. Further, the Banks 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. The Banks, however, as outlined in Note 10 have resolved to meet higher capital requirements to fulfill requests from the Banks’ regulators.

 

Floridian Financial Group, Inc. and Subsidiaries

Note 6.           Regulatory Capital Matters (continued)

(Dollars in Thousands)	Actual						Minimum Amount and Ratio Required by Regulators
	Amount			Ratio			Amount			Ratio
As of June 30, 2011:
Total capital (to risk-weighted assets)
Consolidated	$	42,717			12.1	%		N/A			N/A
Floridian Bank	$	13,809			12.0	%	$	11,478			10.0	%
Orange Bank of Florida	$	24,322			10.4	%	$	23,432			10.0	%
Tier 1 capital (to risk-weighted assets)
Consolidated	$	38,245			10.8	%		N/A			N/A
Floridian Bank	$	12,367			10.8	%	$	6,887			6.0	%
Orange Bank of Florida	$	21,359			9.1	%	$	14,059			6.0	%
Tier 1 capital (to average assets)
Consolidated	$	38,245			8.4	%		N/A			N/A
Floridian Bank	$	12,367			8.5	%	$	7,450			5.0	%
Orange Bank of Florida	$	21,359			7.0	%	$	15,305			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 Banks’ ability to pay dividends, the Company is, in effect, similarly restricted as to its ability to pay dividends. Further, the Boards of Directors of the Banks are restricted from paying the Company any dividends. See Note 10.

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 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.

Floridian Financial Group, Inc. and Subsidiaries

Note 7.           Fair Values of Financial Instruments (continued)

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 $6.5 million at June 30, 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 nonperforming 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 maturing within 90 days in the amount of $6.3 million and a long-term note payable of $1.7 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 June 30, 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 June 30, 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)		June 30, 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		$	—		$	28,637		$	—		$	28,637
States & political subdivisions			—			1,766			—			1,766
Mortgage backed			—			11,787			—			11,787
Total securities available for sale		$	—		$	42,190		$	—		$	42,190
		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 June 30, 2011 and December 31, 2010:

 

(Dollars in Thousands)		June 30, 2011
		Quoted Prices in Active Markets for Identical Assets Level 1			Significant Other Observable Inputs Level 2			Significant Unobservable Inputs Level 3
Impaired loans		$	—		$	—		$	8,908
Other real estate owned		$	—		$	—		$	10,372

 

		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 $1.1 million and $2.4 million were recorded on impaired loans during the six months ended June 30, 2011 and 2010, respectively.

 

Write-downs of $641 thousand and $0 were recorded on other real estate owned during the six months ended June 30, 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 June 30, 2011 and December 31, 2010. The fair value estimates presented are based on pertinent information available to management as of June 30, 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)		June 30, 2011								December 31, 2010
		Carrying				Estimated				Carrying				Estimated
		Amount				Fair Value				Amount				Fair Value
Financial assets:
Cash and due from banks		$	14,248			$	14,248			$	9,399			$	9,399
Federal funds sold			81,033				81,033				52,473				52,473
Securities held to maturity			6,018				6,076				10,082				10,281
Available-for-sale securities			42,190				42,190				42,658				42,658
Other investments			100				100				100				100
Loans, net			301,933				301,582				309,555				306,114
Accrued interest receivable			1,104				1,104				1,322				1,322
Financial liabilities:
Deposits		$	439,625			$	439,950			$	412,187			$	413,555
Other borrowings			7,963				7,963				6,762				6,762
Accrued interest payable			147				147				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.

 

On May 13, 2011, the FASB issued new requirements for Fair Value Measurement and Disclosure. The pronouncement developed a single, converged guidance on how to measure fair value and what disclosures to provide concerning fair value measurements. The measurement and disclosure requirements are effective for reporting periods beginning after December 15, 2011 and are applied prospectively.

 

On June 16, 2011, the FASB finalized guidance on the Presentation of Comprehensive Income to improve the comparability, consistency, and transparency of financial reporting and to increase prominence of items recorded in other comprehensive income. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The guidance requires reporting to be applied retrospectively for all periods presented in the financial statements.

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 former 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.

 

Note 10 – Regulatory Agreement

 

On July 22 2011, as a result of a periodic examination of the Banks during the first quarter 2011 by the Federal Deposit Insurance Company (FDIC) and the Florida Office of Financial Regulation (OFR), the Boards of Directors of the Banks agreed to approve certain board resolutions (“Resolutions”) requested by the FDIC and the OFR. From a regulatory perspective, these are informal, nonpublic agreements; however, in the interest of full disclosure, the Company is summarizing the main obligations of the Resolutions. The Resolutions provide that the Board of Directors of each Bank:

 

	•	Will not declare or pay any dividends or take any other form of payment representing a reduction in capital from the Bank without prior regulatory approval;
	•	Will not appoint any new directors or senior executive officers without prior regulatory approval; and
	•	Will within 90 days (Floridian Bank) and 182 days (Orange Bank) and during the life of the Resolutions have Tier 1 Capital equal to or exceeding eight percent (8%) and Total Risk-Based Capital equal to or exceeding twelve percent (12%).

 

The Company is committed to taking all necessary actions to promptly address the requirements of the Resolutions.

 

Note 11 – Subsequent Events

 

On July 15, 2011, the sale of Orange Bank of Florida’s Inverness branch to Old Florida National was closed. Orange Bank now has six offices with its primary service area in Orange, Seminole, Lake and Citrus counties.

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 10 banking offices, excluding Orange Bank’s Inverness branch, which was sold 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 June 30, 2011, we had total assets of $490.5 million, deposits of $439.6 million, total gross loans of $309.8 million and total shareholders’ equity of $40.3 million. At June 30, 2011, our consolidated capital ratios all surpassed regulatory “well capitalized measures” as shown in the following table. Also see Note 6 of our consolidated financial statements for a breakdown by subsidiary Banks, which also surpass all regulatory “well capitalized measures”.

	As of June 30, 2011	Minimum to be “Well Capitalized”
Risk Based Capital	12.1%	10.0%
Tier 1 Capital	10.8%	6.0%
Leverage Capital	8.4%	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 June 30,
(Dollars in Thousands, Except Per Share Data)		2011				2010
Interest Income		$	4,247			$	5,156
Interest Expense			1,067				1,541
Net Interest Income			3,180				3,615
Provision For Loan Losses			30				3,634
Noninterest Income			370				282
Noninterest Expense			3,518				3,625
Income (Loss) Before Income Taxes			2				(3,362	)
Provision for Income Taxes			175				—
Net Income (loss)		$	(173	)		$	(3,362	)
Basic net income (loss) per share		$	(0.03	)		$	(0.54	)
Diluted net income (loss) per share		$	(0.03	)		$	(0.54	)
Selected Operating Ratios
Return on Assets			(0.15	)%			(2.81	)%
Return on Equity			(1.75	)%			(26.41	)%
Dividend Payout Ratio			N/A				N/A
Equity to Assets Ratio			8.21	%			9.88	%

The income before income taxes for the three months ended June 30, 2011 was $2 thousand compared to a $3.4 million net loss for the same period in 2010. The profit earned in the second quarter of 2011 was principally due to the reduction in expenses through the closing of two branches at the end of 2010 and an improvement in our loan portfolio which resulted in the provision in loan losses being reduced to $30 thousand from $3.6 million for the three months ended June 30, 2011 and 2010, respectively.

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 for the three month periods ended June 30, 2011 and 2010. It sets forth, (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 June 30,
		2011												2010
		Average Balance				Interest				Rate				Average Balance				Interest				Rate
ASSETS
Loans, Net(1)(2)		$	307,451			$	3,867				5.04	%		$	342,710			$	4,555				5.33	%
Investment Securities			51,916				345				2.66				79,344				591				2.98
Federal Funds Sold			51,725				30				0.23				22,138				10				0.18
Interest Bearing Deposits			3,158				5				0.64				100				—				—
Total Earning Assets			414,250				4,247				4.11	%			442,292				5,156				4.65	%
Other Assets			43,731												35,072
Total Assets		$	457,970											$	479,364
LIABILITIES
Savings, NOW and Money Market		$	159,423			$	360				0.90	%		$	171,474			$	509				1.19	%
Time Deposits			149,568				642				1.72				175,566				982				2.25
Total Interest Bearing Deposits			308,991				1,002				1.30				347,040				1,491				1.72
Other Borrowings			7,956				65				3.28				6,751				50				2.97
Total Interest Bearing Liabilities			316,947				1,067				1.35	%			353,791				1,541				1.75	%
Noninterest Bearing Deposits			98,914												72,546
Other Liabilities			2,569												1,975
Total Liabilities			418,430												428,312
Total Shareholders’ Equity			39,540												51,052
Total Liabilities and Equity		$	457,970											$	479,364
Interest Rate Spread											2.76	%											2.90	%
Net Interest Income						$	3,180											$	3,615
Net Interest Margin											3.08	%											3.26	%

 

(1) Average balances include nonaccrual loans, and are net of unearned loan fees of $140 and $247 at June 30, 2011 and 2010, respectively.

(2) Interest income includes fees on loans of $13 and $4 for the three months ended June 30, 2011 and 2010, respectively.

Net interest income decreased $435 thousand, 11.1%, from $3.6 million in 2010 to $3.2 million in 2011, principally due to a 34.6% decrease in investment securities and a 10.3% decrease in average net loans. 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 June 30, 2011 compared to the quarter ended June 30, 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)		Three months ended June 30, 2011 and 2010
		Total				Due To Average
		Change				Volume				Rate
Interest Earning Assets
Loans, Net		$	(688	)		$	(469	)		$	(219	)
Investment Securities			(246	)			(204	)			(42	)
Federal Funds Sold			20				13				7
Other			5				—				5
Total		$	(909	)		$	(660	)		$	(249	)
Interest Bearing Liabilities
Savings, NOW, Money Market Accounts		$	(149	)		$	(35	)		$	(114	)
Time Deposits			(340	)			(146	)			(194	)
Other Borrowings			15				9				6
Total		$	(474	)		$	(172	)		$	(302	)
Changes In Net Interest Income		$	(435	)		$	(488	)		$	53

 

Provision for Loan Losses

The allowance for loan losses is 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 $30 thousand for the three months ended June 30, 2011 compared to $3.6 million for the same period in 2010.

Noninterest Income

Following is a schedule of noninterest income:

 

		Three months ended June 30,
(Dollars in Thousands)		2011				2010
Loan fee income		$	13			$	5
Service charges on deposit accounts			164				103
Cash surrender value – life insurance			84				92
Other			109				72
Gain on sale of securities			—				10
Totals		$	370			$	282

Noninterest income, increased in 2011 because of increased service charges of $61 thousand reflecting growth in noninterest bearing demand deposit accounts. Noninterest income includes bank owned life insurance which decreased to $84 thousand for the three months ended June 30, 2011 from $92 thousand in the same period of 2010.

Noninterest Expense

Following is a schedule of noninterest expense:

		Three months ended June 30,
(Dollars in Thousands)		2011				2010
Salaries and employee benefits		$	1,654			$	1,761
Occupancy and equipment expense			681				828
FDIC insurance			158				212
Data processing			295				259
Other real estate expense			177				78
Professional fees			253				249
Credit and collection expenses			82				66
Telephone and communications			64				58
Core deposit intangible amortization			48				48
Operating recovery			—				(70	)
Other			106				136
Totals		$	3,518			$	3,625

Total noninterest expense of $3.5 million for the three months ended June 30, 2011 decreased $107 thousand or 3.0% from the same period in 2010. The decrease was due to the closing of two branches and the relocation of our operations center in 2010 that resulted in a $107 thousand, or 6.1%, reduction in salary and employee benefits and a $147 thousand, or 17.8%, reduction in occupancy and equipment expense.

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 determined no additional valuation allowance was required and based on their evaluation of the deferred tax benefit and losses incurred, elected to reduce the carrying value of the deferred asset account. Going forward should we experience net income, we will re-evaluate the need to reverse any remaining valuation allowance. For the quarter ended June 30, 2011 we recorded a valuation allowance of $175 thousand, thereby reducing our deferred tax asset to $12 thousand. We did not recognize an income tax benefit for the quarter ended June 30, 2010.

Six Months Ended June 30, 2011 Compared to the Six Months ended June 30, 2010

CONDENSED SUMMARY OF EARNINGS
		For The Six Months Ended June 30,
(Dollars in Thousands, Except Per Share Data)		2011				2010
Interest Income		$	8,519			$	10,304
Interest Expense			2,133				3,175
Net Interest Income			6,386				7,129
Provision For Loan Losses			1,197				3,823
Noninterest Income			686				575
Noninterest Expense			7,058				6,954
Loss Before Income Taxes			(1,183	)			(3,073	)
Provision for Income Taxes			175				—
Net Loss		$	(1,358	)		$	(3,073	)
Basic net loss per share		$	(0.22	)		$	(0.50	)
Diluted net loss per share		$	(0.22	)		$	(0.50	)
Selected Operating Ratios
Return on Assets			(0.61	)%			(1.29	)%
Return on Equity			(6.87	)%			(12.14	)%
Dividend Payout Ratio			N/A				N/A
Equity to Assets Ratio			8.21	%			9.88	%

The loss before income taxes for the six months ended June 30, 2011 was a loss of $1.2 million compared to a loss of $3.1 million for the same period in 2010.

Net Interest Income

The following table reflects the components of net interest income, for the six month periods ended June 30, 2011 and 2010. It sets forth (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)		Six Months Ended June 30,
		2011												2010
		Average Balance				Interest				Rate				Average Balance				Interest				Rate
ASSETS
Loans, Net(1)(2)		$	310,875			$	7,754				5.04	%		$	338,833			$	9,019				5.37	%
Investment Securities			52,903				705				2.66				85,329				1,268				2.97
Federal Funds Sold			43,240				51				0.23				17,368				17				0.20
Deposits at Interest with Banks			3,038				9				0.64				100				—				—
Total Earning Assets			410,056				8,519				4.11	%			441,630				10,304				4.71	%
Other Assets			40,756												36,964
Total Assets		$	451,601											$	478,594
LIABILITIES
Savings, NOW and Money Market		$	163,467			$	699				0.86	%		$	173,524			$	1,105				1.28	%
Time Deposits			143,019				1,304				1.84				174,495				1,967				2.27
Total Interest Bearing Deposits			306,486				2,003				1.32				348,019				3,072				1.78
Other Borrowings			8,122				130				3.23				7,040				103				2.95
Total Interest Bearing Liabilities			314,608				2,133				1.37	%			355,059				3,175				1.80	%
Noninterest Bearing Deposits			94,561												70,563
Other Liabilities			2,592												1,934
Total Liabilities			411,761												427,556
Total Shareholders’ Equity			39,840												51,038
Total Liabilities and Equity		$	451,601											$	478,594
Interest Rate Spread											2.82	%											2.91	%
Net Interest Income						$	6,386											$	7,129
Net Interest Margin											3.14	%											3.26	%

 

(1) Average balances include nonaccrual loans, and are net of unearned loan fees of $140 and $247 at June 30, 2011 and 2010, respectively.

(2) Interest income includes fees on loans of $26 and $22 for the six months ended June 30, 2011 and 2010, respectively.

Net interest income decreased $742 thousand, or 10.4%, from $7.1 million in 2010 to $6.4 million in 2011. The decrease was primarily due to a 38.0% decrease in investment securities and an 8.3% reduction in average net loans. The increased interest expense and lower average net loans were partially offset by an increase in noninterest bearing deposits of $24.0 million and a reduction in average rates from 1.80% to 1.37% for the six months ended June 30, 2010 and 2011, respectively.

The following table sets forth certain information regarding changes in our interest income and interest expense for the six months ended June 30, 2011 compared to the six months ended June 30, 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)		Six months ended June 30, 2011 and 2010
		Total				Due To Average
		Change				Volume				Rate
Interest Earning Assets
Loans, Net		$	(1,265	)		$	(744	)		$	(521	)
Investment Securities			(563	)			(482	)			(81	)
Federal Funds Sold			34				25				9
Other			9				—				9
Total		$	(1,785	)		$	(1201	)		$	(584	)
Interest Bearing Liabilities
Savings, NOW, Money Market Accounts		$	(406	)		$	(64	)		$	(342	)
Time Deposits			(663	)			(355	)			(308	)
Other Borrowings			27				16				11
Total		$	(1,042	)		$	(403	)		$	(639	)
Changes In Net Interest Income		$	(743	)		$	(798	)		$	55

 

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 six months ended June 30, 2011 compared to $3.8 million for the same period in 2010. The decrease in the loan loss provision was also supported by a 43.9% decrease in nonaccrual loans from $15.7 million at December 31, 2010, compared to $8.8 million at June 30, 2011 and a 10.0% decrease in past due loans from $11.0 million to $9.9 million, respectively. Past due loans, as a percentage of total loans, decreased to 3.2% at June 30, 2011, compared to 3.5% at December 31, 2010.

Noninterest Income

Following is a schedule of noninterest income:

		Six months ended June 30,
(Dollars in Thousands)		2011				2010
Loan fee income		$	26			$	22
Service charges on deposit accounts			322				210
Cash surrender value – life insurance			169				204
Other			169				126
Gain on sale of securities			—				13
Totals		$	686			$	575

Noninterest income, excluding gains on sales of securities, increased $124 thousand from 2010. Deposit fees increased $112 thousand reflecting growth in deposit accounts.

Noninterest Expense

 

Following is a schedule of noninterest expense:

 

		Six months ended June 30,
(Dollars in Thousands)		2011				2010
Salaries and employee benefits		$	3,328			$	3,503
Occupancy and equipment expense			1,406				1,670
FDIC insurance			382				427
Data processing			590				486
Other real estate expense			217				243
Professional fees			495				383
Credit and collection expenses			173				141
Telephone and communications			144				113
Core deposit intangible amortization			96				96
Operating recovery			—				(450	)
Other			227				342
Totals		$	7,058			$	6,954

Total noninterest expense of $7.1 million for the six months ended June 30, 2011 increased $104 thousand or 1.5% from the same period in 2010. The increase was due to the $450 thousand operating recovery realized in 2010. Without the recovery, noninterest expenses decreased $346 thousand, or 4.7%, primarily due to the closing of two branches and the relocation of the operations center to Lake Mary.

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 determined no additional valuation allowance was required and based on their evaluation of the deferred tax benefit and losses incurred, elected to reduce the carrying value of the deferred asset account. Going forward should we experience net income, we will re-evaluate the need to reverse any remaining valuation allowance. We did not recognize an income tax benefit for the six months ended June 30, 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 this capacity, 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 because some borrowers have the option to prepay their loans when rates fall while some 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 interest rate risk. Interest rate risk measures 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				4 To 6				7 To 12				Total
		3 Months				Months				Months				1 Year
Interest Earning Assets (IEA)
Loans		$	170,534			$	6,587			$	14,162			$	191,283
Investment Securities			20,645				5,000				1,006				26,651
Federal funds sold			6,500				—				—				6,500
Other investments			76,619				—				—				76,619
Total		$	274,298			$	11,587			$	15,168			$	301,053
Interest Bearing Liabilities (IBL)
Savings, NOW, Money Market		$	170,024			$	—			$	—			$	170,024
Time deposits			30,379				11,105				57,234				98,718
Other borrowings			6,263				—				1,700				7,963
Total		$	206,666			$	11,105			$	58,934			$	276,705
Period Gap		$	67,632			$	482			$	(43,766	)		$	24,348
Cumulative Gap		$	67,632			$	68,114			$	24,348
Cumulative Gap / Total Assets			13.79	%			13.89	%			4.96	%
IEA / IBL (Cumulative)			133	%			131	%			109	%

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)		June 30, 2011				December 31, 2010
Commercial		$	45,578			$	45,202
Commercial real estate			237,688				240,151
Residential real estate			6,944				12,580
Consumer and home equity			19,578				19,837
Total loans			309,788				317,770
Less: Allowance for loan losses			7,715				8,010
Less: Net deferred fees			14				205
Loans, Net		$	301,933			$	309,555

Total loans decreased by $8.0 million during the first six months of 2011 due to the reclassification of $7.4 million to other real estate owned, write downs of $2.2 million, and approximately $12.9 million in net pay downs and payoffs. These decreases were offset by new loans of $14.8 million. There were approximately $8.8 million in nonperforming loans at June 30, 2011.

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 2011, it 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 June 30, 2011, securities totaling $42.2 million and $6.0 million were classified as available for sale and held to maturity, respectively. During the six months ended June 30, 2011, securities available for sale decreased by $468 thousand as we used proceeds from called securities to offset declines in high cost deposits. Securities held to maturity decreased $4.1 million from December 31, 2010 primarily due to the securities being called by the issuer.

Deposits and Other Borrowings

As a bank holding company, our primary source of funds is deposits. Typically, 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 increased $27.4 million to $439.6 million at June 30, 2011, compared to December 31, 2010, due to a concentrated effort to increase our deposit base while improving our margins. Core deposits, which exclude time certificates of deposit, increased by $11.0 million to $271.0 million at June 30, 2011 from $260.0 million at December 31, 2010. This increase was attributable to a few customers and is expected to be short-term in nature. Time certificates of deposits, increased to $168.6 million from $152.1 million during the same period due to the Banks’ certificate of deposit promotions offered during the 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 June 30, 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 June 30, 2011, other borrowings were approximately 19.8% 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 increasing 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. During the period reported, the Banks offered promotional rates on their time deposits and obtained low cost brokered deposits that resulted in an 11% increase in our time deposit volume. Established relationships with area businesses and municipalities also resulted in a 4.2% increase in core deposits. However, core deposits are short-term in nature and are expected to fluctuate based on the fiscal year ends of our customers.

Brokered deposits 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 the Banks fall below “well capitalized” levels, regulators would 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 continuing operating activities primarily include net income (loss), adjusted for items that did not impact cash. Net cash provided by operating activities increased by $132 thousand to $1.9 million for the six months ended June 30, 2011compared to $1.7 million for the six months ended June 30, 2010.

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 six months ended June 30, 2011, we had net cash flows provided from investing activities of $3.0 million, compared to $16.0 million for the same period in 2010. The change in cash flows from investing activities was primarily due to the purchase and call of investment securities and 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 six months ended June 30, 2011, we had net cash flows provided by financing activities of $28.6 million, compared to $23.5 million for the six months ended June 30, 2010. The change in cash flows from financing activities was primarily due to $27.4 million in net deposit growth for the six months ended June 30, 2011 compared to $24.4 million for the six months ended June 30, 2010.

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 June 30, 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 both 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 nonperforming 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 nonperforming 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 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 per share, which were issued in March 2011. In 2009, employees purchased 4,727 shares valued at $12.50 per share, 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; however, pursuant to the Resolutions, the Banks are prohibited from paying any dividends to the Company, without prior approval from their regulators. There are other 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”.

Even if the Banks received approval from their regulators to pay the Company a dividend the declaration and payment of dividends on our common stock would 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. Further, however, pursuant to the Resolutions, the Banks are prohibited from paying any dividends to the Company, without prior approval from our regulators.

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 June 30, 2011, we had approximately $57.0 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 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.

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 June 30, 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 June 30, 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 arising out of the normal course of business. In management’s opinion, there is no known pending 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, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our 2010 Form 10-K, as updated in our subsequent quarterly reports. The risks described in our 2010 Form 10-K are not the only risks facing us. 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. There have been no material changes in our risk factors from those disclosed in our 2010 Form 10-K, except for the following:

The FDIC’s repeal of the prohibition against payment of interest on demand deposits may increase competition for such deposits and ultimately increase interest expense.

Substantially all of our revenue is derived from our interest rate spread, which is the difference between the interest rates paid by us on amounts used to fund assets and the interest rates and fees we receive on our interest-earning assets. Our interest-earning assets include outstanding loans extended to our customers and securities held in our investment portfolio. We fund assets using deposits and other borrowings. We currently maintain approximately 25% of deposits as non-interest bearing.

On July 14, 2011, the FDIC issued final rules to repeal the prohibition on the payment of interest on demand deposits by institutions that are nonmember banks of the Federal Reserve System. The final rules implement Section 627 of the Dodd-Frank Act, which repealed Section 11(a) (1) of the Federal Deposit Insurance Act in its entirety effective July 21, 2011. Member banks were impacted by a substantially similar repeal by the Federal Reserve. As a result, banks are now permitted to offer interest-bearing demand deposit accounts to commercial customers, which were previously forbidden. This repeal may cause increased competition from other financial institutions for these deposits. If we decide to pay interest on demand accounts, we would expect interest expense to increase. Since we have a higher than average level of commercial demand deposits, paying interest on commercial demand deposits may have a larger negative impact on our net interest margin than our peers.

Item 2.           Purchase of Equity Securities by the Issuer and Affiliated Purchasers

The following table contains information about all purchases made by or on behalf of us or any affiliated purchase (as defined in Rule 10b-18(a)(3) under the Exchange Act) of shares or other units of any class of our equity securities that is registered pursuant to Section 12 of the Exchange Act.

 

Period		Total number of shares purchased				Average price paid per share				Total number of shares purchased as part of our share repurchase program(1)				Maximum Number of shares that may yet be purchased under our share repurchase program
April 1, 2011 to April 30, 2011			—				—				—				—
May 1, 2011 to May 31, 2011			—				—				—				—
June 1, 2011 to June 30, 2011			19,000	(1)		$	5.50				—				—
Total			19,000			$	5.50				—				—

 

(1)	The shares were purchased from Floridian Bank after the bank foreclosed on a loan that was collateralized by the Company’s stock. The stock was used to reduce the principal outstanding on the loan.

Item 6. Exhibits

(A) Exhibits

10.1      Employment Agreement with Charlie W. Brinkley, dated as of May 6, 2011 – incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (filed 5/12/11)(No. 000-53589).

10.2      Employment Letter Agreement for Jorge F. Sanchez, dated May 4, 2011 – incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (filed 6/30/11)(No. 000-53589).

31.1      Certification of Charlie W. Brinkley, Jr., Chairman and 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 Jorge F. Sanchez, 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.

101.INS  XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema Document

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB XBRL Taxonomy Extension Label Linkbase Document

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF XBRL Taxonomy Extension Definition Linkbase Document

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/ Jorge F. Sanchez
	Jorge F. Sanchez
	Executive Vice President and Chief Financial Officer
	(Mr. Sanchez is the Principal Financial Officer and has been duly authorized to sign on behalf of the Registrant)
Date:   August 15, 2011

 

Exhibit Index

10.1	Employment Agreement with Charlie W. Brinkley, dated as of May 6, 2011 – incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (filed 5/12/11)(No. 000-53589).
10.2	Employment Letter Agreement for Jorge F. Sanchez, dated May 4, 2011 – incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (filed 6/30/11)(No. 000-53589).
31.1	Certification of Charlie W. Brinkley, Jr., Chairman and 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 Jorge F. Sanchez, 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.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

 

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