0001162245-11-000006.txt : 20110414 0001162245-11-000006.hdr.sgml : 20110414 20110414171026 ACCESSION NUMBER: 0001162245-11-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20101231 FILED AS OF DATE: 20110414 DATE AS OF CHANGE: 20110414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FPB BANCORP INC CENTRAL INDEX KEY: 0001162245 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 651147861 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-33351 FILM NUMBER: 11760286 BUSINESS ADDRESS: STREET 1: 1301 SE PORT ST. LUCIE BLVD CITY: PORT ST. LUCIE STATE: FL ZIP: 34952 BUSINESS PHONE: 5613981388 MAIL ADDRESS: STREET 1: 1301 SE PORT ST. LUCIE BLVD CITY: PORT ST. LUCIE STATE: FL ZIP: 34952 10-K 1 form10k.htm 10K FOR DECEMBER 2010 form10k.htm
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
 
FORM 10-K

 
[ X ]            ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934
 
 
For the Fiscal Year Ended December 31, 2010

 
[     ]            TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934

 
For the transition period from _______________________ to _____________

 
Commission File No. 000-33351

Small BHC Logo
(Name of small business issuer in its charter)
 

 
 
FLORIDA
65-1147861
                                        (State or other jurisdiction of incorporation or organization)                                         (I.R.S. Employer Identification No.)
 
 
                                           1301 SE Port St. Lucie Boulevard
                                                                  Port St. Lucie, FL
34952
 
 (Address of principal executive offices)
(Zip Code)
 
 
(772) 225-5930
  Issuer’s Telephone Number
 
 
Securities Registered Under Section 12(b) of the Exchange Act:
 
 
 
              Title of each class
Name of each exchange on which registered

 
                        N.A.
       N.A.
 
 
 
Securities Registered Under Section 12(g) of the Exchange Act:
 

 
Common Stock, $0.01 Par Value
(Title of Class)
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [] Yes [X]No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
[] Yes [X]No

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). □Yes □ No  *This registrant has not yet been phased into the interactive data requirements.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer []                                                                                                       Accelerated filer []
Non-accelerated filer (Do not check if a smaller reporting company)                                                              Smaller reporting company [X]

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

 
The issuer's revenues for its most recent fiscal year: $13,924,000.                    .
 

 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange Act.)
 
As of June 30, 2010, the aggregate market value of the voting and non-voting common equity held by non-affiliates was $1,856,052.
 
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date.
 
As of April 4, 2011, the Issuer had 2,058,047 shares of common stock outstanding.



 
 
 
SMALL BHC LGOG
 
2010 Form 10-K Annual Report

 
 
 
    Page
     
 PART I.    
Item 1. Business 
 1
     
 Risk Factors   18
     
   Item 1B.  Unresolved Staff Comments
 18
     
Item 2.  Properties   18
     
Item 3.  Legal Proceedings   19
     
Item 4.  Submission of Matters to a Vote of Security Holders   19
     
 PART II.    
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of  Equity Securities
 19
     
 Selected Financial Data  19
     
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   20
     
   Item 7A.   Quantitative and Qualitative Disclosures About Market Risk   20
     
  Item 8.   
 Financial Statements and Supplementary Data  20
     
  Item 9.   
 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  20
     
  Item 9A.  Controls and Procedures  20
     
  Item 9B.  Other Information 21
     
 PART III.    
 Item 10.  Directors, Executive Officers and Corporate Governance  21
     
 Item 11.  Executive Compensation   26
     
 Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters  36
     
 Item 13.  Certain Relationships and Related Transactions, and Director Independence   37
     
 Item 14.  Principal Accountants Fees and Services   37
     
 PART IV.    
 Item 15.  Exhibits, Financial Statement Schedules  38
     
SIGNATURES  40
 
 
 
 
PART I

Forward-Looking Statements
 
 
This document contains forward-looking statements as defined by Section 21E of the Securities Exchange Act of 1934.  These forward-looking statements involve substantial risks and uncertainties.  When used in this document, or in the documents incorporated by reference, the words “anticipate”, “believe”, “estimate”, “may”, “intend” and “expect” and similar expressions are some of the forward-looking statements used in these documents.  Actual results, performance, or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements.  Factors which may cause results to change materially include competition, inflation, general economic conditions, changes in interest rates, and changes in the value of collateral securing loans First Peoples Bank has made, among other things.
 
 
ITEM 1.                BUSINESS
 
 
Going Concern

There are substantial doubts as to our ability to continue as a going concern and it is possible that our subsidiary bank may fail and be placed into receivership with the FDIC.

The Company’s recent and continuing increases in non-performing assets, continuing high levels of operating expenses related to the credit problems and eroding regulatory capital raise substantial doubt about the Company’s ability to continue as a going concern.  The Company has not complied with its regulatory capital requirements set forth in the Consent Order and Prompt Corrective Action discussed in Footnote 19, Regulatory Matters.  At December 31, 2010, the Company was considered “significantly undercapitalized”. The Company needs to raise substantial additional capital.  Management is evaluating all potential sources of capital to meet the Company’s capital requirements, to include offering stock to outside parties and seeking a strategic merger partner.  There is no guarantee that sufficient capital would be available at acceptable terms, if at all, or that the Company would be able to sell assets at terms favorable enough to accomplish its regulatory capital needs.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Our board of directors is actively considering strategic alternatives.  We can give no assurance that we will identify an alternative that allows our stockholders to realize any value in the Company’s common stock.  We also can give no assurance that a transaction or other strategic alternative, once identified, evaluated and consummated, will provide any value to our stockholders.  In addition, a transaction would result in substantial dilution to our current stockholders and could adversely affect the price of our common stock.  If we are unable to return to profitability and if we are unable to identify and execute a viable strategic alternative, we may be unable to continue as a going concern.

Subsequent Event

With the concurrence of the FDIC and OFR, the Bank will record an additional provision for loan losses during the quarter ended March 31, 2011.  The range of additional losses to be recorded is $2.0 million to $2.7 million.  These losses will further degrade our capital and increase the likelihood of the failure of the Bank.



 
 

Regulatory Matters
 
 
Board Resolutions. The Federal Reserve Bank of Atlanta (“Federal Reserve”) has requested our Board of Directors to adopt resolutions limiting us from reducing our capital position, and we have adopted them. Pursuant to these resolutions, we  have committed to: (i) not incurring debt at the holding company level without prior Federal Reserve approval; (ii) not paying dividends on our securities (including our Series A Preferred Stock) without prior Federal Reserve approval; (iii) not purchasing or redeeming stock without Federal Reserve approval; (iv) not making any other payment which would represent a reduction in capital, other than normal and routine operating expenses; and (v) providing to the Federal Reserve on a quarterly basis, a parent-only balance sheet and confirmation of compliance with the resolutions.  Our Board of Directors adopted these resolutions at its October 21, 2009 meeting. These resolutions also prohibit us from paying dividends on, or redeeming, the Series A Preferred Stock without Federal Reserve approval.
 
 
Consent Order.   Effective March 18, 2010, the Bank entered into a Stipulation to the Issuance of a Consent Order (“Stipulation”) with the Federal Deposit Insurance Corporation (the “FDIC”) and the Florida Office of Financial Regulation (the “OFR”). Pursuant to the Stipulation, the Bank consented, without admitting or denying any charges of unsafe or unsound banking practices or violations of law or regulation, to the issuance of a Consent Order by the FDIC and the OFR, also effective as of March 18, 2010.

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

Pursuant to the Consent Order:

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

Ø By June 16, 2010, and during the life of the Consent Order, the Bank shall achieve and maintain a Tier 1 leverage capital ratio of not less than 8% and a total risk-based capital ratio of not less than 11%. At December 31, 2010, the Bank’s Tier 1 leverage capital ratio was 3.02% and its total risk-based capital ratio was 5.57%. As of December 31, 2010, an additional $14.3 million in capital would be required by the Bank to attain the required capital levels.

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

Ø The Bank shall also reduce the aggregate balance of assets classified “Substandard” by the FDIC in October 2009: (i) by June 16, 2010, to not more than 140% of Tier 1 capital plus the ALLL; (ii) by September 14, 2010, to not more than 120% of Tier 1 capital plus the ALLL; (iii) by December 13, 2010, to not more than 100% of Tier 1 capital plus the ALLL; (iv) by March 23, 2011, to not more than 80% of Tier 1 capital plus the ALLL; and (v) by September 19, 2011, to not more than 60% of Tier 1 capital plus the ALLL. As of December 31, 2010, the Bank’s ratio was 187%.

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

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

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

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

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

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

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

Ø Within 30 days of the end of each calendar quarter, the Bank shall furnish written progress reports to the FDIC and the OFR detailing the form, manner, and results of any actions taken to secure compliance. The Bank has, and will continue to prepare and submit such reports.
 
 
Prompt Corrective Action Directive.  On February 2, 2011, the Bank received a Supervisory Prompt Corrective Action Directive (the “Directive”), effective as of January 28, 2011 (the “Effective Date”) from the Federal Deposit Insurance Corporation (“FDIC”).  The FDIC issued the Directive due to the Bank’s failure to submit an acceptable capital restoration plan to the FDIC, the deteriorating condition of the Bank and management’s failure to improve the condition of the Bank.  The Directive requires that: (1) within 30 days of the Effective Date (by February 27, 2011), the Bank must comply with the requirements of its Consent Order by attaining a Tier 1 Leverage Capital Ratio of 8% and a Total Risk Based Capital Ratio of 11% and (2) within 10 days of the Effective Date (extended to February 11, 2011) submit an acceptable capital restoration plan to the FDIC, which expressly provides that the Bank will attain such capital levels.  The Directive further requires that if the Bank does not increase its capital to such levels by February 27, 2011, the Bank must take any necessary action for the Bank to be acquired by, or merged into, another financial institution.  An updated capital restoration plan was submitted on February 11, 2011; however, the Bank has not been able to comply with the required capital ratios.
 

 

(continued)
 
 
 
If the Bank continues to fail to satisfy the requirements of the Directive, it is likely that the FDIC or the Florida Office of Financial Regulation will take further regulatory enforcement action against the Bank, including the closure of the Bank and the placement of it into receivership with the FDIC.
 
 
The Directive also prohibits the Bank from: (1) making any payments on its subordinated debt or paying any capital distributions or dividends; (2) providing certain compensation to senior executive officers or excessive compensation or bonuses generally; (3) accepting, renewing or rolling over any brokered deposits; (4) paying interest on deposits in excess of FDIC-established market rates; and (5) acquiring any interest in any company, establishing any branches, engaging in any new line of business, entering into any material transaction outside the ordinary course of business, extending credit for any highly leveraged transaction, amending its Articles of Incorporation or Bylaws, materially changing its accounting methods, or engaging in certain transactions with affiliates (including the holding company), without the FDIC’s prior approval.  Furthermore, the Directive requires the Bank to alter, reduce or terminate any activity the FDIC determines poses excessive risk to the Bank.
 
 
FPB Bancorp, Inc.

 
FPB was incorporated on September 5, 2001. On December 3, 2001, we acquired all of the issued and outstanding stock of First Peoples Bank in a one-for-one share exchange. As of December 31, 2010, we had total consolidated assets of $232.4 million, and total consolidated stockholders’ equity of $6.7 million.
 
 
First Peoples Bank

The Bank commenced banking operations in Port St. Lucie, Florida, on April 26, 1999, as a state-chartered commercial bank. Our customers are primarily individuals, professionals, small and medium size businesses, and seasonal retirees located predominantly in St. Lucie, Martin and Indian River counties, Florida. We currently have six retail full-service banking offices located in Port St. Lucie, Stuart, Palm City, Fort Pierce, and Vero Beach, Florida. Our Stuart branch office opened for business in December 2003, the Fort Pierce branch office opened in June 2004, the Vero Beach branch office opened in March 2006, the Palm City branch office opened in January, 2008, and the Gatlin branch office opened in May 2008. The Bank also opened an Operations Center in March of 2007. Our primary business is attracting deposits from the general public and using those deposits, together with borrowings and other funds, to originate loans and to purchase securities.

We offer a broad range of retail and commercial banking services, including various types of deposit accounts and loans for businesses and consumers. As part of our community bank approach, officers are encouraged to actively participate in community activities and organizations.

In June, 2008, the Bank formed a subsidiary, Treasure Coast Holdings, Inc., for the sole purpose of managing foreclosed assets.

 
Operating and Business Strategy

We are organized as a locally-owned, locally managed community financial institution, owned and managed by people who are actively involved in our market area and committed to our economic growth and development. With local ownership, management, and directors, we believe that we can be more responsive to the communities we serve. Local ownership allows faster, more responsive and flexible decision-making which is not generally available at the majority of financial institutions in or near our market area which mainly consist of branch offices of large regional holding company banks with headquarters located elsewhere in the United States.
 

 
(continued)
 
4
 
 
 
Our principal business is to attract deposits from the general public and to invest those funds in various types of loans and other interest-earning assets. Funds are provided for these investments from the proceeds from the sale of investments, from amortization and repayment of outstanding loans and investments, from net deposit inflow, and from borrowings. Our earnings depend primarily upon the difference between (1) non-interest income, the interest and fees we receive from loans, the securities held in our investment portfolio and other investments, and (2) the expenses we incur in connection with obtaining funds for lending (including interest paid on deposits and other borrowings) and expenses relating to day-to-day operations.

To the extent market conditions permit, our strategy is intended to insulate our interest rate gap from adverse changes in interest rates by maintaining spreads through the adjustability of our interest-earning assets and interest-bearing liabilities. Our ability to reduce interest-rate risk in our loan and investment portfolios depends upon a number of factors, many of which are beyond our control, including among others, competition for loans and deposits in our market area and conditions prevailing in the economy.

Our primary sources of funds for loans and for other general business purposes are our capital, deposits and loan repayments. We expect that loan repayments will be a relatively stable sources of funds, while deposit inflows and outflows will be significantly influenced by prevailing interest rates, money market rates, and general economic conditions. Generally, short-term borrowings may be used to compensate for reductions in normal sources of funds while longer-term borrowings may be used to support expanded lending activities.

We continually seek to develop new business through an ongoing program of personal calls on both present and potential customers. As a local independent bank, we utilize traditional local advertising media to promote and develop loans and deposits. In addition, all of our directors have worked and lived in or near our market area for a number of years. We believe that these factors, coupled with the past and continued involvement of the directors, officers and staff in various local community activities, will further promote our image as a locally-owned independent institution, which we believe is an important factor to our targeted customer base.
 
 
Personalized Products and Service. We strive to provide innovative financial products and high service levels, and to maintain strong customer relationships. We seek customers who prefer to conduct business with a locally owned and managed financial institution.
 
 
Local Management and Community Focus. We approach banking with a community focus, emphasizing local management and local decision-making. Our main office is located in one of the primary business districts of Port St. Lucie on Port St. Lucie Boulevard. Most of the executive officers and directors are long-time residents of the tri-county area, and all management decisions are made within our market area.
 
 
Dedicated Employees.  We believe that the key to our success lies with our employees, because it is through our employees that we are able to provide our banking customers with a very high level of service and attention. To this end, we seek to hire well qualified banking professionals who are committed to providing a superior level of banking service and are willing to accept a significant degree of responsibility.  Each employee focuses on the individual customer’s needs and strives to deliver the specific products and services that are best suited to achieve the customer’s financial goals.
 
 
Internal Growth and Branch Expansion. Our first branch office opened in December of 2003 at 715 Colorado Avenue in Stuart, Florida, in a 6,100 square foot leased facility.

Our second branch office opened in June of 2004 in a two-story branch building at 2500 Virginia Avenue in Fort Pierce, Florida. The bank occupies 3,733 square feet on the first floor. We are leasing 5,025 square feet on the second floor to unaffiliated parties.
 
 
(continued)
 
5
 
 
 
In March 2006, we opened a full-service branch office at 4000 20th Street, Vero Beach, Florida, in a former bank branch building.  An 11,000 square foot Operations Center, which is leased, opened in March of 2007, in Jensen Beach, Florida, and a fifth branch office at 3001 Martin Downs Boulevard in Palm City, Florida opened in January of 2008 and is 3,000 square feet.  A 3,700 square foot building now houses our sixth branch office, which opened in May of 2008 on Gatlin Boulevard, in Port St. Lucie, Florida.
 
 
Develop Commercial Loan Relationships.  Since our inception, we have been gradually building our loan portfolio mix by purchasing, originating and retaining commercial and commercial real estate loans. We believe that large regional and out-of-state financial institutions have shifted their focus away from lending to small and medium-sized business. As part of our lending efforts, we have been developing, within our market, strong commercial loan and deposit relationships with small to medium-sized businesses which tend to value personalized service and attention to their specific borrowing needs. Timely decisions and prompt, courteous service is very important and we believe will foster long-term, quality loan and deposit relationships. In addition, we are active in the Small Business Administration lending program earning our Preferred Lender Status in 2002.
 
 
Residential Loans. In order to be a full service bank, we engage in residential lending activities which include the origination of residential mortgage loans. Our strategy is to sell, to the extent practical, all of our fixed-rate and adjustable-rate residential mortgage loan originations. The sale of mortgage loans in the secondary market provides additional non-interest income, including mortgage loan origination fees and gains on the sale of mortgage loans. Typically a minimal amount of these loans are held in our portfolio.
 
 
Maintain Strong Credit Quality.  We place a great deal of emphasis on maintaining strong asset quality. The asset quality we are experiencing to date is principally due to our strict underwriting criteria, the relationship of our senior officers and directors to our customers and their knowledge of the demographics and needs of our local community. Nonetheless, due to the economic downturn, particularly in Florida, we have experienced a decrease in our overall asset quality in 2010 and 2009.
 
 
Primary Market Areas. We are the only financial institution headquartered in Port St. Lucie, Florida. Our geographic market area encompasses Martin County, St. Lucie County, and Indian River County, Florida. St. Lucie, Martin and Indian River Counties have a total combined year-round adult population of approximately 547,930. From 2000 to 2009, the population of St. Lucie County grew at a rate of 38.3%, while Martin County grew by 10.3% and Indian River County by 2.54%. In 2007, the U.S. Department of Commerce recognized St. Lucie County as having one of the fastest growing populations of all U.S. Counties.

St. Lucie West is home to the spring training facility for the New York Mets, the St. Lucie Mets and the PGA training center, one of the better golf training centers in the U.S.

Port St. Lucie is home to one of two family-oriented Club Med’s in the U.S. Major employers include St. Lucie County School District, St. Lucie County, Liberty Medical, Indian River State College, Walmart, Lawnwood Regional Medical Center, QVC, FPL and Publix Supermarkets.

The newest major development in St. Lucie County is the Town of Tradition, which is a master-planned, mixed-use community. St. Lucie County is home to several universities and research institutions working in the areas of bioscience, marine science and ocean engineering, agriculture and aquaculture, even technical innovation in digital production. These companies include Torrey Pine Institute for Molecular Studies, Vaccine and Gene Therapy Institute of Oregon Health and Science University, Digital Domain, Harbor Branch Oceanographic Institute at Florida Atlantic University, the U.S. Department of Agriculture Horticultural Research Laboratory, the Smithsonian Marine Research Station, and the University of Florida Indian River Research and Education Center.  Also planned is a new medical campus for Martin Memorial Health Systems.  This local expansion is estimated to bring hundreds of new job opportunities to the St. Lucie County area. Our sixth branch office, which opened in May of 2008, is located on Gatlin Boulevard, just outside of the Tradition development.
 
 
(continued)
 
 

 
In Martin County, some of the major employers include Martin Memorial Health Systems, Martin County School District, Publix Supermarkets, Home Depot and Armellini Express Lines. In Indian River County, some of the major employers include Indian River Medical Center, Piper Aircraft, Inc., John’s Island, Sebastian River Medical Center and Visiting Nurse Association.

As of June 30, 2010, the 203 commercial bank and thrift branch offices operating within Martin County, St. Lucie County, and Indian River County, Florida maintained aggregate deposits of approximately $10.9 billion, representing a .38% decrease over June 30, 2005 levels. Of the total deposits as of June 30, 2010, an estimated 70.3%, or $7.7 billion, of commercial bank and thrift deposits were held at offices of large, out-of-state institutions.
 
 
Competition. Our primary market areas are St. Lucie, Martin and Indian River Counties, Florida. The banking business in these areas is extremely competitive, and the level of competition may increase further, which may limit our asset growth and profitability. We experience competition in both lending and attracting deposits from other banks, savings institutions, and non-bank financial institutions located within our market area, many of which are significantly larger institutions. These institutions, which include Bank of America, Wachovia Bank (now Wells Fargo), Riverside National Bank of Florida (now TD Bank), National City Bank (now PNC Bank), Seacoast National Bank, and SunTrust Bank offer services, including extensive and established branch networks and trust services, that we do not provide. Non-bank competitors competing for deposits and deposit-type accounts include mortgage bankers and brokers, finance companies, credit unions, securities firms, money market funds, life insurance companies and the mutual funds industry. For loans, we encounter competition from other banks, savings associations, finance companies, mortgage bankers and brokers, insurance companies, small loan and credit card companies, credit unions, pension trusts and securities firms, including many competing lenders that are outside our geographic market area.

The primary factors in competing for deposits are interest rates, the range of financial services offered, convenience of office locations, and the flexibility of office hours. The primary factors in competing for loans include interest rates, loan fees, flexible terms, and timely loan decisions. We compete for deposits by offering a variety of deposit programs geared to our potential customers. By developing strong ties in the local community and providing a high quality of personal banking services to families, professionals, retirees, and owner-operated businesses with an emphasis on flexibility and timely responses to customer demands, we believe that we can successfully compete in our market for deposits.

With respect to loans, we have targeted small to medium-sized businesses as our customer base, because we believe that the large out-of-state financial institutions continue to shift the focus away from these business opportunities.
 
 
Loan Activities
 
 
General.  Our primary business emphasis is on making commercial business, commercial real estate and consumer loans. As of December 31, 2010, the net loan portfolio totaled $161.9 million, or 69.66% of total assets.
 
 
Loan Underwriting. Loan activities are subject to underwriting standards and loan origination procedures prescribed by the board of directors and management. Loan applications are obtained to determine the borrower’s ability to repay, and the more significant items on these applications are verified through the use of credit reports, financial statements and confirmations. Our loan policy for real estate loans generally requires that collateral be appraised by an independent, outside appraiser approved by the board of directors.
 
 
(continued)
 
 
 
General Loan Policies. Loans are approved at various management levels up to and including the board of directors, depending on the amount of the loan. Loan approvals are made in accordance with delegated authority approved by the board of directors. Generally loans less than $150,000 are approved by certain authorized officers. The President has individual loan authority up to $250,000. Loans up to $500,000 are approved by an officer’s loan committee, and loans between $500,000 and $1,000,000 are approved by a directors’ loan committee.  All loans over $1,000,000 require approval by the board of directors.

For real estate loans, our policy is to have a valid mortgage lien on real estate securing a loan and to obtain a title insurance policy, which insures the validity and priority of the lien. Borrowers must also obtain hazard insurance policies prior to closing, and if the property is in a flood prone area, flood insurance is required.

We are permitted to lend up to 100% of the appraised value of the real property securing a single family residential mortgage loan. However, if the amount of a conventional, residential loan (including a construction loan or a combination construction and permanent loan) originated or refinanced exceeds 80% of the appraised value or of the purchase price, whichever is less, we are required by federal regulations to obtain private mortgage insurance on that portion of the principal amount of the loan that exceeds 80% of the value of the property or 65% on “raw” land loans.  We will originate single-family residential mortgage loans with up to a 90% loan-to-value ratio if the required private mortgage insurance is obtained. Loans over 90% loan-to-value ratio are limited to special community support programs or one of the FHA, VA, or Farmers Home Administration guarantee or insurance programs.  The loan-to-value ratio on a home secured by a junior lien generally does not exceed 90%, including the amount of the first mortgage, of the collateral. With respect to home loans granted for construction or combination construction/permanent financing, we will lend up to 80% of the appraised value of the property on an “as completed” basis. The loan-to-value ratio on multi-family residential and commercial real estate loans is generally limited to 80% of value. Consumer loans are considered to be loans to natural persons for personal, family or household purposes, and these loans may be unsecured, secured by personal property or secured by liens on real estate which, when aggregated with prior liens, equals or exceeds the appraised value of the collateral property.

The maximum amount which we could have loaned to one borrower and the borrower’s related entities as of December 31, 2010, was approximately $1.9 million on a secured basis, according to the Florida Banking Statutes, or $2.5 million on a secured basis, based on our in-house policy limit. Our largest loan to a single borrower is a $2.9 million loan to a corporation, secured by a first commercial real estate mortgage on a golf course and clubhouse.  The loan is current.

Interest rates charged on loans are affected principally by competitive factors, the demand for such loans and the supply of funds available for lending purposes. These factors are, in turn, affected by general economic conditions, monetary policies of the federal government, including the Federal Reserve Board, legislative tax policies and government budgetary matters.
 
 
Commercial Real Estate Loans. Commercial real estate loans are secured primarily by office, medical and retail business properties located in St. Lucie, Martin and Indian River Counties. These types of loans amounted to $92.8 million or 55.53% of the total loan portfolio as of December 31, 2010. Commercial real estate loans may be amortized for up to 25 years, but frequently mature in three to six years.

Commercial and multi-family real estate loans are originated with a loan-to-value ratio generally not exceeding 80%.  Loans secured by this type of collateral will continue to be a part of our future loan program.  Commercial and multi-family real estate loans are generally larger and involve a greater degree of risk than residential mortgage loans. Because payments on loans secured by commercial property depend to a large degree on results of operations and management of the properties, repayment of such loans may be subject to a greater extent to adverse conditions in the real estate market or the economy. At December 31, 2010, the largest commercial and multi-family real estate loan was approximately $2.9 million to a Florida corporation, secured by a golf course and clubhouse. The loan is current.
 
 
 
(continued)
 
8
 
 
 
Commercial Loans.  Commercial loans are business loans that are not secured by real estate and are dependent on business cash flows for repayment. At December 31, 2010, the largest commercial loan not secured by real estate was a $405,000 loan to a corporation, secured by a ship’s mortgage on a local cruise boat.  The loan is 75% guaranteed by the SBA.  While we have made Small Business Administration loans, we generally will underwrite commercial loans for our own portfolio utilizing other sources of collateral and a maximum of 80% loan to value. The majority of our commercial loans are adjustable-rate loans with adjustment periods ranging from daily to 5 years. As of December 31, 2010 we had $59.0 million in commercial loans, which was 35.29% of the total loan portfolio.
 
 
Residential  Real Estate Loans.  We currently originate fixed-rate residential mortgage loans and adjustable-rate mortgage loans for terms of up to 30 years. As of December 31, 2010, $9.2 million or 5.49% of our total loan portfolio consisted of one-to-four family residential real estate loans.  As of such date, all of these loans were adjustable-rate mortgage loans.

The residential adjustable-rate mortgage loans currently being offered have interest rates that are fixed for a period of one, three or five years and then after the initial period the interest rate is adjusted annually based upon an index such as the yield on treasury securities adjusted to a one-year maturity, plus a margin. Most of our adjustable-rate mortgage loans limit the amount of any increase or decrease in the interest rate at each adjustment and over the life of the loan. Typical limitations are 2% for each adjustment with a limit of 6% over the life of the loan. We may offer adjustable-rate mortgage loans with different annual and life-of-loan interest change limits, shorter or longer adjustment periods and different base indices as may be appropriate to meet market demands, portfolio needs, and our interest-rate risk management goals.  While the initial rate on adjustable-rate mortgage loans may be below a fully indexed rate, the loan is always underwritten based on the borrower’s ability to pay at the interest rate which would be in effect after adjustment of the loan. Some adjustable-rate mortgage loans include features that allow the borrower, under special conditions, to convert the loan to a fixed rate at the then prevailing market rates.

Adjustable-rate mortgage loans reduce our risk of changes in interest rates, but involve other risks because as interest rates increase, the borrower’s required payments increase, thus increasing the potential for default.  Marketability of real estate loans is also affected by the level of interest rates.

Our fixed rate home loans are originated for 30-year amortization terms. Borrowers requesting a term of 15 years or less are usually granted an interest rate slightly lower than is offered for a 30-year amortizing loan. These loans are originated in compliance with documentation and underwriting standards which permit their sale in the secondary market to institutional investors such as Fannie Mae. Fixed-rate home loans include a “due on sale” clause, which provides us with the contractual right to declare the loan immediately due and payable in the event the borrower transfers ownership of the property without our consent.  The “due on sale” provision is always enforced.

We generally sell all fixed rate, 30-year home loans in the secondary market.  No such loans are held in our loan portfolio.
 
 
       Consumer Loans.  We make various types of consumer loans, the majority of which are installment loans, which also include automobile and boat loans, and home equity loans.  Consumer loans are originated in order to provide a range of financial services to customers and to create stronger ties to our customers and because the shorter term and normally higher interest rates on such loans help maintain a profitable spread between our average loan yield and our cost of funds. The terms of installment consumer loans generally range from one to five years and are typically at a fixed rate of interest, while home equity loans are at a variable rate of interest.  Underwriting standards for consumer loans include an assessment of the applicant’s repayment history on other debts and ability to meet existing obligations and payments on the proposed loans.  Although the applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, to the proposed loan amount. Consumer loans generally involve more credit risks than mortgage loans because of the type and nature of the collateral or absence of collateral. Consumer loan repayments are dependent on the borrower’s continuing financial stability, and are likely to be adversely affected by job loss, divorce and illness.  Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. In some cases, repossessed collateral may not provide full repayment of the outstanding loan balance. Our belief is that the yields earned on consumer loans are commensurate with the credit risk associated with such loans and, therefore, we intend to continue to increase our investment in these types of loans. As of December 31, 2010, consumer loans amounted to $6.2 million, or 3.69% of the total loan portfolio.
 
 
 
9
 
 
 
    Income from Loan Activities. Fees are earned in connection with loan commitments and originations, loan modifications, late payments, changes of property ownership and for miscellaneous services related to loans. Income from these activities varies from period to period with the volume and type of loans originated, sold and purchased, which in turn is dependent upon prevailing interest rates and their effect on the demand for loans in our primary service area.

        Loan fees typically are charged at the time of loan origination and may be a flat fee or a percentage of the amount of the loan. Current accounting standards state that the total amount of such fees cannot be recognized as income immediately; rather the fees are deferred and taken into income over the contractual life of the loan, using a level yield method. If loans are prepaid or refinanced, all remaining deferred fees with respect to such loans are taken into income at that time.
 
 
         Non-performing Loans and Repossessed Assets.  When a borrower fails to make a required payment on a loan, our loan officers attempt to collect the payment by contacting the borrower. If a payment on a loan has not been received by the end of a grace period (usually 10 days from the payment due date), notices are sent at that time, with follow-up contacts made thereafter. In most cases, delinquencies are cured promptly. If the delinquency exceeds 29 days and is not cured through normal collection procedures, more formal measures are instituted to remedy the default, including the commencement of foreclosure proceedings. We will then attempt to negotiate with the delinquent borrower to establish a satisfactory payment schedule.

          A loan is generally placed on non-accrual status and ceases accruing interest when loan payment performance is deemed unsatisfactory. All loans past due 90 days, however, are placed on non-accrual status, unless the loan is both well collateralized and in the process of collection. Cash payments received while a loan is classified as non-accrual are recorded as a reduction of principal as long as doubt exists as to full collection of all principal and interest.

          If foreclosure is required, when completed, the property is sold at a public auction in which we will generally participate as a bidder. If we are the successful bidder, the acquired real estate property is then included in the foreclosed assets account until it is sold. We are permitted under federal regulations to finance sales of foreclosed assets by “loans to facilitate,” which may involve more favorable interest rates and terms than generally would be granted under normal underwriting guidelines.

          At December 31, 2010, we had $12.3 million of non-accruing loans which were contractually past due 90 days or more, and troubled debt restructured of $10.8 million. As of December 31, 2010, we have $9.2 million in foreclosed assets.
 
 
        Asset Classification. Commercial banks are required to review and when appropriate classify their assets on a regular basis.  The FDIC and state banking examiners have authority to identify problem assets and, if appropriate, require them to be classified.  There are three classifications for problem assets: “substandard,” “doubtful” and “loss.”  Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified as loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. If full collection of principal and interest is doubtful, the insured institution establishes a specific allowance for loan losses, in accordance with the guidelines established under U.S. generally accepted accounting principles.  All or a portion of general loan loss allowances established to cover possible losses related to assets classified substandard or doubtful may be included in determining an institution’s regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital. Assets that do not warrant classification in one of the aforementioned categories, but possess weaknesses, are classified as special mention and are closely monitored.
 
 

(continued)
 
10
 
 
 
        In 2010, non-performing assets totaled $21.5 million or 9.26% of total assets, as a result of a deterioration in credit quality and borrowers’ ability to meet their loan obligations, due mostly to the drop in real estate values and overall recessionary pressures.
 
 
       Provision for Losses on Loans. The provision for loan losses is established through a provision for loan losses charged against income.  Loans are charged against the provision when we believe that the full collection of principal and interest is doubtful or when an actual loss is incurred. The provision is an estimated amount that we believe will be adequate to absorb losses inherent in the loan portfolio based on evaluations of its collectibility. The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, specific impaired loans, and current anticipated economic conditions that may affect the borrower’s ability to pay. While we use the best information available to us to recognize losses on loans, future additions to the provision may be necessary based on changes in economic conditions. At December 31, 2010, our total allowance for loan losses was approximately $4.8 million representing 2.88% of total loans.
 
 
    Personnel. As of December 31, 2010, we had 68 full-time employees and 9 part-time employees. The employees are not represented by any collective bargaining group. We believe our relations with our employees to be good.

        Employees are covered by a comprehensive employee benefit program which provides for, among other benefits, hospitalization and major medical insurance, short and long-term disability insurance, life insurance, and education assistance. Such employee benefits are considered by management to be generally competitive with employee benefits provided by other major employers in our geographic market area.

 
SUPERVISION AND REGULATION
 
 
General

          As a one-bank holding company, we are subject to an extensive body of state and federal banking laws and regulations which impose specific requirements and restrictions on virtually all aspects of our operations. We are affected by government monetary policy and by regulatory measures affecting the banking industry in general.
   
         The following is a brief summary of some of the statutes, rules and regulations which affect our operations. This summary is qualified in its entirety by reference to the particular statutory and regulatory provisions referred to below and is not intended to be an exhaustive description of the statutes or regulations applicable to our business.  Any change in applicable laws or regulations may have a material adverse effect on our business.

 
 
 
 
 
FPB Bancorp, Inc.

 
    We are a bank holding company within the meaning of the Bank Holding Company Act of 1956.  As such, we are required to file annual reports and other information with the Federal Reserve regarding our business operations and those of our subsidiary. We are also subject to the supervision of, and to periodic inspections by, the Federal Reserve.

The Bank Holding Company Act generally requires every bank holding company to obtain the prior approval of the Federal Reserve before:
 
 
                       · Acquiring all or substantially all of the assets of a bank; 
                       · Acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank or bank holding company: or 
                       · Merging or consolidating with another bank holding company. 
 
 
     The Bank Holding Company Act and the Change in Bank Control Act, together with regulations promulgated by the Federal Reserve, require that, depending on the particular circumstances, either the Federal Reserve’s approval must be obtained or notice must be furnished to the Federal Reserve and not disapproved prior to any person or company, not a bank holding company, acquiring control of a bank holding company, subject to certain exemptions. Control is conclusively presumed to exist when an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control is rebuttably presumed to exist if a person acquires 10% or more, but less than 25%, of any class of voting securities and either the bank holding company has registered securities under Section 12 of the Securities Exchange Act of 1934 or no other person owns a greater percentage of that class of voting securities immediately after the transaction.

          Except as authorized by the Bank Holding Company Act and Federal Reserve regulations or order, a bank holding company is generally prohibited from engaging in, or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in any business other than the business of banking or managing and controlling banks.  Some of the activities the Federal Reserve has determined by regulation to be proper incidents to the business of banking, and thus permissible for bank holding companies, include:
 

 
                         ·  
Making or servicing loans and certain types of leases;
                         ·  
Engaging in certain insurance and discount brokerage activities;
                         ·  
Performing certain data processing services;
                         ·  
Acting in certain circumstances as a fiduciary or investment or financial advisor;
                         ·  
Providing management consulting services;
                         ·  
Owning savings associations; and
                         ·  
Making investments in corporations or projects designed primarily to promote community welfare.
 
 
 
     In accordance with Federal Reserve policy, a bank holding company is expected to act as a source of financial strength to its subsidiary banks. In adhering to the Federal Reserve’s policy, we may be required to provide financial support to the Bank at a time when, absent such Federal Reserve policy, it might not be deemed advisable to provide such assistance. Under the Bank Holding Company Act, the Federal Reserve may also require a bank holding company to terminate any activity or relinquish control of a non-bank subsidiary (other than a non-bank subsidiary of a bank) upon the Federal Reserve’s determination that the activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or non-bank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition.
 
 
 
 
 
First Peoples Bank
 
 
     As a state-chartered bank, the Bank is subject to the supervision and regulation of the Department and the FDIC. Through December of 2013, our deposits are insured by the FDIC for a maximum of $250,000 per account title, and unlimited for all non-interest bearing accounts through December 31, 2012. For this protection, we must pay a semi-annual statutory assessment and comply with the rules and regulations of the FDIC. The assessment levied on a bank for deposit insurance varies, depending on the capital position of each bank, and other supervisory factors. Currently, we are subject to the statutory assessment.
 
 
 
Areas regulated and monitored by the bank regulatory authorities include:

·             
Security devices and procedures;
·             
Adequacy of capitalization and loss reserves;
·             
Loans;
·             
Investments;
·             
Borrowings;
·             
Deposits;
·             
Mergers;
·             
Issuances of securities;
·             
Payment of dividends;
·             
Establishment of branches;
·             
Corporate reorganizations;
·             
Transactions with affiliates;
·             
Maintenance of books and records; and
·             
Adequacy of staff training to carry out safe lending and deposit gathering practices.
 

 
Capital Adequacy Requirements

     Banks are subject to regulatory capital requirements imposed by the Federal Reserve and the FDIC. Until a bank and its holding company’s assets reach $500 million, the capital adequacy guidelines issued by the Federal Reserve are applied to bank holding companies on a non- consolidated basis, unless the bank holding company is engaged in non-bank activities involving significant leverage, or it has a significant amount of outstanding debt held by the general public. The Department’s and the FDIC’s risk-based capital guidelines apply directly to insured state banks, regardless of whether they are subsidiaries of a bank holding company. Both agencies’ requirements, which are substantially similar, establish minimum capital ratios in relation to assets, both on an aggregate basis as adjusted for credit risks and off balance sheet exposures. The risk weights assigned to assets are based primarily on credit risks.  Depending upon the riskiness of a particular asset, it is assigned to a risk category. For example, securities with an unconditional guarantee by the United States government are assigned to the lowest risk category.  The aggregate amount of assets assigned to each risk category is multiplied by the risk weight assigned to that category to determine the weighted values, which are added together to determine total risk-weighted assets.

     Capital is then classified into two categories, Tier 1 and Tier 2. Tier 1 capital consists of common and qualifying preferred shareholder’s equity, less goodwill and other adjustments. Tier 2 capital consists of mandatory convertible, subordinated, and other qualifying term debt, preferred stock not qualifying for Tier 1 capital, and a limited amount of allowance for credit losses, up to a designated percentage of risk-weighted assets. Under the risk-based guidelines, financial institutions must maintain a specified minimum ratio of “qualifying” capital to risk-weighted assets. At least 50% of an institution’s qualifying capital must be “core” or “Tier 1” capital, and the balance may be “supplementary” or “Tier 2” capital. In addition, the guidelines require banks to maintain a minimum leverage ratio standard of capital adequacy. The leverage standard requires top-rated institutions to maintain a minimum Tier 1 leverage capital to assets ratio of 3%.  All other institutions are required to maintain a Tier 1 leverage capital ratio of 4% or greater, based upon their particular circumstances and risk profiles.
 
 

(continued)
 
13
 
 
 
     Federal banking regulators have adopted regulations revising the risk-based capital guidelines to further ensure that the guidelines take adequate account of interest rate risk. Interest rate risk is the adverse effect that changes in market interest rates may have on a bank’s financial condition and is inherent to the business of banking. Under the regulations, when evaluating a bank’s capital adequacy, the revised capital standards now explicitly include a bank’s exposure to declines in the economic value of its capital due to changes in interest rates. The exposure of a bank’s economic value generally represents the change in the present value of its assets, less the change in the value of its liabilities, plus the change in the value of its interest rate off-balance sheet contracts.
 
 
     Federal bank regulatory agencies possess broad powers to take prompt corrective action as deemed appropriate for an insured depository institution and its holding company, based on the institution’s capital levels.  The extent of these powers depends upon whether the institution in question is considered “well-capitalized”, “adequately capitalized”, “undercapitalized”, “significantly under-capitalized”, or “critically undercapitalized”. Generally, as an institution is deemed to be less well-capitalized, the scope and severity of the agencies’ powers increase, ultimately permitting the agency to appoint a receiver for the institution.  Business activities may also be influenced by an institution’s capital classification. For instance, only a “well-capitalized” depository institution may accept brokered deposits without prior regulatory approval, and can engage in various expansion activities with prior notice, rather than prior regulatory approval. However, rapid growth, poor loan portfolio performance or poor earnings performance, or a combination of these factors, could change the capital position of our subsidiary banks in a relatively short period of time. Failure to meet these capital requirements could subject the subsidiary banks to prompt corrective action provisions of the FDIC, which may include filing with the appropriate bank regulatory authorities a plan describing the means and a schedule for achieving the minimum capital requirements. In addition, we would not be able to receive regulatory approval of any application that required consideration of capital adequacy, such as a branch or merger application, unless we could demonstrate a reasonable plan to meet the capital requirement within an acceptable period of time.
 

 
Dividends

     Our ability to pay further cash dividends may depend almost entirely upon the amount of dividends that the Bank is permitted to pay by statutes or regulations. Additionally, the Florida Business Corporation Act provides that we may only pay dividends if the dividend payment would not render us insolvent, or unable to meet our obligations as they come due.

     The Department limits a bank’s ability to pay dividends. As a state-chartered bank, we are subject to regulatory restrictions on the payment of dividends, including a prohibition of payment of dividends from the banks’ capital under certain circumstances without the prior approval of the Department and the FDIC. Except with the prior approval of the Department, all dividends of any Florida bank must be paid out of retained net profits from the current period and the previous two years, after deducting expenses, including losses and bad debts. In addition, a state-chartered bank in Florida is required to transfer at least 20% of its net income to surplus until their surplus equals the amount of paid-in capital.
 

 
Other Laws
 
 
     The Dodd-Frank Act.  On July 21, 2010, President Obama signed the Dodd-Frank Act into law. The Dodd-Frank Act will have a broad impact on the financial services industry, imposing significant regulatory and compliance changes, including the designation of certain financial companies as systemically significant, the imposition of increased capital, leverage, and liquidity requirements, and numerous other provisions designed to improve supervision and oversight of, and strengthen safety and soundness within, the financial services sector. Additionally, the Dodd-Frank Act establishes a new framework of authority to conduct systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, or Council, the Federal Reserve, the OCC, and the FDIC.
 
 

(continued)
 
14
 
 
The following items provide a brief description of certain provisions of the Dodd-Frank Act.
 
 
·         
Source of strength. The Dodd-Frank Act requires all companies that directly or indirectly control an insured depository institution to serve as a source of strength for the institution.
·         
Limitation on federal preemption. The Dodd-Frank Act significantly reduces the ability of national banks and federal thrifts to rely upon federal preemption of state consumer financial laws.
·         
Mortgage loan origination and risk retention. The Dodd-Frank Act contains additional regulatory requirements that may affect our operations and result in increased compliance costs. For example, the Dodd-Frank Act imposes new standards for mortgage loan originations on all lenders, including banks and thrifts, in an effort to require steps to verify a borrower's ability to repay. In addition, the Dodd-Frank Act generally requires lenders or securitizers to retain an economic interest in the credit risk relating to loans the lender sells or mortgage and other asset-backed securities that the securitizer issues. The risk retention requirement generally will be 5%, but could be increased or decreased by regulation.
·         
Imposition of restrictions on certain activities. The Dodd-Frank Act requires new regulations for the over-the-counter derivatives market, including requirements for clearing, exchange trading, capital, margin, and reporting. Additionally, the Dodd-Frank Act requires that certain swaps and derivatives activities be "pushed out" of insured depository institutions and conducted in non-bank affiliates.
·         
Expanded FDIC resolution authority. While insured depository institutions have long been subject to the FDIC's resolution process, the Dodd-Frank Act creates a new mechanism for the FDIC to conduct the orderly liquidation of certain "covered financial companies," including bank and thrift holding companies and systemically significant non-bank financial companies.
·         
Consumer Financial Protection Bureau (“CFPB”). The Dodd-Frank Act creates a new independent CFPB within the Federal Reserve. The CFPB is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services. The CFPB has rulemaking authority over many of the statutes governing products and services offered to bank and thrift consumers.
·         
Deposit insurance. The Dodd-Frank Act makes permanent the general $250,000 deposit insurance limit for insured deposits. The Dodd-Frank Act also extends until January 1, 2013, federal deposit coverage for the full net amount held by depositors in non-interest bearing transaction accounts.
·         
Transactions with affiliates and insiders. The Dodd-Frank Act generally enhances the restrictions on transactions with affiliates under Section 23A and 23B of the Federal Reserve Act, including an expansion of the definition of "covered transactions."
·         
Enhanced lending limits. The Dodd-Frank Act strengthens the existing limits on a depository institution's credit exposure to one borrower.
·         
Corporate governance. The Dodd-Frank Act addresses many investor protection, corporate governance and executive compensation matters that will affect most U.S. publicly traded companies, including the Company. The Dodd-Frank Act (1) grants stockholders of U.S. publicly traded companies an advisory vote on executive compensation; (2) enhances independence requirements for compensation committee members; (3) requires companies listed on national securities exchanges to adopt incentive-based compensation clawback policies for executive officers; and (4) provides the SEC with authority to adopt proxy access rules that would allow stockholders of publicly traded companies to nominate candidates for election as a director and have those nominees included in a company's proxy materials.
 
 

(continued)
 
15
 
 
 
     Many of the requirements of the Dodd-Frank Act will be implemented over time and most will be subject to regulations implemented over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on our operations is unclear.

     State usury and credit laws limit the amount of interest and various other charges collected or contracted by a bank on loans. Our loans are also subject to federal laws applicable to credit transactions, such as the:
 
 
·         
Federal Truth-In-Lending Act, which governs disclosures of credit terms to consumer borrowers;
·         
Community Reinvestment Act, which requires financial institutions to meet their obligations to provide for the total credit needs of the communities they serve, including investing their assets in loans to low- and moderate-income borrowers;
·         
Home Mortgage Disclosure Act requiring financial institutions to provide information to enable public officials to determine whether a financial institution is fulfilling its obligations to meet the housing needs of the community it serves;
·         
Equal Credit Opportunity Act prohibiting discrimination on the basis of race, creed or other prohibitive factors in extending credit;
·         
Real Estate Settlement Procedures Act, which requires lenders to disclose certain information regarding the nature and cost of real estate settlements, and prohibits certain lending practices, as well as limits escrow account amounts in real estate transactions;
·         
Fair Credit Reporting Act governing the manner in which consumer debts may be collected by collection agencies; and
·         
The rules and regulations of various federal agencies charged with the responsibility of implementing such federal laws.
 
 
 
Our operations are also subject to the:
 
 
·         
The privacy provisions of the Gramm-Leach-Bliley Act of 1999, which requires us to maintain privacy policies intended to safeguard consumer financial information, to disclose these policies to our customers, and allow customers to “opt out” of having their financial service providers disclose their confidential financial information to non-affiliated third parties, subject to certain exceptions;
·         
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and
·         
Electronic Funds Transfer Act and Regulation E, which govern automatic deposits to, and withdrawals from, deposit accounts and customers’ rights and liabilities arising from the use of debit cards, automated teller machines and other electronic banking services.

 
Interstate Banking and Branching
 
 
     Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, eligible bank holding companies in any state are permitted, with Federal Reserve approval, to acquire banking organizations in any other state. The Interstate Banking and Branching Efficiency Act also removed substantially all of the prohibitions on interstate branching by banks. The authority of a bank to establish and operate branches within a state, however, continues to be subject to applicable state branching laws.  Under current Florida law, we are permitted to establish branch offices throughout Florida with the prior approval of the Department and the FDIC.  In addition, with prior regulatory approval, we would be able to acquire existing banking operations in other states.
 
 
 
 
Financial Modernization

     The Gramm-Leach-Bliley Act of 1999 sought to achieve significant modernization of the federal bank regulatory framework by allowing the consolidation of banking institutions with other types of financial services firms, subject to various restrictions and requirements. In general, the Gramm-Leach-Bliley Act repealed most of the federal statutory barriers which separated commercial banking firms from insurance and securities firms and authorized the consolidation of such firms in a “financial services holding company”. We have no immediate plans to utilize the structural options created by the Gramm-Leach-Bliley Act, but may develop such plans in the future.
 
 
Anti-Money Laundering

     After September 11, 2001, terrorist attacks in New York and Washington, D.C., the United States government acted in several ways to tighten control on activities perceived to be connected to money laundering and terrorist funding. A series of orders were issued which identify terrorists and terrorist organizations and require the blocking of property and assets of, as well as prohibiting all transactions or dealings with, such terrorists, terrorist organizations and those that assist or sponsor them. The USA Patriot Act enacted in 2001:
 
 
·             
Substantially broadens existing anti-money laundering legislation and the extraterritorial jurisdiction of the United States;
·             
Imposes new compliance and due diligence obligations;
·             
Creates new crimes and penalties;
·             
Compels the production of documents located both inside and outside the United States; including those of foreign institutions that have a correspondent relationship in the United States; and
·             
Clarifies the safe harbor from civil liability to customers.
·             
In addition, the United States Treasury Department issued regulations in cooperation with the federal banking agencies, the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Department of Justice to:
·             
Require customer identification and verification;
·             
Expand the money-laundering program requirement to the major financial services sectors; including insurance and unregistered investment companies, such as hedge funds; and
·             
Facilitate and permit the sharing of information between law enforcement and financial institutions, as well as among financial institutions themselves.
 
 
     The United States Treasury Department also has created the Treasury USA PATRIOT Act Task Force to work with other financial regulators, the regulated community, law enforcement and consumers to continually improve the regulations. Recently, enforcement of the USA PATRIOT Act, the Bank Secrecy Act and other anti-money laundering laws and regulations has greatly increased from both State and Federal regulators.

 
 
 
Emergency Economic Stabilization Act
 
 
      In response to the financial crisis affecting the banking system and financial markets, the Emergency Economic Stabilization Act (“EESA”) was signed into law on October 3, 2008, and established the Troubled Asset Relief Program (“TARP”). As part of TARP, the U.S. Treasury established the Capital Purchase Program (“CPP”) to provide up to $700 billion of funding to eligible financial institutions through the purchase of capital stock and other financial instruments for the purpose of stabilizing and providing liquidity to the U.S. financial markets. On December 5, 2008, FPB issued $5.8 million in preferred stock and a warrant to purchase 183,158 shares of common stock at $4.75 to the U.S. Treasury.  In connection with EESA, there have been numerous actions by the Federal Reserve Board, Congress, the U.S. Treasury, the FDIC, the SEC and others to further the economic and banking industry stabilization efforts under EESA. It remains unclear at this time what further legislative and regulatory measures will be implemented under EESA affecting FPB.
 
 
American Recovery and Reinvestment Act of 2009
 
     On February 17, 2009 President Obama signed into law the American Recovery and Reinvestment Act of 2009 (“ARRA”), more commonly known as the economic stimulus or economic recovery package. ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health, and education needs. In addition, ARRA imposes certain new executive compensation and corporate expenditure limits on all current and future CPP recipients that are in addition to those previously announced by the U.S. Treasury, until the institution has repaid the U.S. Treasury, which is now permitted under ARRA without penalty and without the need to raise new capital, subject to the U.S. Treasury’s consultation with the recipient’s appropriate regulatory agency.
 
 
Future Legislation
 
     Various other legislative and regulatory initiatives, including proposals to overhaul the banking regulatory system and to limit the investments that a depository institution may make with insured funds, are from time to time introduced in Congress and state legislatures, as well as regulatory agencies. Such legislation may change banking statutes and the operating environment of FPB and the Bank in substantial and unpredictable ways, and could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance depending upon whether any of this potential legislation will be enacted, and if enacted, the effect that it or any implementing regulations, would have on the financial condition or results of operations of FPB or the Bank. With the recent enactments of EESA and ARRA, the nature and extent of future legislative and regulatory changes affecting financial institutions is very unpredictable at this time.  FPB cannot determine the ultimate effect that such potential legislation, if enacted, would have upon its financial condition or operations.

 
 
ITEM 1A.             RISK FACTORS.

Not applicable.

 
ITEM 1B.              UNRESOLVED STAFF COMMENTS.

Not applicable.
 
 
ITEM 2.                 PROPERTIES.
 
 
     Our main office was purchased in 2002 for approximately $1.1 million.  It is located at 1301 SE Port St. Lucie Boulevard, Port St. Lucie, Florida 34952.  We purchased land in 2001 and built a two-story, 9,600 square foot branch building located at 2500 Virginia Avenue, Fort Pierce, Florida.  The entire first floor is occupied by the Bank, and it opened for business in June of 2004. The 5,025 square feet on the second floor is leased to third parties. We also lease our Stuart, Palm City and Vero Beach branches. The Bank’s Operations Center, located in Jensen Beach, Florida opened in March of 2007, and is also leased.  The Gatlin Boulevard, Port St. Lucie, Florida branch office opened in May of 2008, and is owned by the Company, with a 50-year ground lease.
 
 
 
 
 
 ITEM 3.               LEGAL PROCEEDINGS.

There are no material proceedings to which FPB or the Bank is a party or to which any of our properties are subject which are not in the ordinary course of business.

 
 
ITEM 4.               SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Our shareholders voted on no matters during the fourth quarter of 2010.
 
 

 
 
PART II
 

 
ITEM 5.
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUE PURCHASES OF EQUITY SECURITIES.
 

 
     As of February 28, 2011, we had approximately 1,400 shareholders. On July 21, 2005, FPB became listed on the Nasdaq Capital Market under the symbol “FPBI.” Prior to that, there was no public market for the stock. The table below shows the high, low and closing bid prices on the Nasdaq Capital Market for the periods indicated. These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, markdown, or commission and may not necessarily reflect actual transactions.

 
Calendar Quarter Ended
 High
 Low   Closing
 
 
          
 March 30, 2007
 $
     17.14
  $      15.71  $
     16.19
 June 30, 2007   $
     16.61
  $      14.87  $
     15.75
 September 30, 2007    $
     15.89
  $      12.72  $      13.40
 December 31, 2007
 $
     13.35
  $        9.71  $        9.80
 March 31, 2008   
$
        8.66  $        8.25  $        8.66
 June 30, 2008  
$
        7.21  $        7.21  $
       7.21
 September 30, 2008   $        5.26  $        5.02  $        5.02
 December 31, 2008    $        2.84  $        1.92  $        1.99
 March 31, 2009     $        3.23  $        1.68  $        2.50
 June 30, 2009    $        2.70 $        2.00  $        2.50
 September 30, 2009   $        4.25  $        2.50  $        3.10
 December 31, 2009  $        1.42  $        1.05  $        1.15
 March 31, 2010    $        1.94  $        1.13   $        1.22
 June 30, 2010    $        1.50   $        1.02   $        1.09
 September 30, 2010    $          .96   $          .55   $          .70
 December 31, 2010    $         1.17  $          .64   $        1.02
 
 
On June 15, 2007, FPB paid a 5% stock dividend. No dividend was paid in 2010, 2009 or 2008.
 
 

 
ITEM 6.
SELECTED FINANCIAL DATA
 
 
Not applicable.


 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
 
 
     FPB hereby incorporates by reference the sections entitled “Selected Financial Data” contained at page 2 of the 2010 Annual Report and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained at pages 3 through 26 of the 2010 Annual Report. The 2010 Annual Report is attached hereto as Exhibit 13.


 
 
 
ITEM 7A.             QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.
 
 
ITEM 8.                FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 
FPB hereby incorporates by reference the sections entitled “Selected Financial Data” contained at page 2 of the 2010 Annual Report and the section entitled “Consolidated Financial Statements” contained at pages 27 through 70 of the 2010 Annual Report. The 2010 Annual Report is attached hereto as Exhibit 13.

 
ITEM 9.                CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

Neither FPB nor the Bank has had any disagreements with its accountants.

 
ITEM 9A.             CONTROLS AND PROCEDURES
 
 
(a)    Evaluation of disclosure controls and procedures.
 
FPB maintains controls and procedures designed to ensure that information required to be disclosed in the reports that FPB files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed within 90 days of the filing date of this report, the Chief Executive and Chief Financial Officer of FPB concluded that FPB’s disclosure controls and procedures were adequate.
 
 
(b)    Management’s Annual Report on Internal Control over Financial Reporting

+Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes of accounting principles generally accepted in the United States.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
 
 
 
(continued)
 
 
Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of FPB’s internal control over financial reporting as of December 31, 2010. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on this evaluation, our management, with the participation of the Chief Executive Officer and Chief Financial Officer, concluded that, as of December 31, 2010, our internal control over financial reporting was effective.

 
(c) Changes in internal controls

FPB made no significant changes in its internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of those controls by the Chief Executive and Chief Financial Officer.

 
ITEM 9B.            OTHER INFORMATION

FPB experienced no events during the fourth quarter of 2010, which were required to be reported on Form 8-K which were not so reported.
 

 

PART III

 
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 
BOARD AND EXECUTIVE INFORMATION

Our Board of Directors is presently comprised of eight members. Our Articles of Incorporation provide that directors shall be divided into three classes, with each group serving for staggered three-year terms. Information relating to the business experience and age of each director nominee and continuing director is set forth below. Also included is information related to FPB’s non-director executive officers and the Bank’s other executive officers.

 
CLASS I DIRECTORS – TERMS TO EXPIRE IN 2012
 
 
Donald J. Cuozzo, age 57, is a director of FPB and the Bank.  He received a Bachelor of Science degree in environmental technology from the Florida Institute of Technology in 1979.  He began his work career in the public sector with the Martin County Growth Management Department before leaving to work with regional and national developers.  In that role, he was instrumental in obtaining approval coordinating the acquisition and development of a number of large residential communities in Palm Beach and Martin Counties.  Mr. Cuozzo also served as a principal with a large Palm Beach County based engineering firm where he gained extensive experience in the area of project management and coordination.    Mr. Cuozzo has more than 30 years of experience planning and implementing numerous land developments throughout the region and has worked in nearly all facets of community and project development.  Mr. Cuozzo is a founding member of the Martin County Business Development Board, a graduate of the first class of Martin County Leadership 91/92, a recipient of the 1991 Industry Appreciation Award for Outstanding Contribution to the Community, and a 2006 recipient of the Industry Appreciation Award for Martin County.  He is a past Second Vice President of the Treasure Coast Builders Association.  Mr. Cuozzo was appointed to the Treasure Coast Regional Planning Council by former Governor Jeb Bush and served for four years in that position.  Mr. Cuozzo was appointed to the Century Commission for Sustainable Florida by former Senate President Ken Pruitt.  The Board has concluded that Mr. Cuozzo’s experience in growth management and project management and coordination, as well as his service as a director of FPB and the Bank have given him the experience and diversity to be an invaluable member of our Board.
 
 
(continued)
 
21
 
 
 
Timothy K. Grimes, age 44, is a director of FPB and the Bank.  Mr. Grimes attended Indian River State College before starting in his family’s air conditioning business, Grimes Heating and Air Conditioning, of which he has served as President for the past 15 years. Mr. Grimes is a past board member for the St. Lucie County United Way, Fort Pierce Manatee Center, and other charity organizations. He has also been a member of Fort Pierce Rotary Club for 15 years and served as its President from 1999 to 2000.  He chaired the 2007 Habitat for Humanity Rotary Club Home in Fort Pierce.  He was born and raised in St. Lucie County, Florida, and graduated from Westwood High School in 1985.  Mr. Grimes’ experience as the owner and/or President of his own companies, as well as his extensive charitable work in our community have led our Board to conclude that Mr. Grimes is duly qualified to serve as a director of FPB.
 
 
Paul A. Zinter, age 56, is Vice Chairman and a director of FPB and the Bank.  He has been a resident of Port St. Lucie for over 40 years, and was a member of the second graduating class from Fort Pierce Central High School.  Mr. Zinter received a Bachelor of Arts degree in business administration from Eastern New Mexico University in 1975, where he majored in real estate and marketing and was managing partner of a family-owned real estate company.  Mr. Zinter was past President and honorary member of the Rotary Club of Port St. Lucie and has been a local realtor/managing partner and business owner for over 30 years.  Mr. Zinter’s business administration experience and real estate background, and his service on FPB’s and the Bank’s Boards, as well as his long term residency in Port St. Lucie, have led to the Board to conclude that he is well qualified to serve on our Board.

 
 CLASS II DIRECTORS – TERMS TO EXPIRE IN 2013
 
 
Ann L. Decker, age 59, is a director and Secretary of FPB and the Bank.  Ms. Decker serves as the Executive Director of the Indian River State College Foundation, Inc., in Fort Pierce, Florida.  For over thirty years, Ms. Decker served as the District Manager for three different U.S. Congressmen that represented our market area.  Ms. Decker was formerly a co-owner of Intracoastal Printing, Inc., which was sold in 1990.  Born in Chicago, Illinois, Ms. Decker has a Bachelor of Science degree in Professional Business Management from Barry University in Miami, Florida, and a Master’s degree in Public Administration from Nova Southeastern University, in Ft. Lauderdale, Florida.  The Board has determined that Ms. Decker’s public administration and government experience in our market area, as well as her prior service on our Board, has given her the requisite experience and background, necessary to serve on our Board.
 
 
Paul J. Miret, age 64, is a director of FPB and the Bank.  Mr. Miret was previously a realtor with RE/MAX 100 Riverside.  Prior to that, he was the owner and operator of Sunshine Carpet Cleaning from 1978 to 1998 and of Ameri-Kleen Services from 1992 to 1998.  He also owns and manages several residential rental units.  From 1995 to 1997, Mr. Miret served on the Community Board of Riverside National Bank.  Mr. Miret is also a past President of the Port St. Lucie Little League and the Port St. Lucie Exchange Club and a past director of the Port St. Lucie Chamber of Commerce.  The Board has concluded that Mr. Miret’s business management, real estate management, community service, and service on our Board, have given him the qualifications necessary and desirable for continued service on our Board.
 
 
Robert L. Seeley, age 86, is a director of FPB and the Bank.  Mr. Seeley has been in private law practice in Florida for more than 50 years.  Mr. Seeley was co-founder of the Stuart, Florida law firm of Fox, Wackeen, Dungey, Beard, Sobel and McCluskey, LLP, for which he currently serves “Of Counsel.”  From 1973 to 1996, Mr. Seeley served as a director of Barnett Bank of the Treasure Coast.  He also served as the founding director and Chairman of the Saint Lucie Medical Center and is a former director of the St. Lucie and Martin County Economic Development Councils.  Mr. Seeley completed his undergraduate studies at the University of Illinois and received his Juris Doctorate degree from the University of Florida.  Mr. Seeley’s prior bank director experience and legal expertise, as well as his service on our Board, has been considered by the Board in determining that Mr. Seeley has the requisite experience to serve on our Board.

 
 
22
 
 
CLASS III DIRECTORS – TERMS TO EXPIRE IN 2011
 
 
Gary A. Berger, age 61, is a director and Chairman of the Board for both FPB and the Bank.  Mr. Berger is President of the accounting firm of Berger, Toombs, Elam, Gaines, and Frank, CPA.  He is a graduate of Michigan State University and has been a certified public accountant since 1975.  Mr. Berger is a member of the Rotary Club of Ft. Pierce, the Florida Institute of Certified Public Accountants, and the American Institute of Certified Public Accountants.  He is a past Treasurer of the United Way, past President of the St. Lucie County Economic Development Council, and past President of the Rotary Club of Ft. Pierce, Florida.  The Board has concluded that Mr. Berger’s experience as a certified public accountant, his service in the community, and his service as a director of FPB and the Bank, have provided him with the qualifications and experience necessary to serve on our Board.
 
 
David W. Skiles, age 63, is the Chief Executive Officer, President, and a director of FPB and the Bank.  Prior to joining First Peoples Bank; he was the Martin County Area Executive at 1st United / Wachovia Bank and also was the Senior Vice President and Senior Lending Officer for Port St Lucie National Bank. Mr. Skiles has a Bachelor of Science degree from Barry University, Miami Fl and an Associate/Applied Science degree from Sinclair Community College in Dayton Ohio. He is Chair-Elect for the (EDC) Economic Development Council of St Lucie County and also serves on the Executive & Board of Directors of that organization. Mr. Skiles serves on the (ICBA) Independent Community Bankers of America Group Lending committee and is on the (FBA) Florida Bankers Association’s Board of Directors (FBA) Bank Pac Board. He is a former member of the (FAU) Florida Atlantic University’s advisory board and Workforce Solutions of the Treasure Coast. He served as a member of the St Lucie County (TAC), Technical Advisory Committee for the (SLC), Airport. He is Past President and of the St Lucie County Chamber of Commerce and Past President of the Education Foundation of St Lucie County. He is active in United Way, having served as campaign chairman in Martin County and on numerous campaigns for the United Way of St Lucie County. Skiles is past chairman of the St Lucie County Chambers Area Council and St Lucie County (BAP), Business Alliance for Prosperity.

 
NON-DIRECTOR EXECUTIVE OFFICERS
 

Nancy E. Aumack, age 62, is FPB’s and the Bank’s Senior Vice President and Chief Financial Officer.  Prior to joining the Bank in 2001, she was Senior Vice President and Chief Financial Officer of Independent Community Bank in Tequesta, Florida.  During the period from 1997 to 1999, she served as Chief Financial Officer and Administrative Support Director for the engineering firm LBFH in Palm City, Florida.  From 1995 to 1997, she served as Vice President and Chief Financial Officer for Treasure Coast Bank in Stuart, Florida, and from 1983 to 1995 she served as Vice President and Financial Accounting Officer for American Bank of Martin County in Stuart, Florida.  Ms. Aumack received an Associates of Science degree in Banking and Financial Services from Indian River State College in 1989, and Consumer Lending, General Banking and Commercial Lending certificates from the American Institute of Banking (AIB).  She is a past member and Chairman of the ARC of Martin County, and is currently a Financial Partner for the Port St. Lucie Women on Wall Street, and a past member of the Port St. Lucie Business Women.
 
 
Marge Riley, age 62, is FPB’s and the Bank’s Executive Vice President and Chief Operating Officer.  She also serves as the Bank’s Security Officer.  Ms. Riley joined the Bank while it was “In Organization” in 1998.  Ms. Riley began her banking career in 1985 at M & I Western State Bank in Oshkosh, Wisconsin.  After moving to Florida in 1987, she worked as Loan Review Specialist for Barnett Bank, Assistant Vice President, Loan Administration at Port St. Lucie National Bank, and Assistant Vice President, Branch Manager for First National Bank.  She has Associate of Science degrees in Accounting and Banking and Financial Services from Fox Valley Technical College in Appleton, Wisconsin.  Ms. Riley is presently a board member for the United Way of St. Lucie County, a member and past President of the Port St. Lucie Business Women, and past Secretary of the Port St. Lucie Women on Wall Street. Ms. Riley has also served on the Business and Education Committee of Indian River County Chamber of Commerce, board member of the Leadership Council of the St. Lucie Chamber of Commerce and graduate of the Leadership Program, Board member for Pace Center for Girls, past Treasurer for the Treasure Coast Chapter of Robert Morris Associates and is a past member of the Nineteenth Judicial District’s Grievance Committee.
 
 
 
(continued)
 
 
 
William V. West, Jr., age 44, is FPB’s and the Bank’s Senior Vice President and Senior Lending Officer.  Mr. West joined the bank in 2004 as a Commercial Lender and was subsequently promoted to Area Executive for Martin County, a position he served in for four years.  He was promoted again in 2009 to his current position where he manages the bank’s commercial, consumer lending and residential mortgage teams along with the special assets department.  Prior to joining the bank he was Vice President of Commercial Lending for Southern Community Bank of Southwest Florida, Naples, Florida for three years.  Mr. West has served in progressive financial management roles since 1990 including commercial lending, consumer lending, residential lending, collections and workouts and commercial equipment leasing.  Prior to his banking career Mr. West served as the logistics manager of a U. S. Marine Corps helicopter group in Japan, Korea and the Philippines.  He completed his Master of Business Administration in Finance, Summa Cum Laude, with International College and holds a Bachelor of Arts in Organizational Management with Warner Southern College.  He also completed the Graduate School of Banking at Colorado and holds a Bank Operations Diploma from the American Institute of Banking.  Mr. West is a fifth generation Floridian who is very active in our community.  He is the Chairman of the Industrial Development Authority of Martin County, President of the Treasured Lands Foundation, Past-President of the Business Development Board of Martin County, Past-President of the Education Foundation of Martin County and Past-President of the Jensen Beach Area Chamber of Commerce.  In 2008, Mr. West was honored with a Business Recognition Award from the Florida Commissioner of Education.  The Florida Economic Development Council awarded him the McLaughlin Award in 2005 for his contributions to economic development in Florida
 
 
RESIGNED DIRECTORS
 
 
John S. Leighton, III, age 43, was a director of FPB and the Bank until he resigned on February 4, 2011.  He was educated at Florida Atlantic University’s College of Business, where he received a Bachelors’ Degree in Business Administration in 1990 and shortly thereafter joined WTS, Inc., a nuclear contracting, real estate development and engineering support services firm.  After serving as Operations Manager for several years, Mr. Leighton was instrumental in forming a real estate development and construction administration division within WTS to serve the institutional and private sectors. Under his direction, WTS and Mr. Leighton have collectively developed, constructed and managed numerous residential, commercial and industrial projects in Martin, St. Lucie, Dade and Seminole Counties.

None of the officers and directors named above has been involved in any material legal proceedings.

 
CODE OF ETHICS
 
 
We have adopted a code of ethics that applies to our executive officers, a copy of which was been filed with our 2005 Form 10-KSB as Exhibit 14. Persons who would like a copy of such code of ethics may receive one without charge upon request made to Nancy E. Aumack, Chief Financial Officer, FPB Bancorp, Inc., 1792 NE Jensen Beach Blvd., Jensen Beach, Florida 34957.
 

 
SECTION 16 COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers, directors, and any person who beneficially owns more than 10% of our common stock, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Directors, executive officers, and more than 10% shareholders are required by regulation to furnish us with copies of all Section 16(a) forms that they file. Based solely on the review of copies of the filings we have received, or representations from such reporting persons, it is our belief that during 2010, there were no late filings by our directors or executive officers.

 
 
 
 
DIRECTOR NOMINATIONS

The Board through the Personnel/Compensation/Nominating Committee annually reviews the composition of the Board, as a whole, to consider if there is an appropriate balance of knowledge, experience, skills, expertise, and diversity in the Board, and whether there is at least a minimum number of independent directors as required by applicable rules and regulations.  The Personnel/Compensation/Nominating Committee considers if the Board’s composition accurately reflects FPB’s needs, and will, if necessary, propose the addition or resignation of members in order to obtain an appropriate balance and skill level.

Our directors are required to commit a requisite amount of time for preparation and attendance at regularly scheduled Board and Committee meetings, as well as be able to participate in other matters necessary to ensure FPB is appropriately governed.  In evaluating our directors for nomination, the Personnel/Compensation/Nominating Committee considers what is in the best interest of FPB and its shareholders, including such things as the knowledge, experience, integrity, and judgment of each individual; the past and/or potential contributions of each individual; an individual’s ability to devote sufficient time and effort to the duties required as Board member; independence and willingness to consider all strategic proposals; core competencies; or other technical experience.  In addition, the directors are assessed on their integrity, judgment, knowledge, experience, skills, and expertise and their ability to oversee and direct the affairs of FPB.

 
AUDIT COMMITTEE

Audit/Compliance Committee - Pursuant to its Charter, the Audit/Compliance Committee reviews FPB’s and the Bank’s auditing, accounting, financial reporting, and internal control functions. This Committee recommends the independent auditing firm and reviews its services. Each member of the Committee is considered independent under Nasdaq Marketplace Rule 4200(a)(15). The Committee met four times in 2010. All Committee members attended at least 75% of the Committee meetings.
 

 
Report of the Audit/Compliance Committee
 
 
The audit functions of the Audit/Compliance Committee are focused on three areas:  the adequacy of FPB’s and the Bank’s internal controls and financial reporting process and the reliability of FPB’s and the Bank’s financial statements; the performance of FPB’s and the Bank’s internal auditors and the independence and performance of FPB’s and the Bank’s independent auditors; and ensuring FPB and the Bank are in compliance with applicable legal and regulatory requirements.

             The Audit/Compliance Committee also recommends to the Board the appointment of the independent auditors and reviews their performance, fees, and independence from management. Members of the Audit/Compliance Committee met with management periodically to consider the adequacy of FPB’s and the Bank’s internal controls and the objectivity of their financial reporting. These matters were discussed with FPB’s and the Bank’s independent auditors and with appropriate company financial personnel. The independent auditors have unrestricted access to the Committee, and vice versa.

            The Board of Directors has determined that none of the members of the Audit/ Compliance Committee has a relationship to FPB or the Bank that may interfere with a member’s independence from FPB and the Bank and its management.
 
Chairman Gary A. Berger, a Certified Public Accountant, has extensive auditing experience, and the Board has determined that he has the requisite financial expertise to qualify as an “audit committee financial expert” as defined by Securities and Exchange Commission Rules. Accordingly, the Board has designated Chairman Berger to hold that position.
 
 
(continued)
 
 
 
Management has primary responsibility for preparing FPB’s and the Bank’s financial statements and the overall reporting process, including the system of internal controls. The independent auditors audit the annual financial statements prepared by management, express an opinion as to whether those financial statements fairly present the financial position, results of operations, and cash flows of FPB and the Bank in conformity with accounting principles generally accepted in the United States of America. The independent auditors discuss any issues they believe should be brought to the Audit/Compliance Committee’s attention. The Audit/Compliance Committee monitors these processes, relying without independent verification, on the information provided and on the representations made by management and the independent auditors.
 
This year, the Audit/Compliance Committee reviewed FPB’s unaudited Form 10-Qs for quarters ended March 31, 2010, June 30, 2010, and September 30, 2010, and audited financial statements as of, and for, the fiscal year ended December 31, 2010.  The Audit/Compliance Committee met with both management and FPB’s and the Bank’s independent auditors to discuss those filings and financial statements. Management has represented to the Audit/Compliance Committee that the quarter ended filings and financial statements were prepared in accordance with accounting principles generally accepted in the United States of America.
 
The Audit/Compliance Committee has received from and discussed with Hacker, Johnson & Smith, P.A. the written disclosure and the letter required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees). These items relate to that firm’s independence from FPB and the Bank. The Audit/Compliance Committee also discussed with Hacker, Johnson & Smith, P.A. any matters required to be discussed by the Statement on Auditing Standards No. 61. (Communication with Audit Committees).
 
Based on these reviews and discussions, the members of the Audit/Compliance Committee recommended to the Board that FPB’s and the Bank’s audited financial statements be included in FPB’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

Chairman Gary A. Berger
Donald J. Cuozzo
Ann L. Decker
John S. Leighton
Robert L. Seeley

 
ITEM 11.             EXECUTIVE COMPENSATION

 
EXECUTIVE COMPENSATION GENERALLY
 
 
Our executive compensation program has been developed with the intent of attracting and retaining qualified management, meeting our short-term financial goals, and enhancing long-term shareholder value.

FPB currently does not compensate its executive officers, other than granting stock options and the compensation that is paid by the Bank.  We strive to pay each executive officer the base salary that would be paid on the open market for a similarly qualified officer with the same position. The Board of Directors, upon recommendation by the Bank’s Personnel/ Compensation/Nominating Committee, determines the level of base salary and any incentive bonus for the Chief Executive Officer and other officers of FPB and the Bank based upon competitive norms, derived from annual surveys published by several independent banking institutes or private companies specializing in analysis of financial institutions.  Such surveys provide information regarding compensation of financial institution officers and employees based on the size and geographic location of the financial institution and serve as a benchmark for determining executive salaries.  Salary adjustments and discretionary bonus awards are based upon the Board of Directors’ and the Bank’s Personnel/Compensation/Nominating Committee’s evaluation of FPB’s and the Bank’s performance, the officer’s responsibilities, and individual performance standards.
 
 
 
 
 
SUMMARY COMPENSATION TABLE
 
 
The following table sets forth compensation information regarding FPB’s and the Bank’s Chief Executive Officer and President and other officers who received compensation in 2010 at a level which is required to be disclosed herein.
 
 
 
 
 
Name and
Principal Position
  
 
 
 
Year
  
 
 
 
Salary
  
 
 
 
Bonus(1)
  
Change in Pension Value &
Non-Qualified Deferred Compensation
Earnings
  
 
 
Stock
Options
  
 
 
All Other
Compensation
  
 
 
 
Total
David W. Skiles
President & Chief Executive Officer
  
2010
2009
2008
  
$
$
$
 170,000 170,000 170,000  
$
$
$
     0
     0
     0
 
$
$
$
     3,571      6,980
6,468
  
$
$
$
      0
     0
     0
 
$
$
$
17,274
 22,501
24,023
(2)
(2)
$
$
$
 190,845 199,481 200,491
                                         
Marge Riley
EVP & Chief Operating Officer
  
2010
2009
2008
  
$
$
$
 124,800 124,800 124,800  
$
$
$
      0
     0
     0
 
$
$
$
   1,914 
  4,559
  4,341
  
$
$
$
      0
     0
     0
 
$
$
$
   0
     0
     1,335
 (3)
$
$
$
 126,714 129,359 130,476
                                         
William V. West
SVP & Sr. Lender
  
2010
2009
2008
  
$
$
$
 123,500 121,208 118,779  
$
$
$
      0
     0
     0
 
$
$
$
      803 
 3,670
 3,155
  
$
$
$
      0
     0
     0
 
$
$
$
   0
     0
     1,189
 (3)
$
$
$
 124,303 124,878 123,123
                                         
Marianne K. Keehan
VP & SBA Commercial Lender
  
2010
2009
2008
  
$
$
$
109,763
  81,667
          0
  
$
$
$
      0
     0
     0
 
$
$
$
         0
        0
        0
 
$
$
$
      0
     0
     0
 
$
$
$
   0
     0
     0
 
$
$
$
109,763
 81,667
 0
                                         
Nancy E. Aumack
SVP & Chief Financial Officer
  
2010
2009
2008
  
$
$
$
 109,720 109,720 109,720  
$
$
$
      0
     0
     0
 
$
$
$
   1,413 
 3,905
 3,792
  
$
$
$
      0
     0
     0
 
$
$
$
 0 $ 0 $1,165 3)
$
$
$
 111,133 113,625 114,677
 
 (1) Bonus amounts reflected in this column were for performance in the year noted, to be paid in January of the next year.  
 (2) Automobile allowance, country club membership, 4019(k) match and directors' fees. 
 (3) 401(k) match. 
 
 
 

AGGREGATED FISCAL YEAR-END OPTION VALUES

The following table discloses the aggregate value of the unexercised options held by the individuals listed in the above Summary Compensation Table:

 
 
 
         Name                      
Number of Shares
Underlying Unexercised
Options at
  December 31, 2010
  
Value of Unexercised
In-the Money Options at
  December 31, 2010
 
Exercisable
  
Unexercisable
  
Exercisable
  
Unexercisable
               
David W. Skiles
   22,591           0   
 -
  -
      1,666       834    -   -
         964        482    -   -
Marge Riley
   12,543            0    -   -
     3,000    1,500    -   -
Nancy E. Aumack
     8,426            0    -   -
      1,500        750    -   -
William V. West
     6,275            0    -   -
     1,500       750    -   -
 

 
 
 
2010 DIRECTOR COMPENSATION TABLE
 

 
The following table discloses compensation paid by FPB or the Bank to FPB’s and the Bank’s directors in 2010.  Compensation and fees for director David W. Skiles are shown in the Summary Compensation Table.
 

 
 
 
Name
  
Fees Earned or Paid in Cash
  
 
All Other Compensation(1)
  
 
 
Total
Gary A. Berger
   $ 5,787   $     911   $ 6,698
Donald J. Cuozzo
   $ 3,388   $     671   $ 4,059
Ann L. Decker
   $ 4,303   $ 1,016   $ 5,319
Timothy K. Grimes
   $ 3,313   $      30   $ 3,343
John S. Leighton(2)
   $ 5,516   $      30   $ 5,546
Paul J. Miret
   $ 3,881   $ 1,597   $ 5,478
Robert L. Seeley
   $ 4,378   $    840   $ 5,218
Paul A. Zinter
   $ 5,514   $    154   $ 5,668
 
_____________________________
(1)  
Imputed earnings on split-dollar insurance policies and interest on deferred compensation.
(2)  
Resigned effective on February 4, 2011.
 
 
 
Bonuses and Salary Determinations
 
 
The continuing economic recession and declining real estate values have adversely affected most financial institution related businesses, including FPB and the Bank, within FPB’s and the Bank’s market areas.  As a result, FPB’s 2010 results of operations and the market price of our common stock have continued to be negatively impacted.  The Personnel/Compensation/ Nominating Committee, therefore, recommended to the Board that no bonuses or salary increases should be awarded to members of our senior management for 2010.
 
 
Employment Agreements
 
 
FPB does not currently have any employment agreements with its employees.  The Bank, however, entered into an Amended and Restated Employment Agreement (“Agreement”) with David W. Skiles on September 5, 2007.  The Agreement has an initial term of three years, commencing on August 1, 2007.  Under the Agreement, Mr. Skiles serves as the Chief Executive Officer and President of the Bank.  The term of the Agreement is automatically renewed for one additional year on each anniversary of the effective date, until the earlier of July 31, 2012, or upon notice by one of the parties. The Bank’s Board or its Personnel/Compensation/Nominating Committee must annually review the Agreement and Mr. Skiles’ performance at the Bank to determine if such renewals should be continued.  Mr. Skiles is also eligible to participate in FPB’s 2005 Stock Compensation Plan, in the capacities of both an employee and a director.  The Agreement also provides that the Bank will pay for Mr. Skiles’ membership in one country club in order to further his presence and recognition in the community.
 
 

(continued)
 
28
 
 
 
Mr. Skiles may terminate the Agreement for any reason upon 90 days written notice to the Bank.  In the event the Agreement is terminated by Mr. Skiles without “good reason” or by the Bank for “cause” (as those terms are defined in the Agreement), Mr. Skiles shall be entitled to no further compensation, except what has already accrued.  Under the Agreement Mr. Skiles is subject to a non-compete provision, which prohibits him from becoming employed, directly or indirectly, at any financial institution, financial institution holding company, bank holding company, or other financial service provider in St. Lucie County, or in such other counties that the Bank has a branch office for six months following his termination for any reason.  He is also subject to a non-solicitation provision, which provides that he may not solicit business from any current customer of the Bank or solicit any employees of the Bank for a period of six months following his termination for any reason.  If the Agreement is terminated by the Bank for any reason other than “cause” or by Mr. Skiles for “good reason” he will be entitled to a severance payment equal to his annual base salary, which shall be payable in substantially equal semi-monthly installments. He would also be entitled to continued participation in the Bank’s employee benefit plans and programs for the shorter of one year or until he becomes eligible to participate in comparable plans provided by another employer.  In addition, should FPB or the Bank undergo a “change in control” (as defined in the Agreement), Mr. Skiles will be entitled to receive a change in control payment equal to 2.5 times his base salary, as averaged for the five year period prior to the change in control.

Mr. Skiles’ Agreement also provides him with the following benefits:  eligibility to receive an annual performance bonus, not to exceed 40% of his base salary; five weeks paid vacation; and $600 per month automobile allowance.  The Agreement also references two separate employment related agreements that Mr. Skiles has entered into with the Bank.  On December 23, 2005 the Bank and Mr. Skiles entered into a Deferred Compensation Agreement, which provides that the Bank will match his contributions up to 2.5% of his base salary.  Mr. Skiles also entered into a Split Dollar Agreement with the Bank, dated February 15, 2006, which provides Mr. Skiles with a $200,000 life insurance benefit.

Due to our participation in the Capital Purchase Program, FPB and thus the Bank is restricted in their abilities to pay certain forms of executive compensation.  Consequently, we have amended Mr. Skiles’s Agreement in order to suspend our obligation to make any golden parachute payments during any period of time when such payments are prohibited.  We have also suspended the consideration of paying any cash bonuses to Mr. Skiles while we are a participant in the Capital Purchase Program.

In addition, the Bank entered into new Change in Control Agreements (“CIC Agreements”) in June 2009 with three of its executive officers, Marge Riley, Executive Vice President and Chief Operating Officer, Nancy E. Aumack, Senior Vice President and Chief Financial Officer, and William V. West, Senior Vice President and Senior Lender. The CIC Agreements were made in recognition of these individuals’ continued service with FPB and the Bank, but do not constitute employment agreements that would give these individuals any right to continued employment with either FPB or the Bank.

All three CIC Agreements provide that the executive officers will receive cash severance payments if they are terminated by the Bank without “just cause,” as defined in the CIC Agreements, as a result of a Change in Control of either FPB or the Bank, including if a contemplated Change in Control occurs within six months of their termination by the Bank.  In addition, if the executive officers elect to resign within ninety days of a Change in Control of either FPB or the Bank, they will receive the cash severance payment. Ms. Aumack’s and Mr. West’s CIC Agreements each provide for a severance payment in the amount of two times their “highest annual base salary,” which is defined to be their highest base salary plus their average annual bonus during the three years immediately preceding their termination. Ms. Riley’s CIC Agreement provides that she will receive two and a half times her highest annual base salary. The payments are to be made to the employees in one lump sum within ten days of the termination of employment. In addition, the employees are entitled to continuation of their insurance benefits until the earlier of obtaining new employment with similar benefits or six months after termination.
 
 

(continued)
 
29
 
 
 
All of the CIC Agreements provide for a term of two years, unless otherwise extended by the parties, commencing on August 1, 2009 and ending on July 31, 2011. In consideration of the Bank’s execution of these CIC Agreements, the employees have agreed that during the term of the CIC Agreements and for a period of six months following their termination for any reason other than a Change in Control, they will not become employed with another financial institution located in any county in which the Bank operates a branch office (including, but not limited to, St. Lucie County, Indian River County, or Martin County) or otherwise compete with FPB or the Bank.

In addition, due to FPB’s participation in the Capital Purchase Program, FPB must abide by certain restrictions on executive compensation payments, which are further detailed in the following section.  The CIC Agreements provide that if federal law in some way prohibits the payment otherwise required under the CIC Agreements, the Bank’s obligation to make such payments shall be deferred until such time as the Bank is legally permitted to make the payments.

 
CAPITAL PURCHASE PROGRAM
 
 
FPB is participating in the Capital Purchase Program (“CPP”) subdivision of the Troubled Asset Relief Program, which was established by the United States Department of the Treasury (“Treasury”) pursuant to the Emergency Economic Stabilization Act of 2008 (“EESA”).  Under the CPP, the Treasury purchased shares of senior preferred stock (“Preferred Stock”) and a warrant to purchase shares of common stock (“Warrant”).  As a condition of participation, the Treasury requires the adoption of certain standards and restrictions on our executive compensation.

On February 17, 2009, President Barack Obama signed into law the American Recovery and Reinvestment Act of 2009 (“ARRA”). ARRA significantly amended the executive compensation limitations of the EESA. ARRA has imposed considerable implications on our compensation arrangements. ARRA directs the Treasury to establish standards and rules on executive compensation practices of CPP recipients.  The Treasury has set forth certain standards and limits our compensation practices, including:

Ø  
limits on compensation that exclude incentives for senior executive officers (“SEOs,”  which would include Chief Executive Officer and President Skiles, Chief Financial Officer Aumack, and the next three most highly compensated employees) to take unnecessary and excessive risks that threaten the value of FPB;

Ø  
provision for the recovery or “clawback” of any bonus, retention award, or incentive compensation paid to a SEO or the next twenty most highly compensated employees based on materially inaccurate statements of earnings, revenues, gains, or other criteria;

Ø  
prohibition on making any golden parachute payment to a SEO or any of the next five most highly compensated employees;

Ø  
prohibition on the payment or accrual of bonus, retention award, or incentive compensation of certain highly compensated employees, subject to certain exceptions for payments made in the form of restricted stock;

Ø  
prohibition on employee compensation plans that would encourage manipulation of earnings reported by FPB to enhance any employee’s compensation;

Ø  
having our Personnel/Compensation/Nominating Committee comprised of independent directors that meet at least semi-annually to review employee compensation plans and the risks posed by these plans to FPB;
 
 
(continued)
 

 
Ø  
adoption of an excessive or luxury expenditures policy;

Ø  
disclosure of perquisites offered to SEOs and certain other highly compensated employees;

Ø  
disclosures related to compensation consultant engagement;

Ø  
prohibition on tax gross-ups to SEOs and certain highly compensated employees;

Ø  
compliance with federal securities rules and regulations regarding the submission of a non-binding resolution on SEO compensation to shareholders (say on pay); and

Ø  
establishment of the Office of the Special Master for TARP Executive Compensation  (“Special Master”) to address the application of these rules to TARP participants and their employees.

 
Restriction on Bonuses
 
 
The amount of financial assistance that a TARP participant received is the determining factor in the number of employees that are subject to the restriction on the payment or accrual of bonuses, retention awards, and other incentive compensation to SEOs.  For FPB, which received less than $25,000,000, this prohibition applies to only Chief Executive Officer and President Skiles, as our most highly compensated employee.  Stock options are specifically included in the definition of an incentive plan, and are therefore subject to the bonus restrictions and may not be granted to Chief Executive Officer and President Skiles.

An exception from such restriction is for restricted stock or restricted stock units, so long as the stock or stock units do not fully vest until the TARP assistance has been repaid, and so that they do not have a value that is greater than one-third of the total amount of annual compensation.  The restricted stock may not become transferrable earlier than 25% of the shares at the time 25% of the aggregate TARP assistance is repaid to the government and in additional 25% tranches when each additional 25% of assistance is repaid.  In addition, employees must forfeit restricted stock or units if the employee does not continue to perform substantial services for at least two years from the date of grant, other than on account of death, disability, or a change of control.

In addition, such restrictions do not apply to bonus payments that are required to be paid under written employment contracts that have been executed on or prior to February 11, 2009.  Provided, however, an employee must have had the legal right to the bonus as of February 11, 2009 and not just be a participant in a plan or agreement that will provide a bonus at a future date.

Whether an employee has accrued bonus, retention award, or other incentive compensation is determined based on the specific facts and circumstances. However, a participant may not merely circumvent the application of the bonus restrictions by delaying bonus payments until after the employee is no longer subject to the prohibition or granting retroactive service credits after the employee is no longer subject to the bonus restrictions.
 

 
Perquisites

Furthermore, we must disclose to the Treasury and our primary federal regulator annually, within 120 days of the end of the fiscal year, any perquisites whose total value exceeds $25,000 for any employee who is subject to the limitations on bonus payments.  The amount and nature of the perquisite along with justification for the perquisite must be disclosed.

 
 
 
 
Clawback of Bonuses, Retention Awards, and Other Incentive Compensation
 
 
In addition, bonuses, retention awards, and other incentive compensation made to FPB’s SEOs and the next twenty most highly compensated employees during the TARP period must be subject to a recovery or clawback if such payment was based upon materially inaccurate financial statements or any other materially inaccurate performance metric criteria.  This clawback provision is more extensive than the one contained under Section 304 of the Sarbanes-Oxley Act in that it applies to a broader group of employees, applies to retention awards, is not exclusively triggered by an accounting restatement, does not limit the recovery period, and includes material inaccuracies beyond financial reporting (such as performance metrics).

 
Prohibition on Golden Parachute Payments
 
 
Golden parachute payments are prohibited for SEOs and any of the next five most highly compensated employees during the TARP period.  A golden parachute payment:

Ø  
Is any payment: (i) for the departure from employment for any reason; or (ii) due to a change in control;

Ø  
Includes acceleration of vesting due to the departure or the change in control;

Ø  
Is treated as paid at the time of departure or change in control and thus may include a right to amounts actually payable after the TARP period;

Ø  
Excludes payments for services performed or benefits accrued (payments that would have to be paid whether or not the employee departs or a change in control occurs, or if the payment is due upon departure, regardless of whether the departure is voluntary or involuntary);

Ø  
Excludes payments from benefit plans and deferred compensation plans if: (i) the plan was in effect at least one year prior to the employee’s departure; (ii) the payment is made pursuant to the plan and in accordance with the terms of the plan as in effect no later than one year before departure; (iii) the employee has a vested right to the payments at the time of the departure or change in control; (iv) benefits under the plan are accrued each period only for current or prior service; (v) any payments are not based on discretionary acceleration of vesting or accrual of benefits that occurs at any time later than one year before the departure or change in control; and (vi) with respect to deferred compensation plans, FPB has previously recognized compensation expense and accrued liability for the benefit payments in accordance with GAAP;

Ø  
Excludes payments from pension or qualified retirement plans;

Ø  
Excludes payments made for a departure on account of the employee’s death or disability; and

Ø  
Excludes severance or similar payments required to be made pursuant to a state statute or foreign law that is applicable to all employers within the appropriate jurisdiction.

 
 
 
Excessive or Luxury Expenditures Policy
 
 
FPB’s Board must also adopt an excessive or luxury expenditures policy, which must be filed with the Treasury and posted on our website.  The purpose of this policy is to ensure there is an appropriate review and approval of potentially excessive and luxury expenditures.  The provisions of our policy include:

Ø  
Identification of types and categories of expenses prohibited or requiring prior approval;

Ø  
The adoption of approval procedures for those expenses requiring prior approval;

Ø  
A mandate that the Principal Executive Officer and Principal Financial Officer provide a certification for the prior approval of any expenditures requiring the prior approval;

Ø  
Providing for a prompt internal reporting of any violation of the policy; and

Ø  
Accountability for adherence to the policy.

 
Compensation Consultant
 
 
FPB must disclose to the Treasury and our primary federal regulator annually whether or not it or its Board or Personnel/Compensation/Nominating Committee has engaged a compensation consultant and provide a description of all types of services that such compensation consultant has provided during the past three years.  We have elected not to retain the services of a compensation consultant.

 
Compensation Committee
 
 
TARP recipients must establish a compensation committee consisting of independent directors within the later of 90 days following the closing date of the TARP agreement or September 14, 2009.  FPB had already established its Personnel/Compensation/Nominating Committee prior to our participation in TARP.  Our Personnel/Compensation/Nominating Committee must discuss, evaluate, and review at least once every six months the SEO and employee compensation plans and the risks posed by these plans to FPB, to ensure that the compensation plans do not encourage SEOs to take unnecessary and excessive risks that may threaten the value of FPB.  The Personnel/Compensation/ Nominating Committee must also discuss, evaluate, and review at least every six months the employee compensation plans in light of the risks posed to FPB by such plans and how to best limit such risks.  Every six months our Personnel/Compensation/Nominating Committee must also discuss, evaluate, and review the executive compensation plans to ensure that the plans do not encourage the manipulation of reported earnings in order to enhance the compensation of any of our employees.

At least once per fiscal year, our Personnel/Compensation/Nominating Committee must provide a narrative description that:

Ø  
Identifies each SEO compensation plan and explains how the SEO compensation plans do not encourage the SEOs to take unnecessary and excessive risks that threaten the value of the company, including how the SEO compensation plans do not encourage behavior focused on short term results rather than on long term value creation;

Ø  
Identifies each employee compensation plan and the risks posed by employee compensation plans and explains how these risks were limited, including how these plans do not encourage behavior focused on short term results rather than on long term value creation; and

Ø  
Explains how the company has ensured that the employee compensation plans do not encourage manipulation of earnings to enhance the compensation of any employee.
 
 
FPB must provide this narrative disclosure and the applicable certifications to our primary federal regulatory and to the Treasury within 120 days of the end of the fiscal year.

 
 
 
Tax Gross Ups
 
 
FPB is prohibited from providing tax gross ups or other reimbursements for the payments of taxes to any of the SEOs and the next twenty most highly compensated employees relating to severance payments, perquisites, or any other form of compensation.

Say on Pay Shareholder Resolution
 
 
FPB must comply with federal securities rules and regulations regarding a non-binding shareholder resolution on SEO compensation (“say on pay”).  Any proxy, consent, or authorization for an annual or other shareholder meeting must permit a separate shareholder vote to approve the compensation of executives, including the compensation tables, and any related materials.

 
Acquisitions of TARP Participants
 
 
When a TARP participant is acquired by a company that is not a TARP participant, the acquiring company does not become subject to the TARP restrictions as a result of the acquisition. In addition, employees of the targeted TARP participant who are subject to the executive compensation restrictions immediately prior to the acquisition will no longer be subject to such restrictions after the acquisition.  However, if the primary purpose of the acquisition is to avoid or evade the TARP compensation restrictions, then the acquirer will be treated as a TARP participant.

 
Certifications of the Principal Executive Officer and Principal Financial Officer
 
 
Our Principal Executive Officer (Chief Executive Officer and President Skiles) and Principal Financial Officer (Chief Financial Officer Aumack) provide certain certifications within 90 days of the completion of each fiscal year any part of which is a TARP period.  Such certifications must verify that:
 

Ø  
Our Personnel/Compensation/Nominating Committee has met at least every six months during the prior fiscal year with the senior risk officer to discuss and evaluate SEO compensation plans and employee compensation plans and the risks these plans pose to FPB;

Ø  
Our Personnel/Compensation/Nominating Committee has identified and limited the features in the SEO compensation plans that could lead SEOs to take unnecessary or excessive risks that could threaten the value of FPB, has identified any features in the employee compensation plans that pose risks to FPB, and has limited those features to ensure FPB is not unnecessarily exposed to risks;

Ø  
Our Personnel/Compensation/Nominating Committee has reviewed at least every six months the terms of each employee compensation plan and identified and limited the features in the plan that could encourage the manipulation of reported earnings to enhance the compensation of any employee;

Ø  
Our Personnel/Compensation/Nominating Committee will certify to these reviews;

Ø  
Our Personnel/Compensation/Nominating Committee will  provide a narrative description of how it limited the features in compensation plans that could lead executives to take unnecessary and excessive risks that could threaten the value of FPB, and ensured that compensation plans did not unnecessarily expose FPB to risks or would otherwise encourage the manipulation of reported earnings;
 
 
 
(continued)
 

 
Ø  
All bonuses, retention awards, and incentive compensation of the SEOs and the next twenty most highly compensated employees are subject to a provision for recovery or “clawback” if the payments were based on materially inaccurate financial statements or any other materially inaccurate performance criteria;

Ø  
Golden parachute payments to SEOs and the next five most highly compensated employees are prohibited;

Ø  
The bonuses, retention awards, and incentive compensation paid to or accrued by employees to whom the bonus payment limitation is applicable have been limited as restricted;

Ø  
FPB will permit a non-binding shareholder resolution on the SEO compensation disclosures provided under the federal securities laws;

Ø  
An excessive and/or luxury expenditures policy has been adopted and implemented, and a copy has been provided to the Treasury;

Ø  
Disclosure will be made of the amount, nature, and justification for the offering of any perquisites whose total value exceeds $25,000 for each of the employees subject to the bonus payment limitations;

Ø  
Disclosure will be made regarding any engagement of a compensation consultant and any such services that were provided;

Ø  
There have been no tax gross-ups on compensation to the SEOs and the next twenty most highly compensated employees;

Ø  
FPB has substantially complied with any compensation requirements set forth in the agreement, as may be amended, with the Treasury;

Ø  
Certain employees named in the certification are the SEOs and most highly compensated employees for the current fiscal year based on their compensation  during the prior fiscal year; and

Ø  
The officer certifying understands that a knowing and willful false or fraudulent statement made in connection with the certification may be punished by fine, imprisonment, or both.

 
 
Establishment of the Office of the Special Master for TARP Executive Compensation
 
 
A Special Master has been appointed, whose duties and responsibilities are as follows:

Ø  
Interpreting TARP and ARRA rules and regulations to determine how they apply to particular facts circumstances;

Ø  
Reviewing bonuses, retention awards, and other compensation paid prior to February 17, 2009 to employees of entities receiving TARP assistance prior to such date to determine whether any such payments were inconsistent with the purposes of TARP;

Ø  
Providing advisory opinions on compensation structures or compensation payments to employees of TARP participants; and

Ø  
Approving compensation payments to, and the compensation structures for, certain employees of TARP recipients that are receiving exception al financial assistance.
 
 

 
 
 
ITEM 12.             SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND  MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
 
The following table contains information regarding the only shareholders known to us to be the beneficial owners of 5% or more of the outstanding shares of FPB common stock as of the record date.
 

 
Name and Address of
Beneficial Owner
  
Number of Shares
  
Percent of Class
  
Alfred J. Cinque
P.O. Box 2411
Palm Beach, Florida 33480-2411
     181,150 (1)   9.40 %
 
David C. Blackburn
1001 S. Indian River Drive
Fort Pierce, Florida  34950
     105,088     5.11 %
 
                                      ____________________
(1)  
As disclosed in a Schedule 13G Amendment filed with the Securities and Exchange Commission on March 16, 2007.

 
 
     The following table contains information regarding the beneficial ownership of FPB common stock of each director and non-director executive officer as of December 31, 2010. The beneficial ownership of each person reflects the number of shares that the person currently owns, plus the number of shares that person has the right to acquire through the exercise of stock options.
 

 
 
Name
  
Number of Shares Owned (4)
    
Right to
Acquire(5)
    
% of Beneficial
Ownership (16)
  
Nancy E. Aumack(1)
     19,651 (6)   10,676     1.47 %
Gary A. Berger(2)
     32,039 (7)   8,771     1.97  
Donald J. Cuozzo(2)
     51,892 (8)   14,032     3.18  
Ann L. Decker(2)
     17,875     2,925     1.01  
Timothy K. Grimes(2)
     17,340 (9)   2,000     0.94  
John S. Leighton, III(2)(17)
     32,000 (10)   2,000     1.65  
Paul J. Miret(2)
     39,456 (11)   12,282     2.50  
Marge Riley(1)
     27,077 (12)   17,043 (12)   2.13  
Robert L. Seeley(2)
     13,076 (13)   872     0.68  
David W. Skiles(3)
     57,999 (14)   26,537     4.06  
William V. West(1)
     28,937     8,525     1.81  
Paul A. Zinter(2)
     33,385 (15)   11,417     2.16  
All directors and executive officers as a group (12 individuals)
     370,727     117,080     22.43 %
       ___________________________

 
 
(1)  
Executive Officer only.
(2)  
Director only.
(3)  
Director and Executive Officer.
(4)  
Includes shares for which the named person:
§ 
has sole voting power and investment power;
§ 
has shared voting and investment power with a spouse; or
§ 
holds in an IRA or other retirement plan; but does not include shares that may be acquired by exercising stock options.
(5)  
Includes shares that may be acquired by exercising stock options that are vested or will vest within the next 2 years.
(6)  
Includes 2,524 shares owned by Ms. Aumack’s spouse in trust and 350 shares owned by Ms. Aumack’s spouse in an Employee Stock Purchase Plan.
(7)  
Includes 5,733 shares owned by a related business interest of Mr. Berger’s.
(8)  
Includes 6,019 shares owned by Mr. Cuozzo’s spouse’s IRA.
(9)  
Includes 330 shares owned by Mr. Grimes’ spouse.
(10)  
These shares are owned by a related business interest of Mr. Leighton’s.
(11)  
Includes 6,063 shares owned by Mr. Miret’s spouse’s IRA.
(12)  
Includes 6,381 shares and 6,016 options owned by Ms. Riley’s spouse.
(13)  
Includes 13,076 shares owned by Mr. Seeley’s spouse in trust.
(14)  
Includes 124 shares owned by Mr. Skiles’ spouse.
(15)  
Includes 3,528 shares owned by Mr. Zinter’s spouse’s Keough Plan.
(16)  
Shares are deemed to be “beneficially owned” if a person has sole or shared power to vote or to direct the voting of shares or the power to dispose, or to direct the disposition of shares, or if a person has the right to acquire.
     (17) Mr. Leighton resigned from the Board effective as of February 4, 2011. 
 
 
 
 
 
ITEM 13.            CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS

FPB does not have any related transactions with its directors or executive officers and it does not make loans to its directors or executive officers. However, certain directors, executive officers, and their immediate family members are customers of the Bank. It is anticipated that such individuals will continue these relationships in the future.  Loans made to directors, executive officers, and their immediate families require approval of a majority of the disinterested directors approving the loan.  All transactions between FPB, the Bank, and their directors, executive officers, the immediate family members of such directors and executive officers, and any principal shareholders, were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with non-affiliated persons, and in the opinion of management, did not involve more than the normal risk of collectability or present any other unfavorable features.

As of December 31, 2010, loans to directors, executive officers, and their immediate family members represented $4.0 million, or approximately 2.39% of the total loan portfolio, all of which are current and performing according to their terms.
 
 
 
ITEM 14.            PRINCIPAL ACCOUNTING FEES AND SERVICES

Hacker, Johnson & Smith, P.A. (“Hacker, Johnson”) served as the independent auditors for FPB and the Bank for the fiscal year ending December 31, 2010.

Audit Fees:  The aggregate fees billed for professional services by Hacker, Johnson, in connection with the audit of the annual financial statements and the reviews of the financial statements included in FPB’s quarterly filings with the Securities and Exchange Commission for the fiscal years ended December 31, 2009 and December 31, 2010, were $48,000 and $48,000 respectively.

Tax Fees:  In 2009 and 2010, Hacker, Johnson also billed FPB $5,000 and $5,000 respectively, for tax compliance and advice, including the preparation of FPB’s corporate tax returns.

All Other Fees: Hacker, Johnson also billed the company for audit services related to stock offerings, in the amounts of $35,000 in 2009 and $15,000 in 2010.

In all instances, Hacker, Johnson’s performance of those services was pre-approved by FPB’s Audit/Compliance Committee, pursuant to its internal policies.






PART IV

ITEM 15.              EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 
Exhibits. The following exhibits are filed with or incorporated by reference into this report. The exhibits marked with an (a) were previously filed as a part of the Company’s Registration Statement on Form SB-1, filed with the Federal Deposit Insurance Corporation on April 30, 2000; those marked with a (b) were filed with the Company’s From 10-KSB on March 31, 2003; those marked with a (c) were filed with the Company’s Definitive Schedule 14A on October 26, 2005; those marked with a (d) were filed with the Company's Form 8-A on November 16, 2001; those marked with an (e) were filed with the Company's Form 10-QSB/A on August 2, 2008; those marked with an (f) were filed with the Company’s Form 10-Q on November 6, 2008; those marked with a (g) were filed with the Company’s Form 10-KSB on March 28, 2005; those marked with an (h) were filed with the Company’s Form 8-K on December 5, 2008; those marked with an (i) were filed with the Company’s Form S-1 on September 17, 2009; and those marked with a (j) were filed with the Company’s Form 10-Q on November 16, 2009.
 

Exhibit No.
  
Description of Exhibit
 
    
 
 
(d)3.1
  
Articles of Incorporation
 
(d)3.2
  
Bylaws
 
(f) 3.3
  
Amendment to Bylaws
 
(d)4.1
  
Specimen copy of certificate evidencing shares of the Company’s common capital stock, $0.01 par value
 
(a)4.2
  
First Peoples Bank Stock Option Plan dated January 14, 1999
 
(b)4.5
  
Amendment to First Peoples Bank Stock Option Plan
 
(c)4.6
  
2005 Stock Compensation Plan
 
(a)10.1
  
First Peoples Bank Qualified 401(k) Profit Sharing Plan, dated May 1, 1999
 
(f)10.2
  
Amended and Restated Employment Agreement for David W. Skiles
 
(e)10.3
  
Amended and Restated Change in Control Agreement for Nancy E. Aumack
 
(e)10.4
  
Amended and Restated Change in Control Agreement for Stephen J. Krumfolz
 
(e)10.5
  
Amended and Restated Change in Control Agreement for Marge Riley
 
(h)3.4
  
Articles of Amendment to the Articles of Incorporation
 
(h)4.3
  
Form of Certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series A
 
(h)4.4
  
Warrant to Purchase Up to 183,158 Shares of Common Stock
 
(h)10.6
  
Letter Agreement, dated December 5, 2008 between the Company and the United States Department of the Treasury
 
(h)10.7
  
Form of Waiver, executed by each of David W. Skiles, Nancy E. Aumack and Marge Riley
 
(h)10.8
  
Form of Compliance Agreement, executed by each of David W. Skiles, Nancy E. Aumack and Marge Riley
 
(h)10.9
  
Securities Purchase Agreement – Standard Terms between the Company and the United States Department of the Treasury
 
(i)21.1
  
Subsidiaries of the Registrant
 
(j)3.5
  
Articles of Amendment to the Articles of Incorporation
  13   
 
(g)14
  
Code of Ethics
  31.1  
  31.2  
  32.1  
  32.2  
  99.1  
  99.2  
 
 
 
 
 
Financial Statement Schedules. FPB hereby incorporates by reference the sections entitled “Selected Financial Data” contained at page 2 of the 2010 Annual Report and the section entitled “Consolidated Financial Statements” contained at pages 27 through 70 of the 2010 Annual Report. The 2010 Annual Report is attached hereto as Exhibit 13.

 
 

 
 
 
 
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

          
                             FPB BANCORP, INC.
 
 
 
 
  By: /s/ David W. Skiles                                                  
Date: April 14, 2011    David W. Skiles 
  Principal Executive Officer, President and Director
 

 
  By: /s/ Nancy E. Aumack                           
Date: April 14, 2011    Nancy E. Aumack
  Principal Financial Officer 
 

 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in capacities and on the dates indicated.
 

Signature
  
Title
  
Date
/s/Gary A. Berger                                       
  
Chairman of the Board
  
April 14, 2011
Gary A. Berger
        
/s/Donald J. Cuozzo                                   
  
Director
  
April 14, 2011
Donald J. Cuozzo
        
/s/Ann L. Decker                               
  
Corporate Secretary and
  
April 14, 2011
Ann L. Decker
  
Director
    
/s/Timothy K. Grimes                                
  
Director
  
April 14, 2011
Timothy K. Grimes
        
/s/Paul J. Miret                                           
  
Director
  
April 14, 2011
Paul J. Miret
        
/s/Robert L. Seeley                           
  
Director
  
April 14, 2011
Robert L. Seeley
        
/s/David W. Skiles                       
  
Chief Executive Officer
  
April 14, 2011
David W. Skiles
  
President and Director
    
/s/Paul A. Zinter                       
  
Vice Chairman of the Board
  
April 14, 2011
Paul A. Zinter
        



 
40
 

EX-13 2 exhibit13.htm ANNUAL REPORT 2010 exhibit13.htm
 
 
BHC LOGO
 
 
 
 
2010
 
ANNUAL
 
REPORT
 
 
 
 

 
CORPORATE PROFILE

FPB Bancorp, Inc. (the "Holding Company") owns 100% of the outstanding common stock of First Peoples Bank (the "Bank") and the Bank owns 100% of the outstanding common stock of Treasure Coast Holdings, Inc., (collectively referred to as the "Company"). The Holding Company operates as a one-bank holding company and it’s only business activity is the operation of the Bank.  The Bank is a state (Florida)-chartered commercial bank and its deposits are insured up to the maximum amounts by the Federal Deposit Insurance Corporation, which are $250,000 for all qualified deposits, and unlimited for non-interest bearing transaction accounts, through December 31, 2012. The Bank offers a variety of community banking services to individual and corporate customers through its six banking offices located in Port St. Lucie, Stuart, Fort Pierce, Vero Beach and Palm City, Florida.  The newest office opened in May 2008, on Gatlin Boulevard in Port St. Lucie, Florida.  In addition, the Palm City, Florida office opened in January of 2008 and an 11,000 square foot Operations Center in Jensen Beach, Florida, opened in March of 2007. The Bank’s subsidiary, Treasure Coast Holdings, Inc., was incorporated in June 2008 for the sole purpose of managing foreclosed assets.  At December 31, 2010, we had total consolidated assets of $232.4 million and total consolidated stockholders' equity of $6.7 million.  For the year ended December 31, 2010, we had net losses of $8.0 million.

 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report contains certain forward-looking statements which represent our expectations or beliefs, including, but not limited to, statements concerning the banking industry and our operations, performance, financial condition and growth.  For this purpose, any statements contained in this Report that are not statements of historical fact may be deemed forward-looking statements.  Without limiting the generality of the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "should," "can," "estimate," or "continue" or the negative of other variations thereof or comparable terminology are intended to identify forward-looking statements.  These statements by their nature may involve substantial risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors, including competition, general economic conditions, changes in interest rates, and changes in the value of real estate and other collateral securing loans, among other things.

This statement has not been reviewed, or confirmed for accuracy or relevance, by the Federal Deposit Insurance Corporation.



 
 
SMALL BHC LGOG
 
 

December 31, 2010, 2009 and 2008 or the Years Then Ended
(Dollars in thousands, except per share figures)
 

At Year End:
      2010
  
      2009
  
       2008
  
             
Assets
 $ 232,445   $ 248,203   $ 239,173  
Loans, net
 $ 161,946   $ 184,312   $ 184,182  
Securities
 $ 37,731   $ 31,752   $ 33,239  
Deposits
 $ 208,366   $ 216,374   $ 200,683  
Stockholders' equity
 $ 6,712   $ 14,639   $ 24,896  
Book value per common share
 $ .61   $ 4.50   $ 9.53  
Common shares outstanding
   2,058,047     2,058,047     2,058,047  
Equity as a percentage of assets
   2.89 %   5.90 %   10.41 %
Non-performing assets as a percentage of total assets
   9.26 %   9.17 %   5.05 %
                   
For The Year:
                  
                   
Interest income
 $ 11,920   $ 12,778   $ 13,802  
Net loss
 $ (7,958 ) $ (9,208 ) $ (2,978 )
Loss per common share, basic
 $ (4.05 ) $ (4.66 ) $ (1.46 )
Loss per common share, diluted
 $ (4.05 ) $ (4.66 ) $ (1.46 )
Return on average assets
   (3.18 )%   (3.55 )%   (1.37 )%
Return on average equity
   (69.27 )%   (41.74 )%   (13.97 )%
Average equity as a percentage of average assets
   4.60 %   8.50 %   9.79 %
Non-interest expenses to average assets
   4.65 %   4.04 %   3.89 %
                   
Yields and Rates:
                  
                   
Loan portfolio
   6.03 %   5.95 %   7.02 %
Securities
   3.64 %   4.20 %   4.95 %
Other interest earning assets
   .24 %   .26 %   2.00 %
All interest earning assets
   5.18 %   5.47 %   6.71 %
Deposits
   1.98 %   2.96 %   4.05 %
Borrowings
   1.64 %   2.16 %   2.54 %
All interest bearing liabilities
   1.95 %   2.92 %   4.04 %
Interest rate spread (1)
   3.23 %   2.55 %   2.67 %
Net yield on average interest earning assets (2)
   3.36 %   2.81 %   3.33 %
___________________________

(1)
Average yield on all interest earning assets less average rate paid on all interest bearing liabilities.
(2)
Net interest income divided by average interest earning assets.


SMALL BHC LGOG


 
December 31, 2010, 2009, 2008, 2007, and 2006 and the
Years Ended December 31, 2010, 2009, 2008, 2007, and 2006
(Dollars in thousands, except per share figures)
 

At Year End:
       2010
  
        2009
  
        2008
  
      2007
  
      2006
  
Cash and cash equivalents
 $ 12,229     12,932     5,457     6,795     5,422  
Securities
   37,731     31,752     33,239     6,793     8,953  
Loans, net
   161,946     184,312     184,182     172,251     130,133  
All other assets
   20,539     19,207     16,295     10,914     8,931  
                               
Total assets
 $ 232,445     248,203     239,173     196,753     153,439  
                               
Deposit accounts
 $ 208,366     216,374     200,683     172,677     130,219  
Federal Home Loan Bank advances
   14,600     14,600     11,100     100     100  
All other liabilities
   2,767     2,590     2,494     2,045     2,057  
Stockholders' equity
   6,712     14,639     24,896     21,931     21,063  
                               
Total liabilities and stockholders' equity
 $ 232,445      248,203     239,173     196,753     153,439  
                               
For the Period:
                              
Total interest income
 $ 11,920     12,778     13,802     13,588     10,626  
Total interest expense
    4,200      6,215     6,951     6,060     3,976  
Net interest income
   7,720     6,563     6,851     7,528     6,650  
Provision for loan losses
    5,679      4,959     4,059     885     429  
Net interest income after provision for loan losses
   2,041     1,604     2,792     6,643     6,221  
Non-interest income
   2,004     1,189     874     996     824  
Non-interest expenses
   11,631     10,482     8,464     7,385     6,082  
                               
(Loss) earnings before income taxes
   (7,586 )   (7,689 )   (4,798 )   254     963  
Income tax (benefit)
    372      1,519     (1,820 )   77     332  
                               
Net (loss) earnings
 $ (7,958 )   (9,208 )   (2,978 )   177     631  
                               
(Loss) earnings per basic common share (1)
 $ (4.05 )   (4.66 )   (1.46 )   .09     .32  
(Loss) earnings per diluted common share (1)
 $ (4.05 )   (4.66 )   (1.46 )   .09     .31  
Weighted-average number of common shares outstanding  for basic (1)
   2,058,047     2,058,047     2,058,047     2,017,553     1,998,871  
Weighted-average number of common shares outstanding for diluted (1)
   2,058,047     2,058,047     2,058,047     2,034,070     2,030,344  
                               
Ratios and Other Data:
                              
Return on average assets
   (3.18 )%   (3.55 )%   (1.37 )%   .10 %   .43 %
Return on average equity
   (69.27 )%   (41.74 )%   (13.97 )%   .83 %   3.04 %
Average equity as a percentage of average assets
   4.60 %   8.50 %   9.79 %   12.11 %   14.08 %
Interest rate spread during the period
   3.23 %   2.55 %   2.67 %   3.33 %   3.82 %
Net yield on average interest earning assets
   3.36 %   2.81 %   3.33 %   4.53 %   4.79 %
Non-interest expenses to average assets
   4.65 %   4.04 %   3.89 %   4.18 %   4.12 %
Ratio of average interest earning assets to average interest bearing liabilities
   1.07     1.10     1.20     1.33     1.34  
Non-performing loans and foreclosed assets as a percentage of total assets at end of year
   9.26 %   9.17 %   5.05 %   .89 %   .22 %
Allowance for loan losses as a percentage of total loans at end of year
   2.88 %   2.49 %   1.36 %   1.36 %   1.36 %
Total number of banking offices
   6     6     6     4     4  
Total shares outstanding at end of year (1)
   2,058,047     2,058,047     2,058,047     2,058,047     2,001,513  
Book value per common share at end of year (1)
 $ .61   $ 4.50   $ 9.53   $ 10.66   $ 10.52  
 
 
        (1) All per share amounts reflect the 5% stock dividends declared on May 16, 2007 and paid on June 15, 2007 
 
 

SMALL BHC LGOG

 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 
 
The following discussion of our financial condition and our results of operations should be read in conjunction with the consolidated financial statements and the related notes, as of December 31, 2010 and 2009, included elsewhere in this Annual Report.  This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements.
 
 
General
 

FPB Bancorp, Inc. (the "Holding Company") owns 100% of the outstanding common stock of First Peoples Bank (the "Bank") and the Bank owns 100% of the outstanding common stock of Treasure Coast Holdings, Inc., (collectively referred to as the "Company"). The Holding Company operates as a one-bank holding company and it’s only business activity is the operation of the Bank. The Bank is a state (Florida)-chartered commercial bank and its deposits are insured up to the maximum amounts by the Federal Deposit Insurance Corporation, which are $250,000 for all qualified deposits, and unlimited for non-interest bearing transaction accounts, through December 31, 2012. The Bank offers a variety of community banking services to individual and corporate customers through its six banking offices located in Port St. Lucie, Stuart, Fort Pierce, Vero Beach and Palm City, Florida.  The newest office opened in May, 2008, on Gatlin Boulevard in Port St. Lucie, Florida.  In addition, the Palm City, Florida office opened in January of 2008 and an 11,000 square foot Operations Center in Jensen Beach, Florida, opened in March of 2007. The bank’s subsidiary, Treasure Coast Holdings, Inc., was incorporated in June 2008 for the sole purpose of managing foreclosed assets.  At December 31, 2010, we had total consolidated assets of $232.4 million and total consolidated stockholders' equity of $6.7 million.  For the year ended December 31, 2010, we had net losses of $8.0 million.
 
 
Management’s Strategy
 

We are organized as a locally owned, locally managed community financial institution, owned and managed by people who are actively involved in our market area and are committed to our economic growth and development.  With local ownership, management, and directors, we believe that we can be more responsive to the communities that we serve.  Local ownership allows faster, more responsive and flexible decision-making, which is not available at the majority of the financial institutions in or near our market area which consist primarily of branch offices of large regional holding company banks with headquarters located elsewhere in the United States.
 
 
 
Our principal business is to attract deposits from the general public and to invest those funds in various types of loans and other interest earning assets.  Funds are provided for the operations by the proceeds from the sale of investments, from amortization and repayment of outstanding loans and investments, from net deposit inflow, and from borrowings.  Our earnings depend primarily upon the difference between: (1) non-interest income, and the interest and fees we receive from loans, the securities held in our investment portfolio and other investments; and (2) the expenses we incur in connection with obtaining funds for lending (including interest paid on deposits and other borrowings) and expenses relating to day-to-day operations.
 
 
To the extent market conditions permit, our strategy is intended to insulate our interest rate gap from adverse changes in interest rates by maintaining spreads through the adjustability of our interest earning assets and interest bearing liabilities.  Our ability to reduce interest rate risk in our loan and investment portfolios depends upon a number of factors, many of which are beyond our control, including among others, competition for loans and deposits in our market area and conditions prevailing in the economy.
 
 
Our primary sources of funds for loans and for other general business purposes are our capital, deposits and loan repayments. We expect that loan repayments will be relatively stable sources of funds, while deposit inflows and outflows will be significantly influenced by prevailing interest rates, money market rates, and general economic conditions. Generally, short-term borrowings may be used to compensate for reductions in normal sources of funds while longer-term borrowings may be used to support expanded lending activities.
 
 
(continued)
 
3
SMALL BHC LGOG
 
 
Our customers are primarily individuals, professionals, small and medium-size businesses, and seasonal retirees located predominantly in St. Lucie, Martin and Indian River Counties, Florida.  Our offices are currently located in Stuart, Palm City, Port St. Lucie, Fort Pierce and Vero Beach, Florida.  The Gatlin Boulevard office in Port St. Lucie, Florida opened in May of 2008 and the Palm City office in Palm City, Florida opened in January of 2008. An 11,000 square foot Operations Center opened in March, 2007 in Jensen Beach, Florida.
 
 
We continually seek to develop new business through an ongoing program of personal calls on both present and potential customers. As a local independent bank, we utilize traditional local advertising media to promote and develop loans and deposits.  In addition, all of our directors have worked and lived in or near our market area for a number of years.  We believe that these factors, coupled with the past and continued involvement of the directors, officers and staff in various local community activities, will further promote our image as a locally owned independent institution, which we believe is an important factor to our targeted customer base.
 
 
Critical Accounting Policies
 
Our financial condition and results of operations are sensitive to accounting measurements and estimates of matters that are inherently uncertain.  When applying accounting policies in areas that are subjective in nature, we must use our best judgment to arrive at the carrying value of certain assets.  The most critical accounting policy we apply is related to the valuation of the loan portfolio.
 
 
A variety of estimates impact the carrying value of the loan portfolio including the calculation of the allowance for loan losses, valuation of underlying collateral, the timing of loan charge-offs and the amount and amortization of loan fees and deferred origination costs.
 
 
Establishing allowance for loan losses requires the most difficult and subjective judgment of all.  The allowance is established and maintained at a level we believe is adequate to cover losses resulting from the inability of borrowers to make required payments on loans. Estimates for loan losses are arrived at by analyzing risks associated with specific loans and with the entire loan portfolio, current trends in delinquencies and charge-offs, the views of our regulators, changes in the size and composition of the loan portfolio and peer comparisons. The analysis also requires consideration of both the local and national economic climate and direction, and changes in the interest rate environment, which may impact a borrower’s ability to pay, legislation impacting the banking industry and economic conditions specific to the bank’s service area. Because the calculation of the allowance for loan losses relies on our estimates and judgments relating to inherently uncertain events, results may differ from our estimates.
 
 
The allowance for loan losses is also discussed as part of “Results of Operations” and in Note 3 to the consolidated financial statements. The significant accounting policies are discussed in Note 1 to the consolidated financial statements.
 
 
Regulation

As a bank holding company, we are regulated by the Board of Governors of the Federal Reserve System. As a Florida state-chartered commercial bank, we are subject to extensive regulation by the Florida Office of Financial Regulation, Department of Financial Services (the “Department”), and the Federal Deposit Insurance Corporation (“FDIC”).  We file reports with the Department and the FDIC concerning our activities and financial condition, in addition to obtaining regulatory approvals from all three agencies prior to entering into certain transactions such as mergers with or acquisitions of other financial institutions.  Periodic examinations are performed by the Department and the FDIC to monitor our compliance with the various regulatory requirements.
SMALL BHC LGOG
 
 
Credit Risk

Our primary business is making business and consumer loans.  That activity entails potential loan losses, the magnitude of which depends on a variety of economic factors affecting borrowers which are beyond our control. While underwriting guidelines have been instituted and credit review procedures have been put in place   to protect us from avoidable credit losses, some losses will inevitably occur. At December 31, 2010, we had non-performing assets of $21.5 million.
 
 
Allowance for Loan Losses
 
 
     The following table presents information regarding our total allowance for loan losses as well as the allocation of such amounts to the various categories of loans at December 31, (dollars in thousands):

 
2010
    
2009
    
2008
    
2007
    
2006
  
     
Loans to
Total Loans
        
Loans to
Total
Loans
        
Loans to
Total Loans
        
Loans to
Total Loans
        
Loans to
Total Loans
  
                             
 
Amount
    
Amount
    
Amount
    
Amount
    
Amount
  
                                                 
Commercial and industrial
 $ 2,192     35.29 %   $ 1,712     33.64 %   $ 1,292     34.04 %   $ 1,156     34.15 %   $ 811     38.13 %
Commercial real estate
   1,931     55.53       2,654     56.30       916     50.54       858     47.31       631     42.24  
Construction and development
   -     -       18     .57       113     5.23       145     6.38       65     4.59  
Consumer
   135     3.69       127     4.39       173     6.47       176     8.62       216     8.87  
Residential real estate
   551     5.49        219     5.10        58     3.72        58      3.54        78      6.17  
                                                                     
Total allowance for loan loss
 $  4,809     100.00 %   $  4,730     100.00 %   $ 2,552     100.00 %   $ 2,393     100.00 %   $ 1,801     100.00 %
                                                                     
Allowance for loan losses as a percentage of total loans outstanding
         2.88 %           2.49 %           1.36 %           1.36 %           1.36 %
 
 

Loan Portfolio

The following table sets forth the composition of our loan portfolio at December 31, (dollars in thousands):
 
 
 
2010
    
2009
    
2008
    
2007
    
2006
  
     
% of
Total
        
% of
Total
        
% of
Total
        
% of
Total
        
% of
Total
  
 
Amount
    
Amount
    
Amount
    
Amount
    
Amount
  
                                                 
Commercial and industrial
 $ 59,003     35.29 %   $ 63,815     33.64 %   $ 63,768     34.04 %   $ 59,878     34.15 %   $ 50,521     38.13 %
Commercial real estate
   92,835     55.53       106,803     56.30       94,675     50.54       82,951     47.31       55,967     42.24  
Construction and development
   -     -       1,081     .57       9,793     5.23       11,186     6.38       6,089     4.59  
Consumer
   6,175     3.69       8,329     4.39       12,118     6.47       15,115     8.62       11,757     8.87  
Residential real estate
   9,182     5.49       9,668     5.10       6,968     3.72       6,212     3.54       8,176      6.17  
    167,195     100.00 %     189,696     100.00 %     187,322     100.00 %     175,342     100.00 %     132,510     100.00 %
Less:
                                                                    
Deferred loan costs and fees, net
   (440 )           (654 )           (588 )           (698 )           (576 )      
Allowance for loan losses
   (4,809 )           (4,730 )           (2,552 )           (2,393 )           (1,801 )      
Loans, net
 $ 161,946           $ 184,312           $ 184,182           $ 172,251           $ 130,133        


 
 
SMALL BHC LGOG

 
The contractual maturity ranges of our loan portfolio and the amount of such loans with fixed and variable interest rates in each maturity range classified by borrower type as of December 31, 2010 (dollars in thousands):
 
 
 
One Year or Less
  
After One Through Five Years
  
After
Five Years
  
Total
  
     
Commercial and industrial
 $ 10,108   $ 17,229   $ 31,666   $ 59,003  
Commercial real estate
   7,347     8,873     76,615     92,835  
Consumer
   1,613     4,256     306     6,175  
Residential real estate
   1,904     4,409     2,869     9,182  
      Total loans
 $ 20,972   $ 34,767   $ 111,456   $ 167,195  
                         
Loans with a fixed interest rate
 $ 17,739   $ 23,998   $ 12,401   $ 54,138  
Loans with a variable interest rate
   3,233     10,769     99,055     113,057  
Total loans
 $ 20,972   $ 34,767   $ 111,456   $ 167,195  
 
 

    As of December 31, 2010, our loan portfolio was composed of approximately 32.38% fixed interest rate loans and 67.62% variable interest rate loans. Scheduled contractual principal repayments do not reflect the actual maturities of the loans. The average actual maturity of our loans is substantially less than their average contractual term because of prepayments. The average life of mortgage loans tends to increase when the current mortgage loan rates are substantially higher than rates on existing mortgage loans and, conversely, decrease when current mortgage loans rates are substantially lower than rates on existing mortgages due primarily to refinancing of adjustable rate and fixed rate loans at lower rates.
 
 
    The following table sets forth certain information on nonaccrual loans and foreclosed assets, the ratio of such loans and foreclosed assets to total assets as of the dates indicated, and certain other related information (dollars in thousands).  The increase in nonaccrual loans is primarily attributable to the downturn in the economy, and the expectations for a lengthened period of economic weakness.



SMALL BHC LGOG


 
 
 At December 31,
  
 
2010
  
2009
  
2008
  
2007
  
2006
  
Nonaccrual loans:
                    
   Commercial real estate
 $ 5,834   $ 8,443   $ 6,627   $ 805   $ -  
   Commercial and industrial
   6,220     6,154     1,635     297     154  
   Construction and development
   -     -     1,106     -     -  
   Residential real estate
   232     448     625     272     172  
   Consumer
   39     38     112     27     18  
                               
      Total nonaccrual loans
   12,325     15,083     10,105     1,401     344  
                               
Accruing loans over 90 days delinquent:
                              
   Commercial real estate
   -     400     -     243     -  
   Commercial and industrial
   -     488     250     106     -  
   Consumer
   -     19     -     -     -  
                               
      Total accrual loans over 90 days delinquent
   -     907     250     349     -  
                               
      Total non-performing loans
   12,325     15,990     10,355     1,750     344  
                               
Foreclosed assets
   9,190     6,763     1,816     41     26  
                               
      Total non-performing loans and foreclosed assets
 $ 21,515   $ 22,753   $ 12,171   $ 1,791   $ 370  
      Total non-performing loans as a percentage of total loans
   7.37 %   8.43 %   5.53 %   1.00 %   .26 %
      Total non-performing loans as a percentage of total assets
   5.30 %   6.44 %   4.33 %   .89 %   .22 %
      Total non-performing loans and foreclosed assets
                              
          as a percentage of total assets
   9.26 %   9.17 %   5.05 %   .89 %   .22 %
                               
      Restructured troubled debt
 $ 10,754   $ 5,591   $ 12,279   $  -   $ -  
 
As of December 31, 2010, the $10.8 million in restructured troubled debt are performing loans.
 
 
Asset Quality

In mid-2008, we formulated a plan to reduce our exposure to weaker lending relationships. Management’s practice has been to do business with borrowers in our area whom we know. The Bank did not fund any sub-prime loans and had very limited exposure to non-owner occupied commercial real estate and residential real estate. We have moved further away from this class of assets by establishing a moratorium on residential construction and development lending in the current economic environment. As of December 31, 2010, we have reduced our exposure in total construction and development loans by $1.1 million, or 100 % from December 31, 2009. The majority of the Bank’s loans are owner occupied commercial loans to local borrowers or consumer loans to their employees. Our market area as a whole has felt the impact of the residential real estate market’s deterioration and our customers appear to be working hard to adjust their business plans to this new reality.

In 2010, total non-performing loans decreased $3.7 million (-22.92%), but foreclosed assets increased $2.4 million (35.89%) and troubled debt restructured increased $5.2 million (92.38%). The overall increase in non-performing assets in 2010 was due primarily to the continued decline in the economy, resulting in continued deterioration in the real estate and commercial secured sectors of our loan portfolio.

 
(continued)
SMALL BHC LGOG
 

We have endeavored to deal aggressively with problem assets in our loan portfolio. Since the Bank’s inception in 1999, we have engaged a third-party audit firm to conduct independent asset quality reviews that are specialized and targeted loan reviews by type. We believe our enhanced credit risk management process positions us to deal effectively with reducing our credit risk profile and maintaining a high quality loan portfolio on an ongoing basis. Additionally, in the future we intend to develop a more balanced real estate portfolio by reducing our concentration of higher risk non-owner occupied commercial real estate and construction and development loans.
 
 
Furthermore, since December 31, 2008, we have enhanced our credit risk management processes by:
 

q  
forming a real estate holding company to manage and liquidate foreclosed assets;
q  
developing processes for supervising criticized and classified loans;
q  
adopting a specific action plan for managing and disposing of foreclosed assets;
q  
performing a quarterly assessment of the Bank’s monitoring systems for timely identification of problem loans;
q  
forming a Special Assets Committee of the Board that meets monthly to review management’s progress on all classified assets; and
q  
creating a Special Assets Department to reduce the Bank’s underperforming credits.
 
 
We believe our enhanced credit risk management process positions us to deal effectively with reducing our credit risk profile.
 
 
In 2010, we have taken several properties into our subsidiary incorporated for the purpose of divesting our foreclosed assets, and we are actively working to market these properties.  For example, in 2010 we have (i) sold one commercial property carried at $302,000 for $262,000; (ii) sold five vacant lots carried at $593,000 for $468,000; (iii) sold three residential properties carried at $516,000 for $445,000; and (iv) sold four other foreclosed assets carried at $31,000 for $41,000.
 
 
The following table illustrates the payment status of certain classes of loans in our portfolio (dollars in thousands):
 
 
 
Accruing and Past Due 30-89 Days
  
Nonaccrual and Past Due 90 days and Over
  
Total
  
 
Amount
  
Amount
  
Amount
  
As of December 31, 2010
            
Commercial real estate
 $ 967   $ 5,834   $ 6,801  
Commercial and industrial
   538     6,220     6,758  
Residential real estate
   269     232     501  
Consumer
    66      39     105  
Total
 $ 1,840   $ 12,325   $ 14,165  
                   
As of December 31, 2009
                  
Commercial real estate
 $ 548   $ 8,843   $ 9,391  
Commercial and industrial
   560     6,642     7,202  
Residential real estate
   10     448     458  
Consumer
    162      57     219  
Total
 $ 1,280   $ 15,990   $ 17,270  



SMALL BHC LGOG
 
 
Allowance for Credit Losses
 
 
In originating loans, we recognize that credit losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, and, in the case of a collateralized loan, the quality of the collateral for the loan as well as general economic conditions.  It is management’s policy to maintain an adequate allowance for loan losses based on, among other things, management’s loan loss experience, evaluation of economic conditions, and regular reviews of delinquencies and loan portfolio quality. We consider several factors in determining the allowances, including charge-off history, the relative level of non-performing assets, and the value of the underlying collateral.
 
 
The calculation of the allowance for loan losses is divided into two primary allocation groups: (1) impaired loans; and (2) all other loans.  For impaired loans, we have determined an allowance amount to set aside which we believe is sufficient to cover any potential collateral shortfall.  Problem loans are identified by the loan officer, by our loan review process, by our Bank’s loan committee, or by the Bank’s regulatory examiners.  All other loans   are multiplied by an historical experience factor adjusted for qualitative factors to determine the appropriate level of the allowance for loan losses.
 
 
        We actively monitor our asset quality to charge-off loans against the allowance for loan losses when appropriate or to provide specific loss allowances when necessary. Although we believe we use the best information available to make determinations with respect to the allowance for credit losses, future adjustments may be necessary if economic conditions differ from the economic conditions in the assumptions used in making the initial determinations.  We consider several factors in determining the allowances, including charge-off history, the relative level of non-performing assets, and the value of the underlying collateral.  Non-performing loans  at December 31, 2010, decreased to 7.37% of total loans, compared to 8.43% at December 31, 2009.  During 2010, our allowance increased by $79,000 or 1.67%, and totaled $4.8 million at December 31, 2010. Additional allowance was made to cover the increase in non-performing loans. We believe that the allowance for loan losses was adequate at December 31, 2010.

 
 

SMALL BHC LGOG


The following table sets forth information with respect to activity in our allowance for loan losses during the years indicated (dollars in thousands):
 
 
 
 Year Ended December 31,
  
 
2010
  
2009
  
2008
  
2007
  
2006
  
Allowance at beginning of year
 $ 4,730   $ 2,552   $ 2,393   $ 1,801   $ 1,383  
                               
Charge-offs:
                              
Residential real estate
   343     953     202     71     -  
Consumer
   237     267     110     144     19  
Construction and development
   -     -     490     -     -  
Commercial real estate
   2,856     241     1,926     -     -  
Commercial  an industrial
   2,355     1,537     1,195     85     14  
                               
Total charge-offs
   5,791     2,998     3,923     300     33  
                               
Recoveries:
                              
Residential real estate
   12     12     2     -     -  
Consumer
   42     19     9     7     10  
Construction and development
   -     -     -     -     -  
Commercial real estate
   8     -     -     -     -  
Commercial  an industrial
    129      186      12     -     12  
                               
Total recoveries
   191     217     23     7     22  
                               
Provision for loan losses charged to operations
   5,679     4,959     4,059     885     429  
                               
Allowance at end of year
 $ 4,809   $ 4,730   $ 2,552   $ 2,393   $ 1,801  
                               
Ratio of net charge-offs during the year to average loans outstanding during the year
   3.19 %   1.47 %    2.11 %    .19 %    .01 %
                               
Allowance for loan losses as a percentage of total loans at end of year
    2.88 %    2.49 %   1.36 %   1.36 %    1.36 %
                               
Allowance for loan losses as a percentage of non-performing loans
   39.02 %   29.58 %   24.65 %   136.74 %   523.55 %

 
Capital Resources and Liquidity
 
 
In managing liquidity, our objective is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on opportunities for expansion.  Liquidity management addresses the ability to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise.  Our primary sources of internally generated funds are principal and interest payments on loans receivable, cash flows generated from operations, and cash flows generated by investments.  External sources of funds include increases in deposits, advances from the FHLB and   a secured line of credit extended by the Federal Reserve Bank for overnight cash flow needs.  Longer term funding sources include a repurchase agreement with our correspondent bank.
 
 
Our management team monitors our liquidity position on an ongoing basis and reports regularly to our Board of Directors the level of liquidity compared to minimum levels established by Board policy.  As of December 31, 2010, our level of liquidity was within the established guidelines of Board policy.

 

(continued)
SMALL BHC LGOG

 
 
We are subject to various regulatory capital adequacy requirements promulgated by each of the FDIC and the Department.  Failure to meet minimum capital requirements can result in certain mandatory and, possibly, additional discretionary actions by federal and state regulators that, if undertaken, could have a direct material effect on our financial condition and results of operations.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.
 
 
Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier 1 capital to risk weighted assets and Tier 1 capital to average assets.  As of December 31, 2010, we did not meet the minimum applicable capital adequacy requirements.  See "Regulation and Supervision - Capital Requirements."
 
 
As of December 31, 2010, our actual and required minimum capital ratios were as follows (dollars in thousands):
 

 
 Actual
  
Minimum
for Capital Adequacy
  Purposes
  
Requirements of Consent Order
  
As of December 31, 2010:
Amount
  
%
  
Amount
  
%
  
Amount
  
%
  
                         
Total Capital to Risk-Weighted Assets
 9,373   5.57 % 13,472   8.00 % 18,524   11.00 %
Tier 1 Capital to Risk-Weighted Assets
 7,235   4.30   6,736   4.00   N/A   N/A  
Tier 1 Capital to Average Assets
 7,235   3.02   9,588   4.00   19,176   8.00  
 
 
Our primary source of cash during the year ended December 31, 2010, was from net proceeds from the sale, maturity, call and repayment of securities totaling $56.1 million. Cash was used primarily to purchase securities, and fund the deposit decrease. At December 31, 2010, we had outstanding commitments to originate loans totaling $509,000, available lines of credit of $10.2 million, and standby letters of credit of $26,000.
 

 
Investment Activities
 
 
Our securities portfolio is managed by our Funds Management Committee in accordance with a written investment policy of the Board of Directors that addresses strategies, types and levels of permitted investments.  At December 31, 2010, our securities portfolio equaled $37.7 million, or 16.2% of total assets. Our investment portfolio is comprised of SBA securities, mortgage-backed securities, taxable municipal securities and CMO securities.
 
 
We classify securities as either available for sale or held to maturity based upon our intent and ability to hold such securities.  Securities available for sale include debt and equity securities that are held for an indefinite period of time and are not intended to be held to maturity.  Securities available for sale include securities that we intend to use as part of our overall asset/liability management strategy and that may be sold in response to changes in interest rates and resultant prepayment risk and other factors related thereto.
 
 
Securities available for sale are carried at fair value, and unrealized gains and losses (net of related tax effects) on such securities are excluded from operations but are included in stockholders’ equity.  Upon realization, such gains and losses will be included in our operations. Investment securities and mortgage-backed securities, other than those designated as available for sale are comprised of debt securities that we have the affirmative intent and ability to hold to maturity.  Securities held to maturity are carried at cost, and are adjusted for amortization of premiums and accretion of discounts over the estimated lives of the securities.


SMALL BHC LGOG
 
Securities
 
 
The following table sets forth the carrying value of our securities portfolio at December 31, 2010, 2009 and 2008 (in thousands):
 

 
  2010
  
  2009
  
2008
  
Securities available for sale:
            
    U.S. Government agency securities
 $ -   $ 14,332   $ 16,375  
Municipal bonds-taxable
   1,902     -     -  
SBA securities
   1,999     -     -  
Asset-backed securities
   -     6,097     -  
Mortgage-backed securities
   12,769     5,087     16,863  
CMO securities
   19,596     6,236      -  
    36,266     31,752     33,238  
Securities held to maturity:
                  
Mortgage-backed securities
    1,465      -      1  
                   
           Total
 $ 37,731   $ 31,752   $ 33,239  
 
 
 
The following table sets forth, by maturity distribution, certain information pertaining to the securities portfolio as follows (dollars in thousands):
 
 
 
Due in
  
From One Year
  
From Five Years
  
Due in More Than
        
 
 One Year or Less
  
 to Five Years
  
 to Ten Years
  
 Ten Years
    
 Total
  
 
Carrying
  
Average
  
Carrying
  
Average
  
Carrying
  
Average
  
Carrying
  
Average
    
Carrying
  
Average
  
 
Value
  
Yield
  
Value
  
Yield
  
Value
  
Yield
  
Value
  
Yield
    
Value
  
Yield
  
 December 31,  2010:
                                          
Municipal bonds-taxable
 $ -     - % $ -     - % $ -     - % $ 1,902     5.23 %   $ 1,902     5.23 %
 
    SBA securities
    -      -     -     -     -      -      -      -        1,999     3.34 %
Mortgage-backed securities
    -      -     -     -     -      -      -      -       14,234     2.60 %
CMO securities
   -      -     -     -     -      -     -      -       19,596     2.60 %
                                                               
Total
                                                   $ 37,731     3.64 %
                                                               
December 31, 2009:
                                                              
U.S. Government agency securities
 $ -     - % $ -     - % $ 5,766     3.97 % $ 8,566     4.51 %   $ 14,332     4.21 %
Mortgage-backed securities
    -      -     -     -     -      -      -      -        5,087     4.07 %
    Asset-backed securities
    -      -     -     -     -      -      -      -        6,097     4.35 %
CMO securities
   -      -     -     -     -      -     -      -         6,236     4.05 %
                                                               
Total
                                                   $ 31,752     4.20 %
                                                               
December 31, 2008:
                                                              
U.S. Government agency securities
 $ 1,000     2.46 % $ 1,002     4.32 % $ 3,577     4.94 % $ 10,796     5.39 %   $ 16,375     5.05 %
Mortgage-backed securities
                                                     16,864     5.49  
                                                               
Total
                                                   $ 33,239     4.95 %





SMALL BHC LGOG
 
 

Regulatory Matters
 
 
Board Resolutions.  The Federal Reserve Bank of Atlanta (“Federal Reserve”) has requested our Board of Directors to adopt resolutions limiting us from reducing our capital position. Pursuant to these resolutions, we  have committed to: (i) not incurring debt at the holding company level without prior Federal Reserve approval; (ii) not paying dividends on our securities (including our Series A Preferred Stock) without prior Federal Reserve approval; (iii) not purchasing or redeeming stock without Federal Reserve approval; (iv) not making any other payment which would represent a reduction in capital, other than normal and routine operating expenses; and (v) providing to the Federal Reserve on a quarterly basis, a parent-only balance sheet and confirmation of compliance with the resolutions.  Our Board of Directors adopted these resolutions at its October 21, 2009 meeting. These resolutions also prohibit us from paying dividends on, or redeeming, the Series A Preferred Stock without Federal Reserve approval.
 
 
        Consent Order.  Effective March 18, 2010, the Bank entered into a Stipulation to the Issuance of a Consent Order (“Stipulation”) with the Federal Deposit Insurance Corporation (the “FDIC”) and the Florida Office of Financial Regulation (the “OFR”). Pursuant to the Stipulation, the Bank consented, without admitting or denying any charges of unsafe or unsound banking practices or violations of law or regulation, to the issuance of a Consent Order by the FDIC and the OFR, also effective as of March 18, 2010.
 
         The Consent Order represents an agreement among the Bank, the FDIC and the OFR as to areas of the Bank’s operations that warrant improvement and presents a plan for making those improvements. The Consent Order imposes no fines or penalties on the Bank.
 
 
Pursuant to the Consent Order:
ØThe Bank’s Board of Directors is required to increase its participation in the affairs of the Bank. This participation shall include comprehensive, documented meetings to be held no less frequently than monthly. Prior to the entry of the Consent Order, the Board conducted such meetings, but it now requires more detailed management reports. The Board has also established a committee to oversee the Bank’s compliance with the Consent Order.
 
 
ØBy June 16, 2010, and during the life of the Consent Order, the Bank shall achieve and maintain a Tier 1 leverage capital ratio of not less than 8% and a total risk-based capital ratio of not less than 11%. At December 31, 2010, the Bank’s Tier 1 leverage capital ratio was 3.02% and its total risk-based capital ratio was 5.57%. As of December 31, 2010, an additional $12 million in capital would be required by the Bank to attain the required capital levels.
 
 
ØThe Bank must maintain a fully funded Allowance for Loan and Lease Losses (“ALLL”), which must be satisfactory to the FDIC and the OFR. The Board of Directors shall quarterly review the adequacy of the ALLL. The Bank has always endeavored to maintain a fully funded, adequate ALLL and believes its ALLL is adequate.
 
 
ØThe Bank shall also reduce the aggregate balance of assets classified “Substandard” by the FDIC in October 2009: (i) by June 16, 2010, to not more than 140% of Tier 1 capital plus the ALLL; (ii) by September 14, 2010, to not more than 120% of Tier 1 capital plus the ALLL; (iii) by December 13, 2010, to not more than 100% of Tier 1 capital plus the ALLL; (iv) by March 23, 2011, to not more than 80% of Tier 1 capital plus the ALLL; and (v) by September 19, 2011, to not more than 60% of Tier 1 capital plus the ALL. As of December 31, 2010, the Bank’s ratio was 187%.
 
 
ØThe Bank shall not extend any credit to, or for the benefit of, any borrower who has a loan that has been charged off or classified “Substandard” and is uncollected, unless the Bank documents that such extension of credit is in the Bank’s best interest. The Bank had, and has, no intention of extending credit to such borrowers in violation of these requirements.
 
 
 
(continued)
 
 
ØBy May 2, 2010, the Bank shall perform a risk segmentation analysis with respect to any concentration cited by the FDIC, including commercial real estate loans. The Bank shall also develop a plan to reduce any segment of the portfolio deemed by the FDIC or OFR to be an undue concentration of credit. Both were completed and submitted on April 29, 2010.
 
 
ØBy June 16, 2010, the Bank shall formulate and implement a strategic plan and a plan to improve and sustain Bank earnings. Additionally, the Bank must prepare a budget and update the profit plan by November 30th of each year. All such items must be submitted to the FDIC and the OFR. The Bank was granted an extension to September 28, 2010 to submit its strategic plan and submitted it prior to that date.
 
 
 ØBy May 17, 2010, the Bank must review, revise and adopt its liquidity, contingency funding and funds management policy, including implementing any changes recommended by the FDIC or the OFR. These were completed and submitted on May 27, 2010, following an extension granted to May 28, 2010.
 
 
ØThroughout the life of the Consent Order, the Bank shall not accept, renew, or rollover any brokered deposit, and shall comply with the restrictions on the effective yields on deposits exceeding national averages. In addition, by March 28, 2010, the Bank was required to submit to the FDIC and the OFR a plan to reduce reliance on brokered deposits, which it has done. The Bank has not accepted, renewed or rolled over any brokered deposits since July 2009. With respect to the yield limitations, it is possible that the Bank could experience a decrease in deposit inflows, or the migration of current deposits to competitor institutions, if other institutions offer higher interest rates than those permitted to be offered by the Bank.
 
 
ØDuring the life of the Consent Order, the Bank shall limit its asset growth to 10% per year, unless the FDIC and the OFR consent to greater growth. Under the recently adopted strategic plan, the growth percentage will not exceed these growth parameters.
 
 
ØWhile the Consent Order is in effect, the Bank shall not declare or pay dividends, or any other form of payment representing a reduction in capital without the prior written approval of the FDIC and the OFR. The Bank has never paid a dividend to the holding company.
 
 
ØWithin 30 days of the end of each calendar quarter, the Bank shall furnish written progress reports to the FDIC and the OFR detailing the form, manner, and results of any actions taken to secure compliance. The Bank has, and will continue to prepare and submit such reports.
 
 
On February 2, 2011, the Bank received a Supervisory Prompt Corrective Action Directive (the “Directive”), effective as of January 28, 2011 (the “Effective Date”) from the Federal Deposit Insurance Corporation (“FDIC”).  The FDIC issued the Directive due to the Bank’s failure to submit an acceptable capital restoration plan to the FDIC, the deteriorating condition of the Bank and management’s failure to improve the condition of the Bank.  The Directive requires that: (1) within 30 days of the Effective Date (by February 27, 2011), the Bank must comply with the requirements of its Consent Order by attaining a Tier 1 Leverage Capital Ratio of 8% and a Total Risk Based Capital Ratio of 11% and (2) within 10 days of the Effective Date (extended to February 11, 2011) submit an acceptable capital restoration plan to the FDIC, which expressly provides that the Bank will attain such capital levels.  An updated capital restoration plan was submitted on February 11, 2011.
 
 
The Directive further requires that if the Bank does not increase its capital to such levels by February 27, 2011, the Bank must take any necessary action for the Bank to be acquired by, or merged into, another financial institution.
 
 
If the Bank fails to satisfy the requirements of the Directive, it is likely that the FDIC or the Florida Office of Financial Regulation will take further regulatory enforcement action against the Bank, including the closure of the Bank and the placement of it into receivership with the FDIC.
 
 

(continued)
SMALL BHC LGOG


The Directive also prohibits the Bank from: (1) making any payments on its subordinated debt or paying any capital distributions or dividends; (2) providing certain compensation to senior executive officers or excessive compensation or bonuses generally; (3) accepting, renewing or rolling over any brokered deposits; (4) paying interest on deposits in excess of FDIC-established market rates; and (5) acquiring any interest in any company, establishing any branches, engaging in any new line of business, entering into any material transaction outside the ordinary course of business, extending credit for any highly leveraged transaction, amending its Articles of Incorporation or Bylaws, materially changing its accounting methods, or engaging in certain transactions with affiliates (including the holding company), without the FDIC’s prior approval.  Furthermore, the Directive requires the Bank to alter, reduce or terminate any activity the FDIC determines poses excessive risk to the Bank.


Market Risk
 
 
Market risk is the risk of loss from adverse changes in market prices and rates.  We do not engage in securities trading or hedging activities and do not invest in interest rate derivatives or enter into interest rate swaps. Our market risk arises primarily from interest rate risk inherent in our loan and deposit-taking activities.  To that end, we actively monitor and manage our interest rate risk exposure.  The measurement of market risk associated with financial instruments is meaningful only when all related and offsetting on- and off-balance-sheet transactions are aggregated, and the resulting net positions are identified. Disclosures about the fair value of financial instruments, which reflect changes in market prices and rates, can be found in Note 8 of Notes to Consolidated Financial Statements.
 
 
The primary objective in managing interest rate risk is to maximize earnings and minimize the potential adverse impact of changes in interest rates on our net interest income and capital, while adjusting our asset-liability structure to obtain the maximum yield-cost spread on that structure.  We rely primarily on our asset-liability structure to manage interest rate risk.  However, a sudden and substantial decrease in interest rates may adversely impact our earnings, to the extent that the interest earning assets and interest bearing liabilities do not change at the same speed, to the same extent, or on the same basis.


Asset and Liability Structure
 
 
Our asset and liability management program establishes and implements various internal asset-liability decision processes, as well as communications and control procedures to aid us in managing our operations.  We believe that these processes and procedures provide us with better capital planning, asset mix and volume controls, loan-pricing guidelines, and deposit interest rate guidelines which should result in tighter controls and less exposure to interest rate risk.
 
 
The matching of assets and liabilities may be accomplished in part by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring an institution’s interest rate sensitivity “gap.”  An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period.  The interest rate sensitivity gap is defined as the difference between interest earning assets and interest bearing liabilities maturing or repricing within a given time period.  The gap ratio is computed as the amount of rate sensitive assets less the amount of rate sensitive liabilities divided by total assets.  A gap is considered positive when the amount of interest rate sensitive assets exceeds interest rate sensitive liabilities.  A gap is considered negative when the amount of interest rate sensitive liabilities exceeds interest rate sensitive assets.  During a period of rising interest rates, a negative gap would adversely affect net interest income, while a positive gap would result in an increase in net interest income.  During a period of falling interest rates, a negative gap would result in an increase in net interest income, while a positive gap would adversely affect net interest income.
 
 
     In order to minimize the potential for adverse effects of material and prolonged increases in interest rates on the results of operations, we continue to monitor asset and liability management policies to better match the maturities and repricing terms of our interest earning assets and interest bearing liabilities.  Such policies have consisted primarily of emphasizing the origination of adjustable-rate loans; maintaining a stable core deposit base; and maintaining a significant portion of liquid assets consisting primarily of cash and short-term securities.
 
 
(continued)
SMALL BHC LGOG
 

The following table sets forth certain information relating to interest earning assets and interest bearing liabilities at December 31, 2010, that are estimated to mature or are scheduled to reprice within the period shown (dollars in thousands):


     
More
  
More
          
     
than One
  
than Five
          
     
Year and
  
Years and
  
Over
      
 
One Year
  
Less than
  
Less than
  
Fifteen
      
 
or Less
  
Five Years
  
Fifteen Years
  
Years
  
Total
  
Loan portfolio (1):
                    
Commercial and industrial
 $ 32,065   $ 22,851   $ 4,087   $ -   $ 59,003  
Commercial real estate
   21,549     57,642     13,147     497     92,835  
Consumer
   2,659     3,362     154     -     6,175  
Residential real estate
   2,218      6,603      361      -     9,182  
                               
Total loans
    58,491     90,458     17,749      497     167,195  
                               
Interest bearing deposits with banks
   10,031     -     -     -     10,031  
Federal funds sold
   104     -     -     -     104  
Federal Home Loan Bank stock
   -     -     -     1,087     1,087  
Securities (2)
    -      97     15,469     22,165     37,731  
                               
Total rate-sensitive assets
    68,626     90,555     33,218     23,749     216,148  
                               
Deposit accounts (3):
                              
Money market deposits
   36,177     -     -     -     36,177  
NOW deposits
   9,276     -     -     -     9,276  
Savings deposits
   6,013     -     -     -     6,013  
Certificates of deposit
    86,681     51,883      -     -     138,564  
                               
Total deposit accounts
   138,147     51,883     -     -     190,030  
                               
Federal Home Loan Bank advances
    10,500     4,100      -     -      14,600  
                               
Total rate-sensitive liabilities
    148,647     55,983     -     -     204,630  
                               
GAP (repricing differences)
 $ (80,021 ) $ 34,572   $ 33,218   $ 23,749   $ 11,518  
                               
Cumulative GAP
 $ (80,021 ) $ (45,449 ) $ (12,231 ) $ 11,518        
                               
Cumulative GAP/total assets
    (34.43 )%   (19.55 )%   (5.26 )%    4.96 %      
 
 
(1)
In preparing the table above, adjustable-rate loans are included in the period in which the interest are next scheduled to adjust rather than in the period in which the loans mature.  Fixed-rate loans are scheduled, including repayment, according to their maturities.
(2)
Securities are scheduled through the maturity or call dates.
(3)
Money-market, NOW, and savings deposits are regarded as readily accessible withdrawable accounts.  All other time deposits are scheduled through the maturity dates.

 
SMALL BHC LGOG

The following table reflects the contractual principal repayments by period of the loan portfolio at December 31, 2010 (in thousands):
 
 
   
Commercial
  
Commercial
          
   
and
  
Real
  
Residential
      
Years Ending
  
Industrial
  
Estate
  
Real Estate
  
Consumer
  
December 31,
  
Loans
  
Loans
  
Loans
  
Loans
  
                   
2011
   $ 19,967   $ 15,107   $ 4,360   $ 3,563  
2012
     7,806     7,551     1,914     1,442  
2013
     4,865     6,324     897     667  
2014-2015     7,028     9,265     1,036     388  
2016-2017     4,003     8,654     631     62  
2018 & beyond
     15,334     45,934     344     53  
                             
Total
   $ 59,003   $ 92,835   $ 9,182   $ 6,175  

 
Of the $124.2 million of loans due after 2011, 19.38% of such loans have fixed interest rates and 80.62 % have adjustable interest rates.

 
The following table sets forth total loans originated and repaid during the period ended December 31 (in thousands):
 
 
Originations:
2010
  
  2009
  
         
Commercial and industrial loans
 $ 5,153   $ 16,764  
Commercial real estate loans
   511     14,202  
Consumer loans
   894     4,411  
Construction and development loans
   59     -  
   Residential real estate loans
    952      790  
             
Total loans originated
   7,569     36,167  
             
Principal reductions and participations sold
   (18,895 )   (21,943 )
             
(Decrease) increase in total loans
 $ (11,326 ) $ 14,224  
 
 
Deposit Activities and Other Sources of Funds
 
 
Deposits are the major source of funds for our lending and investment activities.  In addition, we also generate funds from loan principal repayments and prepayments, and from the maturities and cash flow of investment securities.  Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by general interest rates and money-market conditions.  Borrowings from the Federal Home Loan Bank of Atlanta (the “FHLB”) may be used on a short-term basis to compensate for reductions in the availability of funds from other sources, or for long-term funding purposes. We also have lines of credit extended by the Federal Reserve Bank to utilize for overnight cash flow needs.  Longer-term funding is available through a Repurchase Agreement, which is set-up with a correspondent bank.  Repurchase agreements as a funding source were not utilized in 2010 or 2009.
 
 
Deposit instruments include NOW accounts, demand deposit accounts, money-market accounts, statement savings accounts and certificates of deposit.  Deposit account terms vary, with the principal differences being the minimum balance deposit, early withdrawal penalties and interest rate.  We review our deposit mix and pricing on a frequent basis.
 

(continued)
SMALL BHC LGOG
 

We believe that we are competitive in the type of accounts and interest rates we offer on our deposit products, although deposit pricing continues to be a challenge.  We determine deposit interest rates based on a number of conditions, including rates paid by competitors, rates on U.S. Treasury securities, rates offered on various FHLB advance programs, and the deposit growth rate we are seeking to achieve.
 
 
In 2010, matured brokered deposits of $26.3 million and public funds of $3.5 million were repaid. This decrease in liquidity has resulted in an increase in wholesale funding sources, which has placed further pressure on deposit costs and the net-interest margin.

 
We may use premiums to attract new deposit accounts.  Such premiums would be reflected in an increase in our advertising and promotion expense, as well as our cost of funds.  We also actively solicit business checking accounts and individual retirement accounts.
 
 
The following table shows the distribution of, and certain other information relating to deposit accounts by type (dollars in thousands):
 

   
At December 31,
  
   
2010
    
2009
    
2008
  
       
% of
        
% of
        
% of
  
   
Amount
  
Deposits
    
Amount
  
Deposits
    
Amount
  
Deposits
  
Demand deposits
   $ 18,336     8.80 %   $ 18,925     8.75 %   $ 19,492     9.71 %
Money-market deposits
     36,177     17.36       40,424     18.68       30,262     15.08  
NOW deposits
     9,276     4.45       14,270     6.60       5,039     2.51  
Savings deposits
     6,013      2.89       5,997      2.77       4,157      2.07  
                                           
Subtotal
     69,802      33.50       79,616      36.80       58,950      29.37  
                                           
Certificate of deposits:
                                          
0%- 0.99 %     10,891     5.23       748     .34       23     .01  
1.00% - 1.99 %     72,601     34.84       38,056     17.59       140     .07  
2.00% - 2.99 %     37,459     17.98       56,831     26.26       11,735     5.85  
3.00% - 3.99 %     7,692     3.69       12,659     5.85       48,016     23.93  
4.00% - 4.99 %     1,948     .93       15,140     7.00       59,287     29.54  
5.00% - 5.99 %     7,973      3.83       13,324      6.16       22,532      11.23  
                                             
Total certificates of deposit (1)
     138,564      66.50       136,758      63.20       141,733      70.63  
                                             
Total deposits
   $ 208,366     100.00 %   $ 216,374     100.00 %   $ 200,683     100.00 %
 

 
(1)  
Included individual retirement accounts (“IRAs”) totaling $6.9, $5.0 and $4.3 million at December 31, 2010, 2009, and 2008 all of which are in the form of certificates of deposit.

 

SMALL BHC LGOG
 

The following table presents by various interest rate categories the amounts of certificates of deposit at December 31, 2010, which mature during the periods indicated (in thousands):

   
Year Ending December 31,
  
   
2011
  
2012
  
2013
  
2014
  
2015
  
Total
  
                           
0% - 0.99 %   $ 10,663   $ 228   $ -   $ -   $ -   $ 10,891  
1.00% - 1.99 %     51,038     17,662     3,690     211     -     72,601  
2.00% - 2.99 %     19,899     8,662     4,382     1,788     2,728     37,459  
3.00% - 3.99 %     1,253     4,445     1,340     654     -     7,692  
4.00% - 4.99 %     327     1,321     300     -     -     1,948  
5.00% - 5.99 %     3,501     4,472     -     -     -     7,973  
Total certificates of deposit
   $ 86,681   $ 36,790   $ 9,712   $ 2,653   $ 2,728   $ 138,564  
 
 
Jumbo certificates ($100,000 and over) mature as follows (in thousands):
 
 
 
 December 31,
  
 
2010
  
2009
  
2008
  
             
Due three months or less
 $ 9,518   $ 6,922   $ 11,778  
Due over three months to six months
   7,512     4,493     4,698  
Due over six months to one year
   13,678     16,044     22,404  
Due over one year to five years
   15,003     17,243     16,716  
                   
  $ 45,711   $ 44,702   $ 55,596  
 
 
Other Borrowings
 
 
        The following table illustrates the types, available amounts and outstanding balances of our sources of other borrowings (dollars in thousands) as of December 31, 2010. All borrowings require adequate collateral, such as unpledged investment securities or loans.
 
 
Type of Borrowing
Outstanding
  
Line Amount
  
Available
  
             
Repurchase Agreement
 $ -   $ 5,000   $ 5,000  
FHLB Advances
   14,600     14,600     -  
FRB Discount Window
   -     23,454     23,454  
  $ 14,600   $ 43,054   $ 28,454  
 
 

Interest Rate Sensitivity
 
 
        Our operating results depend primarily on our net interest income, which is the difference between interest income on interest earning assets and interest expense on interest bearing liabilities, consisting primarily of deposits.  Net interest income is determined by the difference between yields earned on interest earning assets and rates paid on interest bearing liabilities (“interest rate spread”) and the relative amounts of interest earning assets and interest bearing liabilities.  Our interest rate spread is affected by regulatory, economic, and competitive factors that influence interest rates, loan demand, and deposit flows.  In addition, our operations are also affected by the level of non-performing loans and foreclosed assets, as well as the level of our non-interest income, and our non-interest expenses, such as salaries and employee benefits, occupancy and equipment costs and income taxes.




    (continued)
SMALL BHC LGOG

 
The following table sets forth, for the years indicated, information regarding: (i) the total dollar amount of interest and dividend income from interest earning assets and the resultant average yield; (ii) the total dollar amount of interest expense on interest bearing liabilities and the resultant average costs; (iii) net interest/dividend income; (iv) interest rate spread; and (v) net interest margin.  Average balances are based on average daily balances (dollars in thousands):
 

 
Year Ended December 31,
  
 
2010
  
2009
  
2008
  
     
Interest
  
Average
      
Interest
  
Average
      
Interest
  
Average
  
 
Average
  
and
  
Yield/
  
Average
  
and
  
Yield/
  
Average
  
and
  
Yield/
  
 
Balance
  
Dividends
  
Rate
  
Balance
  
Dividends
  
Rate
  
Balance
  
Dividends
  
Rate
  
Interest earning assets:
                                    
Loans
 $ 175,710     10,589     6.03 % $ 189,672     11,287     5.95 % $ 185,005     12,988     7.02 %
Securities
   35,278     1,285     3.64     34,961     1,468     4.20     13,608     673     4.95  
Other interest earning assets (1)
   19,015     46     .24     8,894     23     .26     7,063     141     2.00  
Total interest earning assets
   230,003     11,920     5.18     233,527     12,778     5.47     205,676     13,802     6.71  
Non-interest earning assets
   19,953                 26,034                 12,065              
                                                       
Total assets
 $ 249,956               $ 259,561               $ 217,741              
                                                       
Interest bearing liabilities:
                                                      
Savings, NOW and money-market deposits
   55,235     536     .97     58,070     986     1.70     38,292     976     2.55  
Certificates of deposit
   144,564     3,415     2.36     143,781     4,986     3.47     133,180     5,961     4.48  
Other borrowings
    15,206     249     1.64      11,250     243     2.16     552     14     2.54  
                                                       
Total interest bearing liabilities
   215,005     4,200     1.95     213,101     6,215     2.92     172,024     6,951     4.04  
                                                       
Demand deposits
   17,684                 21,640                 22,765              
Non-interest bearing liabilities
   5,779                 2,758                 1,640              
Stockholders' equity
   11,488                 22,062                 21,312              
                                                       
Total liabilities and stockholders' equity
 $ 249,956               $ 259,561               $ 217,741              
                                                       
Net interest income
       $ 7,720               $ 6,563               $ 6,851        
                                                       
Interest rate spread (2)
               3.23 %               2.55 %               2.67 %
                                                       
Net interest margin (3)
               3.36 %               2.81 %               3.33 %
                                                       
Ratio of average interest earning assets to average interest bearing liabilities
   1.07                 1.10                 1.20              

        (1) 
Other interest earning assets included federal funds sold, Federal Home Loan Bank stock and interest bearing deposits with banks.
        (2)
Interest rate spread represents the difference between the average yield on interest earning assets and the average rate of interest bearing liabilities.
        (3)
Net interest margin is net interest income divided by total average interest earning assets.
 
 
 

SMALL BHC LGOG
 
Rate/Volume Analysis
 
 
The following table sets forth certain information regarding changes in interest income and interest expense for the years indicated.  For each category of interest earning assets and interest bearing liabilities, information is provided on changes attributable to (1) changes in rate (change in rate multiplied by prior volume), (2) changes in volume (change in volume multiplied by prior rate) and (3) changes in rate-volume (change in rate multiplied by change in volume).
 
 
 
 
 
Year Ended December 31, 2010 vs. 2009
  
Year Ended December 31, 2009 vs. 2008
  
 
Increase (Decrease)
  
Increase (Decrease)
  
         
Rate/
              
Rate/
      
 
    Rate
  
 Volume
  
Volume
  
Total
  
    Rate
  
 Volume
  
Volume
  
Total
  
 
(In thousands)
  
(In thousands)
  
Interest earning assets:
                                
Loans
 $ 143   $ (830 ) $ (11 ) $ (698 ) $ (1,979 ) $ 328   $ (50 ) $ (1,701 )
Securities
   (194 )   13     (2 )   (183 )   (102 )   1,057     (160 )   795  
Other interest earning assets
   (1 )   26     (2 )   23     (123 )   37     (32 )   (118 )
                                                 
Total
   (52 )   (791 )   (15 )   (858 )   (2,204 )   1,422     (242 )   (1,024 )
                                                 
Interest bearing liabilities:
                                                
Deposits:
                                                
Savings, money-market
 and NOW deposits
   (423 )   (48 )   21     (450 )   (326 )    504     (168 )   10  
Certificates of deposit
   (1,589 )   27     (9 )   (1,571 )   (1,343 )   475     (107 )   (975 )
Other borrowings
   (58 )    85     (21 )    6     (2 )    272     (41 )   229  
                                                 
Total
   (2,070 )    64     (9 )   (2,015 )   (1,671 )   1,251     (316 )   (736 )
                                                 
Net change in net interest income
 $ 2,018   $ (855 ) $ (6 ) $ 1,157   $ (533 ) $  171   $ 74   $ (288 )


Comparison of Years Ended December 31, 2010 and 2009
 
 
General. Net losses for the year ended December 31, 2010, were $8.0 million or $(4.05) per basic and diluted common share compared to net loss of $9.2 million or ($4.66) per basic and diluted common share for the year ended December 31, 2009. This decrease in the net loss was primarily due a decrease in interest expense of $2.0 million, an increase in non-interest income of $815,000, and a decrease in income tax expense of $1.1 million in 2010, partially offset by a decrease in interest income of $858,000, an increase in the provision for loan losses of $720,000 and an increase in non-interest expense of $1.1 million.  The prolonged recession in our state and the country as a whole have resulted in a continued decline in the real estate market, loss of jobs, foreclosures and business failures.  As a result of these factors, and in view of the lengthened expectations for a further weakened economy, we have significantly increased our provision for loan losses.
 

 
Interest Income. Interest income decreased to $11.9 million for the year ended December 31, 2010, from $12.8 million for the year ended December 31, 2009. Interest income on loans decreased to $10.6 million from $11.3 million due to a decrease in the average loan portfolio balance in 2010, partially offset by an increase in the weighted-average yield earned on the portfolio for 2010. Interest on securities decreased to $1.3 million in 2010, from $1.5 million in 2009, due to a decrease in the average yield earned in 2010, partially offset by an increase in the average portfolio balance in 2010. Interest on other interest earning assets increased to $46,000 for the year ended December 31, 2010, from $23,000 for the year ended December 31, 2009, primarily due to an increase in the average balance in 2010.



(continued)
SMALL BHC LGOG
 
 
Interest Expense. Interest expense decreased to $4.2 million in 2010 from $6.2 million in 2009.  Interest   expense decreased due to a decrease in the weighted-average rate paid on liabilities, partially offset by an increase in average interest bearing liabilities in 2010.
 
 
Provision for Loan Losses. The provision for loan losses is charged to operations to bring the total allowance to a level we deem appropriate and is based upon historical experience, the volume and the type of lending we conduct.  In addition, industry standards, the amounts of non-performing loans, general economic conditions, particularly as they relate to our market area, and other factors related to the collectibility of our loan portfolio were considered.  The provision for loan losses increased to $5.7 million in 2010 from $5.0 million in 2009. The allowance for loan losses increased to $4.8 million at December 31, 2010 from $4.7 million at December 31, 2009. The increase was due to an increase in charge-offs and required reserves on loans in 2010, partially offset by a decrease in the loan portfolio during the year. Management believes that the allowance for loan losses of $4.8      million is adequate at December 31, 2010.
 
 
Non-interest Income. Non-interest income increased to $2.0 million in 2010 from $1.2 million in 2009. This was primarily a result of an increase in the gains on the sale of securities available for sale and no write-down of other assets in 2010, partially offset by a decrease in gains on the sale of loans held for sale.
 
 
Non-interest Expense. Total non-interest expense increased to $11.6 million for the year ended December 31, 2010, compared to $10.5 million in 2009.  This was primarily due to increases in data processing, supplies, professional fees (as a result of an increase in problem assets), FDIC insurance, and expenses and losses related to foreclosed assets, partially offset by decreases in employee compensation and benefits, advertising and occupancy.
 
 
Income Taxes. The adjusted income tax for 2010 decreased to $372,000, from the income tax expense of $1.5 million for 2009.

 
 
Comparison of Years Ended December 31, 2009 and 2008
 
 
General. Net losses for the year ended December 31, 2009, were $9.2 million or ($4.66) per basic and diluted common share compared to net loss of $3.0 million or ($1.46) per basic and diluted common share for the year ended December 31, 2008. This increase in the net loss was primarily due to a $4.4 million accounting charge to record a deferred tax asset valuation allowance, which resulted in income tax expense of $1.5 million in 2009, compared to a tax benefit of $1.8 million in 2008, an increase in the provision for loan losses of $900,000, a decrease in interest income of $1.0 million,  and an increase in non-interest expense of $2.0 million, partially offset by and an increase in non-interest income of $315,000, and a decrease in interest expense of $736,000.  In addition to the Company’s growth, the economic downturns both in our State and the country as a whole have resulted in a continued decline in the real estate market, loss of jobs, foreclosures and business failures.  As a result of these factors, and in view of the lengthened expectations for a further weakened economy, we have significantly increased our provision for loan losses.
 
 
Interest Income.  Interest income decreased to $12.8 million for the year ended December 31, 2009, from $13.8 million for the year ended December 31, 2008. Interest income on loans decreased to $11.3 million from $13.0 million due to a decrease in the weighted-average yield earned on the portfolio for 2009, partially offset by an increase in the average loan portfolio balance for the year ended December 31, 2009. Interest on securities increased to $1.5 million in 2009, from $673,000 in 2008, due to an increase in the average portfolio balance in 2009, partially offset by a decrease in the average yield earned. Interest on other interest earning assets decreased to $23,000 for the year ended December 31, 2009, from $141,000 for the year ended December 31, 2008, primarily due to a decrease in the average yield earned in 2009, partially offset by an increase in the average balance in 2009.
 
 
Interest Expense. Interest expense decreased to $6.2 million in 2009 from $7.0 million in 2008.  Interest   expense decreased due to a decrease in the weighted-average rate paid on liabilities, partially offset by an increase in average interest bearing liabilities in 2009.
 
 
 

(continued)
 
22
SMALL BHC LGOG
 
 
Provision for Loan Losses. The provision for loan losses is charged to operations to bring the total allowance to a level we deem appropriate and is based upon historical experience, the volume and the type of lending we conduct.  In addition, industry standards, the amounts of non-performing loans, general economic conditions, particularly as they relate to our market area, and other factors related to the collectibility of our loan portfolio were considered.  The provision for loan losses increased to $5.0 million in 2009 from $4.1 million in 2008. The allowance for loan losses increased to $4.7 million at December 31, 2009 from $2.6 million at December 31, 2008. The increase in the allowance was due to the increase in the loan portfolio during the year, as well as an increase in non-performing loans in 2009. Management believes that the allowance for loan losses of $4.7 million is adequate at December 31, 2009.

Non-interest Income. Non-interest income increased to $1.2 million in 2009 from $874,000 in 2008. This was primarily a result of increases in service charges on deposit accounts, and gains on the sale of loans held for sale and securities available for sale, partially offset by the $548,000 corporate stock write down representing the Company’s investment in 200 shares of common stock of Silverton Bank, N.A. in 2009. This common stock was recorded as an other asset and not considered part of the Company’s investment portfolio.
 
 
Non-interest Expense. Total non-interest expense increased to $10.5 million for the year ended December 31, 2009, compared to $8.5 million in 2008.  This was primarily due to increases in professional fees (as a result of an increase in problem assets), FDIC insurance, and expenses and losses related to foreclosed assets, partially offset by decreases in employee compensation and benefits, supplies and advertising.
 
 
Income Taxes. As a result of a $4.4 million charge related to the recording of a deferred tax asset valuation allowance, the adjusted income tax was $1.5 million for 2009, compared to an income tax benefit of $1.8 million for 2008.
 

 
Commercial Real Estate Lending
 
The bank has significant exposure to commercial real estate loans.
 
 
Loan extensions.  On occasion, the bank may extend such loans at or near original maturity and, due to the existence of guarantees, not consider them to be impaired. As of December 31, 2010, the bank had fewer than ten loans that would be classified in this category. Terms vary by the individual circumstances, guarantor strength and collateral. Management typically looks for some improvement in the bank’s position in exchange for a renewal. This improvement may come in the form of a principal reduction, revised amortization and/or additional conditions agreed upon via a written forbearance agreement. The bank has offered some of these borrowers periods of interest-only payment (typically one year or less) or some other reduced amortization, but this is not always the case. None of these loans would be considered collateral dependent.
 
 
Furthermore, the bank never extends loan terms solely due to the existence of a guarantee. A loan extension would be considered a troubled debt restructuring if the bank granted a distressed borrower reduced payment terms for six months or longer. The bank may offer such terms at the same or a reduced rate to allow for improved cash flow. The bank does not typically offer reduced payment terms without revaluating the credit.
 
 
       Evaluation of guarantors. The bank requires personal guarantees on all commercial real estate loans, except a small number of loans to non-profit organizations where guarantees are not available. A cash flow analysis is performed on the guarantor and the project, along with a consolidated analysis of the entire credit relationship. Information used in this review is collected from personal financial statements, credit reports and tax returns as well as any other available information. A guarantor’s cash flow, liquidity, financial obligations, net worth, payment history and any collections, judgments or other adverse filings are reviewed. When originating new loans the bank generally requires that personal financial statements be no older than one month from application, but in no case older than six months. Underwriting requires the last three years of complete tax returns and extensions if the most recent return is not available. Financial statements and W-2’s are used to supplement this information when the tax returns are stale. The bank does not make new loans where the guarantor is outside of a tax filing extension period and has not provided a current return. Updated financial information is required, and loans are reviewed, at least annually.

 
 
(continued)
 
23
SMALL BHC LGOG
 
 
        Collection from guarantors.  Management has often found that the threat or filing of a suit will bring a guarantor to commence settlement negotiations. In these cases the bank has occasionally considered and accepted the release of a guarantee in exchange for the payment of an expected deficiency. The bank has also released guarantees in exchange for deeds-in-lieu and voluntary foreclosures. In these instances a current certified financial disclosure is obtained from the guarantor. The bank considers the guarantor’s assets, cash flow, the size of any expected deficiency and the cost of litigation to determine whether it is appropriate to release a guarantee or whether to require an additional payment in exchange for a release.

Management has classified the bank’s experience pursuing guarantors since 2007 into three categories: Resolved Satisfactorily, Resolved Unsatisfactorily and Pending. Both categories referred to as Resolved include any relationship where the bank has either come to an agreement with the borrower, come to a settlement, completed litigation or is otherwise very close to settling the entire relationship. Loans accounted for in the Satisfactory subset of Resolved are where the borrower/guarantor is still in compliance with an agreement or where the bank has been able to take possession of collateral to recover at least 90% of the bank’s exposure, with or without additional guarantor support. Some of these have required a series of simple forceful discussions, others have required varying degrees of legal involvement and others have required court action. Many of these did not require a change in terms. A Resolved Unsatisfactorily situation is one were the bank has either completed litigation or reached a settlement where the 90% recovery threshold has not been met. Pending relationships are almost all in litigation currently.
 
 
         In the table below, the year correlates to the year the borrower first began having financial difficulty. Some negotiations have carried on through multiple years. The large jump in 2008 and then the subsequent decline are noteworthy. This is especially true in 2010 where new issues were limited to $4.2MM and all of these were resolved satisfactorily. Almost all of the bank’s current issues have been ongoing for several years (dollars in millions, totals may not reconcile due to rounding).
 
 
 
Status as of December 31, 2010
  
 
Resolved Satisfactorily
  
Resolved Unsatisfactorily
  
Pending
  
Totals
  
  #  
Approximate
Amount
   #  
Approximate
Amount
   #  
Approximate
Amount
   #  
Approximate
Amount
  
2007
 14   $ 5.6   7   $ 2.4   0   $ 0   21   $ 7.9  
2008
 46     24.5   13     8.0   2     2.5   61     35.0  
2009
 51     16.5   16     4.2   3     1.9   70     22.7  
2010
 4     4.2   0     0   0     0   4     4.3  
Total
 115   $ 50.8   36   $ 14.6   5   $ 4.4   156   $ 69.9  
 
 
Updating appraisals. The bank obtains updated appraisals at least annually for non-accrual loans. The bank’s management regularly monitors a variety of local and national economic data such as unemployment, foreclosures and current sales prices on various types of properties. When the bank observes continued deterioration or other issues within any of these factors management may choose to obtain an earlier valuation, such as a comparable market analysis or updated appraisal. The bank’s Special Assets Department also closely monitors comparable sales on properties similar to the collateral on non-accrual loans. All appraisals are reviewed for accuracy by the bank’s credit department and the responsible loan officer. The bank does not make adjustments to appraised values. If a discrepancy is perceived with an appraisal, it is discussed with the appraiser and the appraiser may decide to adjust the value if he or she agrees with the bank’s comments. The bank’s allowance for loan losses calculations are always based on current appraisals. The bank’s credit department is independent from the lending staff and provides an additional level of oversight in the process.
 
 
Out of market lending. FPB operates as a community bank; as such all of the bank’s loans are located in the South Florida markets, with one exception in an out-of-area participation. The out-of-area participation is nonperforming and is currently controlled by the FDIC. The bank has a 1.77% participation ownership in this property for a total balance of just under $1,000,000. The bank received an updated appraisal on this property within the last six months and receives monthly progress reports on the resolution of the asset. The property is located in North Florida and an onsite inspection was conducted by one of the bank’s officers.
 
 
(continued)
 
24
SMALL BHC LGOG
 
 
Interest reserves. The bank has made only one loan with an interest reserve within the last twenty-one months.  The original principal was less than $200,000 and the interest reserve was depleted prior to February 2010. The guarantors have the ability to make their payments without cash flow from the collateral property and have been doing so since February 2010. The interest reserve was made as an inducement to approve and was not needed to support the bank’s analysis of the borrower’s and guarantors’ cash flow. This loan is not on non-accrual status.
 
 
During Q2 2010 the bank also entered into an agreement with a borrower to pre-pay a year of amortized payments in advance on another commercial real estate loan relationship that is in workout. The borrower has been making the payments for these loans on its own since 2007, without an interest reserve. This borrower-funded reserve was obtained as an inducement to us to grant an extension and no new bank-lent funds were extended to fund the reserve.
 
 
The bank has only made three other loans with interest reserves in its entire operating history and does not intend to make any in the future, unless such reserves are established by the borrower with funds from sources other than a loan made by the bank.
 
 
Construction Lending
 
 
         All of the bank’s construction loans are underwritten based on project feasibility and historical cash flow. The bank currently has no construction loans in its portfolio and ceased making non-owner occupied construction loans in 2008.
 
 
         The bank performs the same underwriting procedures for construction loans as described above for commercial real estate loans. The bank also requires a current title insurance policy and satisfactory environmental report. Construction is monitored by an independent construction inspector with supervision and review by the responsible officer. A draw request, current construction inspection and construction lien releases are required prior to the dispersal of each draw.
 
 
Restructured Loans
 

A borrower must make at least six consecutive monthly payments on time to be considered eligible to be returned to accrual status once a loan is restructured. Additionally, a borrower would be required to demonstrate the ability to service the debt with financial statements and/or tax returns.
 
 
With respect to troubled debt restructurings, the primary concession the bank offers is a reduced amortization or an interest-only period lasting from one month to one year. The bank rarely grants payment extensions on anything other than small consumer loans. Management has found that payment extensions cause extended periods of delayed amortization that do not work to the benefit of the borrower or the bank. The bank has made a few exceptions when a borrower grants additional collateral that improves the bank’s position beyond the impact of the payment deferral.
 
 
The bank currently has fewer than ten loan relationships where it has granted some interest rate relief. These were granted for limited periods of less than three years. The bank’s policy when granting relief is to have an interest rate floor of 5% and to charge as close to the current market rate as possible for a similar term loan.
 
 
The bank has no instances where it has forgiven principal. There are two instances where the bank has charged-off a note and is not requiring the borrower to make payments until another note is satisfied or collateral is sold. Each of those charge-offs was for less than $100,000.
 
 
The bank typically requires written forbearance agreements for any commercial real estate loan modifications in excess of six months and frequently require them on shorter modifications. The forbearance agreement form requires a borrower to admit a default and grants the bank numerous legal benefits in the event the bank is are forced to foreclose.

 

(continued)
 
25
SMALL BHC LGOG
 
 
 
The bank has had significant success working with borrowers. A modification is discussed thoroughly among the bank’s senior officers prior to making an offer to a borrower. All modifications are vetted and customized to be feasible considering a borrower’s circumstances and to match the best possible circumstances available for the bank. The addition of a written forbearance agreement provides substantial leverage with a borrower and expedites legal action or settlement in the event a borrower is not able to meet the revised terms.

 
Impact of Inflation and Changing Prices
 
 
The financial statements and related data presented herein have been prepared in accordance with U.S. generally accepted accounting principles, which requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.  Unlike most industrial companies, substantially all of our assets and liabilities are monetary in nature.  As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation.  Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services, since such prices are affected by inflation to a larger extent than interest rates.
 
 

Selected Quarterly Results
 
 
Selected quarterly results of operations for the four quarters ended December 31 are as follows (in thousands, except per share amounts):
 
 
 
2010
  
2009
  
 
Fourth
  
Third
  
Second
  
First
  
Fourth
  
Third
  
Second
  
First
  
 
Quarter
  
Quarter
  
Quarter
  
Quarter
  
Quarter
  
Quarter
  
Quarter
  
Quarter
  
                                 
Interest income
 $ 2,844   2,995   3,069   3,012   $ 3,178   3,207   3,174   3,219  
Interest expense
   923   1,024   1,113   1,140     1,311   1,580   1,660   1,664  
Net interest income
   1,921   1,971   1,956   1,872     1,867   1,627   1,514   1,555  
Provision for loan  losses
   1,049   1,477   1,263   1,890     1,046   1,981   863   1,069  
Loss before income taxes
   (2,276 ) (1,464 ) (1,429 ) (2,417 )   (1,771 ) (2,714 ) (1,970 ) (1,234 )
Net loss
   (2,648 ) (1,464 ) (1,429 ) (2,417 )   (5,773 ) (1,580 ) (1,093 ) (762 )
Basic loss per common share
   (1.47 ) (.76 ) (.74 ) (1.22 )   (2.85 ) (.81 ) (.58 ) (.42 )
Diluted loss per common share
   (1.47 ) (.76 ) (.74 ) (1.22 )   (2.85 ) (.81 ) (.58 ) (.42 )
Cash dividends declared per common share
   -   -   -   -     -   -   -   -  



SMALL BHC LGOG
 
(Dollars in thousands, except per share amounts)

 
December 31,
  
 
2010
  
2009
  
Assets
    
Cash and due from banks
 $ 2,094     2,889  
Federal funds sold
   104     -  
Interest bearing deposits with banks
   10,031     10,043  
             
Total cash and cash equivalents
   12,229     12,932  
             
Securities available for sale
   36,266     31,752  
Security held to maturity (market value of $1,482)
   1,465     -  
Loans, net of allowance for loan losses of $4,809 and $4,730
   161,946     184,312  
Premises and equipment, net
   5,006     5,432  
Federal Home Loan Bank stock, at cost
   1,087     1,087  
Foreclosed assets, net
   9,190     6,763  
Accrued interest receivable
   884     1,201  
Bank-owned life insurance
   3,138     3,017  
Other assets
   1,234     1,707  
             
Total assets
 $ 232,445     248,203  
             
Liabilities and Stockholders' Equity
            
Liabilities:
            
Non-interest bearing demand deposits
   18,336     18,925  
Savings, NOW and money-market deposits
   51,466     60,691  
Time deposits
   138,564     136,758  
             
Total deposits
   208,366     216,374  
             
Official checks
   1,218     960  
Federal Home Loan Bank advances
   14,600     14,600  
Other liabilities
   1,549     1,630  
             
Total liabilities
   225,733     233,564  
             
Commitments (Notes 4, 9 and 19)
            
             
Stockholders' equity:
            
Preferred stock, $.01 par value; 2,000,000 shares authorized, 5,800 shares of Series A issued and outstanding
   -     -  
Additional paid-in capital, preferred
   5,800     5,800  
Preferred stock discount
   (337 )   (429 )
Common stock, $.01 par value; 25,000,000 shares authorized, 2,058,047 shares issued and outstanding
   20     20  
Additional paid-in capital, common
   24,469     24,444  
Accumulated deficit
   (22,625 )   (14,572 )
Accumulated other comprehensive loss
   (615 )   (624 )
             
Total stockholders' equity
   6,712     14,639  
             
Total liabilities and stockholders' equity
 $ 232,445     248,203  

See Accompanying Notes to Consolidated Financial Statements.


SMALL BHC LGOG
 
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)

 
Year Ended December 31,
  
Interest income:
2010
  
2009
  
Loans
 $ 10,589     11,287  
Securities
   1,285     1,468  
Other
   46     23  
             
Total interest income
   11,920     12,778  
             
Interest expense:
            
Deposits
   3,951     5,972  
Other borrowings
   249     243  
             
Total interest expense
   4,200     6,215  
             
Net interest income
   7,720     6,563  
Provision for loan losses
   5,679     4,959  
Net interest income after provision for loan losses
   2,041     1,604  
             
Non-interest income:
            
Service charges and fees on deposit accounts
   728     725  
Loan brokerage fees
   117     117  
Gain on sale of loans held for sale
   199     233  
Gain on sale of securities available for sale
   809     520  
Write-down of other assets
   -     (548 )
Income from bank-owned life insurance
   121     120  
Other fees
   30     22  
             
Total non-interest income
   2,004     1,189  
             
Non-interest expenses:
            
Salaries and employee benefits
   3,743     3,820  
Occupancy and equipment
   1,532     1,564  
Advertising
   126     245  
Data processing
   650     589  
Supplies
   199     118  
Professional fees
   981     757  
Expenses on foreclosed assets
   2,254     1,938  
FDIC insurance
   1,075     610  
Other
   1,071     841  
             
Total non-interest expenses
   11,631     10,482  
             
Loss before income taxes
   (7,586 )   (7,689 )
Income tax expense
   372     1,519  
             
Net loss
   (7,958 )   (9,208 )
Preferred stock dividend requirements and amortization of preferred stock discount
   385     382  
Net loss available to common shareholders
 $ (8,343 )   (9,590 )
             
    Net Loss per common share (basic)
 $ (4.05 )   (4.66 )
    Net Loss per common share (diluted)
 $ (4.05 )   (4.66 )
             
Weighted-average number of common shares, basic
   2,058,047     2,058,047  
Weighted-average number of common shares, diluted
   2,058,047     2,058,047  

See Accompanying Notes to Consolidated Financial Statements.
 
 
SMALL BHC LGOG
 
Consolidated Statements of Stockholders' Equity

Years Ended December 31, 2009 and 2010, Continued
(Dollars in thousands)
 
                   
Accumulated
  
 
­­­­­­­­­­­­­­­­­­­­                              Preferred Stock
  
Common Stock
  
Other
  
     
   Additional
        
Additional
  
Compre-
Total
   
Paid-In
    
Paid-In
Accumulated
hensive
Stockholders’
 
Shares
    Amount
Capital
Discount
  
Shares
Amount
Capital
Deficit
Income (Loss)
Equity
Balance at December 31, 2008
5,800
   $  -
5,800
(521)
  
2,058,047
$20
24,393
(4,982)
  186
             24,896
                       
Comprehensive loss:
                      
Net loss
-
-
-
-
  
-
-
-
   (9,208)
-
(9,208)
                       
Net change in unrealized gain on securities available for sale
-
-
-
-
  
-
-
-
-
(810)
(810)
                       
Comprehensive Loss
                    
(10,018)
 
                      
Preferred stock dividend requirements and amortization of preferred stock discount
-
-
-
            92
  
-
-
-
(382)
-
(290)
                       
Share-based compensation
-
-
-
-
  
              -
          -
      51
         -
       -
51
                       
Balance at December 31, 2009
5,800
$ -
5,800
      (429)
  
2,058,047
$20
 24,444
  (14,572)
(624)
         14,639

See Accompanying Notes to Consolidated Financial Statements.

 
SMALL BHC LGOG
 
Consolidated Statements of Stockholders' Equity

Years Ended December 31, 2009 and 2010, Continued
(Dollars in thousands)
 
                   
Accumulated
  
 
­­­­­­­­­­­­­­­­­­­­                       Preferred Stock
  
              Common Stock
  
       Other        
 
     
   Additional
        
Additional
  
Compre-
Total
   
Paid-In
    
Paid-In
Accumulated
hensive
Stockholders’
 
Shares
Amount
Capital
Discount
  
Shares
Amount
Capital
Deficit
Income (Loss)
Equity
Balance at December 31, 2009
 5,800
   $  -
 5,800
 (429)
  
2,058,047
$20
 24,444
  (14,572)
     (624)
            14,639
                       
Comprehensive loss:
                      
Net loss
       -
-
       -
-
  
-
-
-
   (7,958)
                  -
(7,958)
                       
Net change in unrealized loss on securities available for sale, net of tax
       -
-
       -
-
  
-
-
-
          -
                   9
         9
                       
Comprehensive Loss
                    
     (7,949)
 
                      
Preferred stock dividend requirements and amortization of preferred stock discount
         -
-
       -
          92
  
-
-
-
        (95)
                  -
            (3)
                       
Share-based compensation
        -
-
       -
     -
  
              -
          -
          25
          -
                  -
          25
                       
Balance at December 31, 2010
 5,800
$ -
5,800
      (337)
  
2,058,047
$20
  24,469
      (22,625)
      (615)
        6,712
 
See Accompanying Notes to Consolidated Financial Statements

SMALL BHC LGOG
 
Consolidated Statements of Cash Flows
(In thousands)

 
Year Ended December 31,
  
 
2010
  
2009
  
Cash flows from operating activities:
        
Net loss
 $ (7,958 )   (9,208 )
Adjustments to reconcile net loss to net cash used in operating activities:
            
Depreciation and amortization
   433     467  
Provision for loan losses
   5,679     4,959  
Amortization of loan fees, net
   (207 )   (105 )
Deferred income taxes
   -     1,766  
Net amortization of premiums and discounts on securities
   199     154  
Gain on sale of loans held for sale
   (199 )   (233 )
Gain on sale of securities available for sale
   (809 )   (520 )
Proceeds from sale of loans held for sale
   2,989     5,876  
Originations of loans held for sale
   (2,790 )   (5,643 )
Write-down of foreclosed assets
   1,211     880  
Provision for losses on foreclosed assets
   242     -  
Loss on sale of foreclosed assets
   152     142  
Decrease in accrued interest receivable
   317     154  
Decrease in other assets
   473     298  
Increase in official checks and other liabilities
   174     81  
Income from bank-owned life insurance
   (121 )   (120 )
Share-based compensation
   25     51  
             
Net cash used in operating activities
   (190 )   (1,001 )
             
Cash flows from investing activities:
            
Maturities and calls of securities available for sale
   12,125     16,400  
Purchase of securities available for sale
   (58,929 )   (52,041 )
Principal payments on securities available for sale
   2,247     2,919  
Proceeds from sale of securities available for sale
   40,668     33,652  
Principal payments on securities held to maturity
   97     1  
Purchase of securities held to maturity
   (2,568 )   -  
Call of securities held to maturity
   1,000     -  
Net decrease (increase) in loans
   11,326     (14,224 )
Purchase of premises and equipment
   (7 )   (18 )
Purchase of Federal Home Loan Bank stock
   -     (234 )
Purchase of  bank-owned life insurance
   -     (108 )
Proceeds from the sale of foreclosed assets
   1,236     3,213  
Principal reduction in foreclosed assets
   300     -  
             
Net cash provided by (used in) investing activities
   7,495     (10,440 )
             
Cash flows from financing activities:
            
Net (decrease) increase in deposits
   (8,008 )   15,691  
Cash paid to preferred stockholder
   -     (275 )
Proceeds from Federal Home Loan Bank advances
   -     3,500  
             
Net cash (used in) provided by financing activities
   (8,008 )   18,916  
             
Net (decrease) increase in cash and cash equivalents
   (703 )   7,475  
             
Cash and cash equivalents at beginning of year
   12,932     5,457  
             
Cash and cash equivalents at end of year
 $ 12,229     12,932  

 
 
(continued)
SMALL BHC LGOG
 
Consolidated Statements of Cash Flows, Continued
(In thousands)

 
Year Ended December 31,
  
 
2010
  
2009
  
Supplemental disclosure of cash flow information:
        
Cash paid (received) during the year for:
        
Interest
 $ 4,044     6,347  
             
Income taxes
 $ -     (1,011 )
             
Non-cash transactions:
            
Accumulated other comprehensive loss, net change in unrealized loss (gain) on securities available for sale, net of tax
 $ 9     (810 )
             
             
Transfer of loans to foreclosed assets
 $ 5,568     9,284  
             
Preferred dividends payable at beginning of period
 $ 37     21  
             
Preferred dividends payable at end of period
 $ 40     37  
             
Amortization of preferred stock discount
 $ 92     92  
             

See Accompanying Notes to Consolidated Financial Statements.





SMALL BHC LGOG

Notes to Consolidated Financial Statements
 
                December 31, 2009 and 2008 and the Years Then Ended
 
 
(1)  
Summary of Significant Accounting Policies
 
 
 
Organization.  FPB Bancorp, Inc. (the "Holding Company") owns 100% of the outstanding common stock of First Peoples Bank (the "Bank") and the Bank owns 100% of the outstanding common stock of Treasure Coast Holdings, Inc., (collectively referred to as the "Company"). The Holding Company operates as a one-bank holding company and it’s only business activity is the operation of the Bank.  The Bank is a state (Florida)-chartered commercial bank and its deposits are insured up to the maximum amounts by the Federal Deposit Insurance Corporation, which are $250,000 for all qualified deposits, and unlimited for non-interest bearing transaction accounts, through December 30, 2012. The Bank offers a variety of community banking services to individual and corporate customers through its six banking offices located in Port St. Lucie, Stuart, Fort Pierce, Vero Beach and Palm City, Florida.  The newest office opened in May, 2008, on Gatlin Boulevard in Port St. Lucie, Florida.  In addition, the Palm City, Florida office opened in January of 2008 and an 11,000 square foot Operations Center in Jensen Beach, Florida, opened in March of 2007. The new subsidiary, Treasure Coast Holdings, Inc., was incorporated in June 2008 for the sole purpose of managing foreclosed assets.
 
 
 
Going Concern.  The Company’s recent and continuing increases in non-performing assets, continuing high levels of operating expenses related to the credit problems and eroding regulatory capital raise substantial doubt about the Company’s ability to continue as a going concern.  The Company has not complied with its regulatory capital requirements set forth in the Consent Order and Prompt Corrective Action discussed in Footnote 19, Regulatory Matters.  The Company needs to raise substantial additional capital.  Management is evaluating all potential sources of capital to meet the Company’s capital requirements, to include offering stock to outside parties and seeking a strategic merger partner.  There is no guarantee that sufficient capital would be available at acceptable terms, if at all, or that the Company would be able to sell assets at terms favorable enough to accomplish its regulatory capital needs.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 
 
The following is a description of the significant accounting policies and practices followed by the Company, which conform with U.S. generally accepted accounting principles ("GAAP") and prevailing practices within the banking industry.
 
 
 
Basis of Presentation.  The consolidated financial statements include the accounts of the Holding Company, the Bank and its subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

(continued)
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued
 
 
(1)  
Summary of Significant Accounting Policies, Continued
 
 
 
Use of Estimates.  In preparing 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 consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, foreclosed assets and deferred tax assets.
 
 
 
Cash and Cash Equivalents.  For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks, interest bearing deposits with banks and federal funds sold, all of which mature within ninety days.

The Bank may be required by law or regulation to maintain cash reserves in the form of vault cash or in non-interest earning accounts with the Federal Reserve Bank or other qualified banks. At December 31, 2010 and 2009, there was no required reserve balance

 
Securities.  Securities may be classified as either trading, held to maturity or available for sale. Trading securities are held principally for resale and recorded at their fair values.  Unrealized gains and losses on trading securities are included immediately in operations.  Held-to-maturity securities are those which the Company has the positive intent and ability to hold to maturity and are reported at amortized cost.  Available-for-sale securities consist of securities not classified as trading securities nor as held-to-maturity securities. Unrealized holding gains and losses, net of tax, on available-for-sale securities are reported as a net amount in accumulated other comprehensive income. Gains and losses on the sale of available-for-sale securities are determined using the specific-identification method. Premiums and discounts on securities are recognized in interest income using the interest method over the period to maturity.
 
 
 
Loans.  Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balance, adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs.
 
 
 
Commitment fees and loan origination fees are deferred and certain direct origination costs are capitalized. Both are recognized as an adjustment of the yield of the related loan.

For loans amortized at cost, interest income is accrued based on the unpaid principal balance.

 
The accrual of interest on all classes of loans is discontinued at the time the loan is ninety days delinquent unless the loan is well collateralized and in process of collection.  In all cases, all loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.  Past-due status is based on contractual terms of the loan.
 
 
 
All interest accrued but not collected for all classes of loans that are placed on nonaccrual or charged-off is reversed against interest income.  The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
 

 
(continued)
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued
 

(1)  
Summary of Significant Accounting Policies, Continued


 
Loans Held for Sale.  The Company originates loans guaranteed by the U.S. Small Business Administration, the guaranteed portion of which may be sold at a premium.  These loans are carried at the lower of cost or estimated fair value in the aggregate. There were no loans held for sale at December 31, 2010 or 2009.
 
 
 
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 a regular basis by management and is based upon management’s periodic review of the collectibility 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 non-specific loans in all classes, the general component is based on historical loss experience and adjusted for the following qualitative factors economic conditions and other trends or uncertainties that could affect management’s estimate of probable loss.
 
 
A loan is considered impaired when, based on current information and events, it is probable that 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 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.

 
 
 
(continued)
SMALL BHC LGOG
          
Notes to Consolidated Financial Statements, Continued
 
 
(1)  
Summary of Significant Accounting Policies, Continued

 
 
Allowance for Loan Losses, Continued. 
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.  Accordingly, the Bank generally does not separately identify individual consumer and residential real estate loans for impairment disclosures.
 

 
Foreclosed Assets.  Assets acquired through, or in lieu of, loan foreclosures are to be sold and are initially recorded at fair value at the date of foreclosure establishing a new cost basis.  After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of the new cost basis or fair value less costs to sell.  Revenue and expenses from operations are included in the consolidated statement of operations.
 
 
 
Premises and Equipment.  Land is stated at cost.  Building and improvements, leasehold improvements, and furniture, fixtures and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expense are computed using the straight-line method over the estimated useful life of each type of asset or the length of time the Company expects to lease the property, if shorter.
 
 
 
Transfer of Financial Assets.  Transfers of financial assets or a participating interest in an entire financial asset are accounted for as sales, when control over the assets has been surrendered.  Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.  A participating interest is a portion of an entire financial asset that (1) conveys proportionate ownership rights with equal priority to each participating interest holder (2) involves no recourse (other than standard representations and warranties) to, or subordination by, any participating interest holder, and (3) does not entitle any participating interest holder to receive cash before any other participating interest holder.
 
 
 
Income Taxes.  There are two components of income tax expense:  current and deferred.  Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues.  The Company determines deferred income taxes using the liability (or balance sheet) method.  Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.  Deferred income tax expense results from changes in deferred tax assets and liabilities between periods.


 

(continued)
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued
 
 
(1)  
Summary of Significant Accounting Policies, Continued
 
 
 
Income Taxes, Continued

Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination.  The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any.  A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information.  The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment.  Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

On January 1, 2009, the Company adopted accounting guidance relating to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions. As of December 31, 2010 and 2009, the Company recorded a $7.7 million and $4.4 million valuation allowance against the deferred tax asset of $7.9 million and $4.4 million respectively.

The Company recognizes interest and penalties on income taxes as a component of income tax (benefit) expense.

 
Share-Based Compensation. The Company has adopted the fair value recognition provisions of Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic 718,  Stock Compensation ("ASC 718"), and expenses the fair value of any stock options as they vest.  Under the fair value recognition provisions of ASC 718, the Company recognizes stock-based compensation in the accompanying consolidated statement of operations.

 
Off-Balance-Sheet Instruments.  In the ordinary course of business the Company has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, available lines of credit and standby letters of credit.  Such financial instruments are recorded in the consolidated financial statements when they are funded.

 
Loss Per Common Share. Loss per common share has been computed on the basis of the weighted-average number of shares of common stock outstanding during the year.  In 2010 and 2009, outstanding stock options and warrants are not considered dilutive due to the losses incurred by the Company.

 
Fair Value Measurements. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy describes three levels of inputs that may be used to measure fair value:

 
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
 
 
(continued)
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued
 
 
(1)  
Summary of Significant Accounting Policies, Continued
 
 
 
Fair Value Measurements, continued

 
 
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; and model-driven valuations whose inputs are observable or whose significant value drivers are observable. Valuations may be obtained from, or corroborated by, third-party pricing services.
 
 
 
Level 3: Unobservable inputs to measure fair value of assets and liabilities for which there is little, if any market activity at the measurement date, using reasonable inputs and assumptions based upon the best information at the time, to the extent that inputs are available without undue cost and effort.
 
 
 
The following describes valuation methodologies for assets and liabilities measured at fair value
 
 
 
Securities Available for Sale. Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government bonds, certain mortgage products and exchange-traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows.  Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include certain collateralized mortgage and debt obligations and certain high-yield debt securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Securities classified within Level 3 include certain residual interests in securitizations and other less liquid securities.
 
 
 
Impaired Loans.  Estimates of fair value are determined based on a variety of information, including the use of available appraisals, estimates of market value by licensed appraisers or local real estate brokers and the knowledge and experience of the Company's management related to values of properties in the Company's market areas. Management takes into consideration the type, location and occupancy of the property as well as current economic conditions in the area the property is located in assessing estimates of fair value. Accordingly, fair value estimates for impaired loans are classified as Level 3.
 
 
 
Foreclosed Assets. Estimates of fair values are determined based on a variety of information, including the use of available appraisals, estimates of market value by licensed appraisers or local real estate brokers and the knowledge and experience of the Company's senior lending officers related to values of properties in the Company's market areas. These officers take into consideration the type, location and occupancy of the property as well as current economic conditions in the area the property is located in assessing estimates of fair value. Accordingly, the fair values estimates for foreclosed assets are classified as Level 3.



(continued)
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued
 

(1)  
Summary of Significant Accounting Policies, Continued
 
 
 
Fair Values of Financial Instruments. The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices.  However, in many instances, there are no quoted market prices for the Company's various financial instruments.  In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument or may not necessarily represent the underlying fair value of the Company.  The following methods and assumptions were used by the Company in estimating fair values of financial instruments:
 
 
 
Cash and Cash Equivalents.  The carrying amounts of cash and cash equivalents approximate their fair value.
 
 
 
Securities. The fair value for securities are based on the framework for measuring fair value.
 
 
 
Loans.  For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values.  Fair values for fixed-rate mortgage (e.g. one-to-four family residential), commercial real estate and commercial loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are based on the framework for measuring fair value.
 
 
 
Federal Home Loan Bank Stock.  Fair value of the Company's investment in Federal Home Loan Bank stock is based on its redemption value, which is its cost of $100 per share.
 
 
 
Accrued Interest Receivable.  The carrying amounts of accrued interest receivable approximate their fair values.

 
 
Deposit Liabilities.  The fair values disclosed for demand, NOW, money-market and savings deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts).  Fair values for fixed-rate time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregated expected monthly maturities of time deposits.
 
 
 
Federal Home Loan Bank Advances.  The fair value of Federal Home Loan Bank advances are estimated using a discounted cash flow analysis based on the Company's current incremental          borrowing rate for similar types of borrowings.
 
 
 
Off-Balance-Sheet Instruments.  Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing.

 

(continued)
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued
 

(1)  
Summary of Significant Accounting Policies, Continued
 
 
 
Comprehensive Loss.  Accounting principles generally require that recognized revenue, expenses, gains and losses be included in operations.  Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the consolidated balance sheets, such items, along with net loss, are components of comprehensive loss.  The components of other comprehensive loss and related tax effects are as follows (in thousands):
 
 
 
Before
  
Tax
  
After
  
 
Tax
  
Effect
  
Tax
  
Year Ended December 31, 2010:
                  
Holding gains
 $ 818     -     818  
Gains included in net loss
 $ (809 )   -     (809 )
Net unrealized holding gains
 $ 9     -      9  
                   
Year Ended December 31, 2009:
                  
Holding losses
 $ (290 )   -     (290 )
Gains included in net loss
 $ (520 )   -     (520 )
Net unrealized holding losses
 $ (810 )   -     (810 )
 

 
 
Recent Accounting Pronouncements.  In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value Measurements (Topic 820), which amends the guidance for fair value measurements and disclosures.  The guidance in ASU 2010-06 requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. Furthermore, ASU 2010-06 requires a reporting entity to present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs; clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value; and amends guidance on employers' disclosures about postretirement benefit plan assets to require that disclosures be provided by classes of assets instead of by major categories of assets.  The ASU was effective for interim and annual reporting periods beginning January 1, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the rollforward of activity in Level 3 fair value measurements. Those disclosures were effective January 1, 2011 and for interim periods thereafter. In the period of initial adoption, entities will not be required to provide the amended disclosures for any previous periods presented for comparative purposes.  The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

 
In July 2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.  The new disclosures will require significantly more information about credit quality in a financial institution's loan portfolio. This statement addresses only disclosures and does not change recognition or measurement of the allowance.  For public entities, the disclosures as of the end of a reporting period was effective for interim and annual reporting periods ending on December 31, 2010. The disclosures about activity that occurs during a reporting period was effective for interim and annual reporting periods beginning on or after January 1, 2011.  For nonpublic entities, the disclosures are effective for annual reporting periods ending on or after December 15, 2011.  The adoption of the ASU is not expected to have a material impact on the Company's consolidated financial statements.

 
 
(continued)
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued
 
 
(2)  
Securities
 
 
 
Securities have been classified according to management's intention. The carrying amount of securities and their fair values are as follows (in thousands):
 
 
 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Fair
Value
  
At December 31, 2010:
Securities available for sale:
                
Municipal bonds-taxable
 $ 2,059     -     (157 )   1,902  
SBA securities
   2,059     -     (60 )   1,999  
Mortgage-backed securities
   12,969     2     (202 )   12,769  
Collateralized Mortgage Obligation ("CMO") securities
   20,166     -     (570 )   19,596  
Total securities available for sale
 $ 37,253     2     (989 )   36,266  
                         
Security held to maturity -
                        
Mortgage-backed security
 $ 1,465     17     -     1,482  
                         
At December 31, 2009:
Securities available for sale:
                        
U.S. Government agency securities
 $ 14,620     2     (290 )   14,332  
Mortgage-backed securities
   5,182     4     (99 )   5,087  
Asset-backed securities
   6,282     -     (185 )   6,097  
CMO securities
   6,292     -     (56 )   6,236  
Total securities available for sale
 $ 32,376     6     (630 )   31,752  
 
 

 
 
Sales of securities available for sale are summarized as follows (in thousands):
 
 
Year Ended December 31,
  
 
2010
  
2009
  
         
Proceeds received from sales
 $ 40,668   $ 33,641  
             
Gross gains
 $ 809   $ 520  
 
 

 
Information pertaining to securities with gross unrealized losses at December 31, 2010, aggregated by investment category and length of time that individual securities available for sale have been in a continuous loss position, follows (in thousands):
 
 
 
Less Than Twelve Months
  
 
Gross Unrealized Losses
  
Approximate
Fair
Value
  
At December 31, 2010
        
Municipal bonds-taxable
 $ (157 ) $ 1,902  
SBA securities
   (60 )   1,999  
Mortgage-backed securities
   (202 )   12,670  
CMO securities
   (570 )   19,596  
             
Total
 $ (989 ) $ 36,167  


(continued)
SMALL BHC LGOG
     
Notes to Consolidated Financial Statements, Continued
 
 
(2)  
Securities, continued

 
The scheduled maturities of securities at December 31, 2010 are as follows (in thousands):
 
 
 
Available for Sale
   Held to Maturity
 
Amortized
Cost
  
Fair
 Value
    Amortized
Cost
    
 Fair
  Value
               
Due in more than ten years
   2,059     1,902                 -                -
SBA securities
   2 059     1,999                 -                -
Mortgage-backed securities
   12,969     12,769          1,465         1,482
CMO securities
    20,166     19,596            -             -
                   
  $ 37,253   $ 36,266    $  1,465    $  1,482
 

 
 
At December 31, 2010 and 2009, securities with a carrying value of $28,330,000 and $31,332,000, respectively, were pledged for Federal Home Loan Bank advances, to the Federal Reserve Bank for Treasury Tax and Loan (TT&L) transactions, and the State of Florida as collateral for public funds.
 
 
 
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.  Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
 
 
 
 The unrealized losses on twenty-two investment securities available for sale were caused by market conditions.  It is expected that the securities would not be settled at a price less than the par value of the investments. Because the decline in fair value is attributable to market conditions and not credit quality, and because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

 
 
(continued)
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued
 
 
(3)  
Loans
 
 
Our primary source of income is generated from the interest earned on our loan portfolio and fees generated from our lending activities.  We primarily focus our lending activities on commercial real estate lending to small and medium-sized businesses, including professionals, such as physicians, law firms and accountants. Our commercial mortgage loans include loans for acquisition/development, construction or rehabilitation of commercial, multi-family or residential real property.
 
 
 
We also emphasize commercial loans secured by assets other than real estate.  Our target commercial loan market includes companies in the medical services, retail construction, wholesale, manufacturing, and tourism industries. We also offer residential mortgage loans, as well as consumer loans, such as home equity lines of credit.  Our goal is to develop commercial lending opportunities where the loan relationships provide us with opportunities to develop depository relationships and other non-commercial loan relationships.

 
 
We offer Small Business Administration ("SBA"), 7(a) and 504 loans to small businesses throughout our market area. SBA loans are a complement to our focus on strengthening and supporting local communities. SBA loans are generally made pursuant to a federal government program designed to assist small businesses in obtaining financing. The federal government guarantees 75% to 90% of the SBA loan balances as an incentive for financial institutions to make loans to small businesses.  We generally sell the guaranteed portion of the SBA loan at a premium sale price between approximately 5% and 9%.  We had $14.5 million of outstanding SBA loans at December 31, 2010, of which $8.9 million is guaranteed.
 
 
 
The following table summarizes our loan portfolio by type of loan as of the dates indicated (dollars in thousands):
 
 
 
At December 31,
  
 
2010
  
2009
  
         
Commercial and Industrial
 $ 59,003     63,815  
Commercial real estate
   92,835     106,803  
Construction and development
   -     1,081  
Consumer
   6,175     8,329  
Residential real estate
   9,182     9,668  
             
Total loans
   167,195     189,696  
             
Deduct:
            
Deferred loan costs and fees, net
   (440 )   (654 )
Allowance for loan losses
   (4,809 )   (4,730 )
             
Loans, net
 $ 161,946     184,312  


(continued)
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued
 
 
(3)  
Loans, Continued

 
 
The contractual maturity ranges of our loan portfolio and the amount of such loans with fixed and variable interest rates in each maturity range classified by borrower type as of December 31, 2010 is as follows (dollars in thousands):

 
 
One Year or Less
  
After One Through Five Years
  
After
Five Years
  
 
Total
  
     
Commercial and Industrial
 $ 10,108   $ 17,229   $ 31,666   $ 59,003  
Commercial Real Estate
   7,347     8,873     76,615     92,835  
Consumer
   1,613     4,256     306     6,175  
Residential Real Estate
   1,904     4,409     2,869     9,182  
Total loans
 $ 20,972   $ 34,767   $ 111,456   $ 167,195  
                         
Loans with a fixed interest rate
 $ 17,739   $ 23,998   $ 12,401   $ 54,138  
Loans with a variable interest rate
   3,233     10,769     99,055     113,057  
Total loans
 $ 20,972   $ 34,767   $ 111,456   $ 167,195  
 

 
 
As of December 31, 2010, our loan portfolio was composed of approximately 32.38% fixed interest rate loans and 67.62% variable interest rate loans. Scheduled contractual principal repayments do not reflect the actual maturities of loan. The average actual maturity of our loans is substantially less than their average contractual term because of prepayments. The average life of mortgage loans tends to increase when the current mortgage loan rates are substantially higher than rates on existing mortgage loans and, conversely, decrease when current mortgage loans rates are substantially lower than rates on existing mortgages due primarily to refinancing of adjustable rate and fixed rate loans at lower rates.

 
 
An analysis of the change in the allowance for loan losses for the year ended December 31, 2010 follows (in thousands):
 
 
  Year Ended December 31, 2010   
 
Commercial
   and     Industrial
  
Commercial
Real Estate
  
Construction
and
Development
  
Consumer
  
Residential
Real Estate
  
Total
  
2009
  
                             
Beginning balance
 $ 1,712     2,654     18     127     219     4,730     2,552  
Provision for loan losses
   2,706     2,125     (18 )   203     663     5,679     4,959  
Charge-offs
   (2,355 )   (2,856 )   -     (237 )   (343 )   (5,791 )   (2,998 )
Recoveries
    129     8     -     42     12     191     217  
                                           
Ending balance
 $ 2,192     1,931     -     135     551     4,809     4,730  
                                           
Individually evaluated for impairment:
                                          
Recorded investment
 $ 9,224     13,574     -     49     232     23,079     20,586  
Balance in allowance for loan losses
 $ 546     229     -     1     -     776     2,086  
                                           
Collectively evaluated for impairment:
                                          
Recorded investment
 $ 49,779     79,261     -     6,126     8,950     144,116     169,110  
Balance in allowance for loan losses
 $ 1,646     1,702     -     134     551     4,033     2,644  



 
(continued)
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued
 
 
(3)  
Loans, Continued

 
 
An analysis of the change in the allowance for loan losses for the year ended December 31, 2009 follows (in thousands):
 
 
 
Year-ended
December 31, 2009
  
Beginning balance
 $ 2,552  
Provision for loan losses
   4,959  
Charge-offs, net of recoveries
   (2,781 )
       
Ending balance
 $ 4,730  


   The following summarizes the loan credit quality at December 31, 2010 (in thousands):
 
  At December 31, 2010
 
Pass
  
Potential
Problem
  
OLEM
(Other Loans
Especially
Mentioned)
  
Substandard
  
Doubtful
  
Loss
  
Total
Commercial and Industrial:
                          
Equipment secured
 $      6,819   $    754    $       197    $    1,887    $ -    $ -    $      9,657
Real estate secured
      31,245     3,362        1,238      10,154     -     -        45,999
Other
        2,759           -             94           494     -     -          3,347
Total commercial and industrial
  $    40,823    $ 4,116    $    1,529    $  12,535    $ -    $ -    $    59,003
                                         
Commercial Real Estate:                                        
Owner-occupied
 $      46,147    $ 1,762   $    3,112    $    8,930   $ -    $ -    $    59,951
Nonowner-occupied
        16,836      1,186        3,120        3,657     -      -        24,799
Land
        2,524        611        2,380        2,570     -      -          8,085
Total commercial Real Estate
 $     65,507    $ 3,559    $    8,612    $  15,157    $ -     $ -    $   92,835
                                         
Consumer:
                                         
Vehicles and other tangible assets
 $     3,831    $     78    $           -    $         39    $ -    $ -    $      3,948
Other
       2,217            -             10              -     -     -          2,227
    Total consumer $     6,048    $      78    $         10    $         39    $ -    $ -    $      6,175
                                         
Residential Real Estate:
                                        
HELOC
 $     4,029    $        85   $           -    $       268    $ -    $  -    $      4,382
Closed-end
       4,430          162           113             95     -      -         4,800
     Total residential Real Estate $     8,459    $      247    $       113    $       363    $ -    $  -   $
    9,182
                                         
Total
 $ 120,837    $   8,000   $  10,264    $  28,094    $ -   $  -    $ 167,195
 
Internally assigned loan grades are defined as follows:
 
 
 
Pass – a Pass loan’s primary source of loan repayment is satisfactory, with secondary sources very likely to be realized if necessary.  These are loans that conform in all aspects to bank policy and regulatory requirements, and no repayment risk has been identified.
 
 
 
(continued)
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued
 
 
(3)  
Loans, Continued
 
 
 
Potential Problem – a Potential Problem loan is considered performing, but may exhibit some weaknesses that warrant more frequent review by management.
 
 
 
OLEM (Other Loans Especially Mentioned) – an Other Loan Especially Mentioned has potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Company’s credit position at some future date.
 
 
 
Substandard – a Substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
 
 
 
Doubtful – a loan classified Doubtful 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.  The Company fully charges off any loan classified as Doubtful.
 
 
 
Loss – a loan classified Loss is considered uncollectible and of such little value that continuance as a bankable asset is not warranted.  This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.  The Company fully charges off any loan classified as Loss.


 

(continued)
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued
 
 
(3)  
Loans, Continued

 
 
Age analysis of past due loans is as follows at December 31, 2010 (in thousands):
 

 
    Year Ended December 31, 2010  
 
30-59 Days
Past Due
  
60-89 Days
Past Due
  
Greater Than 90 Days
Past Due
  
Total Past Due
  
Current
  
Total Loans
  
Past Due 90 Days or More but Still Accruing
  
Nonaccrual Loans
  
Commercial & Industrial
                                
Equipment-secured
 $ -     101     212     313     9,344   $ 9,657   $ -     1,175  
RE - secured
   314     1,201     2,944     4,459     41,540     45,999     -     4,521  
Other
   6     -     -     6     3,341     3,347     -     524  
Subtotal
 $ 320     1,302     3,156     4,778     54,225   $ 59,003   $ -     6,220  
                                                 
Commercial Real Estate
                                                
Owner-Occupied
 $ 382     976     3,339     4,697     55,254   $ 59,951   $ -     5,369  
Non Owner Occupied
   -     -     -     -     24,799     24,799     -     -  
Other
   -     584     465     1,049     7,036     8,085     -     465  
Subtotal
 $ 382     1,560     3,804     5,746     87,089   $ 92,835   $ -     5,834  
                                                 
Consumer
                                                
Vehicles & Other Tangible
 $ -     66     -     66     3,882   $ 3,948   $ -     39  
Other
   -     -     -     -     2,227     2,227     -     -  
Subtotal
 $ -     66     -     66     6,109   $ 6,175   $ -     39  
                                                 
Residential Real Estate
                                                
HELOC
 $ -     -     160     160     4,222   $ 4,382   $ -     232  
Closed - End
   187     82     -     269     4,531     4,800     -     -  
Subtotal
 $ 187     82     160     429     8,753   $ 9,182   $ -     232  
                                                 
Total
 $ 889     3,010     7,120     11,019     156,176   $ 167,195   $ -     12,325  
 
 

 
Nonaccrual loans and loans past due ninety days or more but still accruing were as follows (in thousands):
 

 
 
At December 31,
2009
   
Nonaccrual loans
 $ 15,083
Past due ninety days or more but still accruing
        907
  $ 15,990


 
(continued)
 
Notes to Consolidated Financial Statements, Continued

 
(3)  
Loans, Continued
 
 
  The following summarizes the amount of impaired loans at December 31, 2010 (in thousands):
 
 
 
Recorded
Investment
  
Unpaid
Principal Balance
  
Related
Allowance
With no related allowance recorded:
          
  Commercial and Industrial
          
  Equipment-secured
 $       487   $       848   $     -
  RE-secured
      3,942        4,380         -
  Other
         447           456         -
      Subtotal
      4,876        5,684         -
  Commercial Real Estate
                
  Owner-occupied
      6,866        7,897         -
  Nonowner -occupied
         264           310         -
  Land
         201           397         -
     Subtotal
      7,331        8,604         -
  Consumer
                
  Vehicles & Other Tangible
           39             39         -
  Other
            -               -         -
     Subtotal
           39             39         -
  Residential Real Estate
                
  HELOC
         232            321         -
  Closed-end
             -                -         -
     Subtotal
         232            321         -
                 
Subtotal no related allowance
   12,478       14,648         -
                 
With allowance recorded:
                
  Commercial and Industrial
                
  Equipment-secured
         974         1,065     257
  RE-secured
      3,374         3,374     289
  Other
             -                -         -
     Subtotal
      4,348         4,439     546
  Commercial Real Estate
                
  Owner-occupied
      3,757         3,757     157
  Nonowner -occupied
      2,486         2,486       72
  Land
            -                -         -
     Subtotal
      6,243         6,243     229
  Consumer
                
  Vehicles & Other Tangible
            -                -         -
  Other
          10              10         1
     Subtotal
          10              10         1
  Residential Real Estate
                
  HELOC
            -                -         -
  Closed-end
            -                -         -
     Subtotal
            -                -         -
                 
Subtotal with related allowance
   10,601     10,692     776
                 
Total
 $ 23,079   $ 25,340   $ 776
 
 
(continued)
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued
 
 
(3)  
Loans, Continued

 
 
The average net investment in impaired loans and interest income recognized and received on impaired loans for the year ended 2010, are as follows (in thousands):
 
 
 
For the Year Ended December 31, 2010
 
Average Net Investment
  
Interest Income Recognized
  
Interest Income Received
Commercial and Industrial
          
Equipment-secured
 $ 1,303     5     5
RE-secured
 $ 7,032     180     177
Other
 $ 483     -     -
                 
Commercial Real Estate
                
Owner-occupied
 $ 7,888     200     196
Nonowner -occupied
 $ 1,791     -     -
Land
 $ 215     -     -
                 
Consumer
                
Vehicles & Other Tangible
 $ 3     -     -
Other
 $ 3     -     -
                 
Residential Real Estate
                
HELOC
 $ 272     -     -
Closed-end
 $ -     -     -


 
The following summarizes the amount of impaired loans at December 31, 2009 (in thousands):
 
 
Collateral-dependent loans identified as impaired:
    
Gross loans with no related allowance for losses (1)
 $ 7,197  
       
Gross loans with related allowance for losses recorded
   8,443  
Less allowances on these loans
   (2,007 )
       
Net loans with related allowance
   6,436  
       
Net investment in collateral dependent impaired loans
   13,633  
       
Noncollateral dependent loans identified as impaired:
      
Gross loans with no related allowance for losses
   1,945  
       
Gross loans with related allowance for losses recorded
   3,645  
Less allowance on these loans
   (79 )
       
Net loans with related allowance
   3,566  
       
Net investment in noncollateral dependent impaired loans
   5,511  
       
Net investment in impaired loans
 $ 19,144  
 
(1)  
At December 31, 2009, includes loans with partial charge-offs of $734,000 relating to loans with a net carrying value of $915,000.
 
 
 
(continued)
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued
 
 
(3)  
Loans, Continued
 
 
 
Year ended December 31
 
2010
  
2009
       
Average investment in impaired loans
 $ 18,990     21,202
           
Interest income recognized on impaired loans
 $ 385     404
           
Interest income received on impaired loans
 $ 378     426
 

 

 
Troubled debt restructurings during the year ended December 31, 2010 are as follows (dollars in thousands):
 
 
 
 
Number of Contracts
  
Pre-Modification
Outstanding
Recorded Investment
  
Post-Modification
Outstanding
Recorded Investment
Troubled Debt Restructurings:
          
  Commercial real estate
          
      Owner-occupied
          
         Modified interest rate
     1   $ 734   $ 728
         Modified amortization
     4     1,820     1,890
         Modified interest rate and amortization
     2     2,331     2,323
      Non Owner-occupied
                
         Modified interest rate and amortization
     1     2,486     2,486
                 
  Commercial
                
      Equipment secured
                
         Modified interest rate and amortization
     1     94     92
      Real-estate secured
                
         Modified amortization
     1     34     31
         Modified interest rate and amortization
     5     3,326     3,194
                 
  Consumer
                
      Other
                
         Modified interest rate and amortization
     1      10      10
                 
  Total Troubled Debt Restructurings:
   16   $ 10,835   $ 10,754
 
 
 
 
The allowance for loan losses on all loans that have been restructured and are considered troubled debt restructurings (“TDR”) is included in the Company’s specific reserve.  The specific reserve is determined on a loan by loan basis by either the present value of expected cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral dependent.  TDR’s that have subsequently defaulted are considered collateral dependent.

 
 

(continued)
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued
 
 
(3)  
Loans, Continued
 
 
 
Number of
Contracts
  
Recorded
Investment
Troubled Debt Restructurings That Subsequently Defaulted
  During the Last Twelve Months (dollars in thousands):
      
Commercial real estate
      
  Owner-occupied
   3   $ 3,052
  Non owner-occupied
   1     2,486
           
Commercial
          
  Real estate secured
   4     2,834
           
Consumer
          
  Other
   1      10
           
Total
   9   $ 8,382
 

 
(4)  
Premises and Equipment
 
 
 
A summary of premises and equipment follows (in thousands):
 
 
 
At December 31,
  
 
2010
    
2009
  
           
Building and improvements
 $ 3,937       3,936  
Land
   552       552  
Furniture, fixtures and equipment
   2,077       2,072  
Leasehold improvements
   966       965  
               
Total, at cost
   7,532       7,525  
               
Less accumulated depreciation and amortization
   (2,526 )     (2,093 )
               
Premises and equipment, net
 $ 5,006       5,432  


 
The Company leases its Stuart, Vero Beach, Palm City, and Jensen Beach (Operations Center), Florida branch office facilities under leases with various terms. The Company owns the Gatlin, Florida branch office but leases the land under a 50 year lease. The Company is required to pay an allowable share of common area maintenance, insurance and real estate taxes on these leases. Rent expense under the operating leases during the years ended December 31, 2010 and 2009 was approximately $642,000 and $655,000, respectively. In addition, the Company leases space in its Fort Pierce branch office facility to third parties, one of whom is now on a month-by-month basis. The second lease was renewed in 2009 for a term of five years, with one five-year renewal term. Total lease income was approximately $136,000 and $141,000 in 2010 and 2009, respectively

 
 
 
(continued)
SMALL BHC LGOG
   
Notes to Consolidated Financial Statements, Continued
 
 
(4)  
Premises and Equipment, Continued


 
At December 31, 2010, future minimum rental commitments, including certain renewal options, under these non-cancelable leases were approximately as follows (in thousands):
 
 
 
Year Ending
December 31,
  
Operating
Lease
Expense
  
Operating
Lease
Income
         
2011
   $       521     17
2012
           539     17
2013
          548     17
2014
          559     11
2015
          571       -
Thereafter
     14,638       -
             
Total
   $ 17,376     62
 
 
(5)  
Foreclosed Assets
 
 
               The following table illustrates the activity in foreclosed assets as of the dates indicated (dollars in thousands):
 
 
 
Year Ended
 December 31,
  
     2010  
2009
  
               
Total foreclosed assets at beginning of period
 $ 6,763      $ 1,714  
               
Additions to foreclosed assets:
              
 Commercial real estate
   4,546       4,256  
 Residential real estate
   -       2,346  
 Vacant land
   436       1,083  
 Other
   586       1,599  
 Total
   5,568       9,284  
               
Sales of foreclosed assets:
              
 Commercial real estate
   (282 )     (2,342 )
 Residential real estate
   (445 )     (719 )
 Vacant land
   (468 )     (152 )
 Other
   (41 )     -  
 Total
   (1,236 )     (3,213 )
               
Write-down of foreclosed assets
   (1,211 )     (880 )
               
Pay-down on foreclosed assets
   (300 )     -  
               
Loss on sale of foreclosed assets
   (152 )     (142 )
               
Provision for losses on foreclosed assets
   (242 )     -  
               
Foreclosed assets at end of period
 $ 9,190     $ 6,763  


 
(continued)
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued
 

(5)  
Foreclosed Assets, Continued
 

 
An analysis of the allowance for losses on foreclosed assets is as follows (in thousands):
 
 
 
Year Ended
 
December 31, 2010
  Balance at the beginning of the year
 $     -
  Provision for losses on foreclosed assets
   (242)
  Charge-offs
       -
     
  Balance at the end of the year
 $ (242)
 
 
There was no activity in the allowance for losses on foreclosed assets in 2009.

Expenses applicable to foreclosed assets include the following (in thousands):

 
Year Ended
December 31,
 
2010
  
2009
       
Net loss on sales of real estate
 $ 152     142
Provision for losses
   242     -
Operating expenses, net of rental income
   1,860     1,796
           
  $ 2,254     1,938

 
(6) 
Deposits
 
 
 
The aggregate amount of time deposits with a minimum denomination of $100,000 was approximately $45,711,000 and $44,702,000 at December 31, 2010 and 2009, respectively.

A schedule of maturities of time deposits at December 31, 2010 follows (in thousands):

Year Ending
December 31,
  
Amount
     
2011
   $   86,681
2012
       36,790
2013
         9,712
2014
         2,653
2015
         2,728
       
Total
   $ 138,564

 
(continued)
 
 
Notes to Consolidated Financial Statements, Continued
 
 
(7)  
Federal Home Loan Bank Advances
 
 
 
Maturity and interest rate of the advances from the Federal Home Loan Bank of Atlanta ("FHLB") consisted of the following ($ in thousands):
 
 
Maturity
Year Ending
  
Fixed or Variable
        
At December 31,
December 31,
  
Rate
  
Interest Rate
    
2010
  
2009
                   
2010
  
Fixed
     1.81 %   $ -     3,000
2011
  
Variable
     .36% –.47 %     5,500     2,500
2011
  
Fixed
     2.31 %     1,000     1,000
2011
  
Fixed
     1.41 %     4,000     4,000
2012
  
Fixed
     3.05 %     2,500     2,500
2013
  
Fixed
     3.20 %     1,500     1,500
2015
  
Fixed (1)
     .50 %     100     100
                         
                $ 14,600     14,600
 
 
(1)  
Low interest rate due to being related to FHLB low-housing project lending.
 
 
 
The advances were collateralized by securities available for sale with a carrying value of approximately $14,634,000 and $10,039,000 at December 31, 2010 and 2009, respectively. In addition, at December 31, 2010 and 2009, advances were also collateralized by $5,037,000 and $8,107,000, respectively in residential real estate, home equity lines of credit and multi-family loans.
 

 
(8)  
Financial Instruments
 

 
 
The estimated fair values of the Company’s financial instruments were as follows (in thousands):
 

 
 
At December 31, 2010
  
At December 31, 2009
 
Carrying
Amount
  
Fair
Value
  
Carrying
Amount
  
Fair
Value
Financial assets:
              
Cash and cash equivalents
 $ 12,229     12,229     12,932     12,932
Securities available for sale
   36,266     36,266     31,752     31,752
Securities held to maturity
   1,465     1,482     -     -
Loans, net
   161,946     157,376     184,312     184,701
Federal Home Loan Bank stock
   1,087     1,087     1,087     1,087
Accrued interest receivable
   884     884     1,201     1,201
                       
Financial liabilities:
                      
Deposit liabilities
 $ 208,366     209,757     216,374     218,124
Federal Home Loan Bank advances
   14,600     14,794     14,600     14,618
Off-balance-sheet financial instruments
   -     -     -     -

 
(9)  
Off-Balance Sheet Financial Instruments
 
 
 
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments are commitments to extend credit, available 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 consolidated balance sheet. The contract amounts of these instruments reflect the extent of involvement the Company has in these financial instruments.
 
 
(continued)
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued
 
 
(9)  
Off-Balance Sheet Financial Instruments, Continued
 
 
 
The Company's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend 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.
 
 
 
Commitments to extend 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.  Because 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 creditworthiness 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 commitments issued by the Company to guarantee the performance of a customer to a third party.  The credit risk involved in issuing letters of credit is essentially the same as that included in extending loans to customers. The Company generally holds collateral supporting these commitments and management does not anticipate any potential losses if these letters of credit are funded.

 
 
Commitments to extend credit, available lines of credit, and standby letters of credit typically result in loans with a market interest rate when funded. A summary of Company's financial instruments with off balance sheet risk at December 31, 2010 follows (in thousands):
 

 
Commitments to extend credit
 $ 509
     
Available lines of credit
 $ 10,220
     
Standby letters of credit
 $ 26
 
 
 
(10)  
Credit Risk

 
The Company grants the majority of its loans to borrowers throughout the Port St. Lucie, Stuart, Palm City, Fort Pierce and Vero Beach, Florida area. Although the Company has a diversified loan portfolio, a significant portion of its borrowers' ability to honor their contracts is dependent upon the economy in St. Lucie County, Martin County and Indian River County, Florida. The Company does not have significant concentrations to any one industry or customer. The Company did have fourteen loans aggregating $9.6 million and fifteen loans aggregating $11.6 million at December 31, 2010 and 2009 respectively, with original maturities of five years or less, where the primary source of repayment is the sale of the related collateral or the conversion of the existing debt into debt at another financial institution. The majority of these loans are located in Martin, St. Lucie and Indian Counties, Florida.

 
 
 
(continued)
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued
 
 
(10)  
Credit Risk, Continued

 
With the uncertain real estate market in Martin, St. Lucie and Indian River Counties, Florida, in the short-term, obtaining refinancing or sale of the collateral, with terms acceptable to the borrower may be difficult or impossible. While some of these loans have been extended, it is possible others will be extended and/or modified or the loans which have been extended may be extended again. Management is closely monitoring these loans and believes the loan loss allowance at December 31, 2010 is adequate.
 

 
(11)  
Fair Value Measurements
 
 
 
The following table summarizes financial assets measured at fair value on a recurring basis as of December 31, 2010 segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
 
 
     
Fair Value Measurements at Reporting Date 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:
              
Municipal bonds-taxable
 $ 1,902     -     1,902     -
SBA securities
   1,999     1,999     -     -
Mortgage-backed securities
   12,769     -     12,769     -
CMO securities
   19,596     -     19,596     -
  $ 36,266     1,999     34,267     -
                       
As of December 31, 2009:
                      
U.S. government agency securities
 $ 14,332     -     14,332     -
Mortgage-backed securities
   5,087     -     5,087     -
Asset-backed securities
   6,097     -     6,097     -
CMO securities
   6,236     -     6,236     -
  $ 31,752     -     31,752     -
 
 
 
During the year ended December 31, 2010 or 2009, no securities were transferred in or out of Level 1, Level 2, and Level 3.
 
 
 
Impaired collateral-dependent loans and foreclosed assets are carried at fair value when the current collateral value is lower than the carrying value of the assets. Those impaired collateral-dependent assets which are measured at fair value on a nonrecurring basis are as follows (in thousands):

 

(continued)
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued
 
 
(11)  
Fair Value Measurements, Continued
 

 
At December 31, 2010
      
 
Fair
Value(1)
  
Level 1
  
Level 2
  
Level 3
  
Total
Losses
  
Losses Recorded in Operations For the Year Ended
December 31,
2010
  
Commercial & Industrial
                        
Equipment-secured
 $ 937     -     -     937   $ 646   $ 371  
RE - secured
   3,080     -     -     3,080     718     485  
Other
   -     -     -     -     -     -  
Subtotal
 $ 4,017     -     -     4,017   $ 1,364   $ 856  
                                     
Commercial Real Estate
                                    
Owner-Occupied
 $ 3,739     -     -     3,739   $ 1,139   $ 974  
Non Owner Occupied
   264     -     -     264     46     -  
Other
   190     -     -     190     154     125  
Subtotal
 $ 4,193     -     -     4,193   $ 1,339   $ 1,099  
                                     
Residential Real Estate
                                    
HELOC
 $ 160     -     -     160   $ 89   $ 46  
Closed - End
   -     -     -     -     -     -  
Subtotal
 $ 160     -     -     160   $ 89   $ 46  
                                     
Total impaired loans
 $ 8,370     -     -     8,370   $ 2,792   $ 2,001  
                                     
Foreclosed assets
 $ 9,190     -     -     9,190   $ 1,667   $ 1,428  
 
 
          (1)
In addition, impaired loans with a carrying value of $3.4 million were measured for impairment using Level 3 inputs and had a fair value in excess of carrying value.
 
 
 
The following table summarizes financial assets measured at fair value on a nonrecurring basis as of December 31, 2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

 

(continued)
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued

 
 
(11)  
Fair Value Measurements, Continued
 

 
At December 31, 2009
      
 
Fair
Value(1)
  
Level 1
  
Level 2
  
Level 3
  
Total
Losses
  
Losses Recorded in Operations For the Year Ended
December 31,
2009
  
Commercial & Industrial
                        
Equipment-secured
 $ 1,036     -     -     1,036   $ 718   $ 618  
RE - secured
   1,178     -     -     1,178     443     424  
Other
   -     -     -     -     -     -  
Subtotal
 $ 2,214     -     -     2,214   $ 1,161   $ 1,042  
                                     
Commercial Real Estate
                                    
Owner-Occupied
 $ 4,870     -     -     4,870   $ 1,847   $ 1,218  
Non Owner Occupied
   -     -     -     -     -     -  
Other
   -     -     -     -     -     -  
Subtotal
 $ 4,870     -     -     4,870   $ 1,847   $ 1,218  
                                     
Residential Real Estate
                                    
HELOC
 $ 207     -     -     207   $ 43   $ 43  
Closed - End
   60     -     -     60     122     122  
Subtotal
 $ 267     -     -     267   $ 165   $ 165  
                                     
Total impaired loans
 $ 7,351     -     -     7,351   $ 3,173   $ 2,425  
                                     
Foreclosed assets
 $ 6,763     -     -     6,763   $ 336   $ 336  
 
 
          (1)
In addition, impaired loans with a carrying value of $6.3 million were measured for impairment using Level 3 inputs and had a fair value in excess of carrying value.
 
 
 
 
(12) 
Benefit Agreements
 
 
 
The Company has Deferred Compensation Agreements (the "Agreements") with certain officers and directors which require the Company to provide salary continuation benefits to them upon retirement.  The Agreements require the Company to pay annual benefits for five to fifteen years following their normal retirement ages. The Company has purchased life insurance policies on these officers and directors which although not formerly linked, have estimated future cash values that exceed the estimated future benefits that will be due under these Agreements. The Company recognized income on the life insurance policies, net of benefit expense accrued on the Agreements, of $121,000 in 2010 and $96,000 in 2009.
 

 
 
(continued)
 
58
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued
 
 
(13)  
Income Taxes (Benefit)

Income tax benefit consisted of the following (in thousands):

 
Year Ended December 31,
  
 
2010
    
2009
  
Current:
          
Federal
 $ -       (247 )
State
   -       -  
Total current
 $ -       (247 )
               
Deferred:
              
Federal
 $ (2,462 )     (2,241 )
State
   (422 )     (426 )
Valuation allowance
   3,256       4,433  
Total deferred
 $ 372       1,766  
               
Income taxes (benefit)
 $ 372       1,519  
 

 
 
 
The reasons for the differences between the statutory Federal income tax rate and the effective tax rate are summarized as follows (dollars in thousands):

 
 
Year Ended December 31,
  
 
2010
    
2009
  
 
Amount
    
% of Pretax Loss
    
Amount
  
% of Pretax Loss
  
                     
Income taxes (benefit) at statutory rate
 $ (2,579 )     (34 )%   $ (2,614 )   (34 )%
Increase (decrease) resulting from:
                            
State taxes, net of Federal tax benefit
   (278 )     (4 )     (281 )   (4 )
Change in Valuation allowance
   3,256       43       4,433     58  
Income from bank-owned life insurance
   (47 )     (1 )     (46 )   (1 )
Nondeductible expenses
   14       1       12     -  
Share-based compensation
   6        -       15     1  
Income taxes (benefit)
 $ 372       5 %   $ 1,519     20 %


 
 
(continued)
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued
 
 
(13)  
Income Taxes (Benefit), Continued

 
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below (in thousands).
 
 
 
At December 31,
  
 
   2010
  
   2009
  
Deferred tax assets:
        
Allowance for loan losses
 $ 958     1,208  
Net operating loss carryforward
   5,013     2,772  
Foreclosed property expenses
   1,083     354  
Deferred compensation
   201     181  
Tax on unrealized gain on securities available for sale
   371     -  
Other
   226     192  
             
Gross deferred tax assets
   7,852     4,707  
Less: Valuation allowance
   7,689     4,433  
Net deferred tax asset
   163     274  
             
Deferred tax liabilities:
            
Accrual to cash adjustment
   -     -  
Premises and equipment
   (44 )   (147 )
Deferred loan costs
   (119 )   (127 )
             
Deferred tax liabilities
   (163 )   (274 )
             
Net deferred tax asset
 $ -     -  
 
 
 
During the year ended December 31, 2010 and 2009 the Company assessed its earnings history and trend over the past year, its estimate of future earnings, and the expiration of the net operating loss carryforwards and determined that it is more likely than not that the deferred tax assets will not be realized in the near term.  Accordingly, a full valuation allowance was recorded against the net deferred tax asset.
 
 
 
At December 31, 2010, the Company had net operating loss carryforwards of approximately $7.1 million for Federal and $9.9 million for Florida available to offset future taxable income. The carryforwards will begin to expire in 2028.
 
 
 
The Company files income tax returns in the U.S. Federal jurisdiction and the State of Florida. The Company is no longer subject to U.S. Federal, State and local income tax examinations by tax authorities for years before 2007.

 


(continued)
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued
 
 
(14)  
Related Party Transactions

 
In the ordinary course of business, the Company may make loans at terms and rates prevailing at the time to officers and directors of the Company or their affiliates. The Company also accepts deposits from these same related parties. These are summarized as follows (in thousands):
 
 
 
   2010
    
    2009
  
Loans:
          
Balance at beginning of year
 $ 4,523       3,878  
Borrowings
   171       1,140  
Repayments
   (670 )     (495 )
               
Balance at end of year
 $ 4,024       4,523  
               
Deposits
 $ 2,803       3,507  


(15)  
Stock Options and Warrants
 
 
 
The Company established a Stock Option Plan in 1998 (“1998 Plan”) for directors, officers and employees of the Company. The 1998 Plan as amended provides for 131,553 shares of common stock to be available for grant.  The exercise price of the stock options is the fair market value of the common stock on the date of grant.  The options expire ten years from the date of grant. At December 31, 2010, no shares remain available for grant, as the Plan Agreement terminated on December 8, 2008. A summary of stock option information follows related to the 1998 Plan ($ in thousands, except per share amounts):
 
 
 
Number of
Options
  
Weighted-Average
Exercise
Price
  
Weighted-Average
Remaining
Contractual
Term
  
Aggregate
Intrinsic
Value
               
Outstanding at December 31, 2008
   36,761   $ 11.68        
Options forfeited
   (2,755 )   11.88        
Options expired
   (3,306 )   9.07        
                   
Outstanding at December 31, 2009
   30,700     11.94        
Options forfeited
   (2,791 )   9.52        
                   
Options outstanding at December 31, 2010
   27,909   $ 12.18    
3.43 years
   $ -
                     
Options exercisable at  December 31, 2010
   27,562   $ 12.23    
3.38 years
   $ -

 


(continued) 
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued
 

(15)  
Stock Options and Warrants, Continued
 
 
 
In 2005, the Company established a new option plan (“2005 Plan”) for directors, officers and employees of the Company.  The 2005 Plan provides for 158,743 shares of common stock to be available for grant.  The exercise price of the stock options is the fair market value of the common stock on the date of grant. The 2005 Plan allows for various vesting periods and the options expire ten years from the date of grant. At December 31, 2010, 50,507 shares remain available for grant.  A summary of stock option information related to the 2005 Plan follows ($ in thousands, except per share amounts):
 
 
 
Number of
Options
  
Weighted-Average
Exercise
Price
  
Weighted-Average
Remaining
Contractual
Term
  
Aggregate
Intrinsic
Value
  
                 
Options outstanding at December 31, 2008
   123,049   $ 14.27        
Options forfeited
   (6,433 )   (15.91 )        
Options granted
   500     8.85          
                     
Options outstanding at December 31, 2009
   117,116     14.16          
Options forfeited
   (8,880 )   13.13          
                     
Options outstanding at December 31, 2010
   108,236   $ 14.24    
5.73 years
   $ -  
                       
Options exercisable at December 31, 2010
   97,611   $ 14.88    
5.56 years
   $ -  
 
 
The fair value of each option granted during the year ended December 31, 2009, was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
 

Dividend yield
 - %
Expected life
        6 years
  
Expected volatility
 86.14 %
Risk-free interest rate
 3.76 %
Weighted-average grant-date fair value of options issued during the year
 $ 1.18  
 

 
 
The Company examined its historical pattern of option exercises by its directors and employees in an effort to determine if there was any pattern based on these populations. From this analysis, the Company could not identify any patterns in the exercise of options. As such, the Company used the guidance in Staff Accounting Bulletin No. 107 issued by the Securities and Exchange Commission to determine the estimated life of options. Expected volatility is based on historical volatility of the Company’s common stock. The risk-free rate for periods within the contractual life of the option is based on the U.S. treasury yield curve in effect at the time of grant. The dividend yield assumptions are based on the Company’s history and expectation of dividend payments.
 
 

(continued)
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued
 
 
(15)  
Stock Options and Warrants, Continued
 
 
 
The total fair value of shares vested and recognized as compensation expense was $25,000 and $51,000 for 2010 and 2009 respectively. As of December 31, 2010, the Company had 10,972 stock options not fully vested and there was $12,000 of total unrecognized compensation cost related to these non-vested options. This cost is expected to be recognized monthly over a weighted-average period of .49 years on a straight-line basis.
 
 
 
Also in January 2004, 22,050 stock options were granted to a third party as compensation for services provided to the Company.  The options, which expire at the end of ten years, were issued at $11.00 per share and are fully vested.  As of December 31, 2010, none of these options had been exercised.
 
 
 
In addition, as discussed in more detail in Note 16, the Company sold on December 5, 2008 to the U.S. Treasury a ten year warrant to purchase at any time up to 183,158 shares of the Company’s common stock for $4.75 per share. As of December 31, 2010, this warrant had not yet been exercised.
 
 

(16)  
Profit Sharing Plan
 
 
 
The Company sponsors a section 401(k) profit sharing plan (the "Plan") which is available to all employees electing to participate. The Company did not approve any matching contributions during 2010 or 2009.
 

 
(17)  
Stockholders’ Equity
 
 
 
On December 5, 2008, the Company issued and sold to the United States Department of the Treasury (the “Treasury”) 5,800 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Preferred Shares”), along with a ten year warrant (the “Warrant”) to purchase at any time up to 183,158 shares of the Company’s common stock for $4.75 per share, for a total cash investment of $5.8 million from the Treasury (the “Transaction”). The Transaction was completed pursuant to, and is governed by, the U.S. Treasury’s Capital Purchase Program (the “CPP”), which is designed to attract broad participation by healthy institutions, to stabilize the financial system, and to increase lending for the benefit of the U.S. economy.
 
 
 
The Transaction proceeds of $5.8 million were allocated between the Preferred Shares and Warrant based on the ratio of the estimated fair value of the Warrant to the aggregate estimated fair value of both the Preferred Shares and the Warrant. The allocation of proceeds to the Warrant was recorded as a “preferred stock discount” against the Preferred Shares, with a corresponding and equal entry to additional paid in common equity in the amount of $526,000. This discount is being amortized over five years on a straight-line basis and increases the loss available to common shareholders.
 
 
 
The Preferred Shares carry a 5% per year cumulative preferred dividend rate, payable quarterly. The dividend rate increases to 9% after five years. Dividends compound if they accrue and are not paid. The Preferred Shares have a liquidation preference of $1,000 per share, plus accrued unpaid dividends. During the first three years after the Transaction, the Company may not redeem the Preferred Shares except in conjunction with a qualified equity offering meeting certain requirements. After three years, the Company may redeem the Preferred Shares, plus accrued unpaid dividends, in whole or in part, subject to the approval of the Company’s primary federal banking regulator.
 
 
 
(continued)
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued
 
 
(17)  
Stockholders' Equity, Continued
 
 
 
While the Preferred Shares are outstanding, certain restrictions apply to the Company, including, among others, those that are discussed below.
 
 
 
The Preferred Shares have a senior rank and the Company cannot issue other preferred stock senior to the Preferred Shares. Until the third anniversary of the sale of the Preferred Shares, unless the Preferred Shares have been redeemed in whole or the Treasury has transferred all of the shares to a non-affiliated third party, the Company may not increase its common stock cash dividend or repurchase common stock or other equity shares (subject to certain limited exceptions) without the Treasury’s approval. If the Company were to pay a cash dividend in the future, any such dividend would have to be discontinued if a Preferred Share dividend were missed. Thereafter, dividends on common stock could be resumed only if all Preferred Share dividends in arrears were paid. Similar restrictions apply to the Company’s ability to repurchase common stock if Preferred Share dividends are missed. Failure to pay the Preferred Share dividend is not an event of default. However, a failure to pay a total of six   Preferred Share dividends, whether or not consecutive, gives the holders of the Preferred Shares the right to elect two directors to the Company’s board of directors.  That right would continue until the Company pays all dividends in arrears.
 
 
 
Senior Executive Officers of the Company and its subsidiary agreed to limit certain compensation, bonus, incentive and other benefit plans, arrangements, and policies with respect to the Senior Executive Officers during the period that the Treasury owns any debt or equity securities acquired in connection with the Transaction. The Preferred Shares generally are non-voting, other than in connection with proposals to issue preferred stock senior to the Preferred Shares, certain merger transactions, amendments to the rights of the holder of the Preferred Shares, and other than in connection with the board representation rights mentioned above, as required by Delaware State law. The Warrant is exercisable immediately and expires in ten years. The Warrant has anti-dilution protections and certain other protections for the holder, as well as potential registration rights upon written request from the Treasury. If requested by the Treasury, the Warrant (and the underlying common stock) may need to be listed on a national securities exchange. The Treasury has agreed not to exercise voting rights with respect to common shares it may acquire upon exercise of the Warrant. If the Preferred Shares are redeemed in whole, the Company has the right to purchase any common shares held by the Treasury at their fair market value at that time.
 
 
 
At December 31, 2010 the Company had $290,000 in unpaid dividends.
 

 
(18)  
Restrictions on Dividends

 
 
The Company’s ability to pay cash dividends on its common and preferred stock is limited to the amount of dividends it could receive from the Bank plus its own cash and cash equivalents. It is also restricted as discussed in Note 17 and Note 19. The amount of dividends the Bank is permitted to pay to the Company is restricted to 100% of its calendar year-to-date net earnings plus retained earnings for the preceding two years.  In addition, no bank may pay a dividend at any time that net earnings in the current year when combined with retained earnings from the preceding two years produce a loss. Under Florida law, a Florida chartered commercial bank may not pay cash dividends that would cause the Bank’s capital to fall below the minimum amount required by Federal or Florida law.
 
 
 
 
(continued)
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued
 

 
(19)  
Regulatory Matters
 
 
 
The Bank is subject to various regulatory capital requirements administered by the 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 Bank's and the Company's consolidated financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.  The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
 
 
 
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and percentages (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined).  As of December 31, 2010, the Bank did not meet the capital adequacy requirements.
 
 
 
To be categorized as adequately capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage percentages as set forth in the following tables. There are no conditions or events that management believes have changed the Bank's category.  The Bank's actual capital amounts and percentages are also presented in the table ($ in thousands).
 

 
 
Actual
  
Minimum for
Capital Adequacy
Purposes
  
Minimum
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
  
Requirements
of Consent Order
  
 
Amount
  
%
  
Amount
  
  %
  
Amount
  
  %
  
Amount
  
  %
  
As of December 31, 2010:
                                
Total Capital to Risk-Weighted Assets
 $ 9,373   5.57 % $ 13,472   8.00 % $ 16,840   10.00 % $ 18,524   11.00 %
Tier 1 Capital to Risk-Weighted Assets
   7,235   4.30     6,736   4.00     10,104   6.00     N/A   N/A  
Tier 1 Capital To Average Assets
   7,235   3.02     9,588   4.00     11,985   5.00     19,176   8.00  
                                         
As of December 31, 2009:
                                        
Total Capital to Risk-Weighted Assets
   17,324   8.96     15,461   8.00     19,326   10.00     N/A   N/A  
Tier 1 Capital to Risk-Weighted Assets
   14,880   7.70     7,730   4.00     11,596   6.00     N/A   N/A  
Tier 1 Capital To Average Assets
   14,880   5.65     10,538   4.00     13,172   5.00     N/A   N/A  




(continued)
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued
 

 
(19)  
Regulatory Matters, Continued
 

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

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

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

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

Ø  
By June 16, 2010, and during the life of the Consent Order, the Bank shall achieve and maintain a Tier 1 leverage capital ratio of not less than 8% and a total risk-based capital ratio of not less than 11%. At December 31, 2010, the Bank’s Tier 1 leverage capital ratio was 3.02% and its total risk-based capital ratio was 5.57%. As of December 31, 2010, an additional $12 million in capital would be required by the Bank to attain the required capital levels.

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

 
 
(continued)
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued
 
 
(19)  
Regulatory Matters, Continued
 
 
Ø  
The Bank shall also reduce the aggregate balance of assets classified “Substandard” by the FDIC in October 2009: (i) by June 16, 2010, to not more than 140% of Tier 1 capital plus the ALLL; (ii) by September 14, 2010, to not more than 120% of Tier 1 capital plus the ALLL; (iii) by December 13, 2010, to not more than 100% of Tier 1 capital plus the ALLL; (iv) by March 23, 2011, to not more than 80% of Tier 1 capital plus the ALLL; and (v) by September 19, 2011, to not more than 60% of Tier 1 capital plus the ALLL. As of December 31, 2010, the Bank’s ratio was 187%.
 
 
Ø  
The Bank shall not extend any credit to, or for the benefit of, any borrower who has a loan that has been charged off or classified “Substandard” and is uncollected, unless the Bank documents that such extension of credit is in the Bank’s best interest. The Bank had, and has, no intention of extending credit to such borrowers in violation of these requirements.
 
 
Ø  
By May 2, 2010, the Bank shall perform a risk segmentation analysis with respect to any concentration cited by the FDIC, including commercial real estate loans. The Bank shall also develop a plan to reduce any segment of the portfolio deemed by the FDIC or OFR to be an undue concentration of credit. Both were completed and submitted on April 29, 2010.
 
 
Ø  
By June 16, 2010, the Bank shall formulate and implement a strategic plan and a plan to improve and sustain Bank earnings. Additionally, the Bank must prepare a budget and update the profit plan by November 30th of each year. All such items must be submitted to the FDIC and the OFR. The Bank was granted an extension to September 28, 2010 to submit its strategic plan and submitted it prior to that date.

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

 
Ø  
Throughout the life of the Consent Order, the Bank shall not accept, renew, or rollover any brokered deposit, and shall comply with the restrictions on the effective yields on deposits exceeding national averages. In addition, by March 28, 2010, the Bank was required to submit to the FDIC and the OFR a plan to reduce reliance on brokered deposits, which it has done. The Bank has not accepted, renewed or rolled over any brokered deposits since July 2009. With respect to the yield limitations, it is possible that the Bank could experience a decrease in deposit inflows, or the migration of current deposits to competitor institutions, if other institutions offer higher interest rates than those permitted to be offered by the Bank.
 
 
Ø  
During the life of the Consent Order, the Bank shall limit its asset growth to 10% per year, unless the FDIC and the OFR consent to greater growth. Under the recently adopted strategic plan, the growth percentage will not exceed these growth parameters.
 
 
Ø  
While the Consent Order is in effect, the Bank shall not declare or pay dividends, or any other form of payment representing a reduction in capital without the prior written approval of the FDIC and the OFR. The Bank has never paid a dividend to the holding company.
 
 
 
(continued)
SMALL BHC LGOG
 
Notes to Consolidated Financial Statements, Continued
 
 
 
(19)  
Regulatory Matters, Continued
 
 
Ø  
Within 30 days of the end of each calendar quarter, the Bank shall furnish written progress reports to the FDIC and the OFR detailing the form, manner, and results of any actions taken to secure compliance. The Bank has, and will continue to prepare and submit such reports.

On February 2, 2011, the Bank received a Supervisory Prompt Corrective Action Directive (the “Directive”), effective as of January 28, 2011 (the “Effective Date”) from the Federal Deposit Insurance Corporation (“FDIC”).  The FDIC issued the Directive due to the Bank’s failure to submit an acceptable capital restoration plan to the FDIC, the deteriorating condition of the Bank and management’s failure to improve the condition of the Bank.  The Directive requires that: (1) within 30 days of the Effective Date (by February 27, 2011), the Bank must comply with the requirements of its Consent Order by attaining a Tier 1 Leverage Capital Ratio of 8% and a Total Risk Based Capital Ratio of 11% and (2) within 10 days of the Effective Date (extended to February 11, 2011) submit an acceptable capital restoration plan to the FDIC, which expressly provides that the Bank will attain such capital levels.  An updated capital restoration plan was submitted on February 11, 2011; however, the Bank has not been able to comply with the required capital ratios.

The Directive further requires that if the Bank does not increase its capital to such levels by February 27, 2011, the Bank must take any necessary action for the Bank to be acquired by, or merged into, another financial institution.

If the Bank fails to satisfy the requirements of the Directive, it is likely that the FDIC or the Florida Office of Financial Regulation will take further regulatory enforcement action against the Bank, including the closure of the Bank and the placement of it into receivership with the FDIC.

The Directive also prohibits the Bank from: (1) making any payments on its subordinated debt or paying any capital distributions or dividends; (2) providing certain compensation to senior executive officers or excessive compensation or bonuses generally; (3) accepting, renewing or rolling over any brokered deposits; (4) paying interest on deposits in excess of FDIC-established market rates; and (5) acquiring any interest in any company, establishing any branches, engaging in any new line of business, entering into any material transaction outside the ordinary course of business, extending credit for any highly leveraged transaction, amending its Articles of Incorporation or Bylaws, materially changing its accounting methods, or engaging in certain transactions with affiliates (including the holding company), without the FDIC’s prior approval.  Furthermore, the Directive requires the Bank to alter, reduce or terminate any activity the FDIC determines poses excessive risk to the Bank.
 

 
(20)  
Subsequent Events
 
 
 
The Federal Deposit Insurance Corporation (“FDIC”) and the Florida Office of Financial Regulation (“OFR”) recently completed the fieldwork for their joint examination of the Bank.  As a result of the examination, the Bank, with the concurrence of the FDIC and OFR, will record an additional provision for loan losses during the quarter ended March 31, 2011.  The range of additional losses to be recorded is $2.0 million to $2.7 million.


                                                                           (continued)
SMALL BHC LGOG
      
 Notes to Consolidated Financial Statements, Continued
 
 
(21)  
Holding Company Financial Information
 
 
The Holding Company's unconsolidated financial information is as follows (in thousands):
 
Condensed Balance Sheets

 
At December 31,
 
2010
  
2009
Assets
      
       
Cash and cash equivalents
 $ 57     379
Investment in subsidiary
   6,619     14,255
Other assets
   405     192
           
Total assets
 $ 7,081     14,826
           
Liabilities
          
           
Total liabilities
 $ 369     187
           
Stockholders’ Equity
          
           
Stockholders’ Equity
   6,712     14,639
           
Total Liabilities and Stockholders’ Equity
 $ 7,081     14,826
 

 
 
Condensed Statements of Operations

 
Year Ended December 31,
  
 
2010
  
2009
  
         
Revenues
 $ -     -  
Expenses
   (313 )   (225 )
             
Loss before loss of subsidiary
   (313 )   (225 )
Loss of subsidiary
   (7,645 )   (8,983 )
             
Net loss
 $ (7,958 )   (9,208 )

 
(continued)
SMALL BHC LGOG
     
Notes to Consolidated Financial Statements, Continued

 
(21)  
Holding Company Financial Information, Continued
 
 
Condensed Statements of Cash Flows

 
Year Ended December 31,
  
 
    2010
    
    2009
  
Cash flows from operating activities:
           
Net loss
 $ (7,958 )     (9,208 )
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
              
Share-based compensation
   25       51  
Undistributed losses of subsidiary
   7,645       8,983  
(Increase) decrease in other assets
   (213 )     150  
Increase in other liabilities
   179       76  
               
Net cash (used in) provided by operating activities
   (322 )     52  
               
Cash flows from investing activity -
              
Investment in subsidiary
   -       (3,800 )
               
Cash flows from financing activities -
              
   Cash dividends paid to preferred shareholder
   -       (275 )
               
Net decrease in cash and cash equivalents
   (322 )     (4,023 )
               
Cash and cash equivalents at beginning of year
   379       4,402  
               
Cash and cash equivalents at end of year
 $ 57       379  
               
Non-cash transactions:
              
               
Accumulated other comprehensive loss of subsidiary, net change in unrealized loss (gain) on securities available for sale, net of tax
 $ 9       (810 )
               
      Accrual of preferred stock dividend
 $ 3       290  




 



FPB Bancorp, Inc.
Port St. Lucie, Florida:

We have audited the accompanying consolidated balance sheets of FPB Bancorp, Inc. and Subsidiary (the "Company") as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company’s operating and capital requirements, along with recurring losses raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to those matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.



HACKER, JOHNSON & SMITH PA
Fort Lauderdale, Florida
April 14, 2011



BHC LOGO


Gary A. Berger, Chairman
 
Donald J. Cuozzo
 
Ann L. Decker, Secretary
 
Timothy K. Grimes
 
Paul J. Miret
 
Robert L. Seeley
 
David W. Skiles, President and Chief Executive Officer
 
Paul A. Zinter, Vice Chairman
 
 

Marge Riley, Executive Vice President and Chief Operating Officer
 
Nancy E. Aumack, Senior Vice President and Chief Financial Officer
 
William V. West, Senior Vice President and Senior Lender
 

 
BANK LOGO


Gary A. Berger, Chairman
 
Donald J. Cuozzo
 
Ann L. Decker, Secretary
 
Timothy K. Grimes
 
Paul J. Miret
 
Robert L. Seeley
 
David W. Skiles, President and Chief Executive Officer
 
Paul A. Zinter, Vice Chairman
 
 
OFFICERS

David W. Skiles, President and Chief Executive Officer
 
Marge Riley, Executive Vice President and Chief Operating Officer
 
Nancy E. Aumack, Senior Vice President and Chief Financial Officer
 
William V. West, Senior Vice President and Senior Lender
 
Stephen J. Krumfolz, Senior Vice President, SBA Commercial Lender
 
Melissa M. Favorite, Senior Vice President, BSA/Compliance Officer
 
Randy J. Riley, Senior Vice President and Special Assets Manager
 
Brenda K. Parmelee, Vice President, Branch Manager (Fort Pierce)
 
Amy M. Sowerby, Vice President, Deposit Operations
 
Marianne Keehan, Vice President, SBA Commercial Lender
 
Larry T. Hall, Vice President, Commercial Lender
 
Jillian A. Lopez, Vice President, Human Resource Officer
 
Christina M. Saltos, Assistant Vice President, Branch Manager (Gatlin)
 
Sarah C. Baker, Assistant Vice President, Branch Manager (Stuart)
 
Peter G. Ferlatte, Vice President, Network Administration Officer
 
Rebekah A. Witt, Vice President, Loan Operations
 
Leonardo Miranda, Vice President, Credit Administration
 
Marie Lezeau, Assistant Vice President, Controller
 
Kathleen Dayball, Assistant Vice President, Branch Manager (Vero Beach)
 
Kathryn Hayden, Assistant Vice President, Branch Manager (Port St. Lucie)
 
Rochelle Black, Assistant Vice President, Branch Manager (Palm City)
 
 
 
 


Annual Meeting
  
The Annual Meeting of the Stockholders has not been scheduled.
     
Transfer Agent and
  
Registrar and Transfer Co.
Registrar
  
10 Commerce Drive
   
Cranford, NJ 07016
    (800) 368-5948  
       
Corporate Counsel
  
Igler & Dougherty, P.A.
   
2457 Care Drive
   
Tallahassee, Florida 32308
       
Independent
  
Hacker, Johnson & Smith PA
Auditors
  
Independent Registered Public Accountants
   
500 West Cypress Creek Road, Suite 450
   
Fort Lauderdale, Florida 33309
       
Form 10-K
  
A copy of the Form 10-K as filed with the Securities and Exchange Commission may be obtained by stockholders without charge upon written request to Nancy E. Aumack, Senior Vice President and Chief Financial Officer, 1792 NE Jensen Beach Blvd., Jensen Beach, Florida 34957.

 

 


The common stock of FPB Bancorp, Inc. is listed on the Nasdaq Capital Market, under the symbol "FPBI". The Company did not declare a dividend for the year ended December 31, 2010.  Future dividends, if any, will be determined by the Board of Directors. As of December 31, 2010, FPB Bancorp, Inc. had approximately 1,400 holders of record of common stock.


BANK LOGO
 
 

1301 SE Port St. Lucie Blvd.
Port St. Lucie, FL 34952
(772) 398-1388

715 Colorado Avenue
Stuart, FL 34994
(772) 287-1300

2500 Virginia Avenue
Fort Pierce, FL 34982
(772) 460-2220

4000 20th Street
Vero Beach, FL 32960
(772) 770-0090

3001 SW Martin Downs Blvd.
Palm City, FL 34990
(772) 283-5857

  2031 SW Gatlin Blvd.
Port St. Lucie, FL 34953
(772) 340-7550

 
75
 
EX-31.1 3 exhibit31_1.htm CEO CERT exhibit31_1.htm
Exhibit 31.1
 
CERTIFICATIONS

 
I, David W. Skiles, certify that:
 
 
1.  
I have reviewed this Form 10-K of FPB Bancorp, Inc.;
 
 
2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
4.  
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
a.  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
b.  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
c.  
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d.  
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
 
5.  
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
 
a.  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
 
b.  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
 
 
 
/s/ David W. Skiles                                 
 
          Date: April 14, 2011 David W. Skiles  
  Principal Executive Officer  
 
 EX-31.2 4 exhibit31_2.htm CFO CERT exhibit31_2.htm
Exhibit 31.2
 
 
CERTIFICATIONS

 
I, Nancy E. Aumack, certify that:
 
 
1.  
I have reviewed this Form 10-K of FPB Bancorp, Inc.;
 
 
2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
4.  
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
a.  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
b.  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
c.  
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d.  
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
 
5.  
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
 
a.  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
 
b.  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
 
 
 
/s/ Nancy E. Aumack                             
 
          Date: April 14, 2011 Nancy E. Aumack  
  Chief Financial Officer  
 
 EX-32.1 5 exhibit32_1.htm SOX CEO CERT exhibit32_1.htm
Exhibit 32.1

 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADDED BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



In connection with the Annual Report of FPB Bancorp, Inc. on Form 10-K for the year ended December 31, 2009 as filed with the Securities and Exchange Commission (the “Report”), I, David W. Skiles, President and Chief Executive Officer of FPB Bancorp, Inc., certify, pursuant to 18 U.S.C. §1350, as added by §906 of the Sarbanes-Oxley Act of 2002, that:
 

 
 
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 

 
 
2.
To my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of FPB Bancorp, Inc. as of and for the period covered by the Report.



 
  By: /s/ David W. Skiles                               
                           Date:  April 14, 2011   David W. Skiles   
 
Principal Executive Officer
  
 
 
 EX-32.2 6 exhibit32_2.htm SOX CFO CERT exhibit32_2.htm
Exhibit 32.2


CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADDED BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Annual Report of FPB Bancorp, Inc. on Form 10-K for the year ended December 31, 2009 as filed with the Securities and Exchange Commission (the “Report”), I, Nancy E. Aumack, Chief Financial Officer of FPB Bancorp, Inc., certify, pursuant to 18 U.S.C. §1350, as added by §906 of the Sarbanes-Oxley Act of 2002, that:
 

 
 
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 

 
 
2.
To my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of FPB Bancorp, Inc. as of and for the period covered by the report.

 

 
  By: /s/ Nancy E. Aumack                              
                           Date:  April 14, 2011 Nancy E. Aumack  
 
Principal Financial Officer
  
 


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Exhibit 99.1
 
FPB BANCORP, INC. and FIRST PEOPLES BANK – UST #179

Principal CEO and Financial Officer Certifications – 2010
 
 
I, David W. Skiles, President and C.E.O., (Principal Executive Officer), and, Nancy E. Aumack, Sr. V.P. and C.F.O., (Principal Financial Officer), certify, based on my knowledge, that:

(i)  
The Personnel / Compensation / Nominating Committee of FPB Bancorp, Inc. has discussed, reviewed, and evaluated with senior risk officers at least every six months during any part of the most recently completed fiscal year that was a TARP period, senior executive officer (“SEO”) compensation plans and employee compensation plans and the risks these plans pose to FPB Bancorp, Inc.;
 
 
(ii)  
The Personnel / Compensation / Nominating Committee of FPB Bancorp, Inc. has identified and limited during any part of the most recently completed fiscal year that was a TARP period any features of the SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of FPB Bancorp, Inc. and has limited those features to ensure that FPB Bancorp, Inc. is not unnecessarily exposed to risks;
 
 
(iii)  
The Personnel / Compensation / Nominating Committee of FPB Bancorp, Inc. has reviewed, at least every six months during any part of the most recently completed fiscal year that was a TARP period, the terms of each employee compensation plan and identified any features of the plan that could encourage the manipulation of reported earnings of FPB Bancorp, Inc. to enhance the compensation of an employee, and has limited any such features;
 
 
(iv)  
The Personnel / Compensation / Nominating Committee of FPB Bancorp, Inc. will certify to the reviews of the SEO compensation plans and employee compensation plans required under (i) and (iii) above;
 
 
(v)  
The Personnel / Compensation / Nominating Committee of FPB Bancorp, Inc. will provide a narrative description of how it limited during any part of the most recently completed fiscal year that was a TARP period the features in:
 
 
(A)  
SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of FPB Bancorp, Inc.
 
(B)  
Employee compensation plans that unnecessarily expose FPB Bancorp, Inc. to risks; and
 
(C)  
Employee compensation plans that could encourage the manipulation of reported earnings of FPB Bancorp, Inc. to enhance the compensation of an employee;
 
 
(vi)  
FPB Bancorp, Inc. has required that bonus payments to SEOs or any of the next twenty most highly compensated employees, as defined in the regulations and guidance established under section 111 of EESA (bonus payments), be subject to a recovery or “clawback” provision during any part of the most recently completed fiscal year that was a TARP period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria;
 

 
 
 
 
FPB BANCORP, INC. and FIRST PEOPLES BANK – UST #179
Principal CEO and Financial Officer Certifications – 2010
Page 2

 
(vii)  
FPB Bancorp, Inc. has prohibited any golden parachute payment, as defined in the regulations and guidance established under section 111 of EESA, to a SEO or any of the next five most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period;
 
 
(viii)  
FPB Bancorp, Inc. has limited bonus payments to its applicable employees in accordance with section 111 of EESA and the regulations and guidance established thereunder during any part of the most recently completed fiscal year that was a TARP period;
 
 
(ix)  
FPB Bancorp, Inc. and its employees have complied with the excessive or luxury expenditures policy, as defined in the regulations and guidance established under section 111 of EESA, during any part of the most recently completed fiscal year that was a TARP period; and any expenses that, pursuant to the policy, required approval of the board of directors, a committee of the board of directors, an SEO, or an executive officer with a similar level of responsibility were properly approved;
 
 
(x)  
FPB Bancorp, Inc. will permit a non-binding shareholder resolution in compliance with any applicable federal securities rules and regulations on the disclosures provided under the federal securities laws related to SEO compensation paid or accrued during any part of the most recently completed fiscal year that was a TARP period.
 
 
(xi)  
FPB Bancorp, Inc. will disclose the amount, nature, and justification for the offering, during any part of the most recently completed fiscal year that was a TARP period, if any perquisites, as defined in the regulations and guidance established under section 111 of EESA, whose total value exceeds $25,000 for any employee who is subject to the bonus payment limitations identified in paragraph (viii);
 
 
(xii)  
FPB Bancorp, Inc. will disclose whether FPB Bancorp, Inc., the board of directors of FPB Bancorp, Inc., or the compensation committee of FPB Bancorp, Inc. has engaged during any part of the most recently completed fiscal year that was a TARP period a compensation consultant; and the services the compensation consultant or any affiliate of the compensation consultant provided during this period;
 
 
(xiii)  
FPB Bancorp, Inc. has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under section 111 of EESA, to the SEOs and the next twenty most highly compensated employees during any part of the most recently completed fiscal year that was a TARP period;
 
 
(xiv)  
FPB Bancorp, Inc. has substantially complied with all other requirements related to employee compensation that are provided in the agreement between FPB Bancorp, Inc. and Treasury, including any amendments;
 

 
 
 
 
FPB BANCORP, INC. and FIRST PEOPLES BANK – UST #179
Principal CEO and Financial Officer Certifications – 2010
Page 3

 
 
(xv)  
FPB Bancorp, Inc. has submitted to Treasury a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal year, with the non-SEOs ranked in descending order of level of annual compensation, and with the name, title and employer of each SEO and most highly compensated employee identified; and
 
 
(xvi)  
I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both.  (See, for example, 18 USC 1001).
 

 

 
/s/ David W. Skiles                         (Signature)                                                      Date: March 16, 2011
David W. Skiles, President & C.E.O.
Principal Executive Officer

 

/s/ Nancy E. Aumack                       (Signature)                                                    Date: March 16, 2011
Nancy E. Aumack, Sr. Vice President & C.F.O.
Principal Financial Officer





 EX-99.2 11 exhibit99_2.htm ANN CERT exhibit99_2.htm
Exhibit 99.2
 
FPB BANCORP, INC. and FIRST PEOPLES BANK – UST #179

Personnel / Compensation / Nominating Committee Certification – 2010


The Personnel / Compensation / Nominating Committee of FPB Bancorp, Inc. certifies that:

 
(1)  
It has reviewed with senior risk officers, the senior executive officer (SEO) compensation plans and has made all reasonable efforts to ensure that these plans do not encourage SEOs to take unnecessary and excessive risks that threaten the value of FPB Bancorp, Inc.
 
 
(2)  
It has reviewed with senior risk officers the employee compensation plans and has made all reasonable efforts to limit any unnecessary risks these plans pose to FPB Bancorp, Inc.
 
 
(3)  
It has reviewed the employee compensation plans to eliminate any features of these plans that would encourage the manipulation of reported earnings of FPB Bancorp, Inc. to enhance the compensation of any employee.
 



/s/ Ann L Decker                               (Signature)                                                       Date: March 16, 2011
Ann L. Decker, Chairman of the
Personnel / Compensation / Nominating Committee of FPB Bancorp, Inc.