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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, 2011

¨	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 000-53813

FLORIDA BANK GROUP, INC.

(Exact name of registrant as specified in its charter)

FLORIDA

20-8732828

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

201 N. Franklin Street, Suite 100, Tampa, Florida 33602

(Address of principal executive offices) (Zip Code)

(813) 367-5270

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Number of shares of Common Stock, $0.01 Par Value as of October 31, 2011:16,636,815.

FLORIDA BANK GROUP, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED SEPTEMBER 30, 2011

TABLE OF CONTENTS


		Page
PART I – Financial Information

Item 1.	Financial Statements
	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets – September 30, 2011 (Unaudited) and December 31, 2010		1
	Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss) (Unaudited) – Three and Nine months Ended September 30, 2011 and 2010		2
	Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Nine months Ended September 30, 2011 and 2010		3
	Condensed Consolidated Statements of Cash Flows (Unaudited) – Nine months Ended September 30, 2011 and 2010		4
	Notes to Condensed Consolidated Financial Statements (Unaudited)		6
	Review by Independent Registered Public Accounting Firm		22
	Report of Independent Registered Public Accounting Firm		23

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24

Item 3.	Quantitative and Qualitative Disclosure About Market Risk		41

Item 4.	Controls and Procedures		41

PART II – Other Information

Item 1.	Legal Proceedings		41

Item 1A.	Risk Factors		41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		41

Item 3.	Defaults Upon Senior Securities		42

Item 4.	(Removed and Reserved)		42

Item 5.	Other Information		42

Item 6.	Exhibits		42

Signatures			43

Certifications

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

FLORIDA BANK GROUP, INC.

Condensed Consolidated Balance Sheets

($ in thousands, except share amounts)


	September 30, 2011			December 31, 2010
	(unaudited)
Assets
Cash and due from banks	$	7,643		$	4,618
Interest-bearing Deposits and Federal Funds Sold		47,372			35,683

Cash and cash equivalents		55,015			40,301

Securities available for sale		156,349			177,451
Loans, net of allowance for loan losses of $22,333 in 2011 and $20,830 in 2010		490,226			572,045
Federal Reserve Bank stock, at cost		1,428			2,781
Federal Home Loan Bank stock, at cost		4,775			5,032
Accrued interest receivable		1,741			2,475
Premises and equipment, net		25,027			25,815
Foreclosed real estate		5,521			7,018
Prepaid expenses and other assets		4,191			5,490

Total assets	$	744,273		$	838,408


Liabilities and Stockholders’ Equity

Liabilities:
Deposits:
Noninterest-bearing demand	$	79,618		$	68,168
Interest-bearing demand		60,098			72,247
Savings		9,734			10,043
Money market		148,237			201,718
Time		326,498			360,158

Total deposits		624,185			712,334

Accrued expenses and other liabilities		4,491			4,768
Federal Home Loan Bank advances		67,700			67,700

Total liabilities		696,376			784,802


Stockholders’ equity:
Preferred Stock Series A, $.01 par value; $1,000 liquidation value; 20,471 shares outstanding in 2011 and 2010		20,471			20,471
Preferred Stock Series B, $.01 par value; $1,000 liquidation value; 1,024 shares outstanding in 2011 and 2010		1,024			1,024
Preferred Stock Series C, $.01 par value; $1,000 liquidation value; 5,257 shares outstanding in 2011		5,257			—
Preferred Stock - Discount		(576	)		(730	)
Common stock, $.01 par value, 250,000,000 and 50,000,000 shares authorized in 2011 and 2010, respectively, 16,649,398 and 14,341,898 shares issued in 2011 and 2010, respectively		166			143
Additional paid-in capital		152,099			150,817
Treasury stock (12,583 shares in 2011 and 2010), at cost		(164	)		(164	)
Accumulated deficit		(132,417	)		(113,848	)
Accumulated other comprehensive income (loss)		2,037			(4,107	)

Total stockholders’ equity		47,897			53,606

	$	744,273		$	838,408

The accompanying notes are an integral part of these condensed consolidated financial statements.

FLORIDA BANK GROUP, INC.

Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss) (Unaudited)

($ in thousands, except per share amounts)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Interest income:
Loans	$	7,055		$	8,453		$	21,827		$	25,681
Securities available for sale		950			1,075			3,154			3,148
Other interest-earning assets		61			71			194			196

Total interest income		8,066			9,599			25,175			29,025

Interest expense:
Deposits:
Demand		87			137			276			458
Savings		9			15			29			56
Money market		399			598			1,317			1,688
Time		1,688			2,327			5,604			7,501
Federal Home Loan Bank advances		724			771			2,169			2,394

Total interest expense		2,907			3,848			9,395			12,097

Net interest income before provision for loan losses		5,159			5,751			15,780			16,928
Provision for loan losses		2,157			2,961			15,651			14,902

Net interest income after provision for loan losses		3,002			2,790			129			2,026

Noninterest income (expense):
Service charges on deposit accounts		225			241			663			706
Other service charges and fees		166			181			447			424
Gain on sale of securities available for sale		43			3,226			85			3,188
Other-than-temporary impairment of securities available for sale		—			—			—			(549	)
Other		245			161			609			588

Total noninterest income		679			3,809			1,804			4,357

Noninterest expenses:
Salaries and employee benefits		2,635			3,324			8,060			10,819
Occupancy		1,160			1,428			3,494			4,164
Data processing		347			291			1,004			890
Stationary, printing and supplies		59			67			201			226
Business development		44			114			139			316
Insurance, including deposit insurance premium		532			545			1,826			1,549
Professional fees		224			426			845			1,339
Marketing		9			14			40			51
Federal Home Loan Bank advance prepayment penalties		—			—			2			41
Loss on sale of foreclosed real estate		50			127			55			262
Write-down of foreclosed real estate		1,764			150			2,178			792
Foreclosed real estate expense		156			142			359			327
Other		222			292			831			875

Total noninterest expense		7,202			6,920			19,034			21,651

Loss before income tax benefit		(3,521	)		(321	)		(17,101	)		(15,268	)
Income tax benefit (expense)		—			(114	)		25			(5,715	)

Net loss		(3,521	)		(207	)		(17,126	)		(9,553	)
Preferred stock dividend requirements and discount accretion		(367	)		(330	)		(2,279	)		(990	)

Net loss available to common stockholders		(3,888	)		(537	)		(19,405	)		(10,543	)
Other comprehensive income (loss):
Change in unrealized holding losses on securities available for sale		2,536			(994	)		6,144			(704	)

Comprehensive loss	$	(1,352	)	$	(1,531	)	$	(13,261	)	$	(11,247	)

Loss per common share:
Basic and Diluted	$	(0.25	)	$	(0.04	)	$	(1.32	)	$	(0.74	)


Dividends paid	$	—		$	—		$	—		$	—

The accompanying notes are an integral part of these condensed consolidated financial statements.

FLORIDA BANK GROUP, INC.

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

For the Nine Months Ended September 30, 2011 and 2010

($ in thousands, except share amounts)


	Preferred Stock																		Common Stock													Accumulated
	Series A				Series B							Series C											Additional Paid-in			Treasury			Accumulated			Other Comprehensive			Total Stockholders’
	Shares		Amount		Shares		Amount		Discount			Shares		Amount		Discount			Shares		Amount		Capital			Stock			Deficit			Income (Loss)			Equity
Balance, December 31, 2010		20,471	$	20,471		1,024	$	1,024	$	(730	)		—	$	—	$	—			14,341,898	$	143	$	150,817		$	(164	)	$	(113,848	)	$	(4,107	)	$	53,606
Net loss		—		—		—		—		—			—		—		—			—		—		—			—			(17,126	)		—			(17,126	)
Net Change in Unrealized Loss On Available-for-Sale Securities		—		—		—		—		—			—		—		—			—		—		—			—			—			6,144			6,144
Proceeds from issuance of 5,257 shares of Series C preferred stock		—		—		—		—		—			5,257		5,257		(1,289	)		—		—		1,289			—			—			—			5,257

Preferred stock warrants exercised		—		—		—		—		—			—		—		—			2,307,500		23		—			—			—			—			23

Preferred stock discount accretion		—		—		—		—		154			—		—		1,289			—		—		—			—			(1,443	)		—			—

Preferred stock issuance costs		—		—		—		—		—			—		—		—			—		—		(7	)		—			—			—			(7	)

Balance, September 30, 2011		20,471	$	20,471		1,024	$	1,024	$	(576	)		5,257	$	5,257	$	—			16,649,398	$	166	$	152,099		$	(164	)	$	(132,417	)	$	2,037		$	47,897


Balance, December 31, 2009		20,471	$	20,471		1,024	$	1,024	$	(935	)		—		—	$	—			14,341,898	$	143	$	150,817		$	(164	)	$	(58,415	)	$	418		$	113,359

Net loss		—		—		—		—		—			—		—		—			—		—		—			—			(9,553	)		—			(9,553	)
Net Change in Unrealized Gain On Available-for-Sale Securities, net of income taxes		—		—		—		—		—			—		—		—			—		—		—			—			—			(704	)		(704	)
Preferred stock dividend requirements and discount accretion		—		—		—		—		154			—		—		—			—		—		—			—			(990	)		—			(836	)

Balance, September 30, 2010		20,471	$	20,471		1,024	$	1,024	$	(781	)		—	$	—	$	—			14,341,898	$	143	$	150,817		$	(164	)	$	(68,958	)	$	(286	)	$	102,266

The accompanying notes are an integral part of these condensed consolidated financial statements.

FLORIDA BANK GROUP, INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)


	Nine months ended September 30,
	2011			2010
Cash flows from operating activities:
Net loss	$	(17,126	)	$	(9,553	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		1,012			1,139
Amortization of deferred loan fees, net		(96	)		(100	)
Amortization of premium and discounts on securities, net		1,114			525
Provision for loan losses		15,651			14,902
Deferred income taxes		—			(5,715	)
Gain on sale of securities available for sale		(85	)		(3,188	)
Loss on sale of foreclosed real estate		55			262
Write-down of foreclosed real estate		2,178			792
Other-than-temporary impairment of securities available for sale		—			549
Decrease (increase) in accrued interest receivable		734			(15	)
Decrease in prepaid expenses and other assets		1,299			989
(Decrease) increase in accrued expenses and other liabilities		(218	)		580
Decrease in official checks		(59	)		(260	)

Net cash provided by operating activities		4,459			907


Cash flows from investing activities:
Net decrease in loans		64,694			8,110
Proceeds from sales, maturities, calls and repayments of securities available for sale		26,217			153,597
Purchase of securities available for sale		—			(203,147	)
Proceeds from sale of foreclosed real estate		834			7,770
Redemption of Federal Reserve Bank stock		1,353			449
Redemption of Federal Home Loan Bank stock		257			385
Net acquisition of premises and equipment		(224	)		(985	)

Net cash provided by (used in) investing activities		93,131			(33,821	)


Cash flows from financing activities:
Net (decrease) increase in deposits		(88,149	)		52,288
Net decrease in Federal Home Loan Bank advances		—			(4,000	)
Proceeds from exercise of stock purchase warrants		23			—
Preferred Stock Issued, net of issuance costs		5,250			—
Preferred stock dividend requirements		—			(836	)

Net cash (used in) provided by financing activities		(82,876	)		47,452

Net increase in cash and cash equivalents		14,714			14,538
Cash and cash equivalents at beginning of period		40,301			29,361

Cash and cash equivalents at end of period	$	55,015		$	43,899

(Continued)

FLORIDA BANK GROUP, INC.

Condensed Consolidated Statements of Cash Flows (Unaudited), Continued

(In thousands)


	Nine months ended September 30,
	2011		2010
Supplemental cash flow information:
Cash paid during the period for -
Interest	$	9,706	$	12,524

Noncash transactions:
Accumulated other comprehensive income (loss), change in unrealized gains (losses) on securities available for sale, net of income taxes in 2010	$	6,144	$	(704	)

Transfer of loans to foreclosed real estate	$	1,570	$	7,261

Transfer of foreclosed real estate to loans	$	—	$	2,880

The accompanying notes are an integral part of these condensed consolidated financial statements.

FLORIDA BANK GROUP, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars in thousands except per share data)

Note 1 – Significant Accounting Policies

Basis of Presentation

Florida Bank Group, Inc. (the “Holding Company”) owns 100% of the outstanding common stock of Florida Bank (the “Bank”), (collectively, the “Company”). The Holding Company’s only significant business activity is the operation of the Bank. The Bank is a Florida state-chartered Federal Reserve member commercial bank. The Bank was acquired in January 2002.

The Bank offers a wide range of commercial and retail banking services to businesses and individuals. In addition to traditional products and services, the Bank offers other products and services, such as debit cards, internet banking, and electronic bill payment services. Consumer loan products offered by the Bank include residential loans, home equity lines of credit, second mortgages, new and used auto loans, overdraft protection, and unsecured personal credit lines. Commercial and small business loan products include SBA loans, commercial real estate construction and term loans; working capital loans and lines of credit; demand, term and time loans; and equipment, inventory and accounts receivable financing.

The unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. The Company follows GAAP and reporting practices applicable to the banking industry, which are described in Note 1 to the Consolidated Financial Statements included in the Company’s 2010 Form 10-K.

In preparation of the condensed consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the condensed consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the value of foreclosed real estate and the value of the deferred tax asset.

In the opinion of management, the condensed consolidated financial statements contain all adjustments, which are those of a recurring nature, and disclosures necessary to present fairly the financial position of the Company as of September 30, 2011 and the results of operations and cash flows for the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for the entire year or any other interim period.

Note 2 – Securities Available for Sale.

The amortized cost and related market value of investment securities available-for-sale were as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
*At September 30, 2011*
Mortgage-backed securities	$	153,795	$	2,067	$	(35	)	$	155,827
Mutual funds		517		5		—			522

Total	$	154,312	$	2,072	$	(35	)	$	156,349


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
*At December 31, 2010*
Mortgage-backed securities	$	181,053	$	134	$	(4,228	)	$	176,959
Mutual funds		505		—		(13	)		492

Total	$	181,558	$	134	$	(4,241	)	$	177,451

Gross proceeds from the sale of securities classified as available for sale were $13.4 million for the nine months ended September 30, 2011 and resulted in gross gains of $85 and no losses. Gross proceeds from the sale of securities classified as available for sale was approximately $132.7 million for the nine months ended September 30, 2010 and resulted in gains of $3.3 million and gross losses of $0.1 million.

The following tables classify those securities in an unrealized loss position at September 30, 2011 and December 31, 2010, based upon length of time in a continuous loss position. The tables show the current fair value of the securities and the amount of unrealized loss for each category of investment:


	As of September 30, 2011
	Less Than Twelve Months				Over Twelve Months
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
Mortgage-backed securities	$	18	$	6,569	$	17	$	6,051
Mutual funds		—		—		—		—

	$	18	$	6,569	$	17	$	6,051


	As of December 31, 2010
	Less Than Twelve Months				Over Twelve Months
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
Mortgage-backed securities	$	4,228	$	167,130	$	—	$	—
Mutual funds		13		492		—		—

	$	4,241	$	167,622	$	—	$	—

The unrealized losses on investment securities available for sale were caused by market conditions. The Company plans to hold the securities for a period of time sufficient for the fair value of the securities to recover and it is not more likely than not that it will be required to sell the securities before recovery of their amortized cost basis. The losses are therefore not considered other-than-temporary at September 30, 2011.

Management evaluates securities for other-than-temporary impairment (“OTTI”) 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 Company’s intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

For investment securities with unrealized losses greater than 12 months, management utilizes various resources, including input from independent third party firms to perform an analysis of expected future cash flows. Investment securities classified as available-for-sale or held-to-maturity are generally evaluated for OTTI under the provisions of ASC 320-10, Investments — Debt and Equity Securities. In determining OTTI, management considers many factors, including: (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, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

If a security has a decline in fair value that is other than temporary, the security will be written down to its fair value by recording an OTTI loss in the condensed consolidated statement of operations. For a debt security that the Company does not intend to sell and it is not more likely than not that the Company will be required to sell before recovery of its amortized cost, only the credit loss component of the impairment is recorded in the condensed consolidated statement of operations, while the impairment related to all other factors is recorded in other comprehensive income (loss).

The table below provides a cumulative roll forward of credit losses through the nine months ended September 30, 2011, relating to the Company’s available for sale debt securities:


Balance at, January 1, 2011	$	540
Additions for credit losses on securities not previously impaired		—
Reductions for securities sold during the period		—

Balance at, September 30, 2011	$	540

Note 3 – Loans

The components of loans were as follows:


	As of
	September 30, 2011			December 31, 2010
Commercial	$	34,992		$	47,475
Commercial Real Estate		293,254			329,487
Residential Real Estate		176,514			203,488
Consumer Loans		8,050			12,879

		512,810			593,329

Less:
Net deferred fees		(251	)		(454	)
Allowance for loan losses		(22,333	)		(20,830	)

Loans, Net	$	490,226		$	572,045

Allowance for Loan Losses.

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to operations. 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.

The allowance for loan losses is evaluated on at least a quarterly basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired. For such loans that are collateral dependent, an allowance is established when the fair value of the loan’s collateral is less than the recorded value of the loan. For impaired loans that are not collateral dependent, an allowance is established when the discounted cash flows of such loans are lower than their carrying values. A loan is considered impaired when, based on current information and events, it is probable the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. It should be noted that substantially all of our impaired loans are collateral dependent and thus impairment is usually measured by the fair value of the collateral method.

The general component covers all other loans and is based on historical loss experience adjusted for qualitative factors. This is supplemented by the risks for each portfolio segment. Risk factors impacting loans in each of the portfolio segments include: consideration of the reliability of the bank’s loan grading system, the volume of criticized loans, concentrations of credit, the current level of past due and non performing loans, past loan experience, evaluation of probable losses in the Bank’s loan portfolio, including adversely classified loans, and the impact of market conditions on loan and collateral valuations and collectability. Large groups of smaller homogeneous loans are collectively evaluated for impairment.

Credit Exposure and Quality Indicators

The Company has divided the loan portfolio into four portfolio segments, each with different risk characteristics and methodologies for assessing risk. The portfolio segments identified by the Company are Commercial, Commercial Real estate, Residential Real Estate and Consumer Loans. The risk characteristics of each loan portfolio segment are as follows:

Commercial. Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable, inventory, or equipment, and may include a personal guarantee of the owners. Some short-term loans may be made on an unsecured basis.

Commercial Real Estate. Commercial real estate loans are underwritten based upon standards set forth in policies approved by the company’s board of directors (the “Board”). These loans consist of loans to finance construction, real estate purchases, expansion and improvements to commercial properties. These loans are secured by first liens on office buildings, churches, apartments, warehouses, manufacturing facilities, retail and mixed use properties located within the market area. The Company’s underwriting analysis includes credit verification, independent appraisals, a review of the borrower’s financial condition, and an analysis of the borrower’s underlying cash flows. Commercial real estate loans are usually larger than residential loans and involve greater credit risk. The Company monitors construction loans with third-party inspections and requires the receipt of lien waivers on funds advanced. The repayment of commercial real estate loans largely depends on the results of operations and management of these properties.

Residential Real Estate. Residential real estate loans are underwritten in accordance with policies set forth and approved by the Board, including repayment capacity and source, value of the underlying property, credit history and stability. Residential real estate loans include 1-4 family primary, secondary and investment properties, 1-4 family single family construction loans (owner occupied) and multi-family housing. These loans are approved based on an analysis of the borrower and guarantor, the viability of the project and on an acceptable percentage of the appraised value of the property. The Company monitors the construction loans with on-site third-party inspections and requires the receipt of lien waivers on funds advanced.

Consumer Loans. Consumer loans are those loans for personal, family, household purposes or personal investment purposes rather than business, commercial, or agriculture purposes. Consumer credits are to be evaluated on the basis of the borrower’s job, stability, income, capital, and collateral. They include loans extended for various purposes, including automobile purchases, home improvements, lines of credit, personal loans, and home equity loans. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Loans to consumers are extended after a credit evaluation, including the creditworthiness of the borrower(s), the purpose of the credit, and the source of repayment. Consumer loans are made at fixed and variable interest rates. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

An analysis of the changes in the allowance for loan losses for the three and nine month periods ended September 30, 2011 and 2010 is as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010

Balance At Beginning Of Period	$	21,399		$	25,545		$	20,830		$	21,342
Charge-Offs		(2,719	)		(7,164	)		(16,611	)		(15,354	)
Recoveries		1,496			11			2,463			463
Provision For Loan Losses		2,157			2,961			15,651			14,902


Balance At End Of Period	$	22,333		$	21,353		$	22,333		$	21,353

The following table sets forth the changes in the allowance and an allocation of the allowance by loan category as of September 30, 2011. The allocation 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. The general component covers non-impaired loans and is based on historical loss experience adjusted for current economic factors described above.


	At September 30, 2011
	Commercial			Commercial Real Estate			Residential Real Estate			Consumer Loans			Total
Allowance for credit losses:

Three Months Ending September 30, 2011
Balance at beginning of period	$	1,859		$	14,730		$	4,539		$	271		$	21,399
Charge-offs		(96	)		(1,612	)		(935	)		(76	)		(2,719	)
Recoveries		182			145			151			1,018			1,496
Provision for loan losses		(329	)		(241	)		3,745			(1,018	)		2,157

Balance at end of period	$	1,616		$	13,022		$	7,500		$	195		$	22,333


Nine Months Ending September 30, 2011
Balance at beginning of period	$	868		$	15,518		$	4,232		$	212			20,830
Charge-offs		(1,881	)		(7,910	)		(5,457	)		(1,363	)		(16,611	)
Recoveries		294			542			601			1,026			2,463
Provision for loan losses		2,335			4,872			8,124			320			15,651

Balance at end of period	$	1,616		$	13,022		$	7,500		$	195		$	22,333


Ending balance: individually evaluated for impairment	$	993		$	7,519		$	3,802		$	55		$	12,369


Ending balance: collectively evaluated for impairment	$	623		$	5,503		$	3,698		$	140		$	9,964


Loans:
Ending balance	$	34,992		$	293,254		$	176,514		$	8,050		$	512,810


Ending balance: individually evaluated for impairment	$	2,509		$	42,937		$	20,963		$	136		$	66,545


Ending balance: collectively evaluated for impairment	$	32,483		$	250,317		$	155,551		$	7,914		$	446,265


	At December 31, 2010
	Commercial			Commercial Real Estate			Residential Real Estate			Consumer Loans			Total

Allowance for credit losses:

Balance at beginning of year	$	2,136		$	13,081		$	5,393		$	732		$	21,342
Charge-offs		(4,563	)		(16,420	)		(6,965	)		(1,258	)		(29,206	)
Recoveries		365			6			133			—			504
Provision for loan losses		2,930			18,851			5,671			738			28,190

Balance at end of year	$	868		$	15,518		$	4,232		$	212		$	20,830


Ending balance: individually evaluated for impairment	$	225		$	7,870		$	1,692		$	103		$	9,890


Ending balance: collectively evaluated for impairment	$	643		$	7,648		$	2,540		$	109		$	10,940


Loans:
Ending balance	$	47,475		$	329,487		$	203,488		$	12,879		$	593,329


Ending balance: individually evaluated for impairment	$	1,573		$	36,468		$	18,784		$	3,258		$	60,083


Ending balance: collectively evaluated for impairment	$	45,902		$	293,019		$	184,704		$	9,621		$	533,246

Loan Impairment and Credit Losses.

The following is an analysis of impaired loans:


	At September 30, 2011						Three Months Ended September 30, 2011					Nine Months Ended September 30, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized			Average Recorded Investment		Interest Income Recognized
With no related allowance recorded: (1)
Commercial	$	1,284	$	8,152	$	—	$	1,262	$	80		$	1,250	$	220
Commercial Real Estate		18,444		28,731		—		17,415		591			17,956		965
Residential Real Estate		9,352		15,580		—		9,692		159			9,105		451
Consumer Loans		59		101		—		1,114		(126	)		58		1

Total	$	29,139	$	52,564	$	—	$	29,483	$	704		$	28,369	$	1,637


With an allowance recorded:
Commercial	$	1,226	$	1,282	$	993	$	869	$	—		$	1,193	$	18
Commercial Real Estate		24,493		26,216		7,519		23,763		53			23,845		367
Residential Real Estate		11,610		12,288		3,802		8,662		294			11,303		416
Consumer Loans		77		82		55		88		—			75		—

Total	$	37,406	$	39,868	$	12,369	$	33,382	$	347		$	36,416	$	801


Total	$	66,545	$	92,432	$	12,369	$	62,865	$	1,051		$	64,785	$	2,438

⁽¹⁾	Includes loans with partial charge-offs of $19,394 with net carrying values of $24,297 at September 30, 2011.


	At December 31, 2010						Full Year 2010
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:(2)
Commercial	$	1,212	$	5,068	$	—	$	1,090	$	282
Commercial Real Estate		16,278		26,612		—		14,650		1,138
Residential Real Estate		13,506		19,185		—		12,155		584
Consumer Loans		3,032		4,032		—		2,729		156

Total	$	34,028	$	54,897	$	—	$	30,624	$	2,160


With an allowance recorded:
Commercial	$	362	$	368	$	225	$	326	$	17
Commercial Real Estate		20,190		23,502		7,870		18,171		359
Residential Real Estate		5,277		5,571		1,692		4,749		139
Consumer Loans		226		226		103		203		14

Total	$	26,055	$	29,667	$	9,890	$	23,449	$	529


Total	$	60,083	$	84,564	$	9,890	$	54,073	$	2,689

⁽²⁾	Includes loans with partial charge-offs of $20,459 with net carrying values of $29,647 at December 31, 2010.

All loans are considered collateral dependent as of September 30, 2011 and December 31, 2010.

Nonaccrual Loans

The following is an analysis of nonaccrual loans as of September 30, 2011:


	Recorded Investment		Unpaid Principal Balance

Commercial	$	2,510	$	9,434
Commercial Real Estate		32,605		44,615
Residential Real Estate		13,197		20,102
Consumer Loans		136		184

Total	$	48,448	$	74,335

The following is an analysis of nonaccrual loans as of December 31, 2010:


	Recorded Investment		Unpaid Principal Balance
Commercial	$	1,573	$	5,436
Commercial Real Estate		33,907		47,552
Residential Real Estate		18,506		24,478
Consumer Loans		3,071		4,071

Total	$	57,057	$	81,537

The tables below summarize the payment status of loans in our total loan portfolio, including an aging of delinquent loans and loans 90 days or more past due and the credit quality of the Company’s loan portfolio. The delinquency aging includes all past due loans, both performing and nonperforming, as of September 30, 2011 and December 31, 2010:

As of September 30, 2011


	30-59 Days		60-89 Days		Greater Than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing

Commercial	$	—	$	—	$	2,510	$	2,510	$	32,482	$	34,992	$	—
Commercial Real Estate		282		—		32,605		32,887		260,367		293,254		—
Residential Real Estate		596		—		13,197		13,793		162,721		176,514		—
Consumer Loans		91		—		136		227		7,823		8,050		—


Total	$	969	$	—	$	48,448	$	49,417	$	463,393	$	512,810	$	—

As of December 31, 2010


	30-59 Days		60-89 Days		Greater Than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing

Commercial	$	907	$	861	$	1,573	$	3,341	$	44,134	$	47,475	$	—
Commercial Real Estate		7,156		2,205		33,907		43,268		286,219		329,487		—
Residential Real Estate		3,294		662		18,506		22,462		181,026		203,488		—
Consumer Loans		455		210		3,071		3,736		9,143		12,879		—


Total	$	11,812	$	3,938	$	57,057	$	72,807	$	520,522	$	593,329	$	—

The credit quality of the loan portfolio at September 30, 2011 based on internally assigned grades follows:


Risk Rating	Commercial		Commercial Real Estate		Residential Real Estate		Consumer Loans		Total		% of Total

Pass	$	26,101	$	220,465	$	142,487	$	6,725	$	395,778		77.2	%
Special mention		1,153		19,197		2,717		2		23,069		4.5	%
Substandard		5,229		20,987		18,112		1,187		45,515		8.9	%
Substandard Non-Accrual		2,509		32,605		13,198		136		48,448		9.4	%
Doubtful/Loss		—		—		—		—		—		0.0	%

Total	$	34,992	$	293,254	$	176,514	$	8,050	$	512,810		100.0	%

The credit quality of the loan portfolio at December 31, 2010 based on internally assigned grades follows:


Risk Rating	Commercial		Commercial Real Estate		Residential Real Estate		Consumer Loans		Total		% of Total

Pass		38,983		240,427		158,525		8,276		446,211		75.2	%
Special mention		653		18,224		6,433		234		25,544		4.3	%
Substandard		6,266		36,929		20,024		1,298		64,517		10.9	%
Substandard Non-Accrual		1,393		33,907		18,481		3,071		56,852		9.6	%
Doubtful/Loss		180		—		25		—		205		0.0	%

Total	$	47,475	$	329,487	$	203,488	$	12,879	$	593,329		100.0	%

Internally assigned loan grades are defined as follows:

•

Pass—Loan’s primary source of repayment is satisfactory, with secondary sources very likely to be realized if necessary.

•

Special Mention—Loan has potential weaknesses which may, if not reversed or corrected, weaken the credit or inadequately protect our credit position. These loans are generally paying on a timely basis. The maximum period in this risk grade is generally limited to six months.

•

Substandard—Loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. Such loans have a well-defined weakness or weaknesses that jeopardize the full repayment of the loan. They are characterized by the distinct possibility that the Company will sustain some loss in the future if the deficiencies or weaknesses are not corrected.

•

Substandard—Nonaccrual—Loan has all the characteristics of a substandard credit with payments having ceased or collection of payments in question. There is probability of loss.

•

Doubtful—Loan has all the weaknesses inherent in one classified substandard with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

•

Loss—Loan is considered uncollectible and of such little value that continuance as an asset is not warranted.

Modifications

The Company’s loan portfolio includes certain loans that have been modified in a troubled debt restructuring (TDR). A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company offers various types of concessions when modifying a loan, which could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. However, forgiveness of principal is granted on an infrequent basis. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments or term extensions. Additional collateral, a co-borrower, or a guarantor is often requested. Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk. Construction loans modified in a TDR may also involve extending the interest-only payment period. Residential mortgage loans modified in a TDR are primarily comprised of loans where monthly payments are lowered to accommodate the borrowers’ financial needs for a period of time. During that time, the borrower’s entire monthly payment may be applied to principal. After the lowered monthly payment period ends, the borrower may revert back to paying principal and interest per the original terms with the maturity date adjusted accordingly if payment history is satisfactory.

Loans modified in a TDR may already be on non-accrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. As a result, loans modified in a TDR for the Company may have the financial effect of increasing the specific allowance associated with the loan. An allowance for impaired loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent.

The following presents by class, information related to loans modified in a TDR during the three and nine months ended September 30, 2011:


	Three Months Ended September 30, 2011						Nine Months Ended September 30, 2011
Trouble Debt Restructuring⁽¹⁾ (Dollars in thousands)	Number of Modifications Resulting in TDRs		Recorded TDR Investment		Allowance at end of Period		Number of Modifications Resulting in TDRs		Recorded TDR Investment		Allowance at end of Period
Commercial		—	$	—	$	—		1	$	125	$	125
Commercial real estate		1		711		204		8		5,575		1,532
Residential real estate		2		131		—		13		2,203		13

Total		3	$	842	$	204		22	$	7,903	$	1,670

(1)	The period end balances are inclusive of all partial paydowns and charge-offs since the modification date. Loans modified in a TDR that were fully paid down, charged off, or foreclosed upon by period end are not reported.

The following presents by class, loans modified in a TDR from October 1, 2010 through September 30, 2011 that subsequently defaulted (i.e., 30 days or more past due following a modification) during the three and nine months ended September 30, 2011:


	Three Months Ended September 30, 2011				Nine Months Ended September 30, 2011
Trouble Debt Restructuring ⁽¹⁾ (Dollars in thousands)	Number of Defaults		Recorded TDR Investment		Number of Defaults		Recorded TDR Investment
Commercial real estate		2	$	1,819		3		2,060
Residential real estate		4		754		4		754

Total		6	$	2,573		7	$	2,814

(1)	The period end balances are inclusive of all partial paydowns and charge-offs since the modification date. Loans modified in a TDR that were fully paid down, charged off, or foreclosed upon by period end are not reported.

As of September 30, 2011, we had $8.5 million of performing loans classified as TDRs.

Note 4 – Financial Instruments with Off-Balance-Sheet Risk

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 include unfunded loan commitments, unused lines of credit and standby letters of credit and may involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the condensed consolidated balance sheets. The contract amounts of these instruments reflect the extent of involvement the Company has in these financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for unfunded loan commitments, standby letters of credit and unused lines 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.

Unfunded loan commitments and unused lines of credit are agreements to lend to a customer as 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 some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on management’s credit evaluation of the counterparty.

Standby letters-of-credit are conditional lending commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters-of-credit is essentially the same as that involved in extending loan facilities to customers. The Company generally holds collateral supporting these commitments.

A summary of the notional amounts of the Company’s financial instruments at September 30, 2011, with off-balance-sheet risk was as follows:


	Contract Amount
Unfunded loan commitments	$	1,590

Unused lines of credit	$	55,447

Standby letters of credit	$	350

To help meet the funding needs noted above, the Company has available borrowing capacity from various sources including lines of credit with the FHLB. As of September 30, 2011, the Company had $32.6 million of letters of credit with the FHLB.

Note 5 – Stock-Based Compensation Plan

Certain key employees and directors of the Company have options to purchase shares of the Company’s common stock under its 2005 Stock Option Plan (the “Plan”) as amended. Under the plan, the total number of shares which may be issued shall not exceed 1,700,000. Stock options are issued at the fair value of the common stock on the date of grant and expire ten years from grant date.

Stock options vest over a three year period. In 2008, the Company accelerated the vesting of all stock options and at December 31, 2008 all stock options became fully vested and no stock options have been granted since 2008. There were no options exercised during the nine months ended September 30, 2011 and 2010. At September 30, 2011, 1,065,083 shares remain available for grant under the plan. A summary of stock option transactions follows:


	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Intrinsic Value
Outstanding at December 31, 2010		539,250		$	15.57
Options forfeited		(79,000	)	$	14.61


Outstanding and exercisable at September 30, 2011		460,250		$	15.74		5.28		—

Note 6 – Restricted Stock Plan

During 2010, the Company adopted a 2010 Restricted Stock Plan (the “Plan”). Under the Plan, the Company may issue a maximum 750,000 with a maximum of 75,000 that can be granted to independent directors and a maximum of 350,000 shares to be granted in any one calendar year. No shares have been issued under the Plan.

Note 7 – Unregistered Sale of Equity Securities

On June 30, 2011 the Company closed a private placement offering resulting in the issuance of 5,107 shares of its Non-Cumulative Perpetual Series C Preferred Stock (“Series C Preferred Stock”) to accredited investors for an aggregate purchase price of $5.1 million in cash consideration, or $1,000 per share. In addition, during the three months ended September 30, 2011, the Company sold an additional 150 shares of its Series C preferred Stock to accredited investors for an aggregate purchase price of $150 in cash considerations.

The holders of Series C Preferred Stock are entitled to receive for each share of Series C Preferred Stock such non-cumulative dividends if, as, and when declared by the Board of Directors out of funds legally available for such dividends. However, the payment of any dividend on the Series C Preferred Stock is subject to the prior approval of the Federal Reserve Bank of Atlanta and the Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System. The shares of Series C Preferred Stock have no stated dividend rates.

The Series C Preferred Stock may be converted at the election of a holder at any time and from time to time, into shares of Common Stock after December 31, 2011. The Series C Preferred Stock shall be automatically converted into shares of Common Stock upon the earlier of (i) the closing of a Qualified Private Offering, or (ii) the closing of a Qualified Public Offering. A "Qualified Private Offering" means the closing of a private placement of shares of Common Stock with minimum proceeds of $50,000,000 by December 31, 2011. A "Qualified Public Offering" means the closing of an offering of shares of Common Stock registered in accordance with the provisions of the Securities Act of 1933, as amended. The conversion price for the shares of Preferred Stock will be equal to the price per share at which shares of common stock are sold in a Qualified Private Offering. If the Company does not close a Qualified Private Offering on or before December 31, 2011, then the Conversion Price thereafter will be equal to 50% of the tangible common stock book value per share as of the end of the calendar quarter prior to conversion, subject to a 10% annualized reduction from the date of issuance to the date of conversion.

The purchasers of the shares of Series C Preferred Stock also received a non-transferable stock purchase warrant (the “Warrant”) that is immediately exercisable for 1,250 shares of Company common stock at $0.01 per share for each share of Series C Preferred Stock purchased. The Warrant may be exercised at any time, and from time to time, in whole or in part before March 31, 2012. The Warrant also is mandatorily exercisable upon the occurrence of any one of the following events (which event must occur before March 31, 2012): (a) the closing of (i) a Qualified Private Offering, (ii) a Qualified Public Offering, or (iii) a Change in Control, (b) the complete redemption of the shares of Series C Preferred Stock held by a holder, or (c) liquidation or dissolution of the Company. Any unexercised portion of the warrant will expire on March 31, 2012.

The $5.3 million proceeds from the sale of the Series C Preferred Stock were allocated between the Series C Preferred Stock and the Warrants based on the ratio of the estimated fair value of the Warrants to the aggregate estimated fair value of both the Series C Preferred Stock and the Warrants. The value of the Warrants was computed to be $1.7 million using the Black-Scholes model with the following inputs: current stock price of $0.27; expected dividend yield of 0.00%; expected stock volatility of 16.5%; risk-free interest rate of .10% and expected life of 0.5 years. The allocation of the $5.3 million of proceeds to the Warrants was recorded as a “preferred stock discount” against the Preferred Shares, with a corresponding and equal entry to additional paid in capital in the amount of $1.3 million computed as follows ($1.7 million divided by the sum of ($5.3 million plus $1.7 million) multiplied by the transaction proceeds of $5.3 million). This discount was fully amortized as of September 30, 2011 and increased the net loss available to common stockholders. Management estimated a common stock price for the sole and limited purpose of allocating the fair value of the

Warrants and Preferred Shares. Since our common stock is not actively traded, management estimated the stock price by applying the median quoted price to book value multiples of a population of publicly traded, Florida based banks which had the following characteristics: assets between $200 million and $2 billion; nonperforming assets divided by tangible equity capital and loan loss reserves between 50% and 200%; not involved in a pending merger or recapitalization transaction. There can be no assurance that this stock price would represent the price at which the shares trade in the marketplace and there is no assurance that shares of our common stock could be bought or sold at that price.

Note 8 – Fair Value of Financial Instruments

The estimated fair values of the Company’s financial instruments were as follows:


	At September 30, 2011				At December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	55,015	$	55,015	$	40,301	$	40,301
Available-for-sale securities		156,349		156,349		177,451		177,451
Loans, net		490,226		504,621		572,045		585,278
Federal Home Loan Bank Stock		4,775		4,775		5,032		5,032
Federal Reserve Bank Stock		1,428		1,428		2,781		2,781
Accrued interest receivable		1,741		1,741		2,475		2,475

Financial liabilities:
Deposits	$	624,185	$	628,935	$	712,334	$	717,942
Federal Home Loan Bank Advances		67,700		77,068		67,700		75,782
Accrued interest payable		590		590		901		901

Financial assets subject to fair value measurements on a recurring basis are as follows:


	Fair Value Measurements at September 30, 2011 Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
*As of September. 30, 2011:*

Available for sale securities	$	156,349	$	—	$	156,349	$	—


	Fair Value Measurements at December 31, 2010 Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
*As of December 31, 2010:*

Available for sale securities	$	177,451	$	—	$	177,451	$	—

No securities were transferred in or out of level 1, 2, or 3 during the first nine months of 2011 or during the year end 2010.

Impaired collateral-dependent loans are carried at fair value when the current collateral value is lower than the carrying value of the loan. Foreclosed real estate is carried at fair value less estimated selling costs. Those impaired collateral-dependent loans and foreclosed real estate at September 30, 2011, which are measured at fair value on a nonrecurring basis are as follows:


	Fair Value		Level 1		Level 2		Level 3		Total Losses		Losses Recorded in Operations For the Nine Months Ended September 30, 2011
*As of September 30, 2011:*

Impaired loans⁽¹⁾
Commercial	$	1,391	$	—	$	—	$	1,391	$	4,657	$	1,167
Commercial Real Estate		31,792		—		—		31,792		21,851		7,811
Residential Real Estate		16,088		—		—		16,088		10,248		6,639
Consumer Loans		64		—		—		64		125		63

Total	$	49,335	$	—	$	—	$	49,335	$	36,881	$	15,680


Foreclosed real estate	$	5,521	$	—	$	—	$	5,521	$	2,613	$	2,164

(1)	Loans with a total carrying value of $4.8 million were measured for impairment using Level 3 inputs and had fair values in excess of carrying values.


	Fair Value		Level 1		Level 2		Level 3		Total Losses		Losses Recorded in Operations For the Year Ended December 31, 2010
*As of December 31, 2010:*

Impaired loans⁽¹⁾
Commercial	$	504	$	—	$	—	$	504	$	4,029	$	3,960
Commercial Real Estate		27,530		—		—		27,530		22,004		14,956
Residential Real Estate		14,623		—		—		14,623		7,179		5,896
Consumer Loans		3,155		—		—		3,155		1,138		959

Total	$	45,812	$	—	$	—	$	45,812	$	34,350	$	25,771


Foreclosed assets	$	7,018	$	—	$	—	$	7,018	$	499	$	499

(1)	Loans with a total carrying value of $4.4 million were measured for impairment using Level 3 inputs and had fair values in excess of carrying values.

Note 9 – Regulatory Matters

Banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Holding Company. The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by

regulatory banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and percentages (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of September 30, 2011, that the Company and the Bank met all capital adequacy requirements to which they were subject.

As of September 30, 2011, the most recent notification from the regulatory authorities categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized an institution must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage percentages as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category. The Company’s and the Bank’s actual capital amounts and percentages are also presented in the following table:


	Actual					For Capital Adequacy Purposes					For Well Capitalized Purposes
As of September 30, 2011:	Amount		%			Amount		%			Amount		%

Total Capital to Risk-Weighted Assets:
Consolidated	$	52,367		10.38	%	$	40,377		8.00	%		N/A		N/A
Bank		52,098		10.33	%		40,365		8.00	%	$	50,456		10.00	%

Tier One Capital to Risk-Weighted Assets
Consolidated	$	40,603		8.04	%	$	20,189		4.00	%		N/A		N/A
Bank		45,593		9.04	%		20,182		4.00	%	$	30,274		6.00	%

Tier One Capital to Average Assets
Consolidated	$	40,603		5.32	%	$	30,544		4.00	%		N/A		N/A
Bank		45,593		5.97	%		30,537		4.00	%	$	38,172		5.00	%

	Actual					For Capital Adequacy Purposes					For Well Capitalized Purposes
As of December 31, 2010:	Amount		%			Amount		%			Amount		%

Total Capital to Risk-Weighted Assets:
Consolidated	$	65,242		11.06	%	$	47,204		8.00	%		N/A		N/A
Bank		64,854		10.98	%		47,265		8.00	%	$	59,082		10.00	%

Tier One Capital to Risk-Weighted Assets
Consolidated	$	57,700		9.78	%	$	23,602		4.00	%		N/A		N/A
Bank		57,303		9.70	%		23,633		4.00	%	$	35,449		6.00	%

Tier One Capital to Average Assets
Consolidated	$	57,700		6.46	%	$	35,702		4.00	%		N/A		N/A
Bank		57,303		6.48	%		35,387		4.00	%	$	44,234		5.00	%

Note 10 – Loss Per Common Share

Basic and diluted loss per share of common stock has been computed based on the weighted-average number of shares of common stock outstanding as follows:

For the Three Months Ended

For the Nine Months Ended

September 30,
2011

September 30,
2010

September 30,
2011

September 30,
2010

Weighted average number of shares outstanding

15,654,831

14,329,315

14,663,418

14,329,315

Basic and diluted loss per share is the same for these interim periods because of the Company’s net loss position.

Note 11 – Recent Accounting Standards Update

In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08, “Intangibles — Goodwill and Other (Topic 350) — Testing Goodwill for Impairment.” ASU 2011-08 allows an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of the reporting unit. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company does not expect ASU 2011-08 to have an impact on its financial statements and disclosures.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income,” which eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Under ASU 2011-05, an entity can elect to present items of net income and other comprehensive income in one continuous statement — referred to as the statement of comprehensive income — or in two separate, but consecutive, statements. Each component of net income and each component of other comprehensive income, together with totals for comprehensive income and its two parts — net income and other comprehensive income, would need to be displayed under either alternative. The statement(s) would need to be presented with equal prominence as the other primary financial statements. ASU 2011-05 is effective as of the beginning of a fiscal year that begins after December 15, 2011 and interim and annual periods thereafter. The Company is currently assessing the impact of ASU 2011-03 on its financial statements and disclosures.

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,” to substantially converge the guidance in U.S. GAAP and IFRS on fair value measurements and disclosures. The amended guidance changes several aspects of the fair value measurement guidance in FASB Accounting Standards Codification™ (ASC) 820, Fair Value Measurement, including the following provisions:

•

Application of the concepts of highest and best use and valuation premise

•

Introduction of an option to measure groups of offsetting assets and liabilities on a net basis

•

Incorporation of certain premiums and discounts in fair value measurements

•

Measurement of the fair value of certain instruments classified in shareholders’ equity

In addition, the amended guidance includes several new fair value disclosure requirements, including, among other things, information about valuation techniques and unobservable inputs used in Level 3 fair value measurements and a narrative description of Level 3 measurements’ sensitivity to changes in unobservable inputs. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The Company is currently assessing the impact of ASU 2011-03 on its financial statements and disclosures.

In April 2011, the FASB issued ASU No. 2011-03, “Reconsideration of Effective Control for Repurchase Agreements” (“ASU 2011-03”), which revises the criteria for assessing effective control for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The determination of whether the transfer of a financial asset subject to a repurchase agreement is a sale is based, in part, on whether the entity maintains effective control over the financial asset. ASU 2011-03 removes from the assessment of effective control: the criterion requiring the transferor to have the ability to repurchase or redeem the financial asset on substantially the agreed terms, even in the event of default by the transferee, and the related requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets. The amendments in ASU 2011-03 will be effective for interim and annual reporting periods beginning on or after December 15, 2011, early adoption is prohibited, and the amendments will be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. The Company is currently assessing the impact of ASU 2011-03 on its financial statements and disclosures.

In April 2011, the FASB issued ASU No. 2011-02 “Receivables (Topic 310) — A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.” ASU 2011-02 clarifies whether loan modifications constitute troubled debt restructuring. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. ASU 2011-02 was effective for the first interim and annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The impact of ASU 2011-02 on the Company’s financial statements and disclosures is reflected in Note 3 - Loans.

In December 2010, the FASB issued ASU No. 2010-29 “Business Combinations (Topic 805) — Disclosure of Supplementary Pro Forma Information for Business Combinations.” If a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. ASU 2010-29 also expands the supplementary pro forma disclosures. ASU 2010-29 was effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. ASU 2010-29 will only affect the Company if there are future business combinations.

Note 12 – Regulatory Agreement

In March 2011, as a result of a periodic examination of the Bank during 2010 by the Federal Reserve Bank of Atlanta (the “FRB”), the Company and the FRB entered into a Written Agreement (the “Regulatory Agreement”). The Regulatory Agreement, among other requirements, provides that the Company’s Board of Directors will take steps to ensure that the Bank complies with the agreement and will strengthen its oversight of the management and operations of the Bank. In addition, the Regulatory Agreement provides that the Bank:

•

Will within 60 days of the Regulatory Agreement, submit to the FRB a written plan to strengthen Board oversight and also credit risk management practices;

•

Will revise its lending and credit administration policies and procedures;

•

Will submit to the FRB an acceptable written program to ensure the accurate grading of loans and to ensure independent loan portfolio reviews;

•

Will not extend or renew credit to borrowers with criticized loans without the prior approval of the majority of the board of directors or a designated committee thereof;

•

Will submit a revised business plan for 2011 to improve its earnings and overall condition;

•

Will not declare or pay any dividends or take any other form of payment representing a reduction in capital from the Bank without prior regulatory approval;

•

Will not incur, increase or guarantee any debt or redeem any shares without prior regulatory approval;

•

Will not appoint any new directors or senior executive officers without prior regulatory approval;

•

Will review and revise its ALLL methodology consistent with relevant supervisory guidance, and

•

Will submit an acceptable enhanced written internal audit program that addresses a variety of internal risk assessment and audit program activities.

The Company and the Bank have agreed to submit an acceptable plan to maintain sufficient capital at the Bank as a separate legal entity on a stand-alone basis, not declare or pay any dividends without the prior approval of the Federal Reserve, comply with restrictions on indemnification and severance payments under applicable law, and seek the approval of the Federal Reserve before the appointment of any new director or executive officer. In addition, the Company has agreed that it:

•

Will submit to the Federal Reserve an acceptable plan to maintain sufficient capital at the Company on a consolidated basis; and

•

Will not incur or increase any debt, or purchase or redeem any of its shares without the prior approval of the Federal Reserve.

The Company took all the necessary actions to promptly address and comply with all the provisions of the Regulatory Agreement.

Prior to the payment of dividends on the Company’s preferred stock issued under the U.S. Treasury Department’s Capital Purchase Program (CPP Dividends), it must request and be granted approval by the FRB. The Company has not paid dividends on its preferred stock for the last four quarters as a result of its agreement with the FRB that the Company will not pay any cash dividends without prior approval from the FRB. At September 30, 2011, the Company had $1.3 million in unpaid dividends owing on its preferred stock. To date, the Company has deferred four quarterly dividend payments. If the Company misses six quarterly dividend payments, whether or not consecutive, the U.S. Treasury will have the right to appoint two directors and/or observers to the Company’s Board of Directors until all accrued and unpaid dividends have been paid.

Florida Bank Group, Inc.

Review by Independent Registered Public Accounting Firm

Hacker, Johnson & Smith PA, the Company’s independent registered public accounting firm, has made a limited review of the financial data as of September 30, 2011, and for the three and nine month periods ended September 30, 2011 and 2010 presented in this document, in accordance with standards established by the Public Company Accounting Oversight Board.

The report of Hacker, Johnson & Smith PA, furnished pursuant to Article 10 of Regulation S-X, is included on the following page herein.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Florida Bank Group, Inc.

Tampa, Florida:

We have reviewed the accompanying condensed consolidated balance sheet of Florida Bank Group, Inc. (the “Company”) as of September 30, 2011 and the related condensed consolidated statements of operations and other comprehensive income (loss) for the three and nine month periods ended September 30, 2011 and 2010, and the related condensed consolidated statements of changes in stockholders’ equity and cash flows for the nine month periods ended September 30, 2011 and 2010. These interim condensed consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board, the consolidated balance sheet of the Company as of December 31, 2010, and the related consolidated statements of operations and other comprehensive income (loss), changes in stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated March 25, 2011, we, based on our audit expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2010, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Hacker, Johnson & Smith PA

HACKER, JOHNSON & SMITH PA

Tampa, Florida

November 10, 2011

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including this MD&A 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 Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2010 and in this Quarterly Report on Form 10-Q.

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.

In this Quarterly Report on Form 10-Q, we may refer to Florida Bank Group, Inc. as the “Holding Company,” and to Florida Bank as the “Bank”. Collectively, we may refer to the Holding Company and the Bank as “we,” “us,” or “our”.

Business Overview

We are a bank holding company under the Bank Holding Company Act of 1956, as amended, headquartered in Tampa, Florida. We were incorporated on January 12, 2007, under the laws of the State of Florida. We are the sole shareholder of Florida Bank, a Florida chartered commercial bank that provides a wide range of business and consumer financial services in its target marketplace. The Bank currently operates 14 banking offices located in Hillsborough, Pinellas, Duval, St. Johns, Manatee and Leon counties, Florida. As of September 30, 2011, we had $744.3 million in total assets, including $490.2 million in net loans, and $624.2 million in deposits.

Business Strategy

Our business strategy is to operate as a profitable banking organization, with an emphasis on relationship banking. Our lending strategy includes commercial business loans to small and medium-sized businesses, consumer lending, and select real estate loans. We emphasize comprehensive business products and responsiveness that reflect our knowledge of our local markets and customers. We offer a wide range of commercial and retail banking and financial services to businesses and individuals.

Our marketing strategy is targeted to:

•

Capitalize on our personal relationship approach, which we believe differentiates us from our larger competitors;

•

Provide customers with access to our local executives who make key credit and other decisions;

•

Pursue commercial lending opportunities with small to mid-sized businesses that are underserved by our larger competitors;

•

Cross-sell our products and services to our existing customers to leverage our relationships, grow fee income and enhance profitability; and

•

Adhere to safe and sound credit standards.

Our long-term business strategy is geared toward building a preeminent community bank in the state of Florida. The business strategy includes having a significant market share (as defined by deposits), among community banks, in each of the markets in which we currently operate.

We focus on increasing the number of customer relationships and, ultimately, deposits, loans and profitability. Organic strategies include taking advantage of customer dislocation in the market place created by other banks’ operating limitations and customer dissatisfaction. We are also placing increased focus on our retail operations. We have retail strategies in place to drive more

business through our branch infrastructure. More specifically, we have invested in new technology that will enable us to streamline our processing of consumer loans which should result in the offering of a more competitive product. We have also initiated new programs to increase low cost deposits. We believe these initiatives in the retail area will result in overall loan and deposit growth over the next few quarters.

QUARTERLY PERFORMANCE OVERVIEW AND HIGHLIGHTS

•

Our net interest income after provision for loan loss was up $3.5 million compared to the second quarter of 2011 and up $0.2 million compared to the three month period ended September 30, 2010. This increase is mostly the result of lower interest expense and lower loan loss provisions.

•

Our provision for loss continued the downward trend as the provision for the third quarter of 2011 was down $3.6 from the prior quarter ended June 30, 2011, down $5.6 million from the quarter ended March 31, 2011 and down $0.8 million compared to the three month period ended September 30, 2010. The provision was $2.2 million, $5.7 million, $7.8 million and $3.0 million for the quarters ended September 30, 2011, June 30, 2011, March 30, 2011 and September 30, 2010, respectively.

•

Our noninterest income for the third quarter of 2011 reflects an unfavorable change of $3.1 million over the same period in 2010, primarily as a result of a $3.2 million net gain on the sale of securities available for sale recorded in the third quarter of 2010 not repeated in 2011.

•

Our noninterest expenses at September 30, 2011 were up $0.3 million compared to the same period in 2010, primarily due to a $1.6 million increase in the write-down of foreclosed real estate. However, as a partial offset to this increase, we had decreases in salaries and employee benefits expenses of $0.7 million, decreases in occupancy of $0.3 million and decreases in professional fees of $0.2 million.

•

Our recorded investment in non-performing assets at September 30, 2011(comprised of nonaccrual loans and foreclosed real estate), reflects a continued downward trend as total non-performing assets were down 8.3% compared to the June 30, 2011 balance, down 17.0% compared to the March 31, 2011 balance and down 15.1% compared to December 31, 2010 balance.

•

Total past due loans continued the positive downward trend as total past due loans as a percentage of total loans were 9.6% at September 30, 2011, 10.9% at June 30, 2011, 11.7% at March 31, 2011 and 12.3% at December 31, 2010.

•

As of September 30, 2011, total assets were $744.3 million compared to $838.4 million at December 31, 2010, a decrease of $94.1 million or 11.2%. The notable decreases in assets reflect decreases of $81.8 million in net loans and $21.1 million in investment securities offset in part by a $14.7 million increase in cash and cash equivalents. The reduction in the net loan balance reflects a combination of decreased loan demand, loan payoffs and loan charge offs and the decrease in investment securities is attributable to sales and repayments.

•

As of September 30, 2011, the allowance for loan losses was 4.4% of total loans and represented 46.1% of non-performing loans compared to 3.5% of total loans and representing 36.5% of non-performing loans at December 31, 2010.

•

We had an $11.5 million increase in non-interest bearing demand deposits during the nine month period ending September 30, 2011. However, our total deposits, as of September 30, 2011, were down $88.1 million or 12.4% compared to December 31, 2010. This decrease included decreases in money market deposits of $53.5 million, time deposits of $33.7 million and interest-bearing demand and savings deposits of $12.5 million.

RESULTS OF OPERATIONS

Summary of Results of Operation for the Three Months Ended September 30, 2011 and 2010

Following is a condensed operations summary for the three months ended September 30, 2011 and 2010 (in thousands, except per share amounts):


	For the Three Months Ended
	September 30, 2011			September 30, 2010			2011 vs. 2010			Change %
Interest Income	$	8,066		$	9,599		$	(1,533	)		-16.0	%
Interest Expense		2,907			3,848			(941	)		-24.5	%

Net Interest Income		5,159			5,751			(592	)		-10.3	%
Provision for Loan Losses		2,157			2,961			(804	)		-27.2	%
Noninterest income		679			3,809			(3,130	)		-82.2	%
Noninterest expenses		7,202			6,920			282			4.1	%

Loss before income tax benefit		(3,521	)		(321	)		(3,200	)		996.9	%
Income tax benefit		—			(114	)		114			-100.0	%

Net Loss		(3,521	)		(207	)		(3,314	)		1601.0	%
Preferred stock dividend and discount accretion		(367	)		(330	)		(37	)		11.2	%

Net loss available to common stockholders	$	(3,888	)	$	(537	)	$	(3,351	)		624.0	%

Loss per common share - basic and diluted	$	(0.25	)	$	(0.04	)	$	(0.21	)		525.0	%


Selected Operating Ratios:
Return on Average Assets		-2.04	%		-0.25	%
Return on Average Equity		-31.13	%		-2.03	%
Equity to Assets Ratio		6.44	%		11.78	%

Net Loss

The factors affecting the $3.3 million increase in net loss are displayed in the table above. A more detailed discussion of each major component of our financial performance is provided below.

Net Interest Income

Net interest income represents our single largest source of earnings and is the amount by which interest income on interest-earning assets exceeds interest expense incurred on interest-bearing liabilities. Net interest income is the largest component of our income, and is affected by the interest rate environment and the volume and the composition of interest-earning assets and interest-bearing liabilities. Our interest-earning assets include loans, federal funds sold, interest-bearing deposits at the FRB and in other banks and investment securities. Our interest-bearing liabilities include customer deposit and advances from the FHLB.

The decrease in our net interest income was mostly due to a decrease in loan balances, primarily resulting from accelerated loan payoffs and a decrease in loan demand. Partially offsetting the decrease in interest income was a decrease in our interest expense, which was mostly the result of decreases in our deposit balances and related rates, for time deposits and money market instruments, which were repriced at much lower rates. Time deposits carry a fixed rate of interest to maturity and most of our borrowings provide for a fixed rate of interest until maturity or conversion date. The average balance and interest rate paid on time deposits for the three month period ended September 30, 2011, was $337.3 million and 1.99% respectively, compared to an average balance and interest paid of $338.7 million and 2.73%, respectively, for the same period in 2010.

The decrease in interest on loans was primarily the result a reduction in our average loan balances and the effects of an $8.4 million increase in non-accruing loans for the three month period ending September 30, 2011 compared to the same period in 2010. Average loan balances were $528.4 million at September 30, 2011, a decrease of $101.4 million from the average loan balance at September 30, 2010.

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

($ in thousands)


	September 30, 2011								September 30, 2010
	Balance			Interest		Rate			Balance			Interest		Rate

ASSETS
Loans	$	528,432		$	7,055		5.30	%	$	629,863		$	8,453		5.32	%
Securities available for sale		159,035			950		2.37	%		140,064			1,075		3.04	%
Other interest-earning assets		55,695			61		0.43	%		48,108			71		0.59	%

Total Earning Assets		743,162			8,066		4.31	%		818,035			9,599		4.66	%


Cash & Due from Banks		3,702								2,632
Allowance For Loan Losses		(20,050	)							(25,561	)
Other Assets		37,322								67,756

Total Assets	$	764,136							$	862,862


LIABILITIES
Demand	$	60,353		$	87		0.57	%	$	69,450		$	137		0.78	%
Savings		9,491			9		0.38	%		11,068			15		0.54	%
Money Market		158,153			399		1.00	%		188,668			598		1.26	%
Time		337,346			1,688		1.99	%		338,748			2,327		2.73	%

Total Interest Bearing Deposits		565,343			2,183		1.53	%		607,934			3,077		2.01	%

FHLB advances		67,700			724		4.24	%		77,700			771		3.94	%

Total Interest Bearing Liabilities		633,043			2,907		1.82	%		685,634			3,848		2.23	%

Noninterest bearing Deposits		77,150								64,724
Other Liabilities		3,841								7,365

Total Liabilities		714,034								757,723

Total Shareholder’s Equity		50,102								105,139

Total Liabilities & Shareholder’s Equity	$	764,136							$	862,862



Interest Rate Spread							2.49	%							2.43	%



Net Interest Income				$	5,159							$	5,751



Net Interest Margin							2.75	%							2.79	%

Going forward, we expect short-term market interest rates to remain low for a period of time and deposit costs to continue to decline, however, this decline may not fully offset the decline on loan and investment yields. If there is strong demand in the financial markets and banking system for liquidity, then this may lead to elevated pricing competition for deposits, thereby, limiting any net interest margin expansion.

Provision for Loan Losses

The provision for loan losses for the quarter ended September 30, 2011 was $2.2 million compared to $3.0 million for the quarter ended September 30, 2010. Some of the provision decrease reflects the fact that the higher provision recorded during the 2010 period, was in response to effects of the significant contraction of commercial and residential real estate activity and the ripple effect on our local economies resulting in an increase in nonperforming loans, the significant reduction in the fair values of loan collateral and an increase in our net loan charge-off experience. As a result of the higher reserves being recorded in the 2010 period and a moderation in the decline in the fair values of collateral, the amount of provision required for the current period has decreased. Charge-offs, net of recoveries, in the third quarter of 2011 totaled $1.2 million compared to $7.2 million in the same period in 2010.

Management performs regular internal loan reviews and regularly engages the services of third party loan review firms to obtain an independent review of our loans. In addition, various regulatory agencies, as an integral part of their examination process, review our allowance for loan losses. Management considers the results of each of these reviews in establishing its estimated allowance for loan losses. We will continue to monitor the credit quality of the loan portfolio in order for management to record the provision which represents its best estimate as of the financial statement date.

While there is some recently published information on the state and local economies indicating that the trend of local economic contractions may be reaching a plateau, we cannot be sure how long the economic contraction will continue. Consequently, we may experience higher levels of delinquent and nonperforming loans, which may require higher provisions for loan losses, higher charge-offs and higher collection related expenses in future periods.

Noninterest Income

Noninterest Expense

The table below reflects the major components of noninterest expense (in thousands):


	Three Months Ended September 30,
	2011		2010		change			%
Salaries and employee benefits	$	2,635	$	3,324		(689	)		-20.7	%
Occupancy		1,160		1,428		(268	)		-18.8	%
Data processing		347		291		56			19.2	%
Stationary, printing and supplies		59		67		(8	)		-11.9	%
Business development		44		114		(70	)		-61.4	%
Insurance, including deposit insurance premium		532		545		(13	)		-2.4	%
Professional fees		224		426		(202	)		-47.4	%
Marketing		9		14		(5	)		-35.7	%
Loss on sale of foreclosed real estate		50		127		(77	)		-60.6	%
Write-down of foreclosed real estate		1,764		150		1,614			1076.0	%
Foreclosed real estate expense		156		142		14			9.9	%
Other		222		292		(70	)		-24.0	%

Total noninterest expenses	$	7,202	$	6,920		282			4.1	%

The factors contributing to the $0.3 million, or 4.1%, increase in noninterest expense for the three months ended September 30, 2011, compared to the same period in 2010 are noted in the table above. Explanations for significant changes are as follows: (a) a $1.6 million increase in the write-down of foreclosed real estate results from shortfalls identified by current updated appraisals. Partially offsetting this increase in noninterest expenses were the following decreases: (b) a $0.7 million decrease in salary and employee benefits mostly resulting from a third quarter of 2010 reduction in force which resulted in the elimination of 19 employee positions and employee attrition. The purpose of the reduction in force was to more closely align our expense structure with our related revenues. Under our current operating structure, this specific action could result in a $2.0 million reduction in salary and benefit expenses on an annualized basis; (c) There were further reductions in personnel through attrition and as a result of two branch closures in the fourth quarter of 2010. Our total full-time employees were 130 at September 30, 2011 compared to 150 at September 30, 2010; (d) a $0.3 million decrease in occupancy expenses primarily resulting from the closure of two branch locations during 2010 and the sublease of excess office space in our downtown Jacksonville and Tampa, Florida locations and (e) a $0.2 million decrease in professional fees are the result of expenses related to merger activities in the third quarter of 2010 not being incurred in the third quarter of 2011.

Income Tax Benefit

During the third quarter of 2010, we recorded an income tax benefit of $0.1 million, however, we did not record an income tax benefit during the third quarter of 2011 because at the end of 2010, we determined that significant negative evidence existed that led us to conclude that it was more likely than not that we would not realize any portion of the deferred tax asset that was previously recorded, and therefore placed a full valuation allowance on the deferred taxes. As of September 30, 2011, we have not changed our position. As a result of this position, we will not recognize any income tax benefit that result from our net operating losses during the quarter.

Summary of Results of Operation for the Nine months Ended September 30, 2011 and 2010

Following is a condensed earnings summary for the nine months ended September 30, 2011 and 2010 (in thousands, except per share amounts):


	For the Nine Months Ended
	September 30, 2011			September 30, 2010			2011 vs. 2010			Change %
Interest Income	$	25,175		$	29,025		$	(3,850	)		-13.3	%
Interest Expense		9,395			12,097			(2,702	)		-22.3	%

Net Interest Income		15,780			16,928			(1,148	)		-6.8	%
Provision for Loan Losses		15,651			14,902			749			5.0	%
Noninterest income		1,804			4,357			(2,553	)		-58.6	%
Noninterest expenses		19,034			21,651			(2,617	)		-12.1	%

Loss before income tax expense (benefit)		(17,101	)		(15,268	)		(1,833	)		12.0	%
Income tax expense (benefit)		25			(5,715	)		5,740			-100.4	%

Net Loss		(17,126	)		(9,553	)		(7,573	)		79.3	%
Preferred stock dividend and discount accretion		(2,279	)		(990	)		(1,289	)		130.2	%

Net loss available to common stockholders	$	(19,405	)	$	(10,543	)	$	(8,862	)		84.1	%


Loss per common share - basic and diluted	$	(1.32	)	$	(0.74	)	$	(0.58	)		79.9	%


Selected Operating Ratios:
Return on Average Assets		-4.90	%		-1.66	%
Return on Average Equity		-78.66	%		-12.67	%
Equity to Assets Ratio		6.44	%		11.78	%

Net Loss

The factors affecting the $7.6 million increase in net loss are displayed in the table above. A more detailed discussion of each major component of our financial performance is provided below.

Net Interest Income

The decrease in our net interest income was mostly due to a decrease in loan balances, primarily resulting from accelerated loan payoffs and a decrease in loan demand. Average loan balances were $557.7 million at September 30, 2011, a decrease of $80.2 million from the average loan balance at September 30, 2010. Partially offsetting this decrease was a decrease in our interest expense, which was mostly the result of decreases in our deposit rates, primarily related to time deposits which were repriced at a much lower rate, and to a lesser extent, our money market deposits. Time deposits carry a fixed rate of interest to maturity and most of our borrowings provide for a fixed rate of interest until maturity or conversion date. The average balance and interest rate paid on time deposits for the nine month period ended September 30, 2011, was $349.2 million and 2.15% respectively, compared to an average balance and interest paid of $348.5 million and 2.88%, respectively, for the same period in 2010. In addition, we reduced our interest expense on borrowings through the early retirement and restructuring of certain higher cost advances from the FHLB.

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

($ in thousands)



	September 30, 2011								September 30, 2010
	Balance			Interest		Rate			Balance			Interest		Rate

ASSETS
Loans	$	557,650		$	21,827		5.23	%	$	637,833		$	25,681		5.38	%
Securities available for sale		168,152			3,154		2.51	%		122,335			3,148		3.44	%
Other interest-earning assets		51,247			194		0.51	%		43,927			196		0.60	%

Total Earning Assets		777,049			25,175		4.33	%		804,095			29,025		4.83	%


Cash & Due from Banks		3,771								2,647
Allowance For Loan Losses		(20,335	)							(23,447	)
Other Assets		38,759								66,777

Total Assets	$	799,244							$	850,072


LIABILITIES
Demand	$	62,424		$	276		0.59	%	$	67,121		$	458		0.91	%
Savings		9,589			29		0.40	%		11,900			56		0.63	%
Money Market		172,220			1,317		1.02	%		165,717			1,688		1.36	%
Time		349,237			5,604		2.15	%		348,480			7,501		2.88	%

Total Interest Bearing Deposits		593,470			7,226		1.63	%		593,218			9,703		2.19	%

FHLB advances		72,520			2,169		4.00	%		78,982			2,394		4.05	%
Other borrowings		—			—		0.00	%		18			—		0.00	%

Total Interest Bearing Liabilities		665,990			9,395		1.89	%		672,218			12,097		2.41	%

Noninterest bearing Deposits		79,521								62,133
Other Liabilities		3,988								5,743

Total Liabilities		749,499								740,094

Total Shareholder’s Equity		49,745								109,978

Total Liabilities & Shareholder’s Equity	$	799,244							$	850,072



Interest Rate Spread							2.44	%							2.42	%



Net Interest Income				$	15,780							$	16,928



Net Interest Margin							2.72	%							2.81	%

Provision for Loan Losses

The provision for loan losses for the nine months ended September 30, 2011, was $15.7 million compared to $14.9 million for the nine month period ended September 30, 2010. For each of the periods, our provision for loan losses exceeded our net charge offs during that period. The provision provides for probable incurred credit losses inherent in the loan portfolio. The amounts recorded for

the provision reflect the fact that loans secured by commercial and residential real estate are continuing to experience stresses resulting from the current economic conditions. We have continued to closely monitor the impact of economic circumstances on our lending clients, and are working with these clients to minimize losses. See above for a discussion of allowance for loan losses coverage and a discussion of economic factors’ effect on our loan loss reserves.

Noninterest Income

The decrease in noninterest income of $2.6 million for the nine months ended September 30, 2011, compared to the nine months ended September 30, 2010 primarily results from a $3.2 million net gain on the sale of securities available for sale recorded in the third quarter of 2010 not repeated in 2011, offset in part, by the recognition of an other-than-temporary impairment (“OTTI”) during the 2010, period which did not occur during the nine months ended September 30, 2011.

Noninterest Expense

The table below reflects the major components of noninterest expense (in thousands):


	Nine Months Ended September 30,
	2011		2010		change			%
Salaries and employee benefits	$	8,060	$	10,819		(2,759	)		-25.5	%
Occupancy		3,494		4,164		(670	)		-16.1	%
Data processing		1,004		890		114			12.8	%
Stationary, printing and supplies		201		226		(25	)		-11.1	%
Business development		139		316		(177	)		-56.0	%
Insurance, including deposit insurance premium		1,826		1,549		277			17.9	%
Professional fees		845		1,339		(494	)		-36.9	%
Marketing		40		51		(11	)		-21.6	%
Federal Home Loan Bank advance prepayment penalties		2		41		(39	)		-95.1	%
Loss on sale of foreclosed real estate		55		262		(207	)		-79.0	%
Write-down of foreclosed real estate		2,178		792		1,386			175.0	%
Foreclosed real estate expense		359		327		32			9.8	%
Other		831		875		(44	)		-5.0	%

Total noninterest expenses	$	19,034	$	21,651		(2,617	)		-12.1	%

The factors contributing to the $2.6 million, or 12.1%, decrease in noninterest expense for the nine months ended September 30, 2011, compared to the same period in 2010 are noted in the table above. Explanations for significant changes are as follows: (a) a $2.8 million decrease in salary and employee benefits resulting primarily from a third quarter of 2010 reduction in force, and employee attrition as our total full-time employees were 130 at September 30, 2011 compared to 150 at September 30, 2010; (b) a $0.7 million decrease in occupancy expenses primarily resulting from the closure of two branch locations and the sublease of excess office space in our downtown Jacksonville and Tampa, Florida locations, all in the second half of 2010; (c) a $0.5 million decrease in professional fees resulting from expenses related to merger activities in the second and third quarters of 2010 not being repeated in 2011; offset in part by, (d) a $1.4 million increase in the write-down of foreclosed real estate, which reflects the recent fair values of recent appraisals conducted in the third quarter and, (e) a $0.3 million increase in deposit insurance premiums.

FINANCIAL CONDITION

Total assets at September 30, 2011 were $744.3 million, a decrease of $94.1 million or 11.2%, from total assets at December 31, 2010. Total cash and cash equivalents at September 30, 2011 were $55.0 million, up $14.7 million, or 36.5%, from cash and cash equivalents at December 31, 2010. Investment securities available for sale decreased $21.1 million, or 11.9%, to $156.3 million at September 30, 2011 from $177.5 million at December 31, 2010. See our discussion on liquidity and capital resources below for an explanation of the changes in our cash and cash equivalents. Our net loans decreased $81.8 million, or 14.3%, to $490.2 million at September 30, 2011 from $572.0 million at December 31, 2010. The decrease in net loans was primarily due to principal repayments. Foreclosed real estate decreased $1.5 million or 21.3% at September 30, 2011, compared to December 31, 2010, primarily as a result of write-downs and sales of certain foreclosed properties.

Total liabilities at September 30, 2011 decreased $88.4 million to $696.4 million from $784.8 million at December 31, 2010, primarily due to a reduction in all interest bearing deposits.

Total stockholders’ equity decreased $5.7 million to $47.9 million at September 30, 2011 from $53.6 million at December 31, 2010. The decrease reflects a net loss of $17.1 million, offset in part by $5.3 million from the sale of 5,257 shares of Series C preferred stock and a $6.1 million change in unrealized holding loss on available-for-sale securities.

Loans and Non-Performing Assets

Loan Portfolio.

Our loan portfolio consists principally of loans to individuals and small and medium-sized businesses within our primary market areas of greater Tampa Bay, Jacksonville and Tallahassee, Florida. The table below shows our loan portfolio composition for the periods presented:

($ in Thousands)


	As of
	September 30, 2011			December 31, 2010
Commercial	$	34,992		$	47,475
Commercial Real Estate (1)		293,254			329,487
Residential Real Estate		176,514			203,488
Consumer Loans		8,050			12,879

		512,810			593,329

Less:
Net deferred fees		(251	)		(454	)
Allowance for loan losses		(22,333	)		(20,830	)

Loans, Net	$	490,226		$	572,045

(1)	Includes $117.7 million and $127.2 million of owner-occupied nonresidential properties at September 30, 2011 and December 31, 2010, respectively.

The overall decrease in gross loans was primarily the result of loan payoffs by customers.

Allowance and Provision for Loan Losses.

The allowance for loan losses is a valuation allowance established and maintained at a level believed adequate by management to absorb probable incurred credit losses associated with loans in the loan portfolio. The allowance is recorded through a provision for loan losses charged to operations. Loan losses are charged against the allowance when in management’s judgment, the loan’s lack of collectability is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired. For such loans, an allowance is established when the discounted cash flows or collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers all other loans and is based on historical loss experience adjusted for qualitative factors.

For quantitative loss factors, management has determined the historical loss rate for each group of loans with similar risk characteristics and has then considered the current qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the group’s historical loss experience. The overall effect of these factors on each loan group has been reflected as an adjustment that, as appropriate, increases or decreases the historical loss rate applied to each loan group.

We segregate our portfolio of loans not deemed to be impaired by call report category for the purposes of calculating and applying historical loss factors, adjustment factors and total loss factors. Considerable judgment is necessary to establish adjustment factors.

The adjustment factors described below are deemed to be applied to pass credits. Through our reserve methodology, these factors are scaled higher if applied to weak pass, special mention or substandard credits.

The following current environmental factors, among others, have been taken into consideration in determining the adequacy of the Allowance for Loan and Lease Losses (“ALLL”):

Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;

Changes in international, national, regional and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments;

Changes in the nature and volume of the portfolio and in the terms of loans;

Changes in the experience, ability, and depth of the lending management and other relevant staff;

Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans;

Changes in the quality of our loan review system;

Changes in the value of underlying collateral for collateral-dependent loans;

The existence and effect of any concentrations of credit, and changes in the level of such concentrations; and

The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio.

The specific component of the allowance relates to loans that are impaired. A loan is considered impaired when, based on current information and events, it is probable the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. It should be noted that substantially all of our impaired loans are collateral dependent and thus impairment is usually measured by the fair value of the collateral method.

As of September 30, 2011, we held an allowance for loan losses of $22.3 million or 4.36% of total loans compared to the allowance for loan losses of $20.8 million or 3.51% at December 31, 2010. Based on an analysis performed by management as of September 30, 2011, management considers the allowance for loan losses to be adequate to cover probable incurred credit losses in the portfolio as of that date. Although we believe we use the best information available to make determinations with respect to the allowance for loan losses, future adjustments to the allowance may be necessary if facts and circumstances differ from those previously assumed in the determination of the allowance. For example, a continued downturn in real estate values and economic conditions could have an adverse impact on our asset quality and may result in an increase in future loan charge-offs and loan loss provisions, and may also result in the decrease in the estimated value of real estate we acquired through foreclosure.

As a result of these factors and analyses in conjunction with the sustained weakness in asset values, particularly real estate, we recorded a loan loss provision of $15.7 million for the nine months ended September 30, 2011, an increase of $0.7 million compared to the provision recorded for the nine months ended September 30, 2010. We establish specific reserves for impaired loans and general reserves for the remainder of the portfolio as follows (in thousands):


	September 30, 2011			December 31, 2010
Specific Reserves :
Impaired loans with no specific reserves	$	29,139		$	34,028
Impaired loans with specific reserves		37,406			26,055

Total impaired loans	$	66,545		$	60,083
Reserve	$	12,369		$	9,890

Reserve % of impaired loans		18.59	%		16.46	%

General Reserves:
Loans subject to general reserve	$	446,265		$	533,246
Reserve	$	9,964		$	10,940
Reserve % of loans		2.23	%		2.05	%

Total impaired loans increased $6.5 million from December 31, 2010 to September 30, 2011 mostly as a result of additional loans meeting the criteria for impaired loans. For the nine months ended September 30, 2011, the loan portfolio subject to the general reserve decreased approximately $87.0 million as a result of impairment and/or payoffs. Management evaluates the reserves on a regular basis to determine its adequacy.

During the three and nine months ended September 30, 2011 and 2010, the activity in our loan loss allowance was as follows:

(in Thousands)

		0000,000			0000,000			0000,000			0000,000
	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010

Balance At Beginning Of Period	$	21,399		$	25,545		$	20,830		$	21,342
Charge-Offs		(2,719	)		(7,164	)		(16,611	)		(15,354	)
Recoveries		1,496			11			2,463			463
Provision For Loan Losses		2,157			2,961			15,651			14,902


Balance At End Of Period	$	22,333		$	21,353		$	22,333		$	21,353

		0000,000			0000,000			0000,000			0000,000
	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010

Charge-Offs:
Commercial	$	(96	)	$	(700	)	$	(1,881	)	$	(821	)
Commercial Real Estate		(1,612	)		(4,116	)		(7,910	)		(9,075	)
Residential Real Estate		(935	)		(1,791	)		(5,457	)		(4,495	)
Consumer and Other Loans		(76	)		(557	)		(1,363	)		(963	)

	$	(2,719	)	$	(7,164	)	$	(16,611	)	$	(15,354	)

		0000,000		0000,000		0000,000		0000,000
	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Recoveries:
Commercial	$	182	$	2	$	294	$	366
Commercial Real Estate		145		1		542		5

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Florida Bank Group, Inc. 10-Q