FLORIDIAN FINANCIAL GROUP INC - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - FLORIDIAN FINANCIAL GROUP INC	Financial_Report.xls
EX-32.1 - FLORIDIAN FINANCIAL GROUP INC	i00214_ex32-1.htm
EX-31.1 - FLORIDIAN FINANCIAL GROUP INC	i00214_ex31-1.htm
EX-31.2 - FLORIDIAN FINANCIAL GROUP INC	i00214_ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended March 31, 2012

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

For the transition period from ____________ to ____________

Commission File Number: 000-53589

FLORIDIAN FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)


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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

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


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

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

At April 30, 2012, 6,179,622 shares of the Registrant’s Common Stock, $5.00 par value, were outstanding.

FLORIDIAN FINANCIAL GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2012

TABLE OF CONTENTS


		Page
PART I – Financial Information

Item 1.	Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets – March 31, 2012 and December 31, 2011	5
	Condensed Consolidated Statements of Operations – Three Months Ended March 31, 2012 and 2011	6
	Condensed Consolidated Statements of Shareholders’ Equity – Three months Ended March 31, 2012 and 2011	7
	Condensed Consolidated Statements of Cash Flows –Three months Ended March 31, 2012 and 2011	8
	Notes to Condensed Consolidated Financial Statements (Unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	46

Item 4.	Controls and Procedures	46

PART II – Other Information

Item 1.	Legal Proceedings	47

Item 1A.	Risk Factors	47

Item 2	Purchase of Equity Securities by the Issuer and Affiliated Purchasers	48

Item 6.	Exhibits	49

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, 2011 (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 ability to lower our expenses;

	§	the effects of our decision to deregister our common stock currently registered under the Securities Exchange Act of 1934, as amended, and “go dark”;

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

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

	§	our ability to comply with increased capital requirements imposed by our regulators;

	§	the loss of our key personnel;

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

	§	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 frequency and magnitude of foreclosure of our loans;

	§	our ability to successfully manage liquidity risk;

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

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

	§	inflation, interest rate, market and monetary fluctuations;

	§	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 support our overhead expenses;

	§	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 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.

FINANCIAL INFORMATION


Item 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Floridian Financial Group, Inc., and Subsidiaries

Condensed Consolidated Balance Sheets
March 31, 2012 and December 31, 2011 (Unaudited)
(Dollars in Thousands)


	March 31, 2012			December 31, 2011
Assets
Cash and due from banks	$	5,322		$	8,930
Federal funds sold		8,150			3,550
Interest bearing deposits		20,164			20,367
Total cash and cash equivalents		33,636			32,847
Securities available for sale		70,888			73,136
Securities held to maturity (Fair value of $1,002 at March 31, 2012 and $1,013 at December 31, 2011)		1,000			1,002
Other investments		100			100
Loans, net of allowance for loan losses of $7,221 and $6,566 at March 31, 2012 and December 31, 2011, respectively		293,679			305,088
Property and equipment, net		14,447			14,670
Bank owned life insurance		11,491			11,411
Intangible assets, net		1,153			1,201
Other real estate owned		3,892			5,129
Other assets		4,815			4,975
Total assets	$	435,101		$	449,559

Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest bearing demand	$	91,171		$	83,909
Savings, NOW and money market		154,867			149,945
Time deposits under $100		69,578			87,090
Time deposits of $100 or more		64,543			72,782
Total deposits		380,159			393,726
Other borrowings		13,105			13,955
Other liabilities		1,716			2,101
Total liabilities		394,980			409,782

Shareholders’ Equity
Preferred stock, $5 par value, 1,000,000 shares authorized; none outstanding		—			—
Common stock, $5 par value, 100,000,000 shares authorized; 6,179,622 and 6,179,240 shares issued and outstanding as of March 31, 2012 and December 31, 2011, respectively		30,898			30,896
Additional paid-in capital		38,444			38,397
Retained deficit		(29,823	)		(29,966	)
Accumulated other comprehensive income		602			450
Total shareholders’ equity		40,121			39,777
Total liabilities and shareholders’ equity	$	435,101		$	449,559

See Notes to Unaudited Condensed Consolidated Financial Statements.

Floridian Financial Group, Inc. and Subsidiaries

Consolidated Statement of Operations and Other Comprehensive Income (Unaudited)
For the Periods Ended March 31, 2012 and 2011
(Dollars in Thousands)


	For the three months ended March 31,
	2012		2011
Interest income:
Interest and fees on loans	$	3,916	$	3,887
Interest on securities		300		360
Interest on federal funds sold		2		21
Other interest		15		4
Total interest income		4,233		4,272

Interest expense:
Interest on deposits		706		1,001
Other interest		30		65
Total interest expense		736		1,066

Net interest income		3,497		3,206

Provision for loan losses		1,130		1,167
Net interest income after provision for loan losses		2,367		2,039

Noninterest income:
Other noninterest income		347		316
Gain on sale of securities		137		—
Gain on sale of other assets		17		—
Total noninterest income		501		316
Noninterest expense:
Salaries and employee benefits		954		1,674
Occupancy and equipment expenses		647		725
FDIC insurance		185		224
Data processing, software and communications		388		375
Other real estate expense		184		40
Professional fees		225		242
Credit and collection expense		15		91
Core deposit intangible amortization		48		48
Other operating expenses		79		121
Total noninterest expense		2,725		3,540

Income (loss) before income taxes		143		(1,185	)

Income tax benefit		—		—
Net income (loss)	$	143	$	(1,185	)

Basic and diluted net income (loss) per share	$	0.02	$	(0.19	)
Average basic and diluted shares outstanding		6,179,760		6,202,313

Other comprehensive income:
Net income (loss)	$	143	$	(1,185	)
Change in unrealized holding gains on securities available for sale, net of tax		152		140
Comprehensive income (loss)	$	295	$	(1,045	)

See Notes to Unaudited Condensed Consolidated Financial Statements.

Floridian Financial Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity
For the Three months Ended March 31, 2012 and 2011 (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, 2010	$	30,995	$	38,148	$	(27,835	)	$	(1,205	)	$	40,103
Net loss		—		—		(1,185	)		—			(1,185	)
Change in unrealized loss on securities available for sale, net of income tax		—		—		—			140			140
Sale of 1,123 shares of common stock to employee benefit plan and 1,319 shares for employee stock purchase plan		12		11		—			—			23
Issuance of 3,280 shares of common stock in lieu of director fees		17		13		—			—			30
Share-based compensation		—		76		—			—			76
Balance at March 31, 2011	$	31,024	$	38,248	$	(29,020	)	$	(1,065	)	$	39,187

Balance at December 31, 2011	$	30,896	$	38,397	$	(29,966	)	$	450		$	39,777
Net income		—		—		143			—			143
Change in unrealized loss on securities available for sale, net of income tax		—		—		—			152			152
Retirement of 529 shares of common stock to employee benefit plan and sale of 911 shares to employee stock purchase plan		2		1		—			—			3
Share-based compensation		—		46		—			—			46
Balance at March 31, 2012	$	30,898	$	38,444	$	(29,823	)	$	602		$	40,121

See Notes to Unaudited Condensed Consolidated Financial Statements.

Floridian Financial Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Three months Ended March 31, 2012 and 2011
(Dollars in Thousands)


	For the three months ended
	March 31, 2012			March 31, 2011

Cash Flows From Operating Activities
Net income (loss)	$	143		$	(1,185	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for loan losses		1,130			1,167
Impairment of other real estate owned, net		124			—
Depreciation expense		223			270
Amortization expense		48			48
Net accretion of securities		380			49
Share-based compensation and director fees		46			106
Realized gain on sales of available for sale securities		(137	)		—
Realized gain on sales of other assets		(17	)		—
Increase in cash surrender value		(80	)		(86	)
Decrease (increase) in accrued interest receivable		63			(74	)
Increase (decrease) in accrued interest payable		(9	)		18
Increase (decrease) other		(265	)		158
Net cash provided by operating activities		1,649			471
Cash Flows From Investing Activities
Purchases of securities available for sale		(8,236	)		—
Sales, maturities and calls on securities available for sale		10,395			2,666
Net decrease in loans		10,176			5,958
Purchases of property and equipment, net		—			(2,485	)
Proceeds from sale of other real estate owned		1,219			79
Net cash provided by investing activities		13,554			6,218
Cash Flows From Financing Activities
Net (decrease) in deposits		(13,567	)		(10,894	)
Net increase (decrease) in borrowings		(850	)		1,201
Proceeds from sale of stock		3			23
Net cash provided by financing activities		(14,414	)		(9,670	)
Net increase in cash and cash equivalents
Cash and cash equivalents		789			(2,981	)
Beginning of period		32,847			61,872
End of period	$	33,636		$	58,891

Supplemental Disclosures of Cash Flow Information and noncash transactions


	For the three months ended
	March 31, 2012		March 31, 2011

Interest paid	$	745	$	3,868
Income taxes paid	$	—	$	—

Loans transferred to other real estate owned	$	93	$	4,502

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 three months ended March 31, 2012 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 quarterly report Form 10-Q should be read in conjunction with the notes to the consolidated financial statements included in the Company’s annual report on 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 federal deposit insurance 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.

Securities available for sale which are used for asset/liability, liquidity and other funds management purposes have indefinite holding periods and are accounted for on a fair value basis with net unrealized gains and losses included in other comprehensive income net of tax. Declines in the fair value of securities available for sale that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer including an evaluation of credit ratings, and (3) the impact of changes in market interest rates, (4) the intent of the Company to sell a security, and (5) whether it is more likely than not the Company will have to sell the security before recovery of its cost basis. If the Company intends to sell an impaired security, the Company records an other-than-temporary loss in the amount equal to the entire difference between the fair value and amortized cost. If a security is determined to be other-than-temporarily impaired, but the Company does not intend to sell the security, only the credit portion of the estimated loss is recognized in earnings, with the other portion of the loss recognized in other comprehensive income. Amortization and accretion of premiums and discounts are recognized as adjustments to interest income. Realized gains and losses are recognized using the specific identification method.

Floridian Financial Group, Inc. and Subsidiaries


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

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.

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, Residential Real Estate, Consumer, and Home Equity. Segments are determined based on the products and services provided and the type of customer served. See Note 4 for a breakdown of loans by segment.

Commercial Loans: All corporate and business purpose loans and lines of credit that are not real estate related are classified as commercial loans. These loans are generally secured by business assets including accounts receivable, inventory, and equipment and may incorporate a personal guarantee. Terms on commercial loans are generally for five years or less with most lines of credit written on an on-demand-basis. The majority of commercial loans have a floating interest rate tied to a published index. As of March 31, 2012, commercial loans represented 15% of the portfolio.

Commercial Real Estate Loans (“CRE”): 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. As of March 31, 2012, 77% of the loan portfolio was concentrated in CRE loans.

Residential Real Estate Loans (“RRE”): RRE represents all consumer purpose loans collateralized by one to four family dwellings. RRE loans generally have terms of less than five years and are written on a fixed rate basis. As of March 31, 2012, 3% of the portfolio was classified as RRE.

Consumer Loans: All non-business purpose loans are considered consumer loans. Consumer loans consist of home equity lines of credit, automobile loans, overdraft loans, loans secured by deposits and securities, and unsecured personal loans. 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 or lines of credit not secured by real estate. As of March 31, 2012, consumer loans represented 5% of the portfolio.

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. 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 of credit 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. See Note 4 for a breakdown of loans by class.

Floridian Financial Group, Inc. and Subsidiaries


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

Troubled Debt Restructuring: The Company considers a loan to be a Troubled Debt Restructuring (“TDR”) when the debtor experiences financial difficulties and a concession is provided such that the Company will not collect all principal or interest in accordance with the original terms of the loan agreement. Concessions can relate to the contractual interest rate, maturity date, or payment structure of the note. As part of our workout plan, we at times restructure loan terms to assist borrowers facing challenges in the current economic environment. Loans classified as TDR’s include loans on nonaccrual, loans moving to nonaccrual, and loans on 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.

As of March 31, 2012, seven loans totaling $16.1 million were classified as TDRs with $6.7 million classified as nonperforming. As of December 31, 2011, 10 loans totaling $17.5 million were classified as TDRs with $971 thousand classified as nonperforming.

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.

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.

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.

Floridian Financial Group, Inc. and Subsidiaries


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

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.

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 2009. The periods subject to examination for the Company’s significant state return, which is Florida, are the tax years subsequent to 2008. 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.

Floridian Financial Group, Inc. and Subsidiaries


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

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. Options outstanding at March 31, 2012 and 2011, to purchase 478 thousand and 527 thousand common shares, respectively, were not included in the computation of diluted earnings per share for the three months ended March 31, 2012 and 2011, because they were antidilutive.

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 2011 financial statements have been reclassified for comparative purposes to conform with the presentation in the 2012 financial statements. The results of these classifications had no effect on net operations or shareholders’ equity.


Note 2.	Cash and Due From Banks

The Banks are required to maintain vault cash and reserve balances with the Federal Reserve Bank based upon a percentage of deposits. These requirements were $1.5 million at March 31, 2012 and $2.5 million at December 31, 2011.


Note 3.	Securities

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


	As of March 31, 2012
(Dollars in Thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

Securities Available for sale
Debt Securities:
U.S. Government and federal agencies	$	6,921	$	196	$	—	$	7,117
States & political subdivisions		1,700		113		—		1,813
U.S. Agency REMIC		39,808		352		123		40,037
Residential mortgage-backed		21,857		82		18		21,921
Total securities available for sale	$	70,286	$	743	$	141	$	70,888
Securities Held to Maturity
Debt Securities:
U.S. Government and federal agencies	$	1,000	$	2	$	—	$	1,002
Total securities held to maturity	$	1,000	$	2	$	—	$	1,002

	As of December 31, 2011
Securities Available for Sale
Debt Securities:
U.S. Government and federal agencies	$	13,385	$	305	$	—	$	13,690
States & political subdivisions		1,701		94		—		1,795
U.S. Agency REMIC		38,917		338		217		39,038
Residential mortgage-backed		18,683		18		88		18,613
Total securities available for sale	$	72,686	$	755	$	305	$	73,136

Securities Held to Maturity
Debt Securities:
U.S. Government and federal agencies	$	1,002	$	11	$	—	$	1,013
Total securities held to maturity	$	1,002	$	11	$	—	$	1,013

At March 31, 2012 and December 31, 2011, government obligations with a carrying value of $20.1 million and $20.6 million, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. At March 31, 2012 and December 31, 2011, the carrying amount of securities pledged to secure repurchase agreements was $12.7 million and $12.6 million, respectively.

Floridian Financial Group, Inc. and Subsidiaries


Note 3.	Securities (continued)

The carrying amount of debt securities by contractual maturity at March 31, 2012 follows:

(Dollars in Thousands)

Within
1 year

After 1
year
through
5 years

After 5 years
Through
10 years

Over
10 years

Total

Available for sale, at fair value

U.S. Government and federal agencies

—

5,196

1,921

7,117

States & political subdivisions

—

759

1,054

—

1,813

U.S. Agency REMIC

—

4,701

35,336

40,037

Residential mortgage-backed

—

15,570

6,351

21,921

Total

—

759

26,521

43,608

70,888

Securities Held to Maturity, at cost

U.S. Government and federal agencies

—

1,000

Total

—

1,000

For the three months ended March 31, 2012 and 2011, proceeds from sales, maturities, and calls of securities available for sale amounted to $10.4 million and $2.7 million, respectively. Gross realized gains amounted to $137 thousand and $0, respectively. There were no gross realized losses for the three months ended March 31, 2012 and 2011.

Information pertaining to securities with gross unrealized losses at March 31, 2012 and December 31, 2011 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:


	March 31, 2012
	Less Than Twelve Months				Over Twelve Months
(Dollars in Thousands)	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Total Unrealized Losses
Securities Available for sale
Debt Securities:
U.S. Government and federal agencies	$	—	$	1,921	$	—	$	—	$	—
U.S. Agency REMIC		123		16,217		—		—		123
Residential mortgage-backed		18		5,976		—		—		18
Total securities available for sale	$	141	$	24,114	$	—	$	—	$	141

Floridian Financial Group, Inc. and Subsidiaries


Note 3.	Securities (continued)


	December 31, 2011
	Less Than Twelve Months				Over Twelve Months
(Dollars in Thousands)	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Total Unrealized Losses
Securities Available for sale
Debt Securities:
U.S. Agency REMIC	$	217	$	23,460	$	—	$	—	$	217
Residential mortgage-backed		88		14,536		—		—		88
Total securities available for sale	$	305	$	37,996	$	—	$	—	$	305

As of March 31, 2012, the Company’s security portfolio consisted of 39 securities, 14 of which were in an unrealized loss position. Approximately $70.1 million, or 97% of the debt securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae, Freddie Mac and Ginnie Mae, institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2012.


Note 4.	Loans and Allowance for Loan Losses

Loans were comprised of the following:


(Dollars in Thousands)	March 31, 2012		December 31, 2011

Commercial	$	44,877	$	44,833
Commercial real estate		232,528		241,648
Residential real estate		7,934		8,542
Consumer loans		15,664		16,745
Total loans		301,003		311,768
Less: Allowance for loan losses		7,221		6,566
Less: Unearned fees		103		114
Net loans	$	293,679	$	305,088

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 Three Months Ended March 31,
	2012			2011
Beginning balance	$	6,566		$	8,010
Loan charge offs:

Commercial		—			—
Commercial real estate		419			272
Residential mortgage		—			141
Consumer and home equity		65			179
Total charge-offs		484			592

Recoveries:
Commercial		2			1
Commercial real estate		4			135
Residential mortgage		—			—
Consumer and home equity		1			2
Total recoveries		7			138

Provision for loan losses:
Commercial		119			420
Commercial real estate		1,189			350
Residential mortgage		(7	)		—
Consumer and home equity		65			377
Unallocated		(234	)		20
Total provision		1,132			1,167

Ending balance	$	7,221		$	8,723

Allowance / Total Loans		2.4	%		2.8	%
Net Charge-Offs / Average Loans		0.4	%		0.1	%
Allowance / Non-Performing Loans		65.4	%		69.3	%

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 March 31, 2012 and December 31, 2011:

As of March 31, 2012


(Dollars in Thousands)	Commercial		Commercial Real Estate		Residential Real Estate		Home Equity		Consumer		Unallocated		Total
Ending allowance for loan losses:
Individually evaluated for impairment	$	—	$	235	$	—	$	—	$	—	$	—	$	235
Collectively evaluated for impairment		864		5,690		128		277		27		—		6,986
Total ending allowance balance	$	864	$	5,925	$	128	$	277	$	27	$	—	$	7,221

Loans:
Individually evaluated for impairment	$	—	$	20,581	$	—	$	—	$	—	$	—	$	20,581
Collectively evaluated for impairment		44,877		211,947		7,934		13,909		1,755		—		280,422
Total ending loan balance	$	44,877	$	232,528	$	7,934	$	13,909	$	1,755	$	—	$	301,003

As of December 31, 2011


(Dollars in Thousands)	Commercial		Commercial Real Estate		Residential Real Estate		Home Equity		Consumer		Unallocated		Total
Ending allowance for loan losses:
Individually evaluated for impairment	$	—	$	255	$	—	$	—	$	—	$	—	$	255
Collectively evaluated for impairment		743		4,896		135		246		57		234		6,311
Total ending allowance balance	$	743	$	5,151	$	135	$	246	$	57	$	234	$	6,566

Loans:
Individually evaluated for impairment	$	—	$	23,622	$	—	$	23	$	—	$	—	$	23,645
Collectively evaluated for impairment		44,833		218,026		8,542		14,210		2,512		—		288,123
Total ending loan balance	$	44,833	$	241,648	$	8,542	$	14,233	$	2,512	$	—	$	311,768

Floridian Financial Group, Inc. and Subsidiaries


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

The following presents loans individually evaluated for impairment by class of loans as of March 31, 2012 and December 31, 2011:

As of March 31, 2012


(Dollars in Thousands)	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Income Recognized
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	315	$	—	$	—
Commercial real estate
Construction and land		8,302		2,786		—		3,007		43		—
Non-owner occupied		9,684		7,352		—		7,413		127		—
Owner occupied		3,308		2,075		—		2,029		29		—
Residential		—		—		—		—		—		—
Home equity		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Total		21,294		12,213		—		12,764		199		—

With an allowance recorded:
Commercial		—		—		—		—		—		—
Commercial real estate
Construction and land		—		—		—		—		—		—
Non-owner occupied		1,500		1,500		10		1,500		23		—
Owner occupied		6,868		6,868		225		6,856		64		—
Residential		—		—		—		—		—		—
Home equity		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Total		8,368		8,368		235		8,356		87		—

Total	$	29,662	$	20,581	$	235	$	21,120	$	286		—

Floridian Financial Group, Inc. and Subsidiaries


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

As of December 31, 2011


(Dollars in Thousands)	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Income Recognized
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	239	$	—	$	—
Commercial real estate
Construction and land		9,825		4,776		—		9,640		40		—
Non-owner occupied		10,026		8,391		—		9,956		199		—
Owner occupied		3,295		2,079		—		3,265		61		—
Residential		—		—		—		—		—		—
Home equity		59		23		—		23		—		—
Consumer		—		—		—		—		—		—
Total		23,205		15,269		—		23,123		300		—

With an allowance recorded:
Commercial		—		—		—		—		—		—
Commercial real estate
Construction and land		—		—		—		—		—		—
Non-owner occupied		2,177		1,500		10		2,177		158		—
Owner occupied		6,876		6,876		245		6,860		49		—
Residential		—		—		—		—		—		—
Home equity		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Total		9,053		8,376		255		9,037		207		—

Total	$	32,258	$	23,645	$	255	$	32,160	$	507	$	—

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

Floridian Financial Group, Inc. and Subsidiaries


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

Impaired loans include TDRs of $16.1 million and $17.5 million at March 31, 2012 and December 31, 2011, respectively. As of March 31, 2012 there were four nonperforming TDRs with an outstanding balance of $6.7 million compared to December 31, 2011, when two loans totaling $971 thousand were classified as nonperforming TDRs.

During the three months ended March 31, 2012, the Banks classified one CRE loan with an outstanding balance both before and after the modification, of $510 thousand as a TDR. The Bank reduced the interest rate on the loan and modified the payment to interest only. The Banks had no commitments to lend additional funds for loans classified as TDRs at March 31, 2012. No TDR’s defaulted within 12 months of being restructured.

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 March 31, 2012 and December 31, 2011:


	March 31, 2012				December 31, 2011

(Dollars in Thousands)	Nonaccrual		Loans Past Due Over 90 Days Still Accruing		Nonaccrual		Loans Past Due Over 90 Days Still Accruing

Commercial	$	—	$	—	$	—	$	—
Commercial real estate
Construction and land		2,786		—		4,777		—
Non-owner occupied		7,351		—		2,245		471
Owner occupied		845		—		842		—
Residential		—		—		—		—
Home equity		63		—		71		—
Consumer		—		—		—		—
Total	$	11,045	$	—	$	7,935	$	471

Nonaccruing loans totaled $11.0 million and $7.9 million at March 31, 2012 and December 31, 2011, 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 nonaccruing loans had been recognized on a fully-accruing basis, interest income recorded would have been $184 thousand and $453 thousand higher for the quarter ended March 31, 2012 and year ended December 31, 2011, respectively. As of March 31, 2012, there were no loans past due 90 days or more and still accruing interest income. The one loan past due 90 days or more as of December 31, 2011 represented a matured loan that was subsequently renewed.

Floridian Financial Group, Inc. and Subsidiaries


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

The following presents the aging of the recorded investment in past due loans as of March 31, 2012 and December 31, 2011 by class of loans:


	March 31, 2012

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

Commercial	$	—	$	28	$	—	$	28	$	44,849
Commercial real estate
Construction and land		—		—		1,873		1,873		37,372
Non-owner occupied		512		—		1,257		1,769		95,141
Owner occupied		143		—		845		988		95,385
Residential		—		—		—		—		7,934
Home equity		—		15		48		63		13,846
Consumer		3		—		—		3		1,752
Total	$	658	$	43	$	4,023	$	4,724	$	296,279


	December 31, 2011

(Dollars in Thousands)	30 – 59 Days Past Due		60 – 89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Loans Not Past Due
Commercial	$	1,500	$	—	$	—	$	1,500	$	43,333
Commercial real estate
Construction and land		—		—		3,283		3,283		39,156
Non-owner occupied		399		—		2,716		3,115		96,185
Owner occupied		—		—		842		842		99,067
Residential		—		501		—		501		8,041
Home equity		—		—		71		71		14,162
Consumer		4		3		—		7		2,505
Total	$	1,903	$	504	$	6,912	$	9,319	$	302,449

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

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

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

Floridian Financial Group, Inc. and Subsidiaries


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

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

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

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

As of March 31, 2012 and December 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:


	March 31, 2012

(Dollars in Thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Not Rated
Commercial	$	44,674	$	—	$	203	$	—	$	—	$	—
Commercial real estate
Construction and land		36,459		—		2,786		—		—		—
Non-owner occupied		89,558		—		7,352		—		—		—
Owner occupied		83,159		5,090		8,124		—		—		—
Residential		7,934		—		—		—		—		—
Home equity		13,846		—		63		—		—		—
Consumer		1,755		—		—		—		—		—
Total	$	277,385	$	5,090	$	18,528	$	—	$	—	$	—


	December 31, 2011

(Dollars in Thousands)	Pass		Special Mention		Substandard		Doubtful		Loss		Not Rated
Commercial	$	44,628	$	—	$	205	$	—	$	—	$	—
Commercial real estate
Construction and land		37,663		—		4,776		—
Non-owner occupied		90,909		—		8,391		—		—		—
Owner occupied		86,663		5,115		8,131		—		—		—
Residential		8,542		—		—		—		—		—
Home equity		14,162		—		71		—		—		—
Consumer		2,512		—		—		—		—		—
Total	$	285,079	$	5,115	$	21,574	$	—	$	—	$	—

Floridian Financial Group, Inc. and Subsidiaries


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

The following presents the recorded investment in residential and consumer loans based on payment activity as of March 31, 2012 and December 31, 2011:


	March 31, 2012

(Dollars in Thousands)	Residential		Home Equity		Consumer
Performing	$	7,934	$	13,846	$	1,755
Nonperforming		—		63		—
Total	$	7,934	$	13,909	$	1,755


	December 31, 2011

(Dollars in Thousands)	Residential		Home Equity		Consumer
Performing	$	8,542	$	14,162	$	2,512
Nonperforming		—		71		—
Total	$	8,542	$	14,233	$	2,512


Note 5.	Commitments and Contingencies

Financial instruments with off-balance-sheet risk: The financial statements do not reflect various commitments and contingent liabilities that arise in the normal course of business to meet the financing needs of customers. These include commitments to extend credit and honor stand-by letters of credit. These instruments involve, to varying degrees, elements of credit, interest rate and liquidity risks in excess of amounts reflected in the balance sheets. The extent of the Banks’ involvement in these commitments or contingent liabilities is expressed by the contractual, or notional, amounts of the instruments. Commitments to extend credit, which amount to $52.2 million and $57.2 million at March 31, 2012 and December 31, 2011, 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 $3.2 million were outstanding as of March 31, 2012 and December 31, 2011.

Lines of credit: At March 31, 2012 and December 31, 2011, the Banks had federal funds lines of credit available from their correspondent banks of $30.3 million. At these dates, there were no outstanding draws under these lines. No draws were made on the lines during the three months ended March 31, 2012.

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 adverse 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 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). As of March 31, 2012 and December 31, 2011, the Banks meet all capital adequacy requirements to be classified as “well capitalized” under prompt corrective action provisions and meet all capital adequacy requirements to which they are subject.


	Actual					For Capital Adequacy Purposes					To be Considered Well Capitalized by Prompt Corrective Action
	Amount		Ratio			Amount		Ratio			Amount		Ratio ⁽¹⁾
As of March 31, 2012
Total capital (to risk-weighted assets)
Consolidated	$	42,681		12.5	%	$	NA		NA			NA		NA
Floridian Bank	$	15,084		12.9	%	$	9,392		8	%	$	11,740		10	%
Orange Bank of Florida	$	24,666		11.1	%	$	17,807		8	%	$	22,260		10	%

Tier 1 capital (to risk-weighted assets)
Consolidated	$	38,365		11.2	%	$	NA		NA			NA		NA
Floridian Bank	$	13,612		11.6	%	$	4,696		4	%		7,044		6	%
Orange Bank of Florida	$	21,852		9.8	%	$	8,904		4	%		13,356		6	%

Tier 1 capital (to average assets)
Consolidated	$	38,365		8.8	%	$	NA		NA			NA		NA
Floridian Bank	$	13,612		9.5	%	$	5,748		4	%	$	7,185		5	%
Orange Bank of Florida	$	21,852		7.5	%	$	11,646		4	%	$	14,557		5	%

(1) During the pendency of the bank merger transaction, Orange Bank notified the FDIC and OFR that it would not meet the board agreed capital ratios by the specified time. At March 31, 2012, the Bank had a Tier 1 leverage ratio of 7.5% and a total risk based capital ratio of 11.1% while at December 31, 2011, the Bank had a Tier 1 leverage ratio of 6.9% and a total risk based capital ratio of 10.7%.

Floridian Financial Group, Inc. and Subsidiaries


Note 6.	Regulatory Capital Matters (continued)


	Actual					For Capital Adequacy Purposes					To be Considered Well Capitalized by Prompt Corrective Action
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2011
Total capital (to risk-weighted assets)
Consolidated	$	42,545		12.1	%	$	NA		NA			NA		NA
Floridian Bank	$	14,991		12.5	%	$	9,560		8	%	$	11,950		10	%
Orange Bank of Florida	$	24,625		10.7	%	$	18,355		8	%	$	22,943		10	%

Tier 1 capital (to risk-weighted assets)
Consolidated	$	38,126		10.9	%	$	NA		NA			NA		NA
Floridian Bank	$	13,495		11.3	%	$	4,780		4	%		7,170		6	%
Orange Bank of Florida	$	21,732		9.5	%	$	9,177		4	%		13,766		6	%

Tier 1 capital (to average assets)
Consolidated	$	38,126		8.1	%	$	NA		NA			NA		NA
Floridian Bank	$	13,495		9.0	%	$	6,032		4	%	$	7,541		5	%
Orange Bank of Florida	$	21,732		6.9	%	$	12,607		4	%	$	16,007		5	%

Pursuant to certain board resolutions (the “Bank Resolutions”), the Banks are required to maintain a minimum Tier 1 capital to average assets ratio of 8% and total capital to risk-weighted assets of 12%. As of March 31, 2012, Floridian Bank met the minimum capital requirement as required by the Bank Resolutions. Orange Bank did not meet the minimum capital requirement and is reviewing alternatives to improve its capital position.

The payment of dividends by a Florida state bank is subject to various restrictions set forth in the Florida Financial Institutions Code. Such restrictions generally limit dividends to an amount not exceeding net income for the current and two preceding years, less any dividends paid during that period. Accordingly, management does not expect the payment of dividends at any time in the near future. Since the Company is dependent upon the Bank’s ability to pay dividends, the Company is, in effect, similarly restricted as to its ability to pay dividends. Further, the Boards of Directors of the Banks are restricted from paying the Company any dividends. See Note 10.

Floridian Financial Group, Inc. and Subsidiaries


Note 7.	Fair Values of Financial Instruments

Fair value is defined 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.

Estimating fair value 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.

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. Other investments include FHLB stock which is estimated to approximate its historical cost because the stock’s value is determined by the ultimate recoverability of the par value.

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 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 lower of cost or the net fair value less disposal costs. 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 amount of $12.3 million and a long-term note payable of $850 thousand approximate their fair values.

Off-balance-sheet instruments: Loan commitments and standby letters of credit are negotiated at current market rates and are relatively short-term in nature. Therefore, their estimated fair value approximates the fees charged and is nominal at March 31, 2012 and December 31, 2011.

Floridian Financial Group, Inc. and Subsidiaries


Note 7.	Fair Values of Financial Instruments (continued)

Financial Instruments Recorded at Fair Value on a Recurring Basis

The following table sets forth the Company’s assets and liabilities which are carried at fair value on a recurring basis as of March 31, 2012 and December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:


	March 31, 2012
(Dollars in Thousands)	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	$	—	$	7,117	$	—	$	7,117
States & political subdivisions		—		1,813		—		1,813
U.S. Agency REMIC		—		40,037		—		40,037
Residential mortgage backed		—		21,921		—		21,921
Total securities available for sale	$	—	$	70,888	$	—	$	70,888

	December 31, 2011
	Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Total at Fair Value
Securities available for sale
Debt securities:
U.S. Government and federal agencies	$	—	$	13,690	$	—	$	13,690
States & political subdivisions		—		1,795		—		1,795
U.S. Agency REMIC		—		39,038		—		39,038
Residential mortgage backed		—		18,613		—		18,613
Total securities available for sale	$	—	$	73,136	$	—	$	73,136

Floridian Financial Group, Inc. and Subsidiaries


Note 7.	Fair Values of Financial Instruments (continued)

Financial Instruments Recorded at Fair Value on a Nonrecurring Basis

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

The fair values of assets measured at fair value on a nonrecurring basis are as follows at March 31, 2012 and December 31, 2011:


	March 31, 2012
(Dollars in Thousands)	Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Impaired loans	$	—	$	—	$	3,423
Other real estate owned	$	—	$	—	$	3,892

	December 31, 2011
(Dollars in Thousands)	Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Impaired loans	$	—	$	—	$	5,913
Other real estate owned	$	—	$	—	$	5,129

Provisions for loan losses of $234 thousand and $573 thousand were recorded on impaired loans during the three months ended March 31, 2012 and 2011, respectively.

Write-downs of $112 thousand and $594 thousand were recorded on other real estate owned during the three months ended March 31, 2012 and 2011, respectively.

Floridian Financial Group, Inc. and Subsidiaries


Note 7.	Fair Values of Financial Instruments (continued)

Following is a summary of the carrying amounts and approximate fair values of the Company’s financial instruments at March 31, 2012 and December 31, 2011. The fair value estimates presented are based on pertinent information available to management as of March 31, 2012 and December 31, 2011. 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.


	March 31, 2012 Fair Value Measurements Using:
(Dollars in Thousands)	Carrying Amount		Quoted Price in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and due from banks	$	5,322	$	5,322	$	—	$	—
Federal funds sold and
interest bearing deposits		28,314		28,314		—		—
Securities held to maturity		1,000		—		1,002		—
Available for sale securities		70,888		—		70,888		—
Other investments		100		—		—		100
Loans, net		293,679		—		292,885		3,423
Accrued interest receivable		1,117		—		1,117		—

Financial liabilities:
Deposits	$	380,159	$	—	$	381,172	$	—
Other borrowings		13,105		13,105		—		—
Accrued interest payable		78		—		78		—


	December 31, 2011
(Dollars in Thousands)	Carrying Amount		Quoted Price in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and due from banks	$	8,930	$	8,930	$	—	$	—
Federal funds sold and
interest bearing deposits		23,917		23,917		—		—
Securities held to maturity		1,002		—		1,013		—
Available for sale securities		73,136		—		73,136		—
Other investments		100		—		—		100
Loans, net		305,088		—		301,549		5,913
Accrued interest receivable		1,180		—		1,180		—

Financial liabilities:
Deposits	$	393,726	$	—	$	394,940	$	—
Other borrowings		13,955		13,955		—		—
Accrued interest payable		87		—		87		—

Floridian Financial Group, Inc. and Subsidiaries


Note 7.	Fair Values of Financial Instruments (continued)

Assets measured at fair value on a recurring basis and for which the Company has utilized Level 3 inputs to determine fair value were immaterial at March 31, 2012.

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company utilized Level 3 inputs to determine fair value:


	March 31, 2012 Quantitative Information about Level 3 Fair Value Measurements
(Dollars in Thousands)	Fair Value Estimate		Valuation Techniques		Unobservable Input		Range (Weighted Average)

						Appraisal		0% to -50	%
						adjustments (2)		(-10.2%	)
				Appraisal of		Estimated selling		0% to -11	%
Impaired loans	$	3,423		collateral (1)		costs (2)		(-4.0%	)

						Appraisal		0% to -42	%
						adjustments (2)		(-13.9%	)
				Appraisal of		Estimated selling		-10% to -11	%
Other real estate owned and repossessed assets	$	3,892		collateral (1), (3)		costs (2)		(-10.1%	)

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level 3 inputs which are not identifiable.
(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated selling costs. The range and weighted average of estimated selling costs and other appraisal adjustments are presented as a percent of the appraisal.
(3) Includes qualitative adjustments by management and estimated selling costs.


Note 8.	New Accounting Pronouncements

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The provisions of ASU No. 2011-04 result in a consistent definition of fair value and common requirements for the measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards (“IFRS”). 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.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income: Presentation of Comprehensive Income”. The ASU amends existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity. The amendment requires that comprehensive income be presented in either a single continuous statement or in two separate consecutive statements. The guidance is effective for interim and annual period beginning on or after December 15, 2011. The Company adopted the single continuous statement method for its disclosure method.

In December 2011, the FASB issued ASU No. 2011-12, “Comprehensive Income (Topic220): Deferral of the Effective Date for the Amendments to the Presentation of Reclassifications of the Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05”. This guidance delays the effective date of the disclosures for only those changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments to allow the FASB time to reconsider whether to require presentation of such adjustments on the face of the financial statements to show the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. ASU 2011-12 allows entities to continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12. ASU No. 2011-12 is effective for annual and interim periods beginning on or after December 15, 2011 and is not expected to have a significant impact on our 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 21, 2011, the boards of directors of Floridian Bank and Orange Bank each agreed to approve certain board resolutions (the “Bank Resolutions”) in consultation with their banking regulators. From a regulatory perspective, these are informal, nonpublic agreements; however, in the interest of full disclosure, we are summarizing the main obligations of the Bank Resolutions.

For Floridian Bank, these obligations include, among other things, (i) annual submissions of a comprehensive budget and earnings forecast; (ii) maintaining a Tier 1 leverage capital ratio and total risk-based capital ratio of at least 8% and 12% respectively; (iii) submitting of a capital contingency plan; (iv) developing plans to reduce and improve certain lines of credit with adverse classification; (v) prohibiting extensions of credit to certain high-risk borrowers; (vi) implementation of a plan to reduce exposure to commercial real estate lending; (vii) maintaining an adequate allowance and methodology for loan and lease losses; (viii) submitting certain internal bank policies and to review and revise certain internal policies and procedures; and (ix) providing quarterly reports to the Federal Deposit Insurance Company (“FDIC”) and the Florida Office of Financial Regulation (“OFR”) regarding the steps taken to address the foregoing. Additionally, Floridian Bank must receive approval from the FDIC and OFR prior to declaring or paying dividends.

Floridian Financial Group, Inc. and Subsidiaries


Note 10.	Regulatory Agreement (continued)

For Orange Bank, these obligations include, among other things, (i) establishing a committee to ensure compliance with the Bank Resolutions; (ii) seeking approval from the FDIC and OFR prior to appointing new directors and executive officers; (iii) enhancing the board of director’s participation in the affairs of Orange Bank; (iv) developing plans to reduce and improve certain loan relationships with adverse classification; (v) charging off remaining assets classified as “Loss”; (vi) prohibiting extensions of credit to certain high-risk borrowers; (vii) submitting of a new business plan and annual budgets and earnings forecasts; (viii) achieving and maintaining a Tier 1 leverage capital ratio and total risk-based capital ratio of at least 8% and 12%, respectively; (ix) submission of a plan to systematically monitor Orange Bank’s concentration risk; and (x) providing quarterly reports to the FDIC and OFR regarding the steps taken to address the foregoing. Orange Bank must also receive approval from the FDIC and OFR prior to declaring or paying dividends.

The Bank Resolutions adopted by each Bank and the restrictions imposed thereby on each Bank will remain in effect unless modified or terminated by the Bank’s regulators. Since entering into the Bank Resolutions, we have been actively pursuing the corrective actions. We intend to continue to take the actions necessary to comply with the requirements of the Bank Resolutions and implement the submitted plans successfully, although we may be unable to do so. As of March 31, 2012, Floridian Bank’s Tier 1 leverage capital ratio and total risk-based capital ratio were approximately 9.5% and 12.9%, respectively; meeting all regulatory requirements. Orange Bank was not in compliance with its heightened capital requirements.

During the pendency of the subsidiary bank merger transaction, Orange Bank notified the FDIC and OFR that it would not meet the board agreed capital ratios by the specified time. As of March 31, 2012, Orange Bank’s Tier 1 leverage capital ratio and total risk-based capital ratio were approximately 7.5% and 11.1%, respectively while at December 31, 2011, Tier 1 leverage ratio was approximately 6.9% and total risk based capital ratio was approximately 10.7%. The Company is reviewing its alternatives for increasing the capital of Orange Bank to meet applicable regulatory requirements.

On October 20, 2011, the Company’s board of directors agreed to adopt certain board resolutions (the “FRB Resolutions”) in consultation with the Federal Reserve Bank of Atlanta (the “FRB”). The FRB Resolutions require, among other things, that the Company seek approval from the FRB prior to incurring any debt, declaring or paying any dividends, reducing its capital position (e.g., through the purchase of treasury shares), or making distributions on subordinated debentures or trust preferred securities. The FRB Resolutions approved by the Company and the restrictions imposed thereby on the Company will remain in effect until terminated by the FRB. We intend to take the actions necessary to comply with the requirements of the FRB Resolutions.


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. From 2006 to 2008, we experienced periods of rapid growth. 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. In 2009, we began a process of slowing our growth and preserving capital.

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.

The Banks offer commercial and retail banking services with an emphasis on commercial and commercial real estate lending, particularly to the medical services industry. As of March 31, 2012, we had total assets of $435.0 million, deposits of $380.2 million, total gross loans of $301.0 million and total shareholders’ equity of $40.1 million.

At March 31, 2012, the Company’s capital ratios surpassed all regulatory “minimum 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 regulatory “minimum well capitalized measures”.


	As of March 31, 2012
Total Risk Based Capital		12.5	%
Tier 1 Capital		11.2	%
Leverage Capital		8.8	%

Pursuant to the regulatory resolutions as described in Note 10, the Banks are required to maintain a minimum Tier 1 capital to average assets ratio of 8.0% and total capital to risk-weighted assets of 12.0%.

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

Regulatory Matters

As described in Note 10 to our consolidated financial statements, the Company and each of the Banks have adopted certain board resolutions in consultation with their regulators. Pursuant to these resolutions, we have agreed to preserve capital by agreeing to place restrictions on our ability to declare and pay dividends, issue debt, repurchase shares of stock, or make other distributions. The Banks, among other things, have agreed to maintain heightened capital ratios. Orange Bank is currently not in compliance with the heightened capital ratios. Our original plan to raise Orange Bank’s capital ratios was to merge the Banks; however, we have withdrawn our application to merge the Banks. We are now exploring other alternatives to meet the heightened capital ratios. During the pendency of the subsidiary bank merger, Orange Bank had notified the FDIC and OFR that it would not meet the board agreed capital ratios by the specified time. At December 31, 2011, Orange Bank had a Tier 1 leverage ratio of 6.9% and a total risk based capital ratio of 10.7%. At March 31, 2012, Orange Bank had a Tier 1 leverage ratio of 7.5% and a total risk based capital ratio of 11.1%. We are working with our regulators to meet the heightened ratios. See Note 10 for a further discussion.

Results of Operations

CONDENSED SUMMARY OF EARNINGS


	For The Three Months Ended March 31,
(Dollars in Thousands, Except Per Share Data)	2012			2011
Interest Income	$	4,233		$	4,272
Interest Expense		736			1,066
Net Interest Income		3,497			3,206
Provision For Loan Losses		1,130			1,167
Noninterest Income		501			316
Noninterest Expense		2,725			3,540
Income (Loss) Before Income Taxes		143			(1,185	)
Income Tax Benefit		—			—
Net Income (loss)	$	143		$	(1,185	)
Basic net income (loss) per share	$	0.02		$	(0.19	)
Diluted net income (loss) per share	$	0.02		$	(0.19	)

Selected Operating Ratios
Return on Assets		0.13	%		(2.88	)%
Return on Equity		1.42	%		(33.14	)%
Dividend Payout Ratio		N/A			N/A
Equity to Assets Ratio		9.2	%		9.0	%

The net profit for the three months ended March 31, 2012 was $143 thousand compared to a $1.2 million net loss for the same period in 2011. The improvement was principally due a 44.9% decrease in salary expense from $1.7 million for the three months ended March 31, 2011, to $954 thousand for the three months ended March 31, 2012. The reduction in salary expense was a combination of the consolidation of senior executive positions in 2011 and a $369 thousand adjustment to deferred compensation related to the resignation of Charlie Brinkley in September 2011. As of the resignation date, Mr. Brinkley was 30% vested in the accrued balance of his salary continuation agreement.

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, interest bearing checking accounts (“NOW accounts”), savings deposits, and money market accounts. Funds attracted by these interest bearing liabilities, as well as noninterest bearing deposits, 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.

Our net interest income is impacted by the market rates of interest as influenced by the Federal Reserve’s monetary policy. We have seen a narrowing of margins over the last year and with the Federal Reserve’s announcement to keep short-term interest rates at near zero through 2013 we expect this trend to continue. We believe our service commitment to our customers, however, will enable us to continue to attract deposits and make loans at rates that will not significantly deteriorate our margins.

The following table reflects the components of net interest income for the three month periods ended March 31, 2012 and 2011. 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


	Three Months Ended March 31,
	2012							2011
(Dollars in Thousands)	Average Balance		Interest		Rate			Average Balance		Interest		Rate
ASSETS
Loans, Net⁽¹⁾⁽²⁾	$	305,600	$	3,916		5.15	%	$	314,335	$	3,887		5.02	%
Investment Securities		72,881		300		1.65			53,901		360		2.67
Federal Funds Sold		21,183		12		0.25			34,661		21		0.25
Deposits at interest with banks		2,786		5		0.72			2,914		4		0.56
Total Earning Assets		402,450		4,233		4.23	%		405,811		4,272		4.27	%
Other Assets		36,781							39,349
Total Assets	$	439,231						$	445,160
LIABILITIES
Savings, NOW and Money Market	$	153,512		166		0.43	%	$	167,558	$	360		0.87	%
Time Deposits		143,690		540		1.51			136,397		641		1.91
Total Interest Bearing Deposits		297,202		706		0.96			303,955		1,001		1.34
Other Borrowings		13,119		30		0.92			8,290		65		3.18
Total Interest Bearing Liabilities		310,321		736		0.95	%		312,245		1,066		1.39	%
Noninterest Bearing Deposits		86,136							90,159
Other Liabilities		2,321							2,612
Total Liabilities		398,778							405,016

Total Shareholders’ Equity		40,453							40,144

Total Liabilities and Equity	$	439,231						$	445,160

Interest Rate Spread						3.28	%						2.88	%
Net Interest Income			$	3,497						$	3,206
Net Interest Margin						3.49	%						3.20	%


(1)	Average balances include nonaccrual loans, and are net of unearned loan fees of $174 and $165 at March 31, 2012 and 2011, respectively.

(2)	Interest income includes fees on loans of $14 and $13 for the three months ended March 31, 2012 and 2011, respectively.

Net interest income for the three months ended March 31, 2012 increased $291 thousand, or 9.1%, from $3.2 million in 2011 to $3.5 million in 2012. The increase was primarily due to a 29.5% decrease in interest paid on interest bearing deposits due to an approximate 40 basis point reduction in rates and a 53.4% reduction of interest paid on other borrowings. The average interest rate on other borrowings decreased from 3.18% to 0.92% at March 31, 2011 and 2012, respectively. Average noninterest bearing deposits decreased by 4.5% to $86.1 million at March 31, 2012 compared to $90.2 million at March 31, 2011.

The following table sets forth certain information regarding changes in our interest income and interest expense for the quarter ended March 31, 2012 compared to the quarter ended March 31, 2011. 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


	March 31, 2012 and 2011
	Total Change			Due To Average
(Dollars in Thousands)	Total Change			Volume			Rate			Days
Interest Earning Assets
Loans, Net	$	30		$	(109	)	$	106		$	33
Investment Securities		(60	)		127			(187	)		—
Federal Funds Sold		(9	)		(8	)		(1	)		—
Other		1			—			1			—
Total	$	(38	)	$	10		$	(81	)		33

Interest Bearing Liabilities
Savings, NOW, Money Market Accounts	$	(193	)	$	(30	)	$	(166	)		3
Time Deposits		(101	)		35			(141	)		5
Short Term Borrowings		(35	)		38			(74	)		1
Total	$	(329	)	$	43		$	(381	)		9

Changes In Net Interest Income	$	291		$	(33	)	$	300			24

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 $1.1 million for the three months ended March 31, 2012 compared to $1.2 million for the same period in 2011. Past due loans decreased by 49.3% from $9.3 million at December 31, 2011 to $4.7 million at March 31, 2012. Our focus on restructuring our credit function and actively monitoring the loan portfolio resulted in loans 30 to 59 days past due decreasing to $658 thousand from $1.9 million and past due 60 days and over decreasing to $4.1 million at March 31, 2012 compared to $7.4 million at December 31, 2011. Past due loans, as a percentage of total loans, decreased to 1.6% at March 31, 2012, compared to 2.4% at December 31, 2011. Loans categorized as substandard decreased 13.9% to $18.5 million at March 31, 2012. As of March 31, 2012, 92.2% of the portfolio was categorized as pass compared to 91.4% at December 31, 2011.

Noninterest Income

Following is a schedule of noninterest income:


	Three months ended March 31,
(Dollars in Thousands)	2012		2011

Loan fee income	$	11	$	13
Service charges on deposit accounts		157		158
Cash surrender value – life insurance		85		85
Other		94		60
Gain on sale of securities and assets		154		—
Totals	$	501	$	316

Total noninterest income of $501 thousand for the three months ended March 31, 2012, was an increase of $185 thousand or 58.5% from the same period in 2011. The increase was due to a $137 thousand gain on the sale of securities compared to $0 in 2011.

Noninterest Expense

Following is a schedule of noninterest expense:


	Three months ended March 31,
(Dollars in Thousands)	2012		2011

Salaries and employee benefits	$	954	$	1,674
Occupancy and equipment expenses		647		725
FDIC insurance		185		224
Data processing, software and communications		388		375
Other real estate expense		184		40
Professional fees		225		242
Credit and collection expense		15		91
Core deposit intangible amortization		48		48
Other operating expenses		79		121
Totals	$	2,725	$	3,540

Total noninterest expense of $2.7 million for the three months ended March 31, 2012 decreased $815 thousand or 23.0% from the same period in 2011. The decrease was due to the elimination and combining of senior executive positions in 2011 and the reversal of deferred compensation expense, resulting in a 43.0% or $720 thousand reduction in salaries and benefits and the closing of two branches at the end of March 2011 resulting in a $78 thousand, or 10.8%, reduction in occupancy and equipment expense. FDIC insurance decreased $39 thousand, or 17.4%, due to a change in the way the premiums are calculated and expensed to the Banks. Other real estate expense increased by $144 thousand primarily due to the write-down of properties held for sale.

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 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 eliminate the carrying value of the deferred asset account. The Company, however, retains the tax benefit should it be needed in future periods. We did not recognize an income tax benefit or expense for the quarter ended March 31, 2012.

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. As indicated in our Gap Analysis table, our one-year cumulative gap at March 31, 2012, was a negative 13.92% compared to a positive 1.15% at December 31, 2011. The change in our one-year cumulative gap is primarily due to long-term time deposits maturing over the next 12 months.

GAP ANALYSIS


(Dollars in Thousands)	Within 3 Months			4 To 6 Months			7 To 12 Months			Total 1 Year

Interest Earning Assets (IEA)

Loans	$	155,238		$	4,996		$	10,988		$	171,222
Investment Securities		2,827			1,776			3,102			7,705
Federal funds sold		8,150			—			—			8,150
Other investments		19,064			—			—			19,064
Total	$	185,279		$	6,772		$	14,090		$	206,141

Interest Bearing Liabilities (IBL)

Savings, NOW, Money Market	$	154,867		$	—		$	—		$	154,867
Time deposits		26,216			45,035			27,489			98,740
Other borrowings		12,255			—			850			13,105
Total	$	193,338		$	45,035		$	28,339		$	266,712

Period Gap	$	(8,059	)	$	(38,263	)	$	(14,249	)	$	(60,571	)
Cumulative Gap	$	(8,059	)	$	(46,322	)	$	(60,571	)

Cumulative Gap / Total Assets		(1.85	)%		(10.65	)%		(13.92	)%
IEA / IBL (Cumulative)		96	%		81	%		77	%

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:


(Dollars in Thousands)	March 31, 2012		December 31, 2011

Commercial	$	44,877	$	44,833
Commercial real estate		232,528		241,648
Residential real estate		7,934		8,542
Consumer loans		15,664		16,745
Total loans		301,003		311,768
Less: Allowance for loan losses		7,221		6,566
Less: Unearned fees		103		114
Net loans	$	293,679	$	305,088

Total loans decreased by $10.8 million during the first three months of 2012 due to the payoff of several large loans. During the quarter, $93 thousand was transferred to other real estate owned, write-downs totaled $483 thousand, and approximately $20.5 million in net pay downs and payoffs. These decreases were offset by new loans of $10.3 million. There were approximately $11.0 million in nonperforming loans at March 31, 2012.

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 2012 and 2011. Although the Company has seen an increase in loan demand in 2012, 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 March 31, 2012, securities totaling $70.9 million and $1.0 million were classified as available for sale and held to maturity, respectively. During the three months ended March 31, 2012, securities available for sale increased by $2.2 million as we invested cash on hand.

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 decreased $13.5 million to $380.2 million at March 31, 2012, compared to $393.7 million at December 31, 2011, due to a decision to reduce brokered deposits and pay lower interest rates on certificates of deposit. Core deposits, which exclude time deposit, increased by $12.2 million to $246.1 million at March 31, 2012 from $233.9 million at December 31, 2011. Time deposits decreased to $134.1 million from $159.9 million. The decrease in time deposits is attributable to a $10.8 million reduction in brokered deposits with the remaining decrease attributable to customers moving time deposits to Banks’ less restrictive core deposit accounts due to minimal differences in interest rates.

Other borrowings, made up of short- and long-term borrowings, decreased by $850 thousand to $13.1 million at March 31, 2012 compared to a balance of $14.0 million at December 31, 2011 due to a scheduled principal reduction on the Clermont branch loan. As of March 31, 2012, other borrowings were approximately 32.0% 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 comparable to our competitors. Deposits can be very price sensitive; therefore, we believe that fluctuating deposit offering rates to the top of the market would generate a larger inflow of funds. In addition to local market deposits, the Banks have access to national brokered certificates of deposit markets as well as deposit subscription services. The Banks use these alternative sources of deposits to supplement deposits particularly when the rates are lower than the local market. These sources of deposit are limited by our policies to 25% of assets. Further, access to these brokered deposits is limited by regulation to banks that meet or exceed “well capitalized” definitions. In the event that the Company would fall below “well capitalized” levels, regulators will not permit any additional brokered deposits and would impose deposit rate restrictions not to exceed a published national rates. Overall deposit levels are monitored on a constant basis as are liquidity policy levels, which must be maintained at a minimum of 14% of total deposits. Sources of these liquidity levels include cash and due from banks, short-term investments such as federal funds sold, and our investment portfolio, which can also be used as collateral for short-term borrowings. Alternative sources of funds include unsecured federal funds lines of credit through correspondent banks. The Banks have established contingency plans in the event of extraordinary fluctuations in cash resources.

Operating Activities

Cash flows from operating activities primarily include net income (loss), adjusted for items that did not impact cash. Net cash provided by operating activities increased by $1.1 million to $1.6 million for the three months ended March 31, 2012 compared to $471 thousand for the three months ended March 31, 2011. The improvement was due to the Company achieving a $143 thousand profit for the three months ended March 31, 2012 compared to a loss of $1.2 million for the three months ended March 31, 2011.

Investing Activities

Cash used in investing activities reflects the impact of loans and investments acquired for our interest-earning asset portfolios, as well as cash flows from asset sales and the impact of acquisitions. For the three months ended March 31, 2012, we had net cash flows provided by investing activities of $13.6 million compared to $6.2 million for the same period in 2011. The change in cash flows from investing activities was due to a decrease in net loans of $10.2 million and a net decrease of $2.2 million in securities. The Company also had $1.2 million in proceeds from the sale of other real estate owned.

Financing Activities

Cash flows from financing activities include transactions and events whereby cash is obtained from depositors, creditors or investors. For the three months ended March 31, 2012, we had net cash flows provided by financing activities of $14.4 million, compared to $9.7 million for the three months ended March 31, 2011. The change in cash flows from financing activities was primarily due to a $13.6 million decrease in net deposit growth for the three months ended March 31, 2012 compared to a $10.9 million decrease in net deposit growth for the three months ended March 31, 2011.

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 provide stability to current operations and to promote public confidence. As of March 31, 2012, 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; however, the poor loan portfolio performance and the related impact on earnings have deteriorated our capital position. Our intent is to strengthen our capital position, and both management and the Board of Directors have had exploratory discussions to determine the availability and cost of additional capital. As of March 31, 2012, Orange Bank’s Tier 1 leverage and total capital to risk weighted assets ratio did not meet the ratios as required by the Bank Resolutions. Based on these discussions and the need to comply with the Bank Resolutions, the Company will likely need to pursue another capital offering within 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 continuing to pursue a number of strategic alternatives to improve the core earnings of the Banks and to reduce the level of classified assets such as consolidating the Banks’ charter and redefining our credit organization. While we have recently withdrawn our application to merge the Banks, we expect to submit a new application to merge the Banks when Orange Bank’s capital ratios exceed the heightened minimum ratios. Current market conditions for banking institutions, the overall uncertainty in financial markets and the Banks’ high level of nonperforming assets are impediments 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, as well as result in further supervisory actions from our regulators.

We offer a stock purchase plan to our employees and directors to purchase shares of our common stock at fair market value. In 2011, employees purchased 911 shares valued at $5.50 per share, which were issued in March 2012. In 2010, employees purchased 1,319 shares valued at $10.00 per share, which were issued in March 2011.

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

For a foreseeable period of time, our principal source of cash revenues will be dividends paid by the Banks to us with respect to their common stock. There are certain restrictions on the payment of these dividends imposed by federal banking laws, regulations and authorities. See the sections of our Annual Report on Form 10-K captioned “Item 1. Business-Regulatory Considerations – The Banks – Dividends”.

As described in Note 10, we have adopted certain board resolutions in consultation with our regulators. Pursuant to these resolutions, we have agreed to preserve capital by agreeing to place restrictions on our ability to declare and pay dividends, issue debt, repurchase shares of stock, or make other distributions. See Note 10 for further discussion.

Off-Balance Sheet Arrangements

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

At March 31, 2012, we had approximately $52.2 million in commitments to extend credit and $3.2 million in standby letters of credit. Commitments to extend credit are agreements to lend to a customer so long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. We use the same credit policies in establishing commitments and issuing letters of credit as we do for on-balance sheet instruments.

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

Critical Accounting Policies

Allowance for Loan Losses

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

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

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

Income Taxes

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

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


Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See Market Risk in Management’s Discussion and Analysis of Financial Condition and Results of Operations, above, which is incorporated herein by reference. Management has determined that no additional disclosures are necessary to assess changes in information about market risk that have occurred since December 31, 2011.


Item 4.	CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of March 31, 2012, the end of the period covered by this Form 10-Q, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer each concluded that as of March 31, 2012, 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 2011 Form 10-K, as updated in our subsequent quarterly reports. The risks described in our Annual Report on 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 Annual Report on Form 10-K, except for the following:

We have filed to deregister our common stock under the Exchange Act, which could negatively affect the liquidity and trading prices of our common stock and result in less disclosure about the Company.

Given the increasing cost and resource demands of being a public company, we have decided to deregister our common stock under the Exchange Act and “go dark”, as permitted under the Jumpstart Our Business Startups Act (JOBS Act) enacted in April 2012. By going dark, our obligations to file reports with the SEC (including periodic reports and proxy statements) will cease and we expect that there will be a substantial decrease in the liquidity in our common stock. Further, the market’s interpretation of our motivation for “going dark” could vary from cost savings, to negative changes in our prospects, to serving insider interests, all of which may affect the overall price and liquidity of our common stock and our ability to raise capital on terms acceptable to us or at all. Investors may find it more difficult to dispose of our common stock, and the ability of our shareholders to sell our securities in the secondary market may be materially limited.

Orange Bank did not comply with the heightened minimum capital requirements by the March 19, 2012 deadline as required by the Bank Resolutions and may result in further regulatory enforcement actions against us or require us to undertake efforts to increase Orange Bank’s regulatory capital levels.

The Bank Resolutions adopted by Orange Bank required Orange Bank to, among other things, increase its Tier 1 capital ratio to at least 8% and increase its total risk-based capital to at least 12% by March 19, 2012. The Bank was not in compliance with the heightened minimum capital requirements by the March 19, 2012 deadline. During the pendency of the subsidiary bank merger transaction, Orange Bank notified the FDIC and OFR that it would not meet the board agreed capital rations by the specified time. At December 31, 2011, the Bank had a Tier 1 leverage ratio of 6.9% and a total risk based capital ratio of 10.7%. At March 31, 2012, Orange Bank’s Tier 1 leverage capital was approximately 7.5% and its total risk-based capital ratio was approximately 11.1%. We are considering strategic alternatives intended to allow Orange Bank to achieve and maintain the prescribed minimum regulatory capital levels, including but not limited to potentially pursuing a capital raising initiative. However, Orange Bank’s failure to satisfy the capital requirements of the Bank Resolutions by the March 19, 2012 deadline could result in further enforcement actions being taken by our regulators, including but not limited to imposing further operating restrictions on us or Orange Bank, requiring us to raise additional capital. Any further enforcement actions taken by our regulators could have a materially adverse effect on our financial condition and results of operations.

We will pursue additional capital resources in the future and these capital resources may not be available on acceptable terms or at all.

The Bank Resolutions entered into by our subsidiary Banks, among other things, contain capital directives that impose heightened capital requirements on both of our subsidiary Banks. Failure to comply with the terms of the Bank Resolutions could result in significant enforcement actions against us of increasing severity. Under the terms of the Bank Resolutions, Floridian Bank is required to maintain a Tier 1 leverage capital ratio of at least 8% and a total risk-based capital ratio of at least 12%. Orange Bank is required to maintain a Tier 1 capital ratio and total risk based capital ratio of at least 8% and 12%, respectively, not later than March 19, 2012. As of March 31, 2012, Floridian Bank met the minimum levels required by the Bank Resolutions. Orange Bank is currently not in compliance with its Bank Resolution and is reviewing alternatives for increasing its capital position.

We will incur additional debt or equity financing in the future for future growth, to fund losses or additional provisions for loan losses in the future, or to maintain or increase capital levels in accordance with banking regulations and the Bank Resolutions. Such financing may not be available to us on acceptable terms or at all. If we are not able to maintain the capital levels of our subsidiary Banks above the levels required by the Bank Resolutions, we could become subject to enforcement actions by our banking regulators, which could have an adverse impact on our business, financial condition, results of operations, and cash flows, as well as the value of our common stock. Moreover, capital directives imposed by the Bank Resolutions on our subsidiary Banks further restrain asset growth by requiring that asset growth be funded by a greater amount of additional capital. We may be required to reduce assets or limit asset growth to manage our regulatory capital position. Restraining asset growth could reduce our profitability.


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 purchase program		Maximum Number of shares that may yet be purchased under our share purchase program

January 1, 2012 to January 31, 2012		—			—		—		—
February 1, 2012 to February 29, 2012		—			—		—		—
March 1, 2012 to March 31, 2012		911	⁽¹⁾	$	5.50		14,679		285,321
Total		911		$	5.50		14,679		285,321


(1)	The shares were purchased as part of the Bank’s employee stock purchase plan.


	Item 6.	Exhibits

(A) Exhibits


31.1	Certification of Thomas H. Dargan, 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: May 15, 2012

Exhibit Index


31.1	Certification of Thomas H. Dargan, Jr., 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

FLORIDIAN FINANCIAL GROUP INC - FORM 10-Q - May 15, 2012

Attached files

FLORIDIAN FINANCIAL GROUP INC Reports