UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2010

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 000-33351

(Exact Name of Registrant as Specified in Its Charter)

Florida		65-1147861
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

1301 SE Port St. Lucie Boulevard

Port St. Lucie, Florida 34952

(Address of Principal Executive Offices)

(772) 225-5930

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by checkmark 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 þ NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) YES o NO o *The registrant has not yet been phased into the interactive data requirements.

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

Large accelerated filer o Accelerated filer o

Non-accelerated filer p Smaller reporting company x

(Do not check if a smaller reporting company)

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

Common stock, par value $.01 per share		2,058,047 shares
(class)		Outstanding at October 31, 2010

Transitional Small Business Disclosure Format (check one): YES o NO þ

INDEX

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements		Page

Condensed Consolidated Balance Sheets -
September 30, 2010 (unaudited) and December 31, 2009		2

Condensed Consolidated Statements of Operations -
Nine months ended September 30, 2010 and 2009 (unaudited)		3-4

Condensed Consolidated Statements of Stockholders' Equity -
Nine months ended September 30, 2010 and 2009 (unaudited)		5-6

Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 2010 and 2009 (unaudited)		7-8

Notes to Condensed Consolidated Financial Statements (unaudited)		9-22

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		23-33

Item 4. Controls and Procedures		34

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		35

Item 3. Defaults Upon Senior Securities		35

Item 6. Exhibits		36

SIGNATURES		37

Index

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets

(Dollars in thousands, except per share amounts)

	September 30,			December 31,
	2010			2009
Assets	(unaudited)

Cash and due from banks	$	2,657			2,889
Interest-bearing deposits with banks		15,657			10,043

Total cash and cash equivalents		18,314			12,932

Securities available for sale		33,511			31,752
Securities held to maturity (market value of $1,516)		1,488			-
Loans, net of allowance for loan losses of $5,261 and $4,730		167,849			184,312
Premises and equipment, net		5,110			5,432
Federal Home Loan Bank stock, at cost		1,087			1,087
Foreclosed assets, net of allowance for losses of $264 and $0		7,657			6,719
Accrued interest receivable		866			1,201
Bank-owned life insurance		3,106			3,017
Other assets		1,706			1,751

Total assets	$	240,694			248,203

Liabilities and Stockholders’ Equity

Liabilities:
Non-interest bearing demand deposits		19,491			18,925
Savings, NOW and money-market deposits		52,578			60,691
Time deposits		141,176			136,758

Total deposits		213,245			216,374

Official checks		1,343			960
Federal Home Loan Bank advances		14,600			14,600
Other liabilities		1,630			1,630

Total liabilities		230,818			233,564

Stockholders’ equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized, 5,800 shares of Series A issued and outstanding		-			-
Additional paid-in capital, preferred		5,800			5,800
Preferred stock discount		(360	)		(429	)
Common stock, $.01 par value; 25,000,000 shares authorized, 2,058,047 shares issued and outstanding		20			20
Additional paid-in capital, common		24,463			24,444
Accumulated deficit		(19,954	)		(14,572	)
Accumulated other comprehensive loss		(93	)		(624	)

Total stockholders’ equity		9,876			14,639

Total liabilities and stockholders’ equity	$	240,694			248,203

See Accompanying Notes to Condensed Consolidated Financial Statements.

Index

Condensed Consolidated Statements of Operations (Unaudited)

(Dollars in thousands, except per share amounts)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Interest income:
Loans	$	2,670			2,831		$	8,038			8,444
Securities		307			365			1,002			1,141
Other		18			11			36			15

Total interest income		2,995			3,207			9,076			9,600

Interest expense:
Deposits		966			1,521			3,086			4,728
Other borrowings		58			59			191			176

Total interest expense		1,024			1,580			3,277			4,904

Net interest income		1,971			1,627			5,799			4,696

Provision for loan losses		1,477			1,981			4,630			3,913

Net interest income (expense) after provision for loan losses		494			(354	)		1,169			783

Non-interest income:
Service charges and fees on deposit accounts		178			197			545			532
Loan brokerage fees		34			83			69			153
Gain on sale of loans held for sale		30			45			199			170
Gain on sale of securities available for sale		809			-			809			493
Write-down of other assets		-			-			-			(548	)
Income from bank-owned life insurance		29			29			89			85
Other fees		2			1			28			17

Total non-interest income		1,082			355			1,739			902

Non-interest expenses:
Salaries and employee benefits		931			959			2,776			2,829
Occupancy and equipment		389			387			1,141			1,166
Advertising		35			30			102			219
Data processing		158			158			488			435
Supplies		103			28			170			93
Professional fees		297			209			770			538
Loss on sale of foreclosed assets		12			112			112			112
Write-down of foreclosed assets		183			181			474			684
Expenses on foreclosed assets		105			233			307			520
Provision for losses on foreclosed assets		264			-			264			-
FDIC insurance		274			237			825			392
Other		289			181			789			615

Total non-interest expenses		3,040			2,715			8,218			7,603

Loss before income taxes		(1,464	)		(2,714	)		(5,310	)		(5,918	)
Income tax benefit		-			(1,134	)		-			(2,483	)

Net loss	$	(1,464	)	$	(1,580	)	$	(5,310	)	$	(3,435	)
Preferred stock dividend requirements and amortization of preferred stock discount		(98	)		(96	)		(289	)		(287	)
Net loss available to common shareholders	$	(1,562	)	$	(1,676	)	$	(5,599	)	$	(3,722	)

See Accompanying Notes to Condensed Consolidated Financial Statements.

Index

Condensed Consolidated Statements of Operations (Unaudited), continued

(Dollars in thousands, except per share amounts)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Net loss per common share:

Basic	$	(.76	)	$	(.81	)	$	(2.72	)	$	(1.81	)
Diluted	$	(.76	)	$	(.81	)	$	(2.72	)	$	(1.81	)

Weighted-average number of common shares, basic		2,058,047			2,058,047			2,058,047			2,058,047
Weighted-average number of common shares, diluted		2,058,047			2,058,047			2,058,047			2,058,047

See Accompanying Notes to Condensed Consolidated Financial Statements.

Index

Consolidated Statements of Stockholders' Equity

Nine Months Ended September 30, 2010 and 2009

(Dollars in thousands)

									Accumulated
	Preferred Stock				Common Stock					Other
			Additional				Additional		Compre-		Total
			Paid-In				Paid-In	Accumulated	hensive		Stockholders’
	Shares	Amount	Capital	Discount	Shares	Amount	Capital	Deficit	Income (Loss)		Equity
Balance at December 31, 2008	5,800	$ -	5,800	(521)	2,058,047	$ 20	24,393	(4,982)	186		24,896

Comprehensive loss:
Net loss for the three months ended September 30, 2009 (unaudited)	-	-	-	-	-	-	-	(3,435)	-		(3,435)

Net change in unrealized gain on securities available for sale, net of tax of $(111) (unaudited)	-	-	-	-	-	-	-	-	(184)		(184)

Comprehensive Loss (unaudited)											(3,619)

Preferred stock dividend requirements and amortization of preferred stock discount (unaudited)	-	-	-	69	-	-	-	(287)	-		(218)

Share-based compensation (unaudited)	-	-	-	-	-	-	39	-	-		39

Balance at September 30, 2009 (unaudited)	5,800	$ -	5,800	(452)	2,058,047	$20	24,432	(8,704)	2		21,098

See Accompanying Notes to Consolidated Financial Statements.

Index

Consolidated Statements of Stockholders' Equity

Nine Months Ended September 30, 2010 and 2009, Continued

(Dollars in thousands)

									Accumulated
	Preferred Stock				Common Stock					Other
			Additional				Additional		Compre-		Total
			Paid-In				Paid-In	Accumulated	hensive		Stockholders’
	Shares	Amount	Capital	Discount	Shares	Amount	Capital	Deficit	Income (Loss)		Equity
Balance at December 31, 2009	5,800	$ -	5,800	(429)	2,058,047	$ 20	24,444	(14,572)	(624)		14,639

Comprehensive loss:
Net loss for the three months ended September 30, 2010 (unaudited)	-	-	-	-	-	-	-	(5,310)	-		(5,310)

Net change in unrealized loss on securities available for sale (unaudited)	-	-	-	-	-	-	-	-	531		531

Comprehensive Loss (unaudited)											(4,779)

Preferred stock dividend requirements and amortization of preferred stock discount (unaudited)	-	-	-	69	-	-	-	(72)	-		(3)

Share-based compensation (unaudited)	-	-	-	-	-	-	19	-	-		19

Balance at September 30, 2010 (unaudited)	5,800	$ -	5,800	(360)	2,058,047	$20	24,463	(19,954)	(93)		9,876

See Accompanying Notes to Consolidated Financial Statements.

Index

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

	Nine months ended September 30,
	2010			2009
Cash flows from operating activities:
Net loss	$	(5,310	)	$	(3,435	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		329			355
Provision for loan losses		4,630			3,913
Amortization of loan fees, net		(156	)		(91	)
Deferred income taxes		-			(2,433	)
Net amortization of premiums and discounts on securities		124			96
Gain on sale of securities available for sale		(809	)		(493	)
Gain on sale of loans held for sale		(199	)		(170	)
Proceeds from sale of loans held for sale		2,989			4,738
Originations of loans held for sale		(2,790	)		(4,568	)
Write-down of foreclosed assets		474			684
Loss on sale of foreclosed assets		112			112
Principal reduction in foreclosed assets		300			-
Provision for losses in foreclosed assets		264			-
Decrease in accrued interest receivable		335			35
Decrease in other assets		45			243
Increase (decrease) in official checks and other liabilities		380			(310	)
Income from bank-owned life insurance		(89	)		(85	)
Share-based compensation		19			39

Net cash provided by (used in) operating activities		648			(1,370	)

Cash flows from investing activities:
Maturities and calls of securities available for sale		12,125			8,500
Purchase of securities available for sale		(54,701	)		(32,965	)
Principal payments on securities available for sale		1,369			2,379
Proceeds from sale of securities available for sale		40,668			21,164
Purchase of securities held to maturity		(2,568	)		-
Call of security held to maturity		1,000			-
Principal payments on securities held to maturity		76			1
Net decrease (increase) in loans		8,959			(15,561	)
Purchase of premises and equipment		(7	)		(19	)
Purchase of Federal Home Loan Bank stock		-			(65	)
Purchase of bank-owned life insurance		-			(108	)
Proceeds from the sale of foreclosed assets		942			1,992

Net cash provided by (used in) investing activities		7,863			(14,682	)

Cash flows from financing activities:
Net (decrease) increase in deposits		(3,129	)		32,855
Cash paid to preferred stockholder		-			(202	)
Repayment of Federal Home Loan Bank advances		-			(500	)

Net cash (used in) provided by financing activities		(3,129	)		32,153

Net increase in cash and cash equivalents		5,382			16,101

Cash and cash equivalents at beginning of period		12,932			5,457

Cash and cash equivalents at end of period	$	18,314		$	21,558

Index

Condensed Consolidated Statements of Cash Flows, Continued

(In thousands)

	Nine months ended September 30
	2010		2009
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	3,363		4,789

Non-cash transactions:
Accumulated other comprehensive income (loss), net change in unrealized (loss) gain on securities available for sale, net of tax benefit in 2009	$	531		(184	)

Transfer of loans to foreclosed assets	$	3,030		8,111

Preferred dividends payable at beginning of period	$	37		21

Preferred dividends payable at end of period	$	-		37

Amortization of preferred stock discount	$	69		69

See Accompanying Notes to Condensed Consolidated Financial Statements.

Index

Notes to Condensed Consolidated Financial Statements (unaudited)

(1)

General. FPB Bancorp, Inc. (the "Holding Company") owns 100% of the outstanding common stock of First Peoples Bank (the "Bank") and the Bank owns 100% of the outstanding common stock of Treasure Coast Holdings, Inc., (collectively referred to as the "Company"). The Holding Company operates as a one-bank holding company and its only business activity is the operation of the Bank. The Bank is a state (Florida)-chartered commercial bank and its deposits are insured up to the maximum amounts by the Federal Deposit Insurance Corporation, which are $250,000 for all qualified accounts, and unlimited for non-interest bearing transaction accounts through December 31, 2012, unless extended. The Bank offers a variety of community banking services to individual and corporate customers through its six banking offices located in Port St. Lucie, Stuart, Fort Pierce, Vero Beach and Palm City, Florida. Treasure Coast Holdings, Inc. was incorporated in September 2008 for the sole purpose of managing foreclosed assets.

In the opinion of management, the accompanying condensed consolidated financial statements of the Company contain all adjustments (consisting primarily of normal recurring accruals) necessary to present fairly the financial position at September 30, 2010, and the results of operations for the three and nine-month periods ended September 30, 2010 and 2009 and cash flows for the nine-month periods ended September 30, 2010 and 2009. The results of operations for the nine months ended September 30, 2010 are not necessarily indicative of the results to be expected for the full year.

The Company’s operating and capital requirements and the losses due to recent increases in nonperforming loans and provisions for loan losses are factors management considered when evaluating the Company’s ability to continue as a going concern.

Management is evaluating all potential sources of capital to meet the Company’s capital requirements, to include resuming our public offering and entering into other financing arrangements. There can be no assurance, however, that additional financing or recapitalization plans will be available or forthcoming and, if available, can be obtained or undertaken on terms favorable to the Company or its existing shareholders. Further, there is no assurance that our offering or acceptable financing alternatives would be successfully implemented, or would receive regulatory approval.

During the nine months ended September 30, 2010, the Company’s level of nonperforming assets and ratio of past-due loans to total loans has decreased, while its net interest margin and interest rate spread have increased. Based on these trends and on detailed financial projections, assuming no unexpected losses are incurred, management does not expect the Company to be critically undercapitalized at September 30, 2011, even if no additional capital is obtained.

(continued)

Index

Notes to Condensed Consolidated Financial Statements (unaudited)

Securities. Securities have been classified according to management's intention. The carrying amount of securities and their fair values are as follows (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
At September 30, 2010: Securities available for sale:
Mortgage-backed securities	$	11,164		4		(91	)	$	11,077
SBA loan pool securities		2,101		-		(3	)		2,098
CMO securities		20,339		53		(56	)		20,336
Total securities available for sale	$	33,604		57		(150	)	$	33,511

Securities held to maturity -
Mortgage-backed securities	$	1,488		28		-		$	1,516

At December 31, 2009 - Securities available for sale:
U.S. Government agency securities	$	14,620		2		(290	)	$	14,332
Mortgage-backed securities		5,182		4		(99	)		5,087
SBA pool securities		6,282		-		(185	)		6,097
CMO securities		6,292		-		(56	)		6,236
Total securities available for sale	$	32,376		6		(630	)	$	31,752

Sales of securities available for sale in 2010 and 2009 are summarized below (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Principal received from sales	$	40,668		-	$	40,668		21,153

Gross gains	$	809		-	$	809		493

Information pertaining to securities with gross unrealized losses at September 30, 2010, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows (in thousands):

	As of September 30, 2010 Less Than Twelve Months

Securities Available for Sale:	Gross Unrealized Losses			Fair Value

SBA loan pool securities	$	(3	)	$	2,098
CMO Securities		(56	)		7,914
Mortgage-backed securities		(91	)		10,957
	$	(150	)	$	20,969

(continued)

Index

Notes to Condensed Consolidated Financial Statements (unaudited)

Securities, continued . Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (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, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

The unrealized losses on twelve investment securities available for sale were caused by market conditions. It is expected that the securities would not be settled at a price less than the par value of the investments. Because the decline in fair value is attributable to market conditions and not credit quality, and because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

(3)

Lending Activities. Our primary source of income is generated from the interest earned on our loan portfolio and fees generated from our lending activities. We primarily focus our lending activities on commercial real estate lending to small and medium-sized businesses, including professionals, such as physicians, law firms and accountants. Our commercial mortgage loans include loans for the acquisition/development, construction or rehabilitation of commercial, multi-family or residential real property.

We also emphasize commercial loans secured by assets other than real estate. Our target commercial loan market includes companies in the medical services, retail construction, wholesale, manufacturing and tourism industries. We also offer residential mortgage loans, as well as consumer loans, such as home equity lines of credit. Our goal is to develop commercial lending opportunities where the loan relationships provide us with opportunities to develop depository relationships and other non-commercial loan relationships.

We offer Small Business Administration, or SBA, 7(a) and 504 loans to small businesses throughout our market area. SBA loans are a complement to our focus on strengthening and supporting local communities. SBA loans are generally made pursuant to a federal government program designed to assist small businesses in obtaining financing. The federal government guarantees 75% to 90% of the SBA loan balances as an incentive for financial institutions to make loans to small businesses. We generally sell the guaranteed portion of the SBA loan at a premium sale price between approximately 5% and 9%. We had $14.7 million of outstanding SBA loans at September 30, 2010.

(continued)

Index

Notes to Condensed Consolidated Financial Statements (unaudited)

(3)	Lending Activities, continued.

Loan Portfolio. The following tables summarize our loan portfolio by type of loan as of the dates indicated (dollars in thousands):

	As of September 30,						As of December 31,
	2010						2009
	Amount			% of Total			Amount			% of Total

Commercial real estate	$	97,935			56.42	%	$	106,803			56.30	%
Commercial & Industrial		60,576			34.90	%		63,815			33.64	%
Residential real estate		775			.45	%		790			0.42	%
HELOC		3,717			2.14	%		3,925			2.07	%
Construction & Development		-			-			1,081			0.57	%
Closed end 1st lien 1-4 family		4,310			2.48	%		4,953			2.61	%
Other		6,269			3.61	%		8,329			4.39	%

Total loans		173,582			100.00	%		189,696			100.00	%

Allowance for loan losses		(5,261	)					(4,730	)
Deferred loan costs, net		(472	)					(654	)

Loans, net	$	167,849					$	184,312

The contractual maturity ranges of our loan portfolio and the amount of such loans with fixed and variable interest rates in each maturity range classified by borrower type as of September 30, 2010 are as follows (dollars in thousands):

	One Year or Less		After One Through Five Years		After Five Years		Total

Commercial real estate	$	7,463		10,503		79,969	$	97,935
Commercial & Industrial		9,740		21,870		28,966		60,576
Residential real estate		184		424		167		775
HELOC		228		1,371		2,118		3,717
Closed-end 1st Lien 1-4 family		871		3,176		263		4,310
Other		1,285		4,720		264		6,269
Total loans	$	19,771		42,064		111,747	$	173,582

Loans with a fixed interest rate	$	16,378		29,049		10,324	$	55,751
Loans with a variable interest rate		3,393		13,015		101,423		117,831
Total loans	$	19,771		42,064		111,747	$	173,582

As of September 30, 2010, our loan portfolio was composed of approximately 32% fixed interest rate loans and 68% variable interest rate loans. Scheduled contractual principal repayments do not reflect the actual maturities of loans. The average actual maturity of our loans is substantially less than their average contractual term because of prepayments. The average life of a mortgage loan tends to increase when the current mortgage loan rates are substantially higher than rates on existing mortgage loans and, conversely, decrease when current mortgage loan rates are substantially lower than rates on existing mortgages, due primarily to refinancing of adjustable rate and fixed rate loans at lower rates.

(continued)

Index

Notes to Condensed Consolidated Financial Statements (unaudited)

(3)	Lending Activities, continued.

Asset Quality, Loan Impairment and Credit Losses. Although we continue to experience effects in our loan portfolio due to the economic decline and decreased real estate values, our non-performing asset to total assets ratio of 8.26% at September 30, 2010 is less than the 9.15% non-performing asset to total assets ratio at December 31, 2009.

We have endeavored to deal aggressively with problem assets in our loan portfolio. Since the Bank’s inception in 1999, we have engaged a third-party firm to conduct independent asset quality reviews that are specialized and targeted loan reviews by type. We believe our enhanced credit risk management process positions us to deal effectively with reducing our credit risk profile and maintaining a high quality loan portfolio on an ongoing basis. Additionally, in the future we intend to develop a more balanced real estate portfolio by reducing our concentration of higher risk non-owner occupied commercial real estate and construction and development loans.

Furthermore, during 2009 and 2010, we enhanced our credit risk management processes by:

·	Developing processes for supervising criticized and classified loans;

·	Adopting a specific action plan for managing and disposing of foreclosed assets;

·	Performing a quarterly assessment of the Bank’s monitoring systems for timely identification of problem loans;

·	Forming a Special Assets Committee of the Board that meets monthly to review management’s progress on all classified assets; and

·	Creating a Special Assets Department to reduce the Bank’s underperforming credits.

(continued)

Index

Notes to Condensed Consolidated Financial Statements (unaudited)

(3)	Lending Activities, continued. We believe our enhanced credit risk management process positions us to deal effectively with reducing our credit risk profile.

The following table reflects the levels of non-accrual and past-due loans in our loan portfolio as of the dates indicated (dollars in thousands):

	At September 30, 2010			At December 31, 2009

Non-Accrual Loans

Commercial Real Estate	$	6,740		$	11,438
Commercial & Industrial		4,936			2,990
Construction and Land development		-			169
Residential		-			173
Home Equity Lines		243			275
Other		83			38
Total		12,002			15,083

Accruing 90 or more days past due

Commercial Real Estate		217			888
Other		-			19
Total		217			907

Total non-performing loans		12,219			15,990

Foreclosed assets		7,657			6,719

Total non-performing assets		19,876			22,709

Troubled debt restructured loans		7,541			5,590

Total non-performing assets & restructured loans	$	27,417		$	28,299

Ratios
Total non-performing loans to total loans		7.04	%		8.43	%
Total non-performing assets to total assets		8.26	%		9.15	%
Total non-performing assets & restructured loans to total assets		11.39	%		11.40	%

(continued)

Index

Notes to Condensed Consolidated Financial Statements (unaudited)

(3)	Lending Activities, continued. The following table illustrates the payment status of certain classes of loans in our portfolio (dollars in thousands):

	Accruing and Past Due 30-89 Days Amount		Non-Accrual and Past Due 90 days and Over Amount		Total Amount
As of September 30, 2010
Commercial Real Estate	$	197	$	6,957	$	7,154
Commercial & Industrial		1,396		4,936		6,332
Home Equity Lines		-		243		243
Other		365		83		448
Total	$	1,958	$	12,219	$	14,177

As of December 31, 2009
Commercial Real Estate	$	548	$	12,326	$	12,874
Commercial & Industrial		560		2,990		3,550
Construction and Land development		-		169		169
Residential		10		173		183
Home Equity Lines		-		275		275
Other		162		57		219
Total	$	1,280	$	15,990	$	17,270

Information about impaired loans is as follows (in thousands):

	As of
	September 30, 2010			December 31, 2009
Collateral dependent loans identified as impaired:
Gross loans with no related allowance for losses (1)	$	5,975			7,197

Gross loans with related allowance for losses recorded		5,996			8,443
Less allowances on these loans		(1,057	)		(2,007	)

Net loans with related allowance		4,939			6,436

Net investment in collateral dependent impaired loans		10,914			13,633

Non-collateral dependent loans identified as impaired:
Gross loans with no related allowance for losses		2,373			1,945

Gross loans with related allowance for losses recorded		5,168			3,645
Less allowance on these loans		(135	)		(79	)

Net loans with related allowance		5,033			3,566

Net investment in non-collateral dependent impaired loans		7,406			5,511

Net investment in impaired loans	$	18,320			19,144

(1)	At September 30, 2010 and December 31, 2009, includes loans with partial charge-offs of $1.4 million and $734,000, respectively, relating to loans with a net carrying value of $3.4 million and $915,000.

(continued)

Index

Notes to Condensed Consolidated Financial Statements (unaudited)

(3)	Lending Activities, continued.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2010		2009			2010		2009
Average investment in impaired loans	$	18,209	$	19,881		$	19,184		21,455

Interest income recognized on impaired loans	$	91	$	(26	)	$	272	$	400
Interest income received on impaired loans	$	87	$	104		$	270	$	444

During the quarter ending September 30, 2010, there was a net decrease in impaired loans of $2.2 million, primarily due to a decrease in specific reserves taken during the quarter, partially offset by the addition of three loans to impaired status, totaling $1.7 million. Appraisals are obtained on collateral dependent (impaired) loans at least annually. We do not make non-recourse commercial real estate loans and do not adjust appraised values. Instead, we would discuss any perceived discrepancy with the appraiser and allow the appraiser to adjust the value if he or she agreed with our comments. Our allowance for loan loss calculations are always based on current appraisals. At this time, due to the collateral value associated with these impaired loans, no material losses are expected to be incurred above those already reserved or charged-off. However, if the economy continues to deteriorate, or property values decline further, additional adjustments may be necessary in the future.

(continued)

Index

FPB BANCORP, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited)

(3)	Lending Activities, continued. The activity in the allowance for loan losses was as follows (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009

Loans outstanding at end of period	$	173,582		$	192,955		$	173,582		$	192,955

Balance at beginning of period	$	4,807		$	3,227		$	4,730		$	2,552

Charge-offs:
Commercial real estate		(459	)		(40	)		(1,761	)		(45	)
Commercial and industrial		(261	)		(467	)		(1,978	)		(528	)
Construction and land development		-			(81	)		-			(596	)
Residential		-			(87	)		-			(736	)
Home Equity		(96	)		-			(96	)		-
Other		(223	)		(41	)		(351	)		(125	)
Total charge-offs		(1,039	)		(716	)		(4,186	)		(2,030	)

Recoveries:
Commercial real estate		4			-			11			-
Commercial		6			5			53			27
Residential		-			1			-			13
Home equity		2			-			2			-
Other		4			6			21			29
Total recoveries		16			12			87			69

Net charge-offs		(1,023	)		(704	)		(4,099	)		(1,961	)

Provision for loan losses		1,477			1,981			4,630			3,913

Allowance for loan losses at end of period	$	5,261		$	4,504		$	5,261		$	4,504

Ratio of net charge-offs to average loans (annualized)		2.36	%		1.47	%		3.04	%		1.39	%
Ratio of allowance for loan losses to period end loans		3.03	%		2.33	%		3.03	%		2.33	%
Ratio of allowance for loan losses to non-performing assets		26.47	%		18.43	%		26.47	%		18.43	%
Ratio of allowance for loan losses to total assets		2.19	%		1.68	%		2.19	%		1.68	%

The following table illustrates the loan classifications for all troubled debt restructured. None of these loans are currently on non-accrual status (in thousands):

	As of September 30,
	2010
Consumer loans	$	10
Commercial loans		3,006
Commercial real estate		4,525
Total	$	7,541

(continued)

Index

Notes to Condensed Consolidated Financial Statements (unaudited)

(4)	Foreclosed Assets. The following table illustrates the activity in foreclosed assets as of the dates indicated (dollars in thousands)

	Nine Months Ended September 30,			Year Ended December 31,
	2010			2009

Total foreclosed assets at beginning of period	$	6,719		$	1,714

Additions to foreclosed assets:
Commercial real estate		2,713			4,256
Residential real estate		-			2,346
Vacant land		317			1,083
Other		-			1,555
Total		3,030			9,240

Sales of foreclosed assets:
Commercial real estate		-			(2,386	)
Residential real estate		(599	)		(796	)
Vacant land		(455	)		(173	)
Other		-			-
Total		(1,054	)		(3,355	)

Write-down of foreclosed assets		(474	)		(880	)

Pay-down on foreclosed assets		(300	)		-

Provision for losses on foreclosed assets		(264	)		-

Foreclosed assets at end of period	$	7,657		$	6,719

(5)	Regulatory Capital. The Bank is required to maintain certain minimum regulatory capital requirements, pursuant to a Consent Order (see page 25). The following is a summary at September 30, 2010 of the regulatory capital requirements and the Bank's capital on a percentage basis:

	Percentage of		Minimum for Capital Adequacy		Requirements of
	the Bank		Purposes		Consent Order
Tier I capital to total average assets	3.93	%	4.00	%	8.00	%

Tier I capital to risk-weighted assets	5.77	%	4.00	%	N/A

Total capital to risk-weighted assets	7.05	%	8.00	%	11.00	%

(6)

Loss Per Common Share. Basic loss per common share has been computed on the basis of the weighted-average number of shares of common stock outstanding during the period. For the three and nine months ended September 30, 2010 and 2009, outstanding stock options and warrants are not considered dilutive due to the losses incurred by the Company.

(continued)

Index

Notes to Condensed Consolidated Financial Statements (unaudited)

(7)

Share-Based Compensation. The Company established a Stock Option Plan in 1998 (“1998 Plan”) for directors, officers and employees of the Company. The 1998 Plan as amended provides for 131,553 shares of common stock to be available for grant. The exercise price of the stock options is the fair market value of the common stock on the date of grant. The options expire ten years from the date of grant. At September 30, 2010, no shares remain available for grant, as the Plan Agreement terminated on December 8, 2008. A summary of stock option information follows ($ in thousands, except per share amounts):

	Number of Options			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at December 31, 2008		36,761		$	11.68
Options forfeited		(2,755	)		11.88
Options expired		(3,306	)		9.07

Outstanding at December 31, 2009		30,700		$	11.94
Options forfeited		(2,791	)		9.52

Options outstanding at September 30, 2010		27,909		$	12.18		3.68 years	$	-

Options exercisable at September 30, 2010		27,562		$	12.23		3.63 years	$	-

In 2005, the Company established a new option plan (“2005 Plan”) for directors, officers and employees of the Company. The 2005 Plan provides for 158,743 shares of common stock to be available for grant. The exercise price of the stock options is the fair market value of the common stock on the date of grant. The 2005 Plan allows for various vesting periods. All options expire ten years from the date of grant. At September 30, 2010, 50,507 shares remain available for grant.

A summary of stock option information follows:

	Number of Options	Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value
Options outstanding at December 31, 2008	123,049	$	14.27
Options forfeited	(6,433)		(15.91)
Options granted	500		8.85

Options outstanding at December 31, 2009	117,116	$	14.16
Options forfeited	(8,880)	$	13.13

Options outstanding at September 30, 2010	108,236	$	14.24		5.98 years	$	-

Options exercisable at September 30, 2010	97,611	$	14.88		5.81 years	$	-

There were no options granted during the nine months ended September 30, 2010.

(continued)

Index

Notes to Condensed Consolidated Financial Statements (unaudited)

(7)	Share-Based Compensation, continued.

The fair value of each option granted during the nine months ended September 30, 2009, was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

Dividend yield		-	%
Expected life in years		6	years
Expected stock volatility		86.14	%
Risk-free interest rate		3.76	%
Per share grant-date fair value of options issued during the period	$	1.18

The total fair value of shares vested and recognized as compensation expense was $19,000 and $39,000 for the nine-month periods ended September 30, 2010 and 2009, respectively, and there was $2,000 in related tax benefit in 2009. As of September 30, 2010, the Company had 10,972 stock options not fully vested and there was $19,000 of total unrecognized compensation cost related to these non-vested options. This cost is expected to be recognized monthly over a weighted-average period of .74 years on a straight-line basis.

In addition, as discussed in more detail in Note 8, the Company sold on December 5, 2008 to the U.S. Treasury a ten year warrant to purchase at any time up to 183,158 shares of the Company’s common stock for $4.75 per share.

(8)

Stockholders’ Equity. On December 5, 2008, the Company issued and sold to the United States Department of the Treasury (the “Treasury”) 5,800 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Preferred Shares”), along with a ten year warrant (the “Warrant”) to purchase at any time up to 183,158 shares of the Company’s common stock for $4.75 per share, for a total cash investment of $5.8 million from the Treasury (the “Transaction”).

The Transaction proceeds of $5.8 million were allocated between the Preferred Shares and Warrant based on the ratio of the estimated fair value of the Warrant to the aggregate estimated fair value of both the Preferred Shares and the Warrant. The value of the Warrant was computed to be $394,000 using the Black Scholes model with the following inputs: expected stock volatility of 61.89%, risk-free interest rate of 4.11%, expected life of 5 years and no dividend yield. The value of the Preferred Shares was computed to be $3.9 million based on the net present value of the expected cash flows over five years using a discount rate of 14%, which represented what the Company believed to be its incremental borrowing rate for a similar transaction in the private sector.

The allocation of proceeds to the Warrant was recorded as a “preferred stock discount” against the Preferred Shares, with a corresponding and equal entry to additional paid in common equity in the amount of $526,000. This discount is being amortized over five years on a straight-line basis and increases the loss available to common shareholders.

Beginning with the dividend payment due on February 15, 2010, we have suspended paying dividends on our Series A Preferred stock. The total arrearage as of September 30, 2010 was $257,000.

At a Special Meeting of the Shareholders, held on October 6, 2009, the number of authorized shares of common and preferred stock of the Company was increased from 5,000,000 to 25,000,000 and from 1,000,000 to 2,000,000 respectively.

(continued)

Index

Notes to Condensed Consolidated Financial Statements (unaudited)

(9)	Fair Value Measurements. Financial assets subject to fair value measurements on a recurring basis are as follows (in thousands):

			Fair Value Measurements at Reporting Date Using
			Quoted Prices In Active		Significant Other		Significant
			Markets for Identical Assets		Observable Inputs		Unobservable Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
As of September 30, 2010 -
Mortgage-backed securities	$	11,077	$	-	$	11,077		-
SBA loan pool securities		2,098		2,098		-		-
CMO securities		20,336		8,712		11,624		-
Available-for-sale securities	$	33,511	$	10,810	$	22,701		-


As of December 31, 2009 -
U.S. Government agency securities	$	14,332		-	$	14,332		-
Mortgage-backed securities		5,087		-		5,087		-
SBA loan pool securities		6,097		-		6,097		-
CMO securities		6,236		-		6,236		-
Available-for-sale securities	$	31,752	$	-	$	31,752		-

Impaired collateral-dependent loans and foreclosed assets are carried at fair value when the current collateral value is lower than the carrying value of the loan or foreclosed asset. Those impaired collateral-dependent loans and foreclosed assets which are measured at fair value on a non-recurring basis are as follows (in thousands):

												Losses Recorded in Operations
												For the Nine
	Fair								Total			Months Ended
	Value(1)		Level 1		Level 2		Level 3		Losses			September 30, 2010
As of September 30, 2010:
Impaired loans	$	8,363		-		-	$	8,363	$	(2,655	)	$	(1,257	)
Foreclosed assets		5,277		-		-		5,277		(903	)		(664	)

Total	$	13,640		-		-	$	13,640	$	(3,558	)	$	(1,921	)


												Losses Recorded in
	Fair Value(1)		Level 1		Level 2		Level 3		Total Losses			Operations During 2009
As of December 31, 2009:
Impaired loans	$	7,351		-		-	$	7,351	$	(3,173	)	$	(2,425	)
Foreclosed assets		5,358		-		-		5,358		(336	)		(336	)

Total	$	12,709		-		-	$	12,709	$	(3,509	)	$	(2,761	)

(1)	In addition, impaired loans and foreclosed assets with a carrying value of $2.6 million and $2.4 million at September 30, 2010, and $6.3 million and $1.4 million at December 31, 2009, respectively, were measured for impairment using Level 3 inputs and had a fair value in excess of carrying value.

(continued)

Index

Notes to Condensed Consolidated Financial Statements (unaudited)

(9)	Fair Value Measurements, continued. The estimated fair values of the Company's financial instruments were as follows (in thousands):

	At September 30, 2010				At December 31, 2009

	Carrying Amount		Fair Value		Carrying Amount		Fair Value

Financial assets:
Cash and cash equivalents		18,314		18,314		12,932		12,932
Securities available for sale		33,511		33,511		31,752		31,752
Securities held to maturity		1,488		1,516		-		-
Loans, net		167,849		167,367		184,312		184,701
Federal Home Loan Bank stock		1,087		1,087		1,087		1,087
Accrued interest receivable		866		866		1,201		1,201

Financial liabilities:
Deposit liabilities		213,245		206,843		216,374		218,124
Federal Home Loan Bank advances		14,600		14,841		14,600		14,618
Off-balance-sheet financial instruments		-		-		-		-

(10)

Stock Offering. On July 21, 2010, the Company commenced an offering of up to 3,250,000 units. Each unit consists of four shares of its common stock and one warrant to purchase one share of common stock. In that offering, the Company is seeking to raise up to $13 million in gross proceeds. The offering ends on November 19, 2010, with no shares expected to be issued. The company expects to resume this offering in the near future.

Recent Accounting Standards Update. On July 21, 2010, The FASB issued ASU No. 2010-20, “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The new disclosures will require significantly more information about credit quality in a financial institution’s loan portfolio. This statement addresses only disclosures and does change recognition or measurement of the allowance. This statement will be effective for us on December 15, 2010 for disclosures as of the end of the reporting period and on January 1, 2011 for disclosures regarding activity that occurs during the reporting period.

Index

Item 2. Management's Discussion and Analysis

of Financial Condition and Results of Operations

General

FPB Bancorp, Inc. (the "Holding Company") owns 100% of the outstanding common stock of First Peoples Bank (the "Bank") and the Bank owns 100% of the outstanding common stock of Treasure Coast Holdings, Inc., (collectively referred to as the "Company"). The Holding Company operates as a one-bank holding company and its only business activity is the operation of the Bank. The Bank is a state (Florida)-chartered commercial bank and its deposits are insured up to the maximum amounts by the Federal Deposit Insurance Corporation, which are $250,000 for all qualified accounts, and unlimited for non-interest bearing transaction accounts through December 31, 2012, unless extended. The Bank offers a variety of community banking services to individual and corporate customers through its six banking offices located in Port St. Lucie, Stuart, Fort Pierce, Vero Beach and Palm City, Florida. Treasure Coast Holdings, Inc. was incorporated in September 2008 for the sole purpose of managing foreclosed assets.

Consent Order. Effective March 18, 2010, the Bank entered into a Stipulation to the Issuance of a Consent Order (“Stipulation”) with the Federal Deposit Insurance Corporation (the “FDIC”) and the Florida Office of Financial Regulation (the “OFR”). Pursuant to the Stipulation, the Bank consented, without admitting or denying any charges of unsafe or unsound banking practices or violations of law or regulation, to the issuance of a Consent Order by the FDIC and the OFR, also effective as of March 18, 2010.

The Consent Order represents an agreement among the Bank, the FDIC and the OFR as to areas of the Bank’s operations that warrant improvement and presents a plan for making those improvements. The Consent Order imposes no fines or penalties on the Bank.

Pursuant to the Consent Order:

The Bank’s Board of Directors is required to increase its participation in the affairs of the Bank. This participation shall include comprehensive, documented meetings to be held no less frequently than monthly. Prior to the entry of the Consent Order, the Board conducted such meetings, but now requires more detailed management reports. The Board has also established a committee to oversee the Bank’s compliance with the Consent Order.

By June 16, 2010, and during the life of the Consent Order, the Bank shall achieve and maintain a Tier 1 leverage capital ratio of not less than 8% and a total risk-based capital ratio of not less than 11%. At September 30, 2010, the Bank’s Tier 1 leverage capital ratio was 3.93% and its total risk-based capital ratio was 7.05%. As of September 30, 2010, an additional $12.2 million in capital would be required by the Bank to attain the required capital levels.

The Bank must maintain a fully funded Allowance for Loan and Lease Losses (“ALLL”), which must be satisfactory to the FDIC and the OFR. The Board of Directors shall quarterly review the adequacy of the ALLL. The Bank has always endeavored to maintain a fully funded, adequate ALLL and believes its ALLL is adequate.

The Bank shall also reduce the aggregate balance of assets classified “Substandard” by the FDIC in October 2009: (i) by June 16, 2010, to not more than 140% of Tier 1 capital plus the ALLL; (ii) by September 14, 2010, to not more than 120% of Tier 1 capital plus the ALLL; (iii) by December 13, 2010, to not more than 100% of Tier 1 capital plus the ALLL; (iv) by March 23, 2011, to not more than 80% of Tier 1 capital plus the ALLL; and (v) by September 19, 2011, to not more than 60% of Tier 1 capital plus the ALL. As of September 30, 2010, the Bank’s ratio was 173%.

(continued)

Index

Consent Order, continued.

The Bank shall not extend any credit to, or for the benefit of, any borrower who has a loan that has been charged off or classified “Substandard” and is uncollected, unless the Bank documents that such extension of credit is in the Bank’s best interest. The Bank had, and has, no intention of extending credit to such borrowers in violation of these requirements.

By May 2, 2010, the Bank shall perform a risk segmentation analysis with respect to any concentration cited by the FDIC, including commercial real estate loans. The Bank shall also develop a plan to reduce any segment of the portfolio deemed by the FDIC or OFR to be an undue concentration of credit. Both were completed and submitted on April 29, 2010.

By June 16, 2010, the Bank shall formulate and implement a strategic plan and a plan to improve and sustain Bank earnings. Additionally, the Bank must prepare a budget and update the profit plan by November 30th of each year. All such items must be submitted to the FDIC and the OFR. The Bank was granted an extension to September 28, 2010 to submit its strategic plan and submitted it prior to that date.

Ø	By May 17, 2010, the Bank must review, revise and adopt its liquidity, contingency funding and funds management policy, including implementing any changes recommended by the FDIC or the OFR. These were completed and submitted on May 27, 2010, following an extension granted to May 28, 2010.

Throughout the life of the Consent Order, the Bank shall not accept, renew, or rollover any brokered deposit, and shall comply with the restrictions on the effective yields on deposits exceeding national averages. In addition, by March 28, 2010, the Bank was required to submit to the FDIC and the OFR a plan to reduce reliance on brokered deposits, which it has done. The Bank has not accepted, renewed or rolled over any brokered deposits since July 2009. With respect to the yield limitations, it is possible that the Bank could experience a decrease in deposit inflows, or the migration of current deposits to competitor institutions, if other institutions offer higher interest rates than those permitted to be offered by the Bank.

Ø	During the life of the Consent Order, the Bank shall limit its asset growth to 10% per year, unless the FDIC and the OFR consent to greater growth. Under the recently adopted strategic plan, the growth percentage will not exceed these growth parameters.

Ø	While the Consent Order is in effect, the Bank shall not declare or pay dividends, or any other form of payment representing a reduction in capital without the prior written approval of the FDIC and the OFR. The Bank has never paid a dividend to FPB.

Ø	Within 30 days of the end of each calendar quarter, the Bank shall furnish written progress reports to the FDIC and the OFR detailing the form, manner, and results of any actions taken to secure compliance. The Bank has, and will continue to prepare and submit such reports.

Restrictive Board Resolutions. At the request of the Federal Reserve Bank of Atlanta (“Federal Reserve”) our board of directors, on October 21, 2009 adopted resolutions limiting us from reducing our capital position. Pursuant to these resolutions, we have committed to: (i) not incurring debt at the holding company level without prior Federal Reserve approval; (ii) not paying dividends on our securities (including our Series A Preferred Stock) without prior Federal Reserve approval; (iii) not purchasing or redeeming stock without Federal Reserve approval; (iv) not making any other payment which would represent a reduction in capital, other than normal and routine operating expenses; and (v) providing to the Federal Reserve on a quarterly basis, a parent-only balance sheet and confirmation of compliance with the resolutions. These resolutions prohibit us from paying dividends on, or redeeming, the Series A Preferred Stock without Federal Reserve approval.

Index

Item 2. Management's Discussion and Analysis

of Financial Condition and Results of Operations, Continued

Liquidity and Capital Resources

The Company's primary source of cash during the nine months ended September 30, 2010 was from the call, maturity and sale of securities available for sale of approximately $52.8 million and a net decrease in loans of $9.0 million. Cash was used primarily for the purchase of securities available for sale of approximately $54.7 million and securities held to maturity of $2.6 million. At September 30, 2010, the Company had time deposits of $87.3 million that mature in one year or less. Management believes that, if so desired, it can adjust the rates on time deposits to retain or attract deposits in a changing interest-rate environment.

The following table shows selected information for the periods ended or at the dates indicated:

	At or for the
	Nine months Ended			Year Ended			Nine months Ended
	September 30,			December 31,			September 30,
	2010			2009			2009
Average equity as a percentage of average assets		4.90	%		8.50	%		9.02	%

Equity to total assets at end of period		4.10	%		5.90	%		7.89	%

Return on average assets (1)		(2.79	%)		(3.55	%)		(1.78	%)

Return on average equity (1)		(57.02	%)		(41.74	%)		(19.72	%)

Non-interest expenses to average assets (1)		4.32	%		4.04	%		3.94	%

Non-performing loans and foreclosed assets to total assets at end of period		8.26	%		9.15	%		9.14	%

(1)	Annualized for the nine months ended September 30, 2010 and 2009.

The following table indicates selected trends over the periods shown (dollars in thousands):

	For the Year Ended		For the Period Ended
	December 31, 2009		March 31, 2010		June 30, 2010		September 30, 2010
Ratio of past-due loans to total loans	6.53	%	7.78	%	7.73	%	5.80	%
Non-performing loans	15,990		16,632		16,284		12,219
Foreclosed assets	6,719		6,031		6,165		7,657
Troubled debt restructured	5,590		6,046		5,964		7,541
Non-performing loans to total loans	8.43	%	8.78	%	8.95	%	7.04	%
Non-performing assets to total assets	9.15	%	8.82	%	8.62	%	8.26	%
Allowance for loan losses to total loans	2.49	%	2.95	%	2.64	%	3.03	%

	For the Year Ended		For the Three Months Ended
	December 31, 2009		March 31, 2010		June 30, 2010		September 30, 2010
Operating (loss) income before the provision
for loan loss and taxes	(2,730	)	(527	)	(166	)	13
Net interest margin	2.81	%	3.25	%	3.26	%	3.42	%

(continued)

Index

Item 2. Management's Discussion and Analysis

of Financial Condition and Results of Operations, Continued

Off-Balance Sheet Arrangements

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are available lines of credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amounts recognized in the condensed consolidated balance sheet. The contract amounts of those instruments reflect the extent of the Company's involvement in particular classes of financial instruments.

The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for available lines of credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company generally holds collateral supporting these commitments and management does not anticipate any potential losses if these letters of credit are funded.

A summary of the amounts of the Company's financial instruments, with off-balance sheet risk at September 30, 2010, follows (in thousands):


	Contract Amount

Available lines of credit	$	10,650

Standby letters of credit	$	86

Management believes that the Company has adequate resources to fund all of its commitments.

Index

Results of Operations

The following table sets forth, for the periods indicated, information regarding: (i) the total dollar amount of interest and dividend income of the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average cost; (iii) net interest income; (iv) interest-rate spread; (v) net interest margin; and (vi) ratio of average interest-earning assets to average interest-bearing liabilities.

	Three Months Ended September 30,
	2010							2009
			Interest		Average					Interest		Average
	Average		and		Yield/			Average		and		Yield/
	Balance		Dividends		Rate			Balance		Dividends		Rate
	(Dollars in thousands)
Interest-earning assets:
Loans (1)	$	173,041		2,670		6.17	%	$	191,079		2,831		5.93	%
Securities		33,594		307		3.66			33,510		365		4.36
Other (2)		23,824		18		.30			17,948		11		.25

Total interest-earning assets		230,459		2,995		5.20			242,537		3,207		5.29

Noninterest-earning assets		19,694							26,313

Total assets	$	250,153						$	268,850

Interest-bearing liabilities:
Savings, NOW and money-market deposit accounts		52,940		127		.96			65,404		292		1.79
Time deposits		147,517		839		2.27			147,020		1,229		3.34
Borrowings		14,759		58		1.57			10,600		59		2.23

Total interest-bearing liabilities		215,216		1,024		1.90			223,024		1,580		2.83

Demand deposits		17,238							21,775
Noninterest-bearing liabilities		6,859							2,294
Stockholders' equity		10,840							21,757

Total liabilities and stockholders' equity	$	250,153						$	268,850

Net interest income			$	1,971						$	1,627

Interest-rate spread (3)						3.30	%						2.46	%

Net interest margin (4)						3.42	%						2.68	%

Ratio of average interest-earning assets to average interest-bearing liabilities		1.07							1.09

(1)

Includes non-performing loans.

(2)

Includes federal funds sold, dividends from Federal Home Loan Bank stock and interest-earning deposits with banks.

(3)

Interest-rate spread represents the difference between the average yield on interest-earning assets and the average rate of interest-bearing liabilities.

(4)

Net interest margin is net interest income divided by average interest-earning assets.

Index

	Nine Months Ended September 30,
	2010							2009
			Interest		Average					Interest		Average
	Average		and		Yield/			Average		and		Yield/
	Balance		Dividends		Rate			Balance		Dividends		Rate
	(Dollars in thousands)
Interest-earning assets:
Loans (1)	$	179,528		8,038		5.97	%	$	188,316		8,444		5.98	%
Securities		34,427		1,002		3.88			35,445		1,141		4.29
Other (2)		19,720		36		.24			9,598		15		.21

Total interest-earning assets		233,675		9,076		5.18			233,359		9,600		5.49

Noninterest-earning assets		19,701							24,093

Total assets	$	253,376						$	257,452

Interest-bearing liabilities:
Savings, NOW and money-market deposit accounts		56,194		413		.98			54,920		769		1.87
Time deposits		145,888		2,673		2.44			145,547		3,959		3.63
Borrowings		15,408		191		1.65			10,674		176		2.20

Total interest-bearing liabilities		217,490		3,277		2.01			211,141		4,904		3.10

Demand deposits		18,146							21,027
Noninterest-bearing liabilities		5,323							2,055
Stockholders' equity		12,417							23,229

Total liabilities and stockholders' equity	$	253,376						$	257,452

Net interest income			$	5,799						$	4,696

Interest-rate spread (3)						3.17	%						2.39	%

Net interest margin (4)						3.31	%						2.68	%

Ratio of average interest-earning assets to average interest-bearing liabilities		1.07							1.11

(1)

Includes non-performing loans.

(2)

Includes federal funds sold, dividends from Federal Home Loan Bank stock and interest-earning deposits with banks.

(3)

Interest-rate spread represents the difference between the average yield on interest-earning assets and the average rate of interest-bearing liabilities.

(4)

Net interest margin is net interest income divided by average interest-earning assets.

Index

Comparison of the Three-Month Periods Ended September 30, 2010 and 2009

General. Net loss available to common shareholders for the three months ended September 30, 2010, was $1.6 million or $(.76) per basic and diluted common share compared to a net loss available to common shareholders of $1.7 million or $(.81) per basic and diluted common share for the three-month period ended September 30, 2009. This decrease in the Company's net losses was primarily due to decreases in interest expense and the provision for loan losses, partially offset by a decrease in interest income and an increase in non-interest income and an increase in non-interest expenses.

Interest Income. Interest income decreased to $3.0 million for the three months ended September 30, 2010 from $3.2 million for the three months ended September 30, 2009. Interest income on loans decreased to $2.7 million due to a decrease in the average loan portfolio balance for the three months ended September 30, 2010, partially offset by an increase in the average yield earned.

Interest Expense. Interest expense decreased by $556,000 for the three months ended September 30, 2010, from the three months ended September 30, 2009. Interest expense decreased due to a decrease in the average yield paid on deposits, and a decrease in the average balance of deposit accounts for the three months ended September 30, 2010. In addition, the cost of average borrowings from the Federal Home Loan Bank decreased for the three months ended September 30, 2010 as compared to the same period in 2009, partially offset by an increase in the average balance of total borrowings.

Provision for Loan Losses. The provision for loan losses is charged to operations to bring the total allowance to a level deemed appropriate by management and is based upon historical experience, the volume and type of lending conducted by the Company, industry standards, the amount of impaired loans, general economic conditions, particularly as they relate to the Company's market areas, and other factors related to the estimated collectibility of the Company's loan portfolio. The provision for the three months ended September 30, 2010, was $1.5 million compared to $2.0 million for the same period in 2009. Management believes the balance in the allowance for loan losses of $5.3 million at September 30, 2010 is adequate.

Allowance for Loan Losses to Nonperforming Loans. At September 30, 2010, the ratio of the allowance for loan losses to nonperforming loans was 43.06%. At September 30, 2009, this ratio was 25.88%.

Non-interest Income. Total non-interest income increased to $1.1 million for the three months ended September 30, 2010, from $355,000 for the three months ended September 30, 2009. The increase in 2010 was primarily due to an increase in gain on sale of securities, offset by decreases in loan brokerage fees, service charges and fees, and gain on sale of SBA loans.

Non-interest Expenses. Total non-interest expenses increased to $3.0 million for the three months ended September 30, 2010 from $2.7 million for the three months ended September 30, 2009, primarily due to an increases in FDIC insurance of $37,000, as well as an increases in supplies, professional fees and other expenses totaling $271,000 and a provision for losses on foreclosed assets of $264,000, partially offset by decreases in employee compensation, and losses, write-downs and expenses on foreclosed assets, totaling $256,000 .

Income Taxes. The income tax benefit was $1.1 million for the three months ended September 30, 2009. There was no tax benefit recognized for the three months ended September 30, 2010.

(continued)

Index

Comparison of the Nine-Month Periods Ended September 30, 2010 and 2009

General. Net loss available to common shareholders for the nine months ended September 30, 2010 was $5.6 million or $(2.72) per basic and diluted common share compared to a net loss available to common shareholders of $3.7 million or $(1.81) per basic and diluted common share for the nine months ended September 30, 2009. This increase in the Company's net losses was primarily due to a decrease in interest income, an increase in the provision for loan losses, an increase in non-interest expense and a tax benefit recognized in 2009, partially offset by a decrease in interest expense and an increase in non-interest income.

Interest Income. Interest income decreased to $9.1 million for the nine months ended September 30, 2010 from $9.6 million for the nine months ended September 30, 2009. Interest income on loans decreased to $8.0 million due to a slight decrease in the average yield earned, as well as a decrease in the average loan portfolio balance for the nine months ended September 30, 2010.

Interest Expense. Interest expense decreased to $3.3 million for the nine months ended September 30, 2010, from $4.9 million for the nine months ended September 30, 2009. Interest expense decreased due to a decrease in the average yield paid on deposits, partially offset by an increase in the average balance of deposit accounts for the nine months ended September 30, 2010. In addition, the cost of average borrowings from the Federal Home Loan Bank decreased for the nine months ended September 30, 2010 as compared to the same period in 2009, partially offset by an increase in the average balance of total borrowings.

Provision for Loan Losses. The provision for loan losses is charged to operations to bring the total allowance to a level deemed appropriate by management and is based upon historical experience, the volume and type of lending conducted by the Company, industry standards, the amount of impaired loans, general economic conditions, particularly as they relate to the Company's market areas, and other factors related to the estimated collectibility of the Company's loan portfolio. The provision for the nine months ended September 30, 2010, was $4.6 million compared to $3.9 million for the same period in 2009. Management believes the balance in the allowance for loan losses of $5.3 million at September 30, 2010 is adequate.

Non-interest Income. Total non-interest income increased to $1.7 million for the nine months ended September 30, 2010, from $902,000 for the nine months ended September 30, 2009. The 2009 period included a $548,000 write-down of other assets which did not occur in 2010. The remaining $289,000 increase in 2010 was due to increases in service charges on deposit accounts, gain on the sale of SBA loans, gain on the sale of securities, income from BOLI and other service charges and fees, partially offset by a decrease in loan brokerage fees.

Non-interest Expenses. Total non-interest expenses increased to $8.2 million for the nine months ended September 30, 2010 from $7.6 million for the nine months ended September 30, 2009. This increase was primarily due to a $433,000 increase in FDIC insurance premiums, as well as an $800,000 increase in professional fees, data processing, supplies, provision for losses on foreclosed assets and other expense. These increases were partially offset by decreases of $618,000 in compensation, occupancy and equipment, advertising and write-down and expenses of foreclosed assets resulting from the Company’s efforts to reduce expenses.

Income Taxes. The income tax benefit for the nine months ended September 30, 2009, was $2.5 million. There was no tax benefit recognized for the nine months ended September 30, 2010.

Index

Commercial Real Estate Lending

We have significant exposure to commercial real estate loans.

Loan extensions. On occasion, we may extend such loans at or near original maturity and, due to the existence of guarantees, do not consider them to be impaired. As of September 30, 2010, we had fewer than ten loans that would be classified in this category. Terms vary by the individual circumstances, guarantor strength and collateral. We typically look for some improvement in our position in exchange for a renewal. This improvement may come in the form of a principal reduction, revised amortization and/or additional conditions agreed upon via a written forbearance agreement. We have offered some of these borrowers periods of interest-only payment (typically one year or less) or some other reduced amortization, but this is not always the case. None of these loans would be considered collateral dependent.

Furthermore, we never extend loan terms solely due to the existence of a guarantee. A loan extension would be considered a troubled debt restructuring if we granted a distressed borrower reduced payment terms for six months or longer. We may offer such terms at the same or a reduced rate to allow for improved cash flow. We do not typically offer reduced payment terms in excess of one year at a time without revaluating the credit.

Evaluation of guarantors. We require personal guarantees on all commercial real estate loans, except a small number of loans to non-profit organizations where guarantees are not available. We perform a cash flow analysis of the guarantor and the project, along with a consolidated global analysis of the entire credit relationship. Information used in this review is collected from personal financial statements, credit reports and tax returns as well as any other available information. We review a guarantor’s payment history and any collections, judgments or other adverse filings. When originating new loans we generally require that personal financial statements be no older than one month, but in no case older than six months. We require the last three years of complete tax returns and extensions if the most recent return is not available. Financial statements and W-2’s are used to supplement this information when the tax returns are stale. We do not make a loan where the guarantor is outside of a tax filing extension period and has not provided us with a current return. Updated financial information is required, and loans are reviewed, at least annually.

Collection from guarantors. We have often found that the threat or filing of a suit will bring a guarantor to commence settlement negotiations. In these cases we have occasionally considered and accepted the release of a guarantee in exchange for the payment of an expected deficiency. We have also released guarantees in exchange for deeds-in-lieu and voluntary foreclosures. In these instances we obtain a current certified financial disclosure from the guarantor. We consider the guarantor’s assets, cash flow, the size of any expected deficiency and the cost of litigation to determine whether it is appropriate to release a guarantee or whether to require an additional payment in exchange for a release.

We have classified our experience pursuing guarantors into three categories: Resolved Satisfactorily, Resolved Unsatisfactorily and Pending. Both categories referred to as Resolved include any relationship where we have either come to an agreement with the borrower, come to a settlement, completed our litigation or are otherwise very close to settling the entire relationship. The Satisfactory subset of Resolved are where the borrower/guarantor is still in compliance with an agreement or where we have been able to take possession of collateral to recover at least 90% of our exposure, with or without additional guarantor support. Some of these have required a series of simple forceful discussions, others have required varying degrees of legal involvement and others have required court action. Many of these did not require a change in terms. A Resolved Unsatisfactorily situation is one were we have either completed litigation or reached a settlement where the 90% recovery threshold has not been met. Pending relationships are almost all in litigation currently.

(continued)

Index

Commercial Real Estate Lending, continued

In the table below, the year correlates to the year the borrower first began having financial difficulty. Some negotiations have carried on through multiple years. The large jump in 2008 and then the subsequent decline are noteworthy. This is especially true in 2010 where new issues have been limited at $1.3MM. All of our current issues have been ongoing for a while (dollars in millions, totals may not reconcile due to rounding).

	Status as of September 30, 2010
	Resolved Satisfactorily			Resolved Unsatisfactorily			Pending			Totals
	#	Approximate Amount		#	Approximate Amount		#	Approximate Amount		#	Approximate Amount
2007	7	$	5.8	0	$	0	1	$	0.4	8	$	6.2
2008	19		20.3	4		3.8	5		6.6	28		30.7
2009	15		13.4	4		1.6	6		5.2	25		20.2
2010	5		1.3	0		0	0		0	5		1.3
Total	46	$	40.8	8	$	5.4	12	$		66	$	58.4

Updating appraisals. We obtain updated appraisals at least annually for non-accrual loans. We regularly monitor a variety of local and national economic data such as unemployment, foreclosures and current sales prices on various types of properties. When we observe continued deterioration or other issues on any of those factors we may choose to obtain an earlier valuation, such as a comparable market analysis or updated appraisal. We also closely monitor comparable sales on properties similar to its collateral on non-accrual loans. All appraisals are reviewed for accuracy by our credit department and the responsible loan officer. We do not make adjustments to appraised values. If we perceive a discrepancy with an appraisal, we discuss it with the appraiser and allow the appraiser to adjust the value if he or she agrees with our comments. Our allowance for loan losses calculations are always based on current appraisals. Our credit department is independent from the lending staff and provides an additional level of control to the process.

Out of market lending. We operate as a community bank; as such all of our loans are located in the South Florida markets, with one out-of-area loan participation exception. The out-of-area participation loan is nonperforming and is currently controlled by the FDIC. We have a 1.77% participation ownership in this loan for a total balance of just under $1,000,000. We received an updated appraisal on this property within the last quarter and we obtain monthly progress reports on its resolution. The property is located in North Florida and an onsite inspection has been conducted by one of our officers.

Interest reserves. We have made only one loan with an interest reserve within the last twenty-one months. The original principal was less than $200,000 and the interest reserve was depleted prior to February 2010. The guarantors have the ability to make their payments without cash flow from the collateral property and have been doing so since February 2010. The interest reserve was made as an inducement to approve and was not needed to support our analysis of the borrower’s and guarantors’ cash flow. This loan is not on non-accrual status.

We also recently entered into an agreement with a borrower to pre-pay a year of amortized payments in advance on another commercial real estate loan relationship that is in workout. The borrower has been making the payments for these loans on its own since 2007, without an interest reserve. This borrower-funded reserve was obtained as an inducement to us to grant an extension and no new bank-lent funds were extended to fund the reserve.

We have only made three other loans with interest reserves in our entire operating history and we do not intend to make any in the future, unless such reserves are established by the borrower with funds from sources other than a loan made by us.

(continued)

Index

Construction Lending

All of our construction loans are underwritten based on project feasibility and historical cash flow. We have very few construction loans and all of them are intended to be owner occupied. We ceased making non-owner occupied construction loans in 2008.

We perform the same underwriting procedures for construction loans as described above for commercial real estate loans. We also require a current title insurance policy and satisfactory environmental report. Construction is monitored by an independent construction inspector with supervision and review by the responsible officer. A draw request, current construction inspection and construction lien releases are required prior to the dispersal of each draw.

Restructured Loans

A borrower must make at least nine consecutive monthly payments on time to be considered eligible to be returned to accrual status once a loan is restructured. Additionally, a borrower would be required to demonstrate the ability to service the debt with financial statements and/or tax returns.

With respect to troubled debt restructurings, the primary concession we offer is a reduced amortization or an interest-only period lasting from one month to one year. We rarely grant payment extensions on anything other than small consumer loans. We have found that payment extensions cause extended periods of delayed amortization that do not work to the benefit of the borrower or us. We have made a few exceptions when a borrower grants us additional collateral that improves our position beyond the impact of the payment deferral.

We currently have fewer than ten loan relationships where we have granted some interest rate relief. These were granted for limited periods of less than three years. Our policy is to have an interest rate floor of 5% and to charge as close to the current market rate as possible for a similar term loan.

We have no instances where we have forgiven principal. We have two instances where we have charged-off a note and have not required the borrower to make payments until another note is satisfied or collateral is sold. Each of those charge-offs was for less than $100,000.

We typically require written forbearance agreements for any commercial real estate loan modifications in excess of nine months and frequently require them on shorter modifications. Our forbearance agreement form requires a borrower to admit a default and grants us numerous legal benefits in the event we are forced to foreclose.

We have had significant success working with borrowers. A modification is discussed thoroughly among our senior officers prior to making an offer to a borrower. All modifications are vetted and customized to be feasible considering a borrower’s circumstances and to match the best possible circumstances available for us. The addition of a written forbearance agreement provides substantial leverage with a borrower and expedites legal action or settlement in the event a borrower is not able to meet the revised terms.

Index

Item 4.

Controls and Procedures

(a)

Evaluation of Disclosure Controls and Procedures

We maintain controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed as of September 30, 2010, our Principal Executive Officer and Principal Financial Officer concluded that, subject to the limitations noted below, the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms.

(b)	Changes in Internal Controls

We have made no significant changes in our internal controls over financial reporting during the quarter ended September 30, 2010 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

(c)	Limitations on the Effectiveness of Controls

Our Management, including our Principal Executive Officer and Principal Financial Officer, does not expect that our disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Part II. Other Information

Item 1.

Legal Proceedings

There are no material pending legal proceedings to which the Company is a party or to which any of its property is subject.

Item 3. Defaults Upon Senior Securities.

Beginning with the dividend payment due on February 15, 2010, we have suspended paying dividends on our Series A Preferred Stock. The total arrearage as of September 30, 2010 was $257,000.

Index

Part II. Other Information, continued

Item 6.

Exhibits

Exhibits. The following exhibits are filed with or incorporated by reference into this report. The exhibits marked with an (a) were previously filed as a part of the Company’s Registration Statement on Form SB-1, filed with the Federal Deposit Insurance Corporation on April 30, 2000; those marked with a (b) were filed with the Company’s 2003 Proxy Statement filed with the Security and Exchange Commission (“SEC”) on March 28, 2003; those marked with a (c) were filed with the Company’s Definitive Schedule 14A filed with the SEC on October 26, 2005; those marked with a (d) were filed with the Company’s Form 8-A with the SEC on November 16, 2001; those marked with an (e) were filed with the Company’s Form 10-QSB with the SEC on August 2, 2008; those marked with an (f) were filed with the Company’s Form 10-QSB with the SEC on November 6, 2008; those marked with an (h) were filed with the Company’s Form 8-K on December 5, 2008; and those marked with a (j) were filed with the Company’s Form 10-QSB with the SEC on November 16, 2009.

Exhibit No.	Description of Exhibit
(d)3.1	Articles of Incorporation
(d)3.2	Bylaws
(e)3.3	Amendment to the Bylaws, Adopted August 15, 2008
(h)3.4	Articles of Amendment to the Articles of Incorporation authorizing the Preferred Shares
(a)4.1	Specimen copy of certificate evidencing shares of the Company’s common capital stock, $0.01 par value
(a)4.2	First Peoples Bank Stock Option Plan dated January 14, 1999
(h)4.3	Form of Certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series A
(h)4.4	Warrant to Purchase Up to 183,158 Shares of Common Stock
(b)4.5	Amendment to First Peoples Bank Stock Option Plan

FPB BANCORP INC 10-Q