UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 
 WASHINGTON,
D.C. 20549
 
 Form
10-Q
 
 
 x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
      the quarterly period ended September 30,
2009
 
 OR
 
 o
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
      the transition period from _____ to
_____
 
 Commission
File Number: 000-1170902
 
 FLORIDA
COMMUNITY BANKS, INC.
 (Exact
name of registrant as specified in its charter)
 
 
 
 Florida
              
              35-2164765(State
      or other jurisdiction of incorporation or organization)
              
              (I.R.S.
      Employer Identification No.)1400
      North 15th
      Street, Immokalee, Florida
              
              34142-2202(Address
      of principal executive offices)
              
              (Including
      zip code)(239)
      657-3171(Issuer's
      telephone number, including area code)
 
 No Change(Former
      name, former address and former fiscal year, if changed since last
      report)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
 
 Yesx
              Noo
 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 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).
 Yeso
              Noo
 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," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
 
 Large accelerated
      filero
              Accelerated filero
              Nonaccelerated
      filer o
                (Do
      not check if a smaller reporting company.)
              Smaller
      reporting companyx
 Indicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b of the Exchange Act).
 
 Yeso
              Nox
 Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
 
 Common
      Stock, $0.01 par
              
              Outstanding
      at November 16,
2009:  7,918,217
  
  Form
10-Q
 FLORIDA
COMMUNITY BANKS, INC.
 September
30, 2009
 
 
 
 TABLE
OF CONTENTS
 
 Page No.Part
      I - Financial InformationItem 1
      -                Consolidated
      Financial Statements (Unaudited)Condensed Consolidated
      Statements of Financial Condition as of September 30,
                2009 and December 31,
      2008
              
              
              3Condensed Consolidated
      Statements of Operations for the Three Months and Nine
                Months Ended September 30,
      2009 and 2008
              
              
              4Condensed Consolidated
      Statement of Shareholders' Equity for the Nine Months
                Ended September 30, 2009
              
              
              5Condensed Consolidated
      Statements of Cash Flows for the Nine Months
                Ended September 30, 2009 and
      2008
              
              
              6Notes to Condensed Consolidated
      Financial Statements
              
              
              7Item 2 -Management's Discussion
      and Analysis of Financial Condition and Results of
                Operations
              
              
              20Item 3 - Quantitative and
      Qualitative Disclosures about Market Risk
              
              
              27Item 4 - Controls and
      Procedures
              
              
              28Part
      II - Other InformationItem 1 - Legal Proceedings
              
              
              28Item 1A - Risk Factors
              
              
              29Item 5 - Other Information
              
              
              34Item 6 - Exhibits
              
              
              35Signatures
 
  2
  PART
I - FINANCIAL INFORMATION
 Item
1 - Financial Statements
 
 FLORIDA
COMMUNITY BANKS, INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 September
30, 2009 (Unaudited) and December 31, 2008
 
 September
      30,
                2009
                (Unaudited)
              
              
              December
      31,
                2008AssetsCash
      and due from banks
              
              $
              4,980,398
              
              
              $
              11,169,731Interest-bearing
      demand deposits with banks
              
              
              99,758,186
              
              
              
              6,245,791Federal
      funds sold
              
              
              562,000
              
              
              
              28,450,000Cash
      and Cash Equivalents
              
              
              105,300,584
              
              
              
              45,865,522Securities
      available-for-sale
              
              
              116,675,034
              
              
              
              —Securities
      held-to-maturity, fair value of $203,310,589 in 2008
              
              
              —
              
              
              
              199,625,229Other
      investments
              
              
              5,263,858
              
              
              
              7,987,869Loans
      held-for-sale
              
              
              —
              
              
              
              156,231Loans,
      net of unearned income
              
              
              570,100,744
              
              
              
              624,478,243Allowance
      for loan losses
              
              
              (36,616,052
              )
              
              
              (36,389,744
              )Net
      Loans
              
              
              533,484,692
              
              
              
              588,088,499Premises
      and equipment, net
              
              
              24,266,934
              
              
              
              24,867,557Accrued
      interest
              
              
              2,641,847
              
              
              
              3,511,261Foreclosed
      real estate
              
              
              85,384,334
              
              
              
              52,005,241Income
      taxes receivable
              
              
              —
              
              
              
              30,483,588Other
      assets
              
              
              4,108,754
              
              
              
              2,479,225Total
      Assets
              
              $
              877,126,037
              
              
              $
              955,070,222Liabilities
      and Shareholders’ EquityLiabilitiesDepositsNoninterest-bearing
              
              $
              47,861,251
              
              
              $
              60,474,172Interest-bearing
              
              
              747,096,320
              
              
              
              784,954,433Total
      Deposits
              
              
              794,957,571
              
              
              
              845,428,605Accrued
      interest
              
              
              6,921,119
              
              
              
              4,853,139Deferred
      compensation
              
              
              132,145
              
              
              
              166,491FHLB
      advances
              
              
              50,000,000
              
              
              
              50,000,000Subordinated
      debentures
              
              
              30,929,000
              
              
              
              30,929,000Other
      liabilities
              
              
              2,984,785
              
              
              
              3,362,046Total
      Liabilities
              
              
              885,924,620
              
              
              
              934,739,281Shareholders’
      EquityPreferred
      stock - par value $0.01 per share, 5,000,000 shares authorized, none
      issued and outstanding at September 30, 2009 and December 31,
      2008
              
              
              —
              
              
              
              —Common
      stock - par value $0.01 per share, 25,000,000 shares authorized,
      25,000,000 and 7,918,217 shares issued and outstanding at September 30,
      2009 and December 31, 2008
              
              
              79,182
              
              
              
              79,182Paid-in
      capital
              
              
              18,570,303
              
              
              
              18,529,677(Accumulated
      deficit) retained earnings
              
              
              (27,110,942
              )
              
              
              2,076,265Accumulated
      other comprehensive income (loss)
              
              
              (337,126
              )
              
              
              (354,183
              )Total
      Shareholders’ Equity
              
              
              (8,798,583
              )
              
              
              20,330,941Total
      Liabilities and Shareholders’ Equity
              
              $
              877,126,037
              
              
              $
              955,070,222
  See notes
to condensed consolidated financial statements
 3
  FLORIDA
COMMUNITY BANKS, INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 Three
and Nine Months Ended September 30, 2009 and 2008
 (Unaudited)
 
 Three
      Months
              
              
              Nine
      MonthsEnded
      September 30,
              
              
              Ended
      September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008Interest
      IncomeInterest
      and fees on loans
              
              $
              5,375,934
              
              
              $
              9,755,353
              
              
              $
              18,862,885
              
              
              $
              32,991,324Interest
      and dividends on taxable securities
              
              
              1,116,643
              
              
              
              2,452,334
              
              
              
              5,183,503
              
              
              
              5,630,456Interest
      on tax-exempt securities
              
              
              18,307
              
              
              
              208,894
              
              
              
              385,944
              
              
              
              626,541Interest
      on federal funds sold and other interest income
              
              
              26,226
              
              
              
              98,317
              
              
              
              95,297
              
              
              
              233,150Total
      Interest Income
              
              
              6,537,110
              
              
              
              12,514,898
              
              
              
              24,527,629
              
              
              
              39,481,471Interest
      ExpenseInterest
      on deposits
              
              
              6,593,583
              
              
              
              7,313,039
              
              
              
              21,051,765
              
              
              
              21,188,483Interest
      on borrowed funds
              
              
              661,794
              
              
              
              909,014
              
              
              
              2,077,383
              
              
              
              3,018,425Total
      Interest Expense
              
              
              7,255,377
              
              
              
              8,222,053
              
              
              
              23,129,148
              
              
              
              24,206,908Net
      Interest Income (Expense)
              
              
              (718,267
              )
              
              
              4,292,845
              
              
              
              1,398,481
              
              
              
              15,274,563Provision
      for loan losses
              
              
              10,950,000
              
              
              
              29,290,400
              
              
              
              14,330,000
              
              
              
              39,802,400Net
      Interest Income (Expense) after Provision for Loan Losses
              
              
              (11,668,267
              )
              
              
              (24,997,555
              )
              
              
              (12,931,519
              )
              
              
              (24,527,837
              )Noninterest
      IncomeCustomer
      service fees
              
              
              378,438
              
              
              
              411,141
              
              
              
              1,135,522
              
              
              
              1,140,200Secondary
      market loan fees
              
              
              38,348
              
              
              
              41,729
              
              
              
              96,102
              
              
              
              112,989Gain
      on sale of other real estate
              
              
              —
              
              
              
              8,056
              
              
              
              —
              
              
              
              62,552Gain
      on sale of investments
              
              
              —
              
              
              
              —
              
              
              
              3,124,000
              
              
              
              —Other
      operating income
              
              
              176,980
              
              
              
              44,989
              
              
              
              412,780
              
              
              
              398,704Total
      Noninterest Income
              
              
              593,766
              
              
              
              505,915
              
              
              
              4,768,404
              
              
              
              1,714,445Noninterest
      ExpensesSalaries
      and employee benefits
              
              
              2,392,700
              
              
              
              2,739,474
              
              
              
              7,481,609
              
              
              
              8,253,267Occupancy
      and equipment expense
              
              
              941,805
              
              
              
              954,949
              
              
              
              2,749,801
              
              
              
              2,774,742Other
      operating expenses
              
              
              5,287,477
              
              
              
              2,810,388
              
              
              
              12,232,663
              
              
              
              6,629,892Total
      Noninterest Expenses
              
              
              8,621,982
              
              
              
              6,504,811
              
              
              
              22,464,073
              
              
              
              17,657,901(Loss)
      before income taxes
              
              
              (19,696,483
              )
              
              
              (30,996,451
              )
              
              
              (30,627,188
              )
              
              
              (40,471,293
              )Income
      tax benefit
              
              
              —
              
              
              
              (12,023,003
              )
              
              
              —
              
              
              
              (15,820,234
              )Net
      (Loss)
              
              $
              (19,696,483
              )
              
              $
              (18,973,448
              )
              
              $
              (30,627,188
              )
              
              $
              (24,651,059
              )Basic
      earnings per common share
              
              $
              (2.49
              )
              
              $
              (2.40
              )
              
              $
              (3.87
              )
              
              $
              (3.11
              )Diluted
      earnings per common share
              
              
              (2.49
              )
              
              
              (2.40
              )
              
              
              (3.87
              )
              
              
              (3.10
              )Cash
      dividends declared per common share
              
              
              0.00
              
              
              
              0.00
              
              
              
              0.00
              
              
              
              0.00Weighted
      average common shares outstanding - basic
              
              
              7,918,217
              
              
              
              7,918,217
              
              
              
              7,918,217
              
              
              
              7,918,119Weighted
      average common shares outstanding - diluted
              
              
              7,918,217
              
              
              
              7,918,217
              
              
              
              7,918,217
              
              
              
              7,949,943
  See notes
to condensed consolidated financial statements
 4
  FLORIDA
COMMUNITY BANKS, INC.
 CONDENSED
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
 Nine
Months Ended September 30, 2009
 (Unaudited)
 
 Preferred
      Stock
              
              
              Common
      Stock
              
              
              Paid-in
      Capital
              
              
              Retained
      Earnings
              
              
              Accumulated
      Comprehensive Loss
              
              
              TotalBalance
      at December 31, 2008
              
              $
              —
              
              
              $
              79,182
              
              
              $
              18,529,677
              
              
              $
              3,516,246
              
              
              $
              (354,183
              )
              
              $
              21,770,922Net
      loss - nine months ended September 30, 2009
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (30,627,188
              )
              
              
              —
              
              
              
              (30,627,188
              )Unrealized
      losses on available-for-sale securities
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              17,057
              
              
              
              17,057Stock-based
      compensation expense
              
              
              —
              
              
              
              —
              
              
              
              40,626
              
              
              
              —
              
              
              
              —
              
              
              
              40,626Balance
      at September 30, 2009
              
              $
              —
              
              
              $
              79,182
              
              
              $
              18,570,303
              
              
              $
              (27,110,942
              )
              
              $
              (337,126
              )
              
              $
              (8,798,583
              )
 
 
 
  See notes
to condensed consolidated financial statements
 5
  FLORIDA
COMMUNITY BANKS, INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine
Months Ended September 30, 2009 and 2008
 (Unaudited)
 
 Nine
      MonthsEnded
      September 30,2009
              
              
              2008Operating
      ActivitiesNet
      loss
              
              $
              (30,627,188
              )
              
              $
              (24,651,059
              )Adjustments
      to reconcile net loss to net cashprovided (used) by
      operating activities:Provision
      for loan losses
              
              
              14,330,000
              
              
              
              39,802,400Compensation
      associated with the issuance of options, net of tax
              
              
              40,626
              
              
              
              14,181Depreciation,
      amortization and accretion, net
              
              
              894,108
              
              
              
              789,174Loss
      on disposal of premises and equipment
              
              
              15,829
              
              
              
              —Gain
      on investments
              
              
              (3,123,999
              )
              
              
              —(Gain)
      loss on sale of foreclosed real estate
              
              
              165,298
              
              
              
              (62,552
              )Writedown
      on foreclosed real estate
              
              
              (431,962
              )
              
              
              463,969Decrease
      in accrued interest receivable
              
              
              869,414
              
              
              
              209,555Increase
      (decrease) in accrued interest payable
              
              
              2,067,980
              
              
              
              (282,448
              )(Increase)
      decrease in accrued income taxes receivable
              
              
              29,123,997
              
              
              
              (12,301,362
              )(Increase)
      decrease in deferred tax asset, net
              
              
              1,359,590
              
              
              
              (10,518,871
              )Other,
      net
              
              
              356,998
              
              
              
              (3,293,614
              )Net
      Cash Provided (Used) by Operating Activities
              
              
              15,040,691
              
              
              
              (9,830,627
              )Investing
      ActivitiesSale
      of investment securities
              
              
              172,898,088
              
              
              
              —Purchase
      of investment securities
              
              
              (117,148,022
              )
              
              
              (85,718,391
              )Proceeds
      from paydowns of investment securities
              
              
              32,640,142
              
              
              
              14,221,140(Purchase)
      sale of other investment securities
              
              
              (91,300
              )
              
              
              (1,504,636
              )Net
      decrease in loans to customers
              
              
              1,412,895
              
              
              
              35,228,276Proceeds
      from the sale of premises and equipment
              
              
              —
              
              
              
              —Purchase
      of premises and equipment
              
              
              (202,419
              )
              
              
              (5,314,849
              )Proceeds
      from the sale of foreclosed real estate
              
              
              5,356,022
              
              
              
              3,332,011Net
      Cash Provided (Used) by Investing Activities
              
              
              94,865,406
              
              
              
              (39,756,449
              )Financing
      ActivitiesNet
      increase (decrease) in deposits
              
              
              (50,471,035
              )
              
              
              48,011,006Increase
      in short-term borrowings
              
              
              —
              
              
              
              1,189,000Net
      decrease in FHLB advances
              
              
              —
              
              
              
              (5,000,000
              )Net
      Cash Provided (Used) by Financing Activities
              
              
              (50,471,035
              )
              
              
              44,200,006Net
      Increase (Decrease) in Cash and Cash Equivalents
              
              
              59,435,062
              
              
              
              (5,387,070
              )Cash
      and Cash Equivalents at Beginning of Period
              
              
              45,865,522
              
              
              
              14,729,315Cash
      and Cash Equivalents at End of Period
              
              $
              105,300,584
              
              
              $
              9,342,245
 
  See notes
to condensed consolidated financial statements
 6
 FLORIDA
COMMUNITY BANKS, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
  
 
 Note
A - Basis of Presentation
 
 Florida
Community Banks, Inc. ("FCBI" or the "Company") is a bank holding company, which
owns all of the common stock of Florida Community Bank (“FCB” or "Bank") and
special purpose business trusts organized to issue Trust Preferred Securities.
The special purpose business trusts are not consolidated in the financial
statements that are included elsewhere herein. The accompanying unaudited
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and disclosures required
by accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine-month period ended September 30,
2009, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2009.
 
 The
consolidated statement of financial condition at December 31, 2008, has been
derived from the audited financial statements at that date, but does not include
all of the information and related disclosures required by accounting principles
generally accepted in the United States for complete financial
statements.
 
 The
interim unaudited consolidated financial statements contained herein should be
read in conjunction with the audited financial statements and disclosures
included in Florida Community Banks, Inc.'s Annual Report on Form 10-K/A No.2
for the year ended December 31, 2008.
 
 Some
items in the September 30, 2008, financial information have been reclassified to
conform to the September 30, 2009, presentation.
 
 FCBI
evaluates variable interest entities for which voting interest are not an
effective means of identifying controlling financial
interests.  Variable interests are those in which the value of the
interest changes with the fair value of the net assets of the entity exclusive
of variable interests.  If the results of the evaluation indicate the
existence of a primary beneficiary and the entity does not effectively disperse
risks among the parties involved, that primary beneficiary is required to
consolidate the entity.  Likewise, if the evaluation indicates that
the requirements for consolidation are not met and the entity has previously
been consolidated, then the entity would be deconsolidated.
 
 FCBI has
investments in certain entities for which the Company does not have controlling
interest.  For these investments, the Company records its interest
using the equity method with its portion of income or loss being recorded in
other noninterest income in the Consolidated Statements of
Income.  The Company periodically evaluates these investments for
impairment.
 
 Subsequent
Events
 
 Generally
accepted accounting principles establish general standards for accounting for
and disclosure of events that occur after the balance sheet date but before the
financial statements are issued. In preparing these consolidated financial
statements, the Company evaluated the events and transactions that occurred
between October 1, 2009 and
 November
14, 2009, the date the financial statements were issued, and has identified an
events that requires disclosure in the consolidated financial statements see
note N.
  7
 FLORIDA
COMMUNITY BANKS, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
  Note
A - Basis of Presentation–
Continued
 
 Going Concern Issues,
Regulatory Oversight, Capital Adequacy, Liquidity and Management’s
Plans
 
 The
consolidated financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the discharge of liabilities in
the normal course of business for the foreseeable future. However, due to the
Company’s 2008 financial results and the results of the first nine months of
2009, and the lack of a capital restoration plan approved by the
regulators,it
is uncertain what additional actions our regulators will undertake. We believe
this uncertainty causes substantial doubt as to our ability to continue as a
going concern. We have determinedthat
significant additional sources of liquidityandcapital
will be required for us to continue operations through 2009 and beyond. We have
engaged financial advisors to assist the company in its efforts to raise
additional capital, sell assets and explore other strategic alternatives to
address our current and expected liquidity and capital deficiencies. To date,
those efforts have not yielded any definitive options.
 
 Regulatory
Oversight
 
 As
described in Part II, Other Information, the Bank and FCBI are currently
operating under heightened regulatory scrutiny; the Bank has entered into a
Cease and Desist Order Agreement (“Order”) with the OFR and FCBI has entered
into a Written Agreement (“Agreement”) with the Federal Reserve Bank of Atlanta.
Both the Order and the Agreement place certain requirements and restrictions on
the Bank and FCBI including but not limited to:
 
  The
Bank:
 
 •
              
              Adherence
      to a Capital Plan to maintain the Tier 1 Leverage Ratio and the Total Risk
      Based Capital Ratio of at least 8% and 12%, respectively, which are above
      current levels and the levels necessary to be categorized as “well
      capitalized” as defined by Prompt Corrective Action
      regulations.•
              
              The
      ratio of certain “classified assets” to Tier 1 Risk Based Capital and Loan
      Loss Reserves must be reduced to prescribed levels by dates beginning
      February 28, 2009.•
              
              Reduction
      of the Bank’s credit concentration
risk.
  
 FCBI:
 
 •
              
              FCBI’s
      resources will be used to support the Bank.•
              
              No
      dividends may be paid on common stock without prior regulatory
      approval.•
              
              Additional
      debt may not be incurred without prior regulatory
  approval.
 
 Capital
Adequacy
 
 As of
September 30, 2009, the Bank’s and FCBI’s capital ratio’s were below the minimum
ratios set in the OFR’s Order.  The Bank’s Tier 1 Leverage Capital
Ratio was 2.32%, the Tier 1 Risk Based Capital Ratio was 3.27% and the Total
Risk Based Capital Ratio was 4.58%.  FCBI’s Tier 1 Leverage Capital
Ratio was -0.93%, the Tier 1 Risk Based Capital Ratio was -1.31% and the Total
Risk Based Capital Ratio was -1.31%.
  In order
to return the Bank’s capital ratios to the level prescribed by the Order, FCBI
and the Bank are looking at numerous options. Issuing more stock to raise
capital is now critical, along with shrinking the Bank; doing both could return
the capital ratios to where the Bank would be considered “well capitalized”
again.  It must also be noted that failure to adequately address the
regulatory concerns may result in further enforcement actions by the banking
regulators, which could include appointment of a receiver or conservator of the
Bank’s assets.
 
 Liquidity
 
 Both the
Bank and FCBI actively manage liquidity. FCBI does not have any debt maturing
during 2009 or 2010. FCBI suspended its dividend to shareholders and Trust
Preferred Securities interest payments until such time as the Company returns to
profitability. At September 30, 2009, FCBI had approximately $496,000
thousand in cash at the parent level to meet its future operating
needs.
 
 Cash and
cash equivalents available at the Bank at September 30, 2009 were approximately
$105 million. The Bank does not have any long-term debt maturing until March
2010. Liquidity at the Bank is dependent upon the deposit franchise which funds
90% of the Company’s assets.
 
 The Bank
is now subject to restrictions on the interest rates it may offer to its
depositors. Under the applicable restrictions, the Bank cannot pay interest
rates higher than 75 basis points above the local average rates for each deposit
type. In light of the Bank’s historical practice of paying above average rates
to attract deposits, the Bank’s liquidity may be negatively impacted, possibly
materially, due to deposit run-off to the extent that it is unable to continue
offering above average rates.
 
 The Bank
is de-leveraging its balance sheet to improve its capital ratios and has been
planning so that as assets are removed from the balance sheet, the highest cost
funding declines in tandem particularly focusing on decreasing higher cost
certificate of deposits. The Bank currently has enough collateral to secure its
Fed Funds lines and to pledge for secured long-term debt borrowings. At
September 30, 2009, the Bank had the capacity to borrow up to $20 million on a
short-term basis which is subject to collateral pledging restrictions and
availability. The FDIC’s temporary changes to increase the amount of deposit
insurance to $250,000 per deposit relationship and to provide unlimited deposit
insurance for certain transaction accounts have contributed to improving the
Bank’s deposit base. All banks that have elected to participate in the deposit
component of the Temporary Liquidation Guarantee Program (“TLGP”) have the same
FDIC insurance coverage. At September 30, 2009, the Bank had approximately $37.4
million of uncollateralized, uninsured deposits. The Bank also does not have a
loan portfolio that could rapidly draw additional funds causing an elevated need
for additional liquidity at the Bank. At September 30, 2009, the Bank had
unfunded loan commitments of approximately $29 million. If a liquidity issue
presents itself, deposit promotions would be expected to yield significant
in-flows of cash.
 
 Based on
current and expected liquidity needs and sources, management expects the Bank
and FCBI to be able to meet obligations at least through September 30,
2010.
  8
 FLORIDA
COMMUNITY BANKS, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
  Note
A - Basis of Presentation–
Continued
  As noted
above, the Company is actively working toward transactions designed to meet the
requirements of the Order and Agreement. Failure to meet these requirements
could result in formal, heightened regulatory oversight and could eventually
lead to the appointment of a receiver or conservator of the Bank’s assets. If
unanticipated market factors emerge and/or the Company is unable to successfully
execute its plans or the banking regulators take unexpected actions, it could
have a material adverse effect on the Company’s business, results of operations
and financial position, and its ability to continue as a going
concern.
 
 Note
B - Critical Accounting Policies
 
 Use of
Estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
 
 The
determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. In connection with the determination
of the estimated losses on loans, management obtains independent appraisals for
significant collateral. While management uses available information to recognize
losses on loans, further reductions in the carrying amounts of loans may be
necessary based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the estimated losses on loans. Such agencies may require the Bank to recognize
additional losses based on their judgments about information available to them
at the time of their examination. Because of these factors, it is reasonably
possible that the estimated losses on loans may change materially in the near
term. However, the amount of the change that is reasonably possible cannot be
estimated.
 
 Note
C - Income Taxes
 
 Effective
January 1, 2007, the Company adopted a new accounting standard relating to "Accounting for Uncertainties in
Income Taxes". This standard requires the Company to record a liability,
referred to as an unrecognized tax benefit ("UTB"), for the entire benefit when
it believes a position taken in a past or future tax return has a less than 50%
chance of being accepted by the taxing or adjudicating authority.  If
the Company determines the likelihood of a position being accepted is greater
than 50%, but less than 100%, the Company should record a UTB for the amount
that it believes will not be accepted by the taxing authority. This standard
also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. Management has
determined that there are no significant uncertain tax positions requiring
recognition in the financial statements at the adoption date of January 1, 2007,
nor did any arise for the period ending September 30, 2009.
  9
 FLORIDA
COMMUNITY BANKS, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
  Note
C - Income Taxes - Continued
 
 The
Company may from time to time be assessed interest or penalties by taxing
authorities. Historically such assessments have been minimal and immaterial to
the financial statements taken as a whole. It is the policy of the Company that
these type of assessments be classified as income tax expense in the financial
statements.
 
 The
effective tax rate was 0.0% and approximately 39.1% for the nine months ended
September 30, 2009 and 2008, respectively.  For 2009, the Company has
a valuation allowance for its deferred tax asset and has elected not to
recognize any tax benefits until expected realization becomes probable (Note
M).   The 2008 figure is more than the federal statutory tax rate
for corporations; this is principally because of the effect of state income
taxes, net of federal tax benefit.
 
 Note
D - Securities
 
 Generally
accepted accounting principles related to "Accounting for Certain Investments
in Debt and Equity Securities" requires that all investments in debt
securities be classified as either "held-to-maturity" securities, which are
reported at amortized cost; “trading securities”, which are reported at fair
value, with unrealized gains and losses included in earnings; or
"available-for-sale" securities, which are reported at fair value, with
unrealized gains and losses excluded from earnings and reported in a separate
component of shareholders' equity (net of deferred tax effect).
 
 In April
2009, a new accounting standard was released relating to the “Recognition and
Presentation of Other-Than-Temporary Impairments”. This standard clarified the
interaction of the factors that should be considered when determining whether a
debt security is other-than-temporarily impaired. For debt securities,
management must assess whether (a) it has the intent to sell the security and
(b) it is more likely than not that it will be required to sell the security
prior to its anticipated recovery. These steps are done before assessing whether
the entity will recover the cost basis of the investment. Previously, this
assessment required management to assert it has both the intent and the ability
to hold a security for a period of time sufficient to allow for an anticipated
recovery in fair value to avoid recognizing an other-than-temporary impairment.
This change does not affect the need to forecast recovery of the value of the
security through either cash flows or market price.
 
 In
instances when a determination is made that an other-than-temporary impairment
exists but the investor does not intend to sell the debt security and it is not
more likely than not that it will be required to sell the debt security prior to
its anticipated recovery, the accounting standards dictates the presentation and
the amount of the other-than-temporary impairment that should be recognized in
the income statement. The other-than-temporary impairment is separated into (a)
the amount of the total other-than-temporary impairment related to a decrease in
cash flows expected to be collected from the debt security (the credit loss) and
(b) the amount of the total other-than-temporary impairment related to all other
factors. The amount of the total other-than-temporary impairment related to the
credit loss is recognized in earnings. The amount of the total
other-than-temporary impairment related to all other factors is recognized in
other comprehensive income.
 
 This
accounting standard was effective for the Company for reporting periods June 30,
2009 and after. The adoption of this standard did not have a material impact on
Riverview’s consolidated financial statements.
 
 
 The
carrying amounts of securities as shown in the consolidated statements of
financial condition and their approximate fair values at September 30, 2009 and
December 31, 2008 were as follows:
 
 Gross
                Amortized
                Cost
              
              
              Gross
                Unrealized
                Gains
              
              
              Gross
                Unrealized
                Losses
              
              
              Estimated Fair
                ValueSeptember
      30, 2009:
                Securities
      available-for-saleSBA
      securities
              
              $
              12,472,628
              
              
              $
              56,777
              
              
              $
              65,044
              
              
              $
              12,464,361Municipal
      securities
              
              
              1,823,064
              
              
              
              23,184
              
              
              
              —
              
              
              
              1,846,248Mortgage-backed
      securities
              
              
              102,362,285
              
              
              
              327,913
              
              
              
              325,773
              
              
              
              102,364,425$
              116,657,977
              
              
              $
              407,874
              
              
              $
              390,817
              
              
              $
              116,675,034December
      31, 2008:
                Securities
      held-to-maturityFHLB
      and FHLMCagency notes
              
              $
              19,486,401
              
              
              $
              546,204
              
              
              $
              —
              
              
              $
              20,032,605Municipal
      securities
              
              
              20,797,848
              
              
              
              10,965
              
              
              
              725,515
              
              
              
              20,083,298Mortgage-backed
      securities
              
              
              159,340,980
              
              
              
              4,025,482
              
              
              
              171,776
              
              
              
              163,194,686$
              199,625,229
              
              
              $
              4,582,651
              
              
              $
              897,291
              
              
              $
              203,310,589
 
 The
following table shows our investments' gross unrealized losses and fair value,
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position, at September 30,
2009.
 
 Less Than 12 Months
              12 Months or
      More
              TotalDescription of Securities
              Fair
                Value
              Unrealized
                Losses
              Fair
                Value
              Unrealized
                Losses
              Fair
                Value
              Unrealized
                LossesSBA
      securities
              $         
      8,195,664
              $          
       65,044
              $            —
              $           —
              $     
      8,195,664
              $     
         65,044Mortgage-backed
                securities
              47,544,941
              325,773
              —
              —
              47,544,941
              325,773Total
              $55,740,605
              $390,817
              $            —
              $           —
              $     
      55,740,605
              $390,817
 
 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.
  10
 FLORIDA
COMMUNITY BANKS, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
  Note
D - Securities - Continued
 
 The
Company believes all individual securities at September 30, 2009 that were in an
unrealized loss position or impaired for the timeframes indicated above are
deemed not to be other-than-temporary impairments. Substantially all of these
positions are backed by 1-4 family mortgages and the unrealized loss of these
securities is based solely on interest rate changes and not due to credit
ratings. All the securities have been classified as “available-for-sale” and
management may from time to time sell securities to reposition the
portfolio.
 
 During
the second and third quarter’s of 2009, management sold approximately $172.9
million in securities and realized a net gain of approximately $5.06 million.
Approximately $117.1 million in securities were purchased to provide collateral
for the Bank’s FHLB Advances, Public Deposits and Federal Funds Lines. The Bank
incurred a $1.9 million loss on the writedown of its Silverton Bank stock,
accounted for as Other Investments, which was put into receivership by the
Office of the Comptroller of the Currency (‘OCC’) on May 1, 2009.
 
 Note
E - Subordinated Debentures
 
 On May
12, 2006, FCBI Capital Trust II (“Trust II”), a Delaware statutory trust, Trust
II, received $20,000,000 in proceeds.  The proceeds of the Trust II
transaction and the $10,000,000 in proceeds from the prior statutory trust
established June 21, 2002, FCBI Capital Trust I ("Trust I") transaction were
then used by the trusts to purchase an equal amount of floating-rate
subordinated debentures (the "subordinated debentures") of the Company. The
Company has fully and unconditionally guaranteed all obligations of the trusts
on a subordinated basis with respect to the preferred securities. Subject to
certain limitations, the preferred securities qualify as Tier 1 capital and are
presented in the consolidated statements of financial condition as subordinated
debentures. The sole assets of the trusts are the subordinated debentures issued
by the Company. Both the preferred securities of the trusts and the subordinated
debentures of the Company each have approximately 30-year lives. However, both
the Company and the trusts have call options of five years, subject to
regulatory capital requirements.  The Company has elected to defer the
interest payments on both trust preferred securities until such time the Bank
returns to profitability. The Company can defer the payments for up to five
years.
 
 Note
F - Segment Information
 
 All of
the Company's offices offer similar products and services, are located in the
same geographic region, and serve the same customer segments of the market. As a
result, management considers all units as one operating segment and therefore
feels that the basic financial statements and related footnotes provide details
related to segment reporting.
 
  11
 FLORIDA
COMMUNITY BANKS, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
  Note
G - Stock-Based Compensation
 
 On
January 1st of
2006, the Company adopted an accounting standard related to "Share-Based Payment" which
requires all stock-based payments to employees to be recognized in the income
statement based on their fair values. The Company adopted this standard using
the modified prospective transition method. The modified prospective transition
method does not require the restatement of prior periods to reflect the fair
value method of expensing stock-based compensation. The standard does require a
cumulative effect adjustment of previously recognized compensation expense in
order to estimate forfeitures for awards outstanding on the adoption date. The
cumulative effect adjustment was immaterial.
 
 The
Company uses the Black-Scholes option pricing model for all grant date
estimations of fair value as the Company believes that its stock options have
characteristics for which the Black-Scholes model provides an acceptable measure
of fair value. The expected term of an option represents the period of time that
the Company expects the options granted to be outstanding. The Company bases
this estimate on a number of factors including vesting period, historical data,
expected volatility and blackout periods. The expected volatility used in the
option pricing calculation is estimated considering historical volatility. The
Company believes that historical volatility is a good predictor of the expected
volatility. The expected dividend yield represents the expected dividend rate
that will be paid out on the underlying shares during the expected term of the
option, taking into account any expected dividend increases. The Company's
options do not permit option holders to receive dividends and therefore the
expected dividend yield was factored into the calculation. The risk-free rate is
assumed to be a short-term treasury rate on the date of grant, such as a U.S.
Treasury zero-coupon issue with a term equal to the expected term of the
option.
 
 The
additional disclosure requirements of this standard have been omitted due to
immateriality.
 
 Note
H - Commitments and Contingencies
 
 In the
normal course of business the Company enters into commitments to extend credit,
which are agreements to lend to customers 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 generally require a payment of
fees. Since commitments may expire without being drawn upon, the total reported
does not necessarily represent expected future cash flows.
 
 Standby
letters of credit are commitments issued by the Company to guarantee the
performance of a customer to a third party. These guarantees are primarily
issued to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions, and expire in
decreasing amounts with terms ranging from one to four years. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
 
 The
following represents the Company's approximate total amounts of commitments to
extend credit and standby letters of credit as of September 30, 2009 and
December 31, 2008:
 
 September
      30,
                2009
              
              
              December 31,2008Loan
      commitments
              
              $
              27,591,000
              
              
              $
              48,190,000Standby
      letters of
      credit
              
              
              1,326,000
              
              
              
              1,471,000$
              28,917,000
              
              
              $
              49,661,000
 
  Florida
Community Bank, as part of its retail mortgage loan production activities,
routinely enters into short-term commitments to originate fixed rate loans. Most
of the loans will be sold to third party correspondent banks upon closing. For
those loans, the Company enters into individual forward sales commitments at the
same time the commitment to originate is finalized. While the forward sales
commitments function as an economic hedge and effectively eliminate the
Company's financial risk of rate changes during the rate lock period, both the
commitment to originate mortgage loans that will be sold and the commitment to
sell the mortgage loans are derivatives, the fair values of which are
essentially equal and offsetting, whereas the Company primarily acts as
intermediary between the borrower and the ultimate lender.
 
 The
Company invested in AMD-FCB, LLP (the "Partnership"), formed to build and lease
an office building in which the Bank will lease space upon completion. In early
2007, the Partnership entered into a construction agreement with a third party
bank. The Company and the other 50% partner have each guaranteed 50% of a
construction loan currently totaling approximately $5,122,000. In addition, the
Bank has entered into a 15 year lease agreement with the Partnership to lease
16,809 square feet of the building, approximately one-half. The annual lease
payments are projected to be approximately $536,000, with annual increases based
on the Consumer Price Index ("CPI").
 
 The
Company also entered into lease agreements with North Port Gateway, LLC to lease
office space for a branch in North Port, Florida  and with Center of
Bonita Springs, Inc. to lease office space for a branch in Bonita Springs,
Florida. Annual lease payments are projected to be approximately $195,000 and
$146,000, respectively, with annual increases based on the CPI.
 
 The
opening of all three offices has been put on hold by the Bank’s regulators. The
Bank has significant issues (see Legal proceedings below for more details)
related to its non-performing assets, that it has to deal with before the
branches can be opened.
 
 Note
I - Recent Accounting Pronouncements
 
 NEW
AND RECENT ACCOUNTING PRONOUNCEMENTS
 
 On June
12, 2009, a new standard was released regarding “Accounting for Transfers of
Financial Assets”, an amendment to the “Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities”, and will require more
information about transfers of financial assets, including securitization
transactions, and where companies have continuing exposure to the risks related
to transferred financial assets. This standard also eliminates the concept of a
“qualifying special-purpose entity”, changes the requirements for derecognizing
financial assets and requires additional disclosures. This standard will be
effective as of the beginning of the Company’s first annual reporting period
that begins after November 15, 2009, for interim periods within that first
annual reporting period and for interim and annual reporting periods thereafter.
Earlier application is prohibited. The recognition and measurement provisions of
this standard shall be applied to transfers that occur on or after the effective
date. The Company will adopt this standard on January 1, 2010, as required.
Management has not determined the impact adoption may have on the Company’s
consolidated financial statements.
 
 On June
12, 2009, a new standard relating to “Consolidation of Variable Interest
Entities”. This standard amends the previous standard and changes how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. The
determination of whether a company is required to consolidate an entity is based
on, among other things, an entity’s purpose and design and a company’s ability
to direct the activities of the entity that most significantly impact the
entity’s economic performance. This standard will be effective as of the
Company’s first annual reporting period that begins after November 15, 2009, for
interim periods within that first annual reporting period and for interim and
annual reporting periods thereafter. Earlier application is prohibited. The
Company will adopt this standard on January 1, 2010, as required. Management has
not determined the impact adoption may have on the Company’s consolidated
financial statements.
 
 On June
29, 2009, a new accounting was released regarding “Accounting Standards
Codification TM and the Hierarchy of Generally Accepted Accounting Principles” —
a replacement of FASB Statement No. 162. This standard establishes the FASB
Accounting Standards Codification TM as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in
the preparation of financial statements in conformity with US GAAP. This
standard will be effective for financial statements issued for interim and
annual periods ending after September 15, 2009, for most entities. On the
effective date, all non-SEC accounting and reporting standards will be
superseded. The Company will adopt this standard for the quarterly period ended
September 30, 2009, as required, and adoption is not expected to have a material
impact on the Company’s consolidated financial statements.
  12
 FLORIDA
COMMUNITY BANKS, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
  Note
I - Recent Accounting Pronouncements - Continued
 ADOPTION
OF NEW ACCOUNTING PRONOUNCEMENTS
 
 In
December 2007, a new standard relating to “Business Combination” was
released.  The standard significantly changes the financial accounting
and reporting of business combination transactions. The standard establishes
principles for how an acquirer recognizes and measures the identifiable assets
acquired, liabilities assumed, and any noncontrolling interest in the acquiree;
recognizes and measures goodwill acquired in the business combination or a gain
from a bargain purchase; and determines what information to disclose to enable
users of the financial statements to evaluate the nature and financial effects
of the business combination. This standard is effective for acquisition dates in
fiscal years beginning after December 15, 2008. The adoption of this standard
did not have a material impact on the Company’s consolidated financial
statements.
 
 In March
2008, a new standard was issued related to “Disclosures About Derivative
Instruments and Hedging Activities.” This standard amends a previous
standard and requires qualitative disclosures about objectives and strategies
for using derivatives, quantitative disclosures about fair value amounts of
gains and losses on derivative instruments, and disclosures about
credit-risk-related contingent features in derivative agreements. The standard
is effective for fiscal years and interim periods beginning after November 15,
2008. The implementation of the standard did not have a material impact on the
Company’s consolidated financial statements.
 
 In April
2009, a new accounting standard was released regarding “Determining fair value when the
volume and level of activity for the asset or liability have significantly
decreased and identifying transactions that are not orderly.” This
standard provides additional guidance for estimating fair value in accordance
with GAAP when the volume and level of activity for the asset or liability have
decreased significantly. The standard also provides guidance on identifying
circumstances that indicate a transaction is not orderly. The provisions of this
standard are effective for the Company’s interim period ending June 30, 2009.
The implementation of this standard did not have a material impact on the
Company’s consolidated financial statements.
 
 In April
2009, new standards relating to “Recognition and presentation of
other-than-temporary impairments” were issued.  These standards
amend current other-than-temporary impairment guidance in GAAP for debt
securities to make the guidance more operational and to improve the presentation
and disclosure of other-than-temporary impairments on debt and equity securities
in the financial statements. These standards do not amend existing recognition
and measurement guidance related to other-than-temporary impairments of equity
securities. The provisions of these standards are effective for the Company’s
interim period ending on June 30, 2009. The implementation of these standards
did not have a material impact on the Company’s consolidated financial
statements.
 
 Effective
January 1, 2009, the Company adopted the amended accounting standard relating to
“Noncontrolling Interests in
Consolidated Financial Statements.” This standard requires that a
noncontrolling interest in a subsidiary be reported separately within equity and
the amount of consolidated net income specifically attributable to the
noncontrolling interest be identified in the consolidated financial statements.
It also calls for consistency in the manner of reporting changes in the parent’s
ownership interest and requires fair value measurement of any noncontrolling
equity investment retained in deconsolidation. The standard requires
retrospective application for the presentation and disclosure requirements. The
provisions of the standard did not have a material impact on the Company’s
consolidated financial statements.
 
 In April
2009, new accounting standards were released relating to “Interim disclosures about fair value
of financial instruments.” These standards require disclosures about fair
value of financial instruments in interim reporting periods of publicly traded
companies that were previously only required to be disclosed in annual financial
statements. The provisions of these standards are effective for the Company’s
interim period ending on June 30, 2009. As these standard amend only the
disclosure requirements about fair value of financial instruments in interim
periods, their adoption did not affect the Company’s consolidated financial
statements.
 
  13
 FLORIDA
COMMUNITY BANKS, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
  Note
I - Recent Accounting Pronouncements - Continued
 
 On May
28, 2009, a new standard was released regarding “Subsequent Events.” Under
this standard, companies are required to evaluate events and transactions that
occur after the balance sheet date but before the date the financial statements
are issued, or available to be issued in the case of non-public entities. The
standard requires entities to recognize in the financial statements the effect
of all events or transactions that provide additional evidence of conditions
that existed at the balance sheet date, including the estimates inherent in the
financial preparation process. Entities shall not recognize the impact of events
or transactions that provide evidence about conditions that did not exist at the
balance sheet date but arose after that date. The standard also requires
entities to disclose the date through which subsequent events have been
evaluated. The standard was effective for interim and annual reporting periods
ending after June 15, 2009. The Company adopted the provisions of this standard
for the quarter ended June 30, 2009, as required, and adoption did not have a
material impact on the Company’s financial statements.
 
 In April
2009, a new accounting standard was issued relating to “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies.” This standard amends and clarifies the “Business Combination”
standard to address application issues on initial recognition and measurement,
subsequent measurement and accounting, and disclosure of assets and liabilities
arising from contingencies in a business combination. This new standard is
effective for assets and liabilities arising from contingencies in business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. The
Company does not expect the adoption of this standard to have a material impact
on its consolidated financial statements.
 
 In April
2009, the Securities and Exchange Commission issued Staff Accounting Bulletin
No. 111 (SAB 111).  SAB 111 amended and replaced SAB Topic 5.M. in the
SAB Series entitled “Other
Than Temporary Impairment of Certain  Investments in Debt and Equity
Securities.” SAB 111 maintains the SEC Staff’s previous views related to
equity securities and amends Topic 5.M. to exclude debt securities from its
scope. The Company does not expect the implementation of SAB 111 to have a
material impact on its consolidated financial statements.
 
 In June
2009, a new standard relating to “The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles —
replacement of FASB Statement No. 162” was issued. This standard
establishes the FASB Accounting Standards Codification will become the source of
authoritative U.S. generally accepted accounting principles (GAAP) recognized by
the FASB to be applied by nongovernmental entities. This standard is effective
immediately. The adoption of this standard did not have an impact on the
Company’s financial position or results of operations.
 
 In June
2009, the Securities and Exchange Commission issued Staff Accounting Bulletin
No. 112 (SAB 112). SAB 112 revises or rescinds portions of the interpretative
guidance included in the codification of SABs in order to make the interpretive
guidance consistent with current U.S. GAAP. The Company does not expect the
adoption of SAB 112 to have a material impact on its (consolidated) financial
statements.
  In August
2009, the FASB issued Accounting Standards Update No. 2009-05 (ASU 2009-05),
“Fair Value Measurements and
Disclosures (Topic 820) — Measuring Liabilities at Fair Value.” ASU
2009-05 amends Subtopic 820-10, “Fair Value Measurements and
Disclosures — Overall,” and provides clarification for the fair value
measurement of liabilities. ASU 2009-05 is effective for the first reporting
period including interim period beginning after issuance. The Company does not
expect the adoption of ASU 2009-05 to have a material impact on its
(consolidated) financial statements.
     
  14
 FLORIDA
COMMUNITY BANKS, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
   Note
J - Fair Value Measurements
  
 The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments for which it is practicable to estimate that
value:
 
 Cash and Short-Term
Investments:For cash and short-term
instruments, the carrying amount is a reasonable estimate of fair
value.
 
 Securities:For securities
available-for sale and held-to-maturity, fair values are based on quoted market
prices or dealer quotes.  For other investments, fair value is
estimated to be approximately the carrying amount.
 
 Loans Held-for-Sale: For
these short-term instruments, the carrying amount is a reasonable estimate of
fair value.
 
 Loans: For certain
homogeneous categories of loans, such as some residential mortgage, credit card
receivables and other consumer loans, fair value is estimated using the quoted
market prices for securities backed by similar loans, adjusted for differences
in loan characteristics. The fair value of other types of loans is estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities.
 
 Accrued Interest Receivable and
Payable:The carrying amount of
accrued interest receivable and payable approximates its fair
value.
 
 Deposits: The fair value of
demand deposits, savings accounts and certain money market deposits is the
amount payable on demand at the reporting date. The fair value of fixed-maturity
certificates of deposit is estimated using the rates currently offered for
deposits of similar remaining maturities.
 
 Long-Term Debt: Rates
currently available to the Company for debt with similar terms and remaining
maturities are used to estimate fair value of existing debt.
 
 Commitments to Extend Credit,
Standby Letters of Credit, and Financial Guarantees Written: The fair
value of commitments, letters of credit, and financial guarantees is estimated
to be approximately the fees charged for these arrangements.
 
  15
 FLORIDA
COMMUNITY BANKS, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
  Note
J - Fair Value of Financial Instruments - Continued
 
 The
estimated fair values of the Company's financial instruments as of September 30,
2009 and December 31, 2008, are as follows:
 
 09/30/2009
              
              
              12/31/2008Carrying
                Amount
              
              
              Fair
                Value
              
              
              Carrying
                Amount
              
              
              Fair
                Value(in
      thousands)
              
              
              (in
      thousands)Financial
      AssetsCash
      and short-term investments
              
              $
              105,301
              
              
              $
              105,301
              
              
              $
              45,866
              
              
              $
              45,866Securities
              
              
              116,675
              
              
              
              116,675
              
              
              
              199,625
              
              
              
              203,311Other
      investments
              
              
              5,264
              
              
              
              5,264
              
              
              
              7,988
              
              
              
              7,988Loans
      held-for-sale
              
              
              —
              
              
              
              —
              
              
              
              156
              
              
              
              156Loans
              
              
              570,101
              
              
              
              560,409
              
              
              
              624,478
              
              
              
              628,562Accrued
      interest receivable
              
              
              2,642
              
              
              
              2,642
              
              
              
              3,511
              
              
              
              3,511Financial
      LiabilitiesDeposits
              
              $
              794,958
              
              
              $
              806,394
              
              
              $
              845,429
              
              
              $
              863,237Accrued
      interest payable
              
              
              6,921
              
              
              
              6,921
              
              
              
              4,853
              
              
              
              4,853Long-term
      debt
              
              
              80,929
              
              
              
              83,791
              
              
              
              80,929
              
              
              
              85,513Financial
      InstrumentsCommitments
      to extend credit
              
              $
              27,591
              
              
              $
              276
              
              
              $
              48,190
              
              
              $
              482Standby
      letters of credit
              
              
              1,326
              
              
              
              13
              
              
              
              1,471
              
              
              
              15
 
 The
Company adopted a new standard entitled“Fair Value Measurements“
effective January 1, 2008 on a prospective basis.  The standard
defines fair value for financial reporting purposes as the price that would be
received to sell an asset or paid to transfer a liability in an orderly market
transaction between market participants at the measurement date (reporting
date).  Under the statement, fair value is based on an exit price in the
principal market or most advantageous market in which the reporting entity could
transact.
 
 For each
asset and liability required to be reported at fair value, management has
identified the unit of account and valuation premise to be applied for purposes
of measuring fair value.  The unit of account is the level at which an
asset or liability is aggregated or disaggregated for purposes of applying
generally accepted accounting principles.  The valuation premise is a
concept that determines whether an asset is measured on a standalone basis or in
combination with other assets.  For purposes of applying the provisions of
the standard, the Company measures its assets and liabilities on a standalone
basis then aggregates assets and liabilities with similar characteristics for
disclosure purposes.
 
 In April
2009, the FASB issued a new standard related to “Interim Disclosures about Fair Value
of Financial Instruments.” This standard amends the “Disclosures about
Fair Value of Financial Instruments” standard, to require disclosure about fair
value of financial instruments for interim reporting periods of publicly traded
companies as well as in annual financial statements. This standard also amends
the “Interim Financial
Reporting” standards, to require those disclosures in summarized
financial information at interim reporting periods.
 Note
J - Fair Value Measurements - Continued
 
 This
standard is effective for the Company for reporting periods June 30, 2009 and
after. The adoption of this standard did not have a material impact on the
consolidated financial statements.
 
 Fair Value
Hierarchy
 
 Management
employs market standard valuation techniques in determining the fair value of
assets and liabilities.  Inputs used in valuation techniques are based on
assumptions that market participants would use in pricing an asset or
liability.  The standard prioritizes inputs used in valuation techniques as
follows:
 
 Level 1- Quoted market prices
in an active market for identical assets and liabilities.
 
 Level 2- Observable
      inputs including quoted prices (other than level 1) in active markets for
      similar assets or liabilities, quoted prices for identical or similar
      assets or liabilities in markets that are not active, inputs other than
      quoted prices that are observable for the asset or liability such as
      interest rates, yield curves, volatilities and default rates, and inputs
      that are derived principally from or corroborated by observable market
      data.
 
 Level 3- Unobservable
      inputs reflect the reporting entity’s own assumptions about the
      assumptions market participants would use in pricing the asset or
      liability based on the best information
  available.
 
 If the
determination of fair value measurement for a particular asset or liability is
based on inputs from different levels of the fair value hierarchy, the level in
the fair value hierarchy within which the entire fair value measurement falls is
based on the lowest level input that is significant to the fair value
measurement in its entirety. Management’s assessment of the significance of a
particular input to the fair value measurement requires judgment and considers
factors specific to the asset or liability measured.
 
 Valuation
Techniques
 
 The
Company’s assets and liabilities recorded at fair value have been categorized in
the following tables based upon a fair value hierarchy.
 
 Items
Measured at Fair Value on a Recurring Basis
 The
following fair value hierarchy table presents information about the Company’s
assets and liabilities measured at fair value on a recurring basis as of
September 30, 2009:
 
 Fair
      Value Measurement at Report Date UsingFair
      Value
              
              
              Quoted
      Prices in Active Markets
                Level
      1
              
              
              Significant
      Other Observable Inputs
                Level
      2
              
              
              Significant
      Unobservable Inputs
                Level
      3Securities
      available-for-sale
              
              $
              116,675,034
              
              
              $
              —
              
              
              $
              116,675,034
              
              
              $
              —Total
      Assets
              
              $
              116,675,034
              
              
              $
              —
              
              
              $
              116,675,034
              
              
              $
              —
 
  16
 FLORIDA
COMMUNITY BANKS, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
  Note
J - Fair Value Measurements - Continued
 
 The
valuation techniques used to measure fair value for the items in the table above
are as follows:
 
 Securities available-for-sale
- The fair value is based on quoted market prices in an active market for
identical assets and liabilities as of the reporting date.
 
 Items
Measured at Fair Value on a Nonrecurring Basis
 The
following fair value hierarchy table presents information about the Company’s
assets and liabilities measured at fair value on a nonrecurring basis as of
September 30, 2009:
 
 Fair
      Value Measurement at Report Date UsingFair
      Value
              
              
              Quoted
      Prices in Active Markets
                Level
      1
              
              
              Significant
      Other Observable Inputs
                Level
      2
              
              
              Significant
      Unobservable Inputs
                Level
      3Impaired
      loans
              
              $
              196,095,599
              
              
              $
              —
              
              
              $
              —
              
              
              $
              196,095,599Foreclosed
      real estate
              
              
              85,384,334
              
              
              
              —
              
              
              
              —
              
              
              
              85,384,334Total
      Assets
              
              $
              281,479,933
              
              
              $
              —
              
              
              $
              —
              
              
              $
              281,479,933
 
 The
valuation techniques used to measure fair value for the items in the table above
are as follows:
 
 Impaired Loans - Nonrecurring
fair value adjustments to loans reflect full or partial writedowns that are
based on the loan’s observable market price or current appraised value of the
collateral in accordance with the accounting standard “Accounting by Creditors for
Impairment of a Loan.”  Loans subjected to nonrecurring fair
value adjustments based on the current appraised value of the collateral may be
classified as Level 2 or Level 3 depending on the type of asset and the inputs
to the valuation.  When appraisals are used to determine impairment,
and these appraisals require significant adjustments to market-based valuation
inputs or apply an income approach based on unobservable cash flows to measure
fair value, the related loans subjected to nonrecurring fair value adjustments
are typically classified as Level 3 due to the fact that Level 3 inputs are
significant to the fair value measurement.
 
 Foreclosed real estate -
Nonrecurring fair value adjustments to foreclosed real estate reflect full or
partial writedowns that are based on the real estate’s observable market price
or current appraised value of the collateral in accordance with the accounting
standard related to “Accounting by Creditors for
Impairment of a Loan.”
 
 A new
accounting standard,“Effective Date of FASB Statement No. 157” issued on
February 12, 2008, amends the accounting standard,“Fair Value Measurements”,
to delay the effective date for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually).
 
  17
 FLORIDA
COMMUNITY BANKS, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
  Note
K – Other Comprehensive Income
 
 Comprehensive
income is generally defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from no
owner sources. Itincludes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. Other
comprehensive income (loss) are those items not recorded as components of net
income. The accumulated balance of other comprehensive income (loss) is reported
separately from retained earnings in the equity section of the statements of
financial condition
 
 In the
calculation of comprehensive income, certain reclassification adjustments are
made to avoid double counting items that are displayed as part of net income for
a period that also had been displayed as part of other comprehensive income
(loss) in that period or earlier periods. The disclosure of the reclassification
amounts and other details of other comprehensive income (loss) are as
follows:
 
 09/30/2009
              
              
              12/31/2008Unrealized
      gains (losses) on securities:Unrealized
      holding gains (losses) arising during the period
              
              $
              2,786,874
              
              
              $
              (354,183
              )Reclassification
      adjustments
              
              
              (3,124,000
              )
              
              
              —Net
      unrealized gains (losses)
              
              
              (337,126
              )
              
              
              (354,183
              )Income
      tax related to items of other comprehensive income
              
              
              —
              
              
              
              —Other
      comprehensive income (loss)
              
              $
              (337,126
              )
              
              $
              (354,183
              )
 
 
 Note
L – Concentration of Credit Risk
 
 A
significant portion of our loan portfolio (approximately 92%) consists of
mortgages secured by real estate located in the Collier/Lee County markets. Real
estate values and real estate markets are generally affected by, among other
things, changes in national, regional or local economic conditions; fluctuations
in interest rates and the availability of loans to potential purchasers; changes
in the tax laws and other governmental statutes, regulations and policies; and
acts of nature. Over the past year, real estate prices in each of our markets
have declined and if real estate prices continue to decline in any of these
markets, the value of the real estate collateral securing our loans could be
reduced. Such a reduction in the value of our collateral could increase the
number of non-performing loans and adversely affect our financial
performance.
 
 Subsequent
events have been evaluated through November 13, 2009, which is the date the
financial statements were issued.
 
  18
 FLORIDA
COMMUNITY BANKS, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
  Note
M – Subsequent Events
 
 Continuing
Operations
 
 The
unforeseen continued severity and longevity of the turmoil in the economy, and
more specifically, with respect to the Southwest Florida real estate market has
caused increased scrutiny and potential intervention of our regulators. The
apparent euphoria with the new administration, which caused the regional
economic indicators to give a premature bump in the first quarter, gave way to
the harsh reality that nothing was in place to stimulate the area’s small
business and essential consumer confidence that initiates tourist demand for
real estate. As the company determined in the first quarter that the deferred
tax assets that were recorded for financial reporting purposes did not qualify
for regulatory capital, the second quarter saw the local economy worsen to lows
not seen since the Great Depression era.  The area in the Bank’s
footprint registered second in the nation for real estate foreclosures at one in
thirteen homes. This was evidenced as the Bank filed its third quarter call
report. Despite vigilant analysis of the loan portfolio, and writing down or
reserving for all foreseen problem loans, nonperforming loans increased to
35.19% of total loans. Additionally, nonperforming assets to total assets rose
to 32.61%. These ratios are unsustainable and communications with our regulators
have confirmed that the need for additional capital is absolutely critical. Our
ability to accomplish capital restoration is significantly constricted by the
current economic environment. As has been widely publicized, access to capital
markets is extremely limited in the current economic environment, and we can
give no assurances that we will be able to access any such capital or sell more
assets. Due to the conditions and events discussed herein it is uncertain what
additional actions our regulators will undertake. We believe this uncertainty
causes substantial doubt as to our ability to continue as a going concern. With
the foregoing, it would be impossible to realize any deferred tax assets; we
therefore amended our 10-K and restated our financial statements as of December
31, 2008, to properly reflect the appropriate devaluation of those assets at
December 31.  Since we have determined that significant additional
sources of capital will be required for us to continue operations through 2009
and beyond, we have engaged financial advisors to assist the company in its
efforts to raise additional capital, and explore other strategic alternatives to
address our current capital deficiencies. To date, those efforts have not
yielded any definitive options.
 
 Income
Taxes
 
 On
November 6, 2009, TheWorker,
Homeownership, and Business Assistance Act of 2009 (H.R. 3548) (the “Act”) was
enacted effective for periods ending on or after the date of
enactment.  The Act provides for the recovery of prior period federal
income taxes paid resulting from the carryback of current year net operating
losses for an extended five-year carryback period.  Prior law had
allowed only a two-year carryback period.  The increased carryback
period will allow the Company to realize tax recovery benefits from its current
net operating loss through carryback to years previously unavailable for tax
recovery.  The Company anticipates a tax net operating loss for the
year ending December 31, 2009.  The anticipated net operating loss
will be available to carryback to prior tax years 2004 and
forward.  The tax net operating loss as of September 30, 2009, if
sustained through year end would generate refunds from carryback of
approximately $10.9 million.  The subsidiary bank allocation of this
recovery would be approximately $10.5 million.  The following tables
reflect current and pro forma amounts of net income and capital amounts and
ratios as if giving effect to the Act as of September 30, 2009.
 
 
 
 Pro Forma Net
Income
 
 Consolidated
              
              
              Bank
      OnlyNet
      loss as reported for the nine months ended September 30,
    2009
              
              $
              30,627
              
              
              $
              29,603Pro
      forma recognized tax benefit
              
              
              10,900
              
              
              
              10,500Pro
      forma net loss
              
              $
              19,727
              
              
              $
              19,103
 
 
 Pro Forma Regulatory
Capital
 
 Actual
              
              
              Pro
      FormaAmount
              
              
              Ratio
              
              
              Amount
              
              
              RatioTier
      1 LeverageConsolidated
              
              $
              (8,462
              )
              
              
              -0.93
              %
              
              $
              3,251
              
              
              
              0.36
              %Bank
              
              
              21,107
              
              
              
              2.32
              %
              
              
              31,607
              
              
              
              3.47
              %Tier
      1 Risk-Based CapitalConsolidated
              
              
              (8,462
              )
              
              
              -1.31
              %
              
              
              3,251
              
              
              
              0.50
              %Bank
              
              
              21,107
              
              
              
              3.27
              %
              
              
              31,607
              
              
              
              4.90
              %Total
      Risk-Based CapitalConsolidated
              
              
              (8,462
              )
              
              
              -1.31
              %
              
              
              6,501
              
              
              
              1.01
              %Bank
              
              
              21,107
              
              
              
              4.58
              %
              
              
              40,021
              
              
              
              6.21
              %
 
 
  19
 FLORIDA
COMMUNITY BANKS, INC.
 September
30, 2009
  Item
2 - Management's Discussion and Analysis of Financial Condition and Results of
Operations
 
 This
discussion is intended to assist an understanding of the Company's financial
condition and results of operations. This analysis should be read in conjunction
with the consolidated financial statements and related notes appearing in Item 1
of the September 30, 2009, Form 10-Q, and "Management's Discussion and Analysis
of Financial Condition and Results of Operations," appearing in the Company's
Annual Report on Form 10-K/A for the year ended December 31, 2008.
 
 Forward-Looking
Information
 
 Certain
statements contained in this Quarterly Report on Form 10-Q, which are not
historical facts, are forward-looking in nature and relate to trends and events
that may affect the Company's future financial position and operating results.
In addition, the Company, through its senior management, from time to time makes
forward-looking public statements concerning its expected future operations and
performance and other developments. All forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The terms "expect," "anticipates," "intend" and "project"
and similar words or expression are intended to identify forward-looking
statements. In addition to risks and uncertainties that may affect operations,
performance, growth projections and the results of the Company's business, which
include, but are not limited to, fluctuations in the economy, the relative
strength and weakness in the commercial and consumer sector and in the real
estate market, the actions taken by the Federal Reserve Board for the purpose of
managing the economy, interest rate movements, the impact of competitive
products, services and pricing, timely development by the Company of technology
enhancements for its products and operating systems, legislation and similar
matters, the Company's future operations, performance, growth projections and
results will depend on its ability to respond to the challenges associated with
a weakening economy, particularly in real estate development, which is prominent
in the Company's primary market. Although management of the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to be
correct. Prospective investors are cautioned that any such forward-looking
statements are not guaranties of future performance, involve risks and
uncertainties, and that actual results may differ materially from those
contemplated by such forward-looking statements. The Company makes no commitment
to update any forward-looking statement or to disclose any facts, events or
circumstances that may affect the accuracy of any forward-looking
statement.
 
 Going
Concern Issues
 
 Florida
Community Bank is experiencing the effects of what many consider to be the worst
economic downturn since the Great Depression. The effects of the current
environment are being felt across many industries, with residential and
commercial real estate being hit particularly hard in Southwest Florida. The
Bank, with a portfolio of loans primarily secured by real estate, has seen a
rapid and incredible decline in the value of the collateral securing our loan
portfolio. Coupled with rising unemployment, Southwest Florida has seen the
foreclosure rates skyrocket to one the highest levels in the country, and it
continues to be a big problem for the Bank, as it tries to sell foreclosed
properties at a price that it can afford to. The decline in real estate values
in 2008 and through the first nine months of 2009 has contributed to the high
level of charge-offs and the significant increase in the provision for credit
losses, resulting in net losses of $76.2 million in 2008 and $30.6 million for
the first nine months of 2009. These losses have severely depleted the Bank’s
capital. We cannot predict when the real estate economy will turn and improve
and we cannot assure you that we will be able to return to being profitable
again in the near future, or even at all.
 We know
however that if the Bank’s financial condition continues to deteriorate we will
become critically undercapitalized which will require significantly more capital
to bring us back to the point where we can be profitable again. Raising capital
in this economic climate is and will be extremely challenging and there is no
assurance that the Company will succeed in this endeavor. If the Company can not
raise sufficient capital to be able to comply with the Order, the regulators may
take additional enforcement action against the Company and the
Bank.
 
 As stated
above, it remains to be seen if the Company and the Bank will be successful,
either on a short-term or long-term basis. In addition, it is unclear at this
time what impact, if any, the interest rate restrictions included in the Order
will have on the Bank’s ability to maintain adequate liquidity. As a result of
our financial condition, our regulators are continually monitoring our liquidity
and capital adequacy. Based on their assessment of our ability to continue to
operate in a safe and sound manner, our regulators at any time may take other
and further actions, including placing the Bank into conservatorship or
receivership, to protect the interests of depositors insured by the
FDIC.
 
 The
accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the discharge of
liabilities in the normal course of business for the foreseeable future, and do
not include any adjustments to reflect the possible future effects on the
recoverability or classification of assets, and the amounts or classifications
of liabilities that may result from the outcome of any regulatory action, which
would affect our ability to continue as a going concern.
 
 
 FINANCIAL
CONDITION
 
 September
30, 2009 compared to December 31, 2008
 
 The Bank
has continued to originate loans in Southwest Florida, albeit at a much slower
pace than in prior years; affected by the worst real estate economy that this
part of Florida has ever experienced. As discussed more fully below, loans
decreased 8.71% during the first nine months of 2009, while equity capital
declined by 140.41%. While management continues to be proactive in recognizing
the losses in the bank’s loan portfolio and trying to reduce the high level of
non-performing assets on the books, its top priority is trying to raise
capital.
 
 Loans
 
 Loans
comprised the largest single category of the Company's earning assets on
September 30, 2009. Loans, net of unearned income, totaled 65.00% of total
assets at September 30, 2009 compared to 65.39% of total assets at December 31,
2008. During the first nine months of 2009, the bank originated approximately
$29 million in new loans compared to approximately $77 million during the same
time period last year. Over the first nine months of 2009, loans decreased
approximately $54.4 million, compared to the decrease of approximately $105.6
million during the same time period last year. Approximately $47 million of the
decrease in 2009 was due to nonperforming loans that were either charged-off and
or transferred to the other real estate owned category. Management expects that
this trend will continue, that the loan portfolio will continue to decrease as
loans are transferred over to the other real estate owned category. At some
point however management expects that the financing of other real estate sales
will slow or stop the decline in the portfolio.
  20
 FLORIDA
COMMUNITY BANKS, INC.
 September
30, 2009
  As of
September, 30, 2009, commercial real estate loans comprised approximately 74% of
the loan portfolio, about the same as it was at the end of 2008.
 
 As part
of the Cease and Desist Order, the Bank was required to reduce its concentration
in commercial real estate loans. The Bank has reduced the commercial real estate
loans by approximately $70.7 million or 14.03% from December 31, 2008; the
reduction was mostly through charge-offs.
 
 Investment
Securities and Other Earning Assets
 
 The
investment securities portfolio is used to provide a source of liquidity, to
serve as collateral for borrowings and to secure certain government deposits.
Federal funds sold and other interest-bearing deposits held for liquidity
purposes increased by $65.6 million during the first nine months of 2009 and
totaled approximately $100.3 million at September 30, 2009; they are the most
liquid earning asset and is used to manage the daily cash position of the
Company. Management increased the bank’s liquidity position by restructuring the
securities portfolio, selling approximately $173 million and only purchasing
$117 million to cover what was needed for collateral purposes. In the
restructuring we sold our Fannie, Freddie and Municipal securities that had a
20% risk-weighting and purchased Ginnie Mae and SBA securities that are 100%
guaranteed by the U.S. government and 0% risk-weighted. Additional liquidity
came from income tax refunds totaling approximately $29 million. Investment
securities and other investment securities totaled $121.9 million at September
30, 2009.
 
 Asset
Quality
 
 From December 31, 2008 to September 30,
2009, the Bank's asset quality continued to deteriorate as measured by three key
ratios. The ratio of loan loss allowance to total nonperforming assets (defined
as non-accrual loans, loans past due 90 days or greater, restructured loans,
non-accruing securities, and other real estate) deteriorated, decreasing from
17.11% to 12.80%.  The percentage of nonperforming assets to total
assets went up, increasing from 22.26% to 32.61%, and the percentage of
nonperforming loans to total loans increased from 25.72% to 35.19%.
Construction, and land and development loans make up the majority of the Bank’s
nonperforming assets. During the first nine months of 2009, nonperforming loans
increased by $87.7
million; of that total, $33.2 million was transferred to other real estate owned
property and $14.5 million was charged-off for a net increase of $40 million;
nonperforming loans totaled $192.1 million at September 30, 2009. Other real
estate owned property increased by $33.4 million (net of sales and writedowns)
to approximately $85.4 million. Management attributes the increase in
nonperforming loans to the depressed real estate economy; real estate prices
continue to decline in certain areas and the local unemployment rate continues
to rise, up 4% from a year ago to 12.7%, which is 1.8% higher than the state
average and 2.9% higher than the national average. The high number of
foreclosures in the area has continued to “back up” in the court system’s which
has significantly slowed the foreclosure process down, increasing the number of
nonperforming loans on the Bank’s books and increasing all the costs related to
that process. A “special assets” management team was established to handle these
loans. Each nonperforming loan is evaluated for impairment and written down to
its net realizable value or a specific reserve is established in the allowance
for loan losses if necessary. Management believes that all the known losses in
these loans have been recognized, however due to the uncertain economy, future
losses may still be likely.
 
 During
the first nine months of 2009, net charge-offs totaled $14.1
million.
 
  21
 FLORIDA
COMMUNITY BANKS, INC.
 September
30, 2009
  The
following table sets forth certain information with respect to the Bank's loans,
net of unearned income, and the allowance for loan losses for the last four
years ended December 31, 2008.
 
 Summary
of Loan Loss Experience
 
 September
                30, 2009
              
              
              December
      31, 2008
              
              
              December
      31, 2007
              
              
              December 31, 2006
              
              
              December
      31, 2005(Dollars
      in thousands)Allowance
      for loan losses at beginning of year
              
              $
              36,390
              
              
              $
              18,309
              
              
              $
              13,590
              
              
              $
              11,523
              
              
              $
              9,791Loans
      charged off:Commercial,
      financial and agricultural
              
              
              433
              
              
              
              1,475
              
              
              
              734
              
              
              
              35
              
              
              
              131Real
      estate – mortgage
              
              
              14,014
              
              
              
              49,548
              
              
              
              1,485
              
              
              
              118
              
              
              
              —Consumer
              
              
              80
              
              
              
              193
              
              
              
              122
              
              
              
              111
              
              
              
              50Total
      loans charged off
              
              
              14,527
              
              
              
              51,216
              
              
              
              2,341
              
              
              
              264
              
              
              
              181Recoveries
      on loans previously charged off:Commercial,
      financial and agricultural
              
              
              205
              
              
              
              123
              
              
              
              9
              
              
              
              6
              
              
              
              24Real
      estate – mortgage
              
              
              206
              
              
              
              28
              
              
              
              139
              
              
              
              —
              
              
              
              2Consumer
              
              
              12
              
              
              
              16
              
              
              
              44
              
              
              
              29
              
              
              
              125Total
      recoveries
              
              
              423
              
              
              
              167
              
              
              
              192
              
              
              
              35
              
              
              
              151Net
      loans charged off (recovered)
              
              
              14,104
              
              
              
              51,049
              
              
              
              2,149
              
              
              
              229
              
              
              
              30Provision
      for loan losses
              
              
              14,330
              
              
              
              69,130
              
              
              
              6,868
              
              
              
              2,296
              
              
              
              1,762Allowance
      for loan losses at end of period
              
              $
              36,616
              
              
              $
              36,390
              
              
              $
              18,309
              
              
              $
              13,590
              
              
              $
              11,523Loans,
      net of unearned income, at end of period
              
              $
              570,101
              
              
              $
              624,478
              
              
              $
              761,431
              
              
              $
              869,608
              
              
              $
              791,609Average loans, net of unearned income, outstanding for the
      period
              
              
              588,613
              
              
              
              701,334
              
              
              
              812,603
              
              
              
              876,604
              
              
              
              670,885Ratio
      of net charge-offs to net average loans
              
              
              2.40
              %
              
              
              7.28
              %
              
              
              0.26
              %
              
              
              0.03
              %
              
              
              0.00
              %
 
 In
evaluating the allowance, management also considers the historical loan loss
experience of the Bank, the amount of past due and nonperforming loans, current
and anticipated economic conditions, lender requirements and other appropriate
information.
 
 As part
of the October 2008 Order, the Bank had to report the balance of assets that
were classified as “substandard”, “doubtful” and “loss” as a percentage of total
Tier 1 capital plus allowance for loan losses. The following table reflects the
assets that were classified (1) by the Bank at September 30, 2009 and December
31, 2008.
 Percentage
      of Tier 1
              
              
              
              
              
              Percentage
      of Tier 1Loan
      Analysis
              
              9/30/2009
              
              
              Capital
      Plus ALLL
              
              
              12/31/2008
              
              
              Capital
      Plus ALLLSubstandard
              
              $
              138,457
              
              
              
              239.72
              %
              
              $
              199,330
              
              
              
              233.91
              %Doubtful
              
              
              2,696
              
              
              
              4.67
              %
              
              
              6,577
              
              
              
              7.72
              %Loss
              
              
              -
              
              
              
              0.00
              %
              
              
              -
              
              
              
              0.00
              %Total
              
              $
              141,153
              
              
              
              244.39
              %
              
              $
              205,907
              
              
              
              241.62
              %Tier
      1 Capital
              
              $
              21,142
              
              
              
              
              
              
              $
              48,828Allowance
      for loan losses (ALLL)
              
              
              36,616
              
              
              
              
              
              
              
              36,390Total
              
              $
              57,758
              
              
              
              
              
              
              $
              85,218
 As part
of the Order, the Bank was given 120 days (by 2/15/2009) to reduce the
classified assets down to 130% of Tier 1 capital and the allowance for loan
losses; 210 days (by 5/15/2009) to reduce the percentage down to 100% and 360
days (10/12/2009) to get it down to 60%.
 
 Reducing
the classified assets has proven to be a difficult task in this “depressed” real
estate economy. Management cannot afford to take any further losses to sell the
assets, as its capital levels have already been depleted by charge-offs and
writedowns. Attracting and getting new capital seems to be the only viable means
to reduce this ratio and get it to the level that the Order requires. Management
has kept the regulators informed of their difficulties in reducing the
classified assets.
 
 (1)
              The
      total amount of classified assets is higher, but under the Order we are
      only required to measure the assets that were actually classified at the
      time of the OFR report. Total classified assets at September 30, 2009, was
      $354 million or 613% of Tier 1 capital and the allowance for loan losses,
      compared to $288.7 million or 333.14% at December 31,
  2008.
 
 Deposits
 
 Total
deposits of $794.9 million at September 30, 2009, represented a decreaseof $50.5 million (5.97%)
from total deposits of $845.4 million at year-end 2008.  The decrease
in deposits is as a result of management shrinking the Bank. Brokered deposits
were reduced by $100.7 million, while core certificate of deposits increased by
$61.4 million, money market, savings and now accounts increased by $1.4 million;
noninterest checking decreased $12.6 million.  At September 30, 2009,
brokered certificates of deposit totaled approximately $252.3 million;
management will continue to let the brokered deposits runoff as they shrink
deposits and the size of the Bank.
 
 As part
of the Cease and Desist Order, the Bank has reduced brokered deposits from
approximately $353 million and 42% of total deposits at December 31, 2008, down
to approximately $252 million and 32% of total deposits. It was able to do this
from two sources, $29 million in income tax refunds and from the excess funds
generated from the sale of securities. Further reductions are projected to come
from the sale of nonperforming assets.
 
 Shareholders'
Equity
 
 Shareholders'
equity decreased$29.1 million from
December 31, 2008 to September 30, 2009, due to a net loss of approximately
$30.6 million in earnings. The Company’s capital position at September 30, 2009
was negative $8.8 million. Unrealized losses on investments totaled $337
thousand at September 30, 2009. The Company is critically undercapitalized at
this point in time.
 
  22
 FLORIDA
COMMUNITY BANKS, INC.
 September
30, 2009
  Liquidity
Management
 
 Liquidity
is defined as the ability of a company to convert assets (by liquidating or
pledging for borrowings) into cash or cash equivalents without significant loss.
Liquidity management involves maintaining the ability to meet the day-to-day
cash flow requirements of its customers, whether they are depositors wishing to
withdraw funds or borrowers requiring funds to meet their credit needs. Without
proper liquidity management, the Company would not be able to perform the
primary function of a financial intermediary and would, therefore, not be able
to meet the production and growth needs of the communities it
serves.
 
 The
primary function of asset and liability management is not only to ensure
adequate liquidity in order to meet the needs of its customer base, but also to
maintain an appropriate balance between interest-sensitive assets and
interest-sensitive liabilities so that the Company can also meet the investment
requirements of its shareholders. Daily monitoring of the sources and uses of
funds is necessary to maintain an acceptable position that meets both
requirements. To the Company, both assets and liabilities are considered sources
of liquidity funding and both are, therefore, monitored on a daily
basis.
 
 The asset
portion of the balance sheet provides liquidity primarily through maturities and
the repayment of loan and investment principal. Loans that mature in one year or
less equaled approximately $167 million at September 30, 2009, and there are
approximately $10 million of investment security payments expected within one
year. At September 30, 2009, the Bank had excess cash of approximately $99.4
million in interest bearing accounts at the Federal Reserve Bank of Atlanta and
the Federal Home Loan Bank of Atlanta and $562 thousand in Federal Funds Sold
through a correspondent bank.
 
 The
liability portion of the balance sheet provides liquidity through deposits to
various customers' interest-bearing and non-interest-bearing deposit accounts,
and through the capacity to borrow short-term overnight funds from our
correspondent banks. The Bank’s main correspondent credit line was with
Silverton Bank which was cancelled after the bank was put into receivership by
the OCC on May 1, 2009; the Bank’s has a $15 million line with another other
correspondent bank. The Bank also had the capacity to borrow on an overnight
basis up to $5 million from the Federal Reserve Bank of Atlanta. During the
second quarter, the Bank’s credit line with the Federal Home Loan Bank of
Atlanta (‘FHLB’) was cancelled due to the Bank’s deteriorating financial
condition; the Bank has $50 million in advances from the FHLB and can continue
to borrow up to that amount. All the Bank’s credit lines are secured by either
securities or loans.
 
 The Bank
has so far not had a problem raising deposits, however its ability to continue
to attract deposits may be restricted by the interest rates restrictions placed
on the Bank by the FDIC. The maximum rate that the Bank is currently permitted
to offer is 75 basis points over the average local rate, as calculated by
RateWatch. This does not mean that the Bank’s rates will not be competitive, but
the Bank can no longer go out and pay the highest rate in area to attract
deposits.
 
 Capital
Resources
 
 A strong
capital position is vital to the continued profitability of the Company and the
Bank because it promotes depositor and investor confidence and provides a solid
foundation for the future growth of the organization. In the past, the Company
provided a significant portion of its capital requirements through the retention
of earnings, but with significant losses in 2008 and the continued losses in
2009, the Company’s capital strength has been weakened to the point where there
is no more capital.
  On June
21, 2002, FCBI Capital Trust I (“Trust I”), a Delaware statutory trust
established by the Company, received $10,000,000 in proceeds in exchange for
$10,000,000 principal amount of Trust I floating rate cumulative trust preferred
securities (the “preferred securities”) in a trust preferred private placement.
On May 12, 2006, FCBI Capital Trust II (“Trust II”) was established also as a
Delaware statutory trust. Trust II received $20,000,000 in similar proceeds. The
proceeds of both transactions were then used by the trusts to purchase an equal
amount of floating rate subordinated debentures (the “subordinated debentures”)
of the Company. The Company has fully and unconditionally guaranteed all
obligations of the trusts on a subordinated basis with respect to the preferred
securities. Subject to certain limitations, the preferred securities qualify as
Tier 1 capital and are presented in the Consolidated Statements of Financial
Condition as subordinated debentures. The sole assets of the trusts are the
subordinated debentures issued by the Company. Both the preferred securities of
the trusts and the subordinated debentures of the Company have approximately
30-year lives. However, both the Company and the trusts have call options of
five years, subject to regulatory capital requirements.  In December
2008, the Company elected to defer the interest payments as allowed under the
agreement to conserve cash.  Payments maybe deferred for up to 20
quarters, but the interest will continue to be accrued every month.
 
 Regulatory
authorities are placing increased emphasis on the maintenance of adequate
capital.  In 1990, new risk-based capital requirements became
effective. The guidelines take into consideration risk factors, as defined by
regulators, associated with various categories of assets, both on and off the
balance sheet.  Under the guidelines, capital strength is measured in
two tiers, which are used in conjunction with risk-adjusted assets to determine
the risk-based capital ratios.  The Company’s Tier I capital was
($8.5) million, which consisted of just common equity. With negative common
equity, the Trust Preferred securities and the allowance for loan losses do not
qualify as capital components therefore the Company’s Total Risk-Based capital
was the same as the Tier 1, ($8.5) million.
 
 
 23
 FLORIDA
COMMUNITY BANKS, INC.
 September
30, 2009
 
 RESULTS
OF OPERATIONS
 
 Three
months ended September 30, 2009 and 2008
 
 Summary
 
 The
Company had a net loss for the three months ended September 30, 2009, totaling
$19,696,483 compared to a net loss of $18,973,448 for the same period in 2008,
representing a 3.81% decrease. The difference was due to several factors: $5
million decrease in net interest income; $2.1 million increase in non-interest
expenses; no income tax benefit (of $12 million); which was all offset by a
lower loan loss provision ($18.3 million).
  Net
Interest Income
 
 Net
interest income, the difference between interest earned on assets and the cost
of interest-bearing liabilities, is the largest component of the Company's net
income. Net interest income during the three months ended September 30, 2009,
decreased $5.01 million (116.7%) from the same period in 2008. This decrease was
due primarily to lower loan balances and the reversal of interest on
non-performing loans, resulting in a $4.4 million reduction (44.9%) in loan
income. Interest expense on deposits decreased $719 thousand or 9.8%, due
primarily to the decrease in (brokered) certificate of deposits and lower
rates.
 
 Earning
assets averaged $804.5 million during the third quarter of 2009 compared to $906
million in 2008, with the decrease due primarily to loans, which were down $96
million or approximately 14%; securities which were down $98.6 million, but this
decrease was basically offset by an increase in excess cash of $95 million.
Average interest-bearing liabilities increased from $843 million during the
third quarter of 2008 to $864.3 million during the same period in
2009.  Average interest bearing accounts (money market, savings and
NOW accounts) were $37 million lower in 2009 compared to the third quarter of
2008 reflecting a decrease of 20.1%; average certificates of deposit increased
$62.4 million, reflecting an increase of 10.9%; average short-term borrowing
(fed funds purchased) was $4.1 million lower in 2009 compared to the same period
in 2008.
 
 The Bank,
usually in an asset sensitive position with a larger dollar amount of
interest-earning assets subject to re-pricing than interest-bearing liabilities,
is currently in a liability sensitive position. The increase in nonaccrual loans
has significantly reduced the amount of interest earning assets subject to
changes in interest rates. In this current rate environment, the Bank is in a
favorable position for re-pricing its liabilities lower. During periods when
interest rates are increasing the Bank strives to increase its asset sensitivity
to take advantage of the rising rates to increase its net interest margin; when
rates have stabilized, the Bank will decrease its asset sensitivity so that if
rates decline the Bank’s net interest margin will not decline as much. The Bank
achieves this strategy by making floating rate loans that have a floor rate;
keeping investment maturities short when rates are low and extending their
durations when rates are higher; extending liability maturities when rates are
low and shortening the maturities when rates have stabilized or are declining.
This strategy helped to stabilize and improve the net interest margin between
2001 and 2003, when rates were declining and also when rates started to increase
in 2004 thru 2006. Since July 2007, the Federal Reserve has cut its key interest
rate by 500 basis points, driving the prime rate down from 8.25% to 3.25% at the
end of 2008; the prime rate has not changed nor is it expected to change in
2009.
 
 The
Company’s net interest margin for the three months ended September 30, 2009 was
(0.34)%, dropping 222 basis points from the third quarter last year, 1.88%. The
decrease in yield is primarily due to the significant increase in nonperforming
loans.
 
 Provision
for Loan Losses
 
 The
provision for loan losses represents the charge against current earnings
necessary to maintain the allowance for loan losses at a level which management
considers appropriate. Management evaluates this level based on various factors
including, but not limited to, the Bank's historical loss experience,
delinquency and non-accrual trends, portfolio growth, underlying collateral
values and current economic conditions. This evaluation is subjective and
requires material estimates that may change over time.
 
 The
provision for loan losses was $10.9 million and $29.3 million for the three
months ended September 30, 2009 and 2008, respectively. The decreasein provision was not
only the result of charging-off $3.9 million less in loans compared to the same
period last year, but also due the general consensus of management that real
estate values will not deteriorate going forward as much as they did in 2008;
there have been several positive trends in the recent months pointing to a
possible “bottoming out” in the real estate market, which could lead to an
increase in real estate activity, which would benefit the whole area. The
components of the allowance for loan losses represents estimates based upon
accounting standards “Accounting for Contingencies”
and “Accounting for Impairment
of a Loan.” “Accounting
for Contingencies” applies to homogeneous loan pools such as consumer,
residential and certain commercial loans. The provisions of “Accounting for Impairment of a
Loan” are applied to loans that are considered impaired.  A
loan is impaired when, based on current information, it is probable that the
loan will not be repaid according to its contractual terms, including both
principal and interest.  Management performs individual assessments of
impaired loans to determine the existence and the extent of any loss exposure
based upon the present value of expected future cash flows or based upon the
estimated realizable collateral value where the loan is collateral
dependent.
 
 Charge-offs
exceeded recoveries by approximately $2.9 million for the three months ended
September 30, 2009, compared to $6.7 million for the three months ended
September 30, 2008. The reserve for loan losses as a percent of outstanding
loans, net of unearned income, was 6.42% at September 30, 2009, compared to
5.83% at year-end 2008.
 
 Noninterest
Income
 
 Noninterest
income for the three months ended September 30, 2009, was $593,766 compared to
$505,915 for the same period of 2008, an increaseof $87,851 or 17.36%. The
increasewas
primarily due to a $56,000 life insurance benefit payment (on a retired
director) and a $38,000 increase in rents received on other real estate owned
property. Service charges on deposits were $33,000 lower than they were last
year, due to a decrease in deposit volume.
 
 Noninterest
Expenses
 
 Noninterest
expenses for the three months ended September 30, 2009, totaled $8.6 million
reflecting a 32.8% increasefrom the same period of
2008. The primary components of non-interest expenses are salaries and employee
benefits, which decreased by $347 thousand or 12.7%; occupancy and equipment
expenses, which decreased $13 thousand or 1.4%, and other expenses which
increased $2.5 million or 88.6%. The biggest increase in other operating
expenses was expenses related to the Bank’s other real estate owned properties,
which totaled approximately $3 million for the quarter and was $1.7 million
higher than last year. Another big increase in other operating expenses was the
FDIC assessment, which was $1.1 million higher than last year. The increase in
the assessment was due an increase in the Bank’s risk rating, caused by the
deterioration in the Bank’s financial condition; the Bank is currently at the
highest risk rating.
 
  24
 FLORIDA
COMMUNITY BANKS, INC.
 September
30, 2009
  Income
Taxes
 
 The
provision for income taxes was $0 for the three months ended September 30, 2009,
compared to an income tax benefit of $12.0 million for the same period in 2008.
The zero effective tax rate for the current period is due to the Company capping
its deferred tax asset amount at its December 31, 2008 level. The effective tax
rate for the prior period is less than the statutory federal rate principally
because of state income taxes, net of the federal tax benefit.
 
 Nine
Months Ended September 30, 2009 and 2008
 
 Summary
 
 The
Company had a net loss of $30,627,188 for the nine months ended September 30,
2009, compared to net loss of $24,651,059 for the same period in 2008,
representing a 24.2% increase. The increase was due to several factors: $13.9
million decrease in net interest income; $4.8 million increase in non-interest
expenses; no income tax benefit of $15.8 million; which was offset by a lower
loan loss provision ($25.5 million) and net security gains of $3.1
million.
 
 Net
Interest Income
 
 Net
interest income, the difference between interest earned on assets and the cost
of interest-bearing liabilities, is the largest component of the Company’s net
income.  Net interest income during the nine months ended September
30, 2009, decreased $13.9 million or 90.8% from the same period in 2008.
Interest income on loans was down $14.1 million from a year ago due to lower
loan balances, lower rates and an increase in non-performing loans; investment
income was down $688 thousand, due to lower balances and rates. Interest expense
on deposits decreased $137 thousand despite a $74.9 million increase in average
interest-bearing deposits; interest expense on borrowed funds decreased $941
thousand due to lower average balances and rates. Earning assets averaged $826.8
million during the first nine months of 2009 compared to $900.9 million in 2008,
a decrease of $74.1 million; average loans decreased $130.1 million (primarily
thru charge-offs and those balances moved to other real estate owned); average
investments decreased $8.7 million; and average federal funds sold and excess
funds in other interest bearing accounts increased $64.8 million. Average
interest-bearing liabilities increased from $792.4 million during the third
quarter of 2008 to $859.3 million during the same period in
2009.  Money market accounts averaged $59.4 million lower in 2009
compared to 2008, reflecting a decrease of 37.6% (a good portion of the decrease
were accounts related to loans and business accounts that have been impacted by
the economy); now accounts averaged $288 thousand or 1.20% higher and savings
accounts averaged $2.6 million or 12.3% lower; average certificates of deposit
increased $136.6 million or 27.3% (increase in retail CDs to replace brokered
CDs); average borrowing (FHLB and overnight) decreased $7.9 million or
8.9%.
 
 As of
September 30, 2009, the Company was in a liability sensitive position, with
approximately $247 million more in interest-bearing liabilities subject to
re-pricing than interest-bearing assets over a 12 month period. In the current
low rate environment this is a beneficial position to be in as it is allowing
the Company to re-price its liability side at a faster rate than the asset side.
While management took steps to lessen the negative impact to earnings that would
result when rates fell, which they did, the high level of nonperforming loans
has had a significant impact on the net interest margin. At September 30, 2009,
the net interest margin was 0.34% compared to 2.26% last
September.  To protect the net interest margin in declining rate
environment, management has floor rates on most of the variable rate loans,
which in “normal” times would keep the margin from dropping too low or too fast,
which it has. However, since almost all the variable rate loans are currently at
their floor rate, when rates do move up these loans will not adjust until rates
move up at least 200 basis points, or on till the prime rate hits 5.25%
(currently its at 3.25%). This lag effect will negatively impact the net
interest margin since the cost of funds will immediately start to increase while
the loan side will not. To offset the lag effect management has in the past
relied on the new loan volume to make up the difference; however, management is
not sure that when the economy recovers this time that the loan volume will be
there.
 
 Provision
for Loan Losses
 
 The
provision for loan losses represents the charge against current earnings
necessary to maintain the reserve for loan losses at a level which management
considers adequate. This level is determined based upon the Bank’s historical
charge-offs, management’s assessment of current economic conditions, the
composition of the loan portfolio and the levels of non-accruing and past-due
loans. The provision for loan losses was $14,330,000 for the nine months ended
September 30, 2009 and $39,802,400 for the comparable period in
2008.  This decrease is due primarily to the decrease in the total
loan portfolio and management’s assessment that real estate values will not
deteriorate at as much as they did in 2008; there is the general perception that
real estate values have “bottomed out” in certain areas of Southwest Florida and
we may start to see an early recovery; all-be-it a very soft one. Charge-offs
exceeded recoveries by approximately $14.1 million during the first nine months
of 2009 compared to $18.5 million during the same time period in 2008. Despite
the significant increase in the level of non-performing loans from $106.7
million to $192.1 million during the period from September 30, 2008 to September
30, 2009, the level of impairments have not increased at the same pace, possibly
signifying that real estate values maybe stabilizing. However, further
deterioration is possible and more charge-offs may still be
incurred.
 
 Noninterest
Income
 
 Noninterest
income for the nine months ended September 30, 2009, was $4.8 million compared
to $1.7 million for the same period of 2008, an increaseof $3.1 million or 183.8%.
The increasewas
primarily due to net security gains of $3.1 million, resulting from
restructuring the securities portfolio. Service charges on deposits and other
fees were generally down a little compared to last year
 
  25
 FLORIDA
COMMUNITY BANKS, INC.
 September
30, 2009
  Noninterest
Expenses
 
 Noninterest
expenses for the nine months ended September 30, 2009, totaled $22.4 million
reflecting a 27.2% increasefrom the same period of
2008. The primary components of non-interest expenses are salaries and employee
benefits, which decreased by approximately $772 thousand or 9.4%; occupancy and
equipments expenses, which increased $25 thousand or 0.90%; and other expenses
which increased $5.6 million or 84.8%. The biggest increase in other operating
expenses was the FDIC assessment, which was $3.7 million higher than a year ago.
The increase in the assessment was due an increase in the Bank’s risk rating,
caused by the deterioration in the Bank’s financial condition; the Bank is
currently at the highest risk rating. Expenses related to nonperforming assets
were $2.1 million higher than last year.
 
 Income
Taxes
 
 The
provision for income taxes was $0 for the nine months ended September 30, 2009,
compared to an income tax benefit of $15.8 million for the same period in 2008.
The zero effective tax rate for the current period is due to the Company capping
its deferred tax asset at its December 31, 2008 level. The effective tax rate
for the prior period is less than the statutory federal rate principally because
of state income taxes, net of the federal tax benefit.
 
 Other
Accounting Issues
 
 Note I to
the Financial Statements outlines the recently issued accounting pronouncements.
The discussion is incorporated by reference herein.
 
 Subsequent
events have been evaluated through November 16, 2009, which is the date the
financial statements were issued.
 
  26
 FLORIDA
COMMUNITY BANKS, INC.
 September
30, 2009
  
 Item
3. Quantitative and Qualitative Disclosures About Market Risk
 
 Market
risk is the risk arising from adverse changes in the fair value of financial
instruments due to a change in interest rates, exchange rates, and equity
prices. The Company’s primary market risk arises from the possibility that
interest rates may change significantly and affect the fair value of the
Company’s financial instruments (also known as interest rate risk).
 
 The
primary objective of Asset/Liability Management at the Company is to manage
interest rate risk and achieve reasonable stability in net interest income
throughout interest rate cycles. This is achieved by maintaining a reasonable
balance between rate sensitive earning assets and rate sensitive
interest-bearing liabilities. The amount invested in rate sensitive earning
assets compared to the amount of rate sensitive liabilities issued are the
principal factors in projecting the effect that fluctuating interest rates will
have on
 future
net interest income and the fair value of financial instruments. Rate sensitive
earning assets and interest-bearing liabilities are those that can be re-priced
to current market rates within a given time period. Management monitors the rate
sensitivity of all interest earning assets and interest bearing liabilities, but
places particular emphasis on the upcoming year. The Company’s Asset/Liability
Management policy requires risk assessment relative to interest pricing and
related terms and places limits on the risk to be assumed by the
Company.
 
 The
Company uses several tools to monitor and manage interest rate sensitivity. One
of the primary tools is simulation analysis. Simulation analysis is a method of
estimating the fair value of financial instruments, the earnings at risk, and
capital at risk under varying interest rate conditions. Simulation analysis is
used to estimate the sensitivity of the Company’s net interest income and
stockholders’ equity to changes in interest rates. Simulation analysis accounts
for the expected timing and magnitude of assets and liability cash flows as
interest rates change, as well as the expected timing and magnitude of deposit
flows and rate changes whether or not these deposits re-price on a contractual
basis. In addition, simulation analysis includes adjustments for the lag between
movements in market interest rates on loans
 and
interest-bearing deposits. These adjustments are made to reflect more accurately
possible future cash flows, re-pricing behavior, and ultimately net interest
income.
 
 As of
September 30, 2009, the Company's simulation analysis indicated that the Company
is at greatest risk in a sudden decreasing interest rate environment (a 300 plus
basis point decrease). This analysis assumes that rates will change suddenly on
a specific date. However, with the Federal Funds rate currently at 0.25%, there
is not much room to drop rates much lower. The Company believes that the Federal
Reserve will hold rates at the current low level until they feel the economy is
improving or until they see inflation becoming a significant factor. In any
event, management expects its net interest margin to improve over the next
twelve months if the cost of funds continues to be priced down and especially if
nonperforming assets are returned to performing again.
 
 
 The table
following depicts the results of the simulation assuming one and two percent
decrease and increase in market interest rates.
 
 Estimated
      Fair Value of Financial InstrumentsDown
                1
      Percent
              
              
              Up
                1
      Percent
              
              
              Down
                2
      Percent
              
              
              Up
                2
      PercentDollars
      in ThousandsInterest-earning
      AssetsFederal
      funds sold and cash equivalents
              
              $
              105,301
              
              
              $
              105,301
              
              
              $
              105,301
              
              
              $
              105,301Securities
              
              
              128,853
              
              
              
              113,841
              
              
              
              137,440
              
              
              
              107,416Loans
              
              
              558,823
              
              
              
              561,458
              
              
              
              557,887
              
              
              
              561,830Total Interest-earning
      Assets
              
              
              792,977
              
              
              
              780,600
              
              
              
              800,628
              
              
              
              774,547Interest-bearing
      LiabilitiesDeposits
      - Savings and demand
              
              
              127,577
              
              
              
              123,167
              
              
              
              129,687
              
              
              
              121,159Deposits
      - Time
              
              
              632,542
              
              
              
              622,805
              
              
              
              633,685
              
              
              
              618,236Other
      borrowings
              
              
              85,784
              
              
              
              82,233
              
              
              
              87,786
              
              
              
              81,472Total Interest-bearing
      Liabilities
              
              
              845,903
              
              
              
              828,205
              
              
              
              851,158
              
              
              
              820,867Net
      Difference in Fair
      Value
              
              $
              (52,926
              )
              
              $
              (47,605
              )
              
              $
              (50,530
              )
              
              $
              (46,320
              )Change
      in Net Interest
      Income
              
              $
              883
              
              
              $
              (806
              )
              
              $
              944
              
              
              $
              (1,010
              )
 
 
  27
 FLORIDA
COMMUNITY BANKS, INC.
 September
30, 2009
  Item
4. Controls and Procedures
 
 Evaluation
of Disclosure Controls and Procedures
 
 The
Company has evaluated the effectiveness of its disclosure controls and
procedures pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934
(the "Exchange Act"), the Company's chief executive officer and chief financial
officer have concluded that as of the end of the period covered by this
Quarterly Report of Form 10-Q such disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Corporation
in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
 
 Changes
in Internal Controls
 
 During
the quarter under report, there was no change in the Company's internal control
over financial reporting that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial
reporting.
 
 PART
II - Other Information
 
 Item
1 - Legal Proceedings
 
 In the
ordinary course of business, the Company is subject to legal proceedings, which
involve claims for substantial monetary relief. However, based upon the advice
of legal counsel, management is of the opinion that any legal proceedings,
individually or in the aggregate, will not have a material adverse effect on the
Company's financial condition or results of operations.
 
 On
October 17, 2008, Florida Community Banks, Inc.’s wholly-owned subsidiary,
Florida Community Bank (“Bank”), the Florida Office of Financial Regulation
(“OFR”) and the Federal Deposit Insurance Corporation (“FDIC”) entered into a
Stipulation and Consent of Entry of Order to Cease and Desist, which
incorporated by reference an Order to Cease and Desist for the Bank
(“Order”).
 
 The Order
requires the Bank to: (i) recruit three new directors; (ii) review its
management to determine if staffing changes or additions are required; (iii)
modify its management succession plan; (iv) increase Board oversight and minute
keeping; (v) obtain regulatory clearance for the appointment of executive
officers; (vi) adopt and adhere to a capital plan for maintaining a Tier 1
Leverage Capital ratio of at least 8%, a Tier 1 Risk Based Capital ratio of at
least 10% and a Total Risk Based Capital ratio of at least 12%; (vii) obtain
regulator approval for the payment of dividends; (viii) charge off or collect
all assets classified as “loss” by the OFR; (ix) establish a special assets
committee to adopt a plan to reduce the Bank’s risk exposure to adversely
classified assets; (x) refrain, except under certain circumstances, from making
loans to borrowers who has had a loan charged off or adversely classified by the
Bank; (xi) evaluate and reorganize the Bank’s special assets department and
policies; (xii) address and cure deficiencies in loan administration,
underwriting, loan policy and loan review; (xiii) review, monitor and reduce the
Bank’s credit concentration risk; (xiv) review and modify its allowance for loan
and lease losses methodology; (xv) develop a plan to increase earnings; (xvi)
amend its 2008 business plan budget and develop a business plan and budget for
2009 and 2010 to reflect the Bank’s current condition and prospects; (xvii) not
increase its amount of brokered deposits and develop a plan to reduce their
level of use; (xviii) not borrow money other than deposits, Federal Funds
purchased or Federal Home Loan Bank advances without regulatory approval; (xix)
evaluate its interest rate risk modeling system: and (xx) establish a compliance
committee of the Board and file periodic reports with the OFR and FDIC as to
compliance with the Order.
 
 Management
believes that it is addressing, or has addressed, most of the substantive items
in, and is compliant with most of the Cease and Desist Order Agreement however,
as of this filing the Bank was not in compliance with all of the
items.  The Bank has recruited three new directors, but only two to
date have been approved by the OFR; approval of the other one is still pending.
The Bank’s capital ratios are below the minimums required by the Order; as of
September 30, 2009 the Tier 1 Leverage Capital Ratio was 2.32%, the Tier 1 Risk
Based Capital ratio was 3.27% and the Total Risk Based Capital Ratio was 4.58%.
Management is reviewing and weighing all of its options for increasing capital
and is actively trying to reduce the size of the Bank by selling nonperforming
assets, which will improve the capital ratios.
 
 On
February 13, 2009 FCBI entered into a Written Agreement (‘Agreement’) with the
Federal Reserve Bank of Atlanta (‘FRB’). The Agreement requires FCBI to: (i) not
pay any dividends without the consent of the FRB; (ii) not accept any dividends
or distributions from the Bank which would serve to reduce the Bank’s capital
without the approval of the FRB; (iii) not make any payments on its subordinated
debentures or trust preferred securities without the FRB’s consent; (iv) not
incur or guarantee any debt without the FRB’s consent; (v) not purchase or
redeem any Company stock; (vi) prepare and submit to the FRB a plan to provide
sufficient capital to the Company and the Bank; (vii) ensure ongoing compliance
by the Bank with FRB regulations related to transactions between the Bank and
its affiliates; (viii) prepare and submit to the FRB procedures to ensure
compliance with the FRB’s reporting requirements; (ix) obtain the FRB’s
non-objection to the appointment of any new directors or senior executive
officers; (x) limit indemnification and severance payments in accordance with
applicable law; and (xi) submit monthly progress reports to the
FRB.
 
 Other
than completing its capital plan which it hopes to have by the end of October
2009, management believes that it is complying with the terms of the Agreement
with the FRB.
 
  28
 FLORIDA
COMMUNITY BANKS, INC.
 September
30, 2009
  Item
1A - Risk Factors
 
 Our
operations involve various risks that could adversely affect our financial
condition, results of operation, liquidity, and the market price of our common
stock. Investing in our common stock involves risk.  In addition, to
the other information set forth elsewhere in this Form 10-Q you should carefully
consider the risks and uncertainties described below before deciding whether to
invest in shares of our common stock. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition and or operating
results.
 
 Risks
Related to our Current Financial Position
 
 There
is doubt about our ability to continue as a going concern.
 
 Our
ability to continue as a going concern is in doubt as a result of the continued
deterioration of our loan portfolio and the deterioration of our capital levels.
While we are actively trying to sell our nonperforming assets to reduce the size
of the Bank and formalizing a capital plan, we can give no assurance that we
will be successful in our endeavors. If we are unable to return to profitability
and if we are unable to execute a viable capital plan, we may be unable to
continue as a going concern.
 
 The
Bank may be subject to a federal conservatorship or receivership if it cannot
comply with the Cease and Desist Order, or if conditions continue to
deteriorate.
 
 The Order
requires the Bank to create and implement a capital plan. Failure of the Bank to
submit an acceptable capital restoration plan would, among other things, result
in the Bank becoming subject to a number of additional restrictions on its
operations, and the Bank and the Company may be subject to additional regulatory
action. Moreover, the condition of the Bank’s loan portfolio may continue to
deteriorate in the current economic environment and thus continue to deplete the
Bank’s capital and other financial resources. Therefore, should the Bank fail to
submit an acceptable capital restoration plan and comply with its terms, or fail
to comply with the Order’s capital and loan requirements, or suffer continued
deterioration in its financial condition, the Bank may be subject to being
placed into a federal conservatorship or receivership by the FDIC.
 The
continued deterioration of the real estate market and the economy has adversely
affected our business, liquidity and financial results, and if the downturn
continues or worsens our ability to continue as a going concern could be
adversely affected.
 
 Our loan
portfolio is concentrated in loans secured by real estate. As a result, the
significant downturn in the real estate market in Southwest Florida has had a
substantial negative effect on our business and contributed to the levels of
delinquent and nonperforming assets, charge-offs and credit reserves. We
reported a net loss of $30.6 million for the nine months ended September 30,
2009, compared to a net loss of $24.7 million for the nine months ended
September 30, 2008 and a net loss of $76.2 million for the year ended December
31, 2008, compared to net income of $10.9 million for the year ended December
31, 2007. If these events continue or worsen, it will have a material adverse
effect on our business, financial condition and results of operation and also
may impact our ability to continue as a going concern.
 
 Our
decision to defer interest on our Trust Preferred Securities will likely
restrict our access to the debt capital markets until such time we are current
on our interest payments, which will further limit our sources of
liquidity.
 
 In
December 2008, the FRB requested that we defer further interest payments on each
of our junior subordinated debt securities relating to the Trust Preferred
Securities. As a result, it is likely that we will not be able to raise money
through the offering of debt securities until we become current on those
obligations. This may also adversely affect our ability to obtain debt financing
on commercially reasonable terms, or even at all. As a result, we will likely
have greater difficulty in obtaining financing and, thus will have fewer sources
to enhance our capital and liquidity position.
 
 We
may be subject to negative publicity that may adversely affect our business,
financial condition, liquidity and results of operation.
 
 We have
been the subject of news reports discussing our financial situation in the past
and may continue to be subject to negative publicity as the press and others
speculate about whether we will be able to continue as a going concern. These
reports may have a negative impact on our business. For example, even though our
deposits are insured by the FDIC, customers may choose to withdraw their
deposits, and new customers may choose to do business elsewhere. In addition, we
may find that our service providers will be reluctant to commit to long-term
projects with us. Even if we are able to improve our current financial
situation, we may continue to be the object of negative publicity and
speculation about our future.
 
 We
have become subject to restrictions on the amount of interest that we can pay
our customers, which could cause our deposits to decrease. Because we depend on
deposits as a source of liquidity, a decrease in deposits would adversely affect
our ability to continue as a going concern.
 
 A
significant portion of our funding comes from deposits, both local and brokered.
The Bank promotes selected deposit accounts locally to both individuals and
businesses at competitive rates. Through brokered deposits the Bank is able to
get certificate of deposits at rates that in most cases are significantly less
than the local rates. The Bank competes for deposits locally on the basis of the
interest rates that it pays. Under the Order, the Bank is restricted in the
rates that it can offer and we can no longer go to the brokered market for
deposits. As a result, we likely could experience a decrease in new deposits,
and our existing customers may transfer their deposits to other institutions
that are able to offer higher interest rates; plus we may be unable to cover the
brokered deposit maturities as they roll off, which could have a material
adverse affect on our ability to continue as a going concern.
 
 The
Regulatory Agreements prohibit the Company and the Bank from paying any
dividends or distributions on our respective equity securities.
 
 Under the
terms of the Agreement, the Company cannot pay any dividends or make any
distributions on its equity or trust preferred securities without the prior
written FRB approval. In addition, under the terms of the Order and in
connection with its undercapitalized status, the Bank cannot pay any dividends
or make any distributions on its equity securities without, among other things,
written FDIC approval. Given the Company’s and Bank’s current condition, it is
doubtful that either the FRB or the FDIC would approve any dividend payment or
capital distribution at this time. As a result, for at least the time being, the
Company probably will not be able to look to the Bank’s financial resources to
satisfy its own financial obligations.
 Regulatory
Factors
 
 The Company is operating under an
Agreement issued by the Federal Reserve Bank of Atlanta (“FRB”) and the Bank is
under a Cease and Desist Order issued by the State of Florida Office of
Financial Regulation (“OFR”); both regulators found defects in our operation and
raised concerns regarding the adequacy of our capital and our financial
soundness.
 
 Areas
addressed by the regulators included inadequate capital; the expertise of the
Board and the adequacy of their supervision; the qualifications and competence
of management; the lack of adequate loan underwriting standards or a loan review
program; excessive levels of adversely classified loans; excessive levels of
brokered deposits; excessive levels of concentrations in commercial real estate
loans; and inadequate earnings. Failure by the Company to adequately
address these regulatory concerns may result in further enforcement actions by
the banking regulators, which could include appointment of a receiver or
conservator of the Bank’s assets.
   29
 FLORIDA
COMMUNITY BANKS, INC.
 September
30, 2009
  
 Industry
Factors
 
 Recent
developments in the financial industry and the U.S. and global capital markets
may adversely impact our operations.
 
 Developments
in the last two years in the capital markets have resulted in uncertainty in the
financial markets in general, with the expectation of the general economic
downturn continuing in the latter half of 2009 and beyond. Loan portfolio
performance has deteriorated at many institutions resulting from, among other
factors, a weak economy and a decline in the value of collateral. The
competition for our deposits has increased significantly due to liquidity
concerns at many of these same institutions. Stock prices of bank holding
companies, like ours, have been negatively affected by the current condition of
the financial markets, as has our ability, if needed, to raise capital or borrow
in the debt markets, compared to prior years. As a result, there is a potential
for new federal or state laws and regulations regarding lending and funding
practices and capital and liquidity standards, and financial institution
regulatory agencies are expected to be very aggressive in responding to concerns
and trends identified in examinations, including the expected issuance of many
formal enforcement actions. Developments in the financial services industry and
the impact of any new legislation in response to those developments could
negatively impact us by restricting our business operations, including our
ability to originate or sell loans, and adversely impact our financial
performance.
 
 Deterioration
in the local economy and real estate markets has led to loan losses and reduced
earnings and that could lead to additional loan losses and reduced
earnings.
 
 For the
past two years, there has been a dramatic decrease in housing and real estate
values in Southwest Florida, coupled with a significant increase in the rate of
unemployment. These trends have contributed to an increase in the Banks'
nonperforming loans and reduced asset quality. As of September 30, 2009, the
Bank’s nonperforming loans were approximately $201 million, or 35.19% of the
loan portfolio. Nonperforming assets were approximately $286 million as of this
same date, or 32.61% of total assets. If market conditions continue to
deteriorate, this may lead to additional valuation adjustments on the Bank’s
loan portfolio and other real estate owned, resulting in additional loan losses
and reduced earnings.
  30
 FLORIDA
COMMUNITY BANKS, INC.
 September
30, 2009
  Company
Factors
 
  The
Company is required to maintain elevated capital ratios for the foreseeable
future, but that additional capital may not be available when it is
needed.
   Under the
cease and desist order issued by the OFR the Bank is required to maintain a Tier
1 leverage ratio of not less than 8% and a total risk-based capital ratio of not
less than 12% for as long as the agreement is in effect. As of September 30,
2009, the Bank’s Tier 1 leverage ratio was 2.32% and its total risk-based
capital ratio was 4.58%. In order for the Bank to achieve the capital ratios
required by the OFR, we (the holding company) will have to raise additional
capital. Our ability to raise capital depends to a great extent on the
conditions in the capital markets which are outside of our control. Reducing the
size of the bank through the sale of nonperforming assets at a price we can
afford is another way to improve our capital ratios, but the sale of
nonperforming assets depends to a great extent on the economy and the real
estate market which again is outside of our control.Failure by the Company to raise
additional or sufficient capital could result in further enforcement actions by
the banking regulators, which could include appointment of a receiver or
conservator of the Bank’s assets.Additional equity (stock) offerings may
dilute the holdings of our existing stockholders or reduce the market price of
our common stock, or both.
  
  The
Loan Portfolio includes commercial real estate loans that have higher
risks.
 
 The
Bank’s commercial real estate loans at September 30, 2009, totaled approximately
$433 million or 76% of total loans. These loans generally involve a greater
degree of financial and credit risk and are usually larger than the other type
of loans. Any significant failure to pay on time by the Bank’s customers would
hurt our earnings. The increased financial and credit risk associated with these
types of loans include the concentration of principal in a limited area
(Southwest Florida) and the size of the loan balances and the credit
relationships tend to be bigger and more complex making evaluating and
monitoring these loans more difficult. The repayment of loans secured by
commercial real estate is usually dependent on the successful resale of the real
estate; therefore these loans are affected to a greater extent by the underlying
condition of the real estate market and the economy.
 
 The
federal banking regulatory agencies released guidance on “Concentrations in
Commercial Real Estate Lending” (the “Guidance”) in 2006. The Guidance defines
commercial real estate loans as exposures secured by raw land, land development
and construction (including 1-4 family residential construction), multi-family
property, and non-farm nonresidential property where the primary or a
significant source of repayment is derived from rental income associated with
the property (that is, loans for which 50% or more of the source of repayment
comes from third party, non-affiliated, rental income) or the proceeds of the
sale, refinancing, or permanent financing of the property. The Guidance requires
that appropriate processes be in place to identify, monitor and control risks
associated with real estate lending concentrations. This could include enhanced
strategic planning, underwriting policies, risk management, internal controls,
portfolio stress testing and risk exposure limits as well as appropriately
designed compensation and incentive programs. Higher allowances for loan losses
and capital levels may also be required.
 
 The
Guidance is triggered when commercial real estate loan concentrations exceed
either:
 
  ·
              total
      reported loans for construction, land development, and other land of 100%
      or more of a bank's total capital;
or
  ·
              total
      reported loans secured by multifamily and nonfarm nonresidential
      properties and loans for construction, land development, and other land of
      300% or more of a bank's total
capital.
  Our
ratios at September 30, 2009 were 1,283% and 2,051% respectively. These high
percentages are due to the capital levels falling and not an increase in
commercial real estate loans.
 
 A
significant portion of our loans are to customers who have been adversely
affected by the down turn in the homebuilding industry.
 
 Customers
who are builders and developers face greater difficulty in selling their homes
in markets where the decrease in housing and real estate values are more
pronounced. Consequently, we have experienced a significant increase in
delinquencies and nonperforming assets as these customers are forced to default
on their loans. While we see some signs of improvement in the local housing
market, we may still have additional downgrades, provisions for loan losses and
charge-offs relating to this segment of our loan portfolio, which would
negatively impact earnings.
 
  An
inadequate allowance for loan losses would reduce our earnings.
 
 The risk
of credit losses on loans varies with, among other things, general economic
conditions, the type of loan being made, the creditworthiness of the borrower
over the term of the loan and in the case of collateral dependent loans, the
value and the marketability of the collateral for the loan. Management maintains
an allowance for loan losses based upon, among other things, historical
experience, an evaluation of economic conditions and regular reviews of
delinquencies and the loan portfolio quality. Based on such factors, management
makes various assumptions and judgments about the ultimate collectibility of the
loan portfolio and provides an allowance for loan losses based upon a percentage
of the outstanding balances and for specific loans when their ultimately is
considered questionable. If management’s assumptions and judgments prove to be
incorrect and the allowance for loan losses is inadequate to absorb losses, or
if the bank regulators require the Bank to increase the allowance as part of
their examination process, the Bank’s earnings and capital could be
significantly and adversely affected.
 
 A
lack of liquidity could affect our operations and jeopardize our financial
condition.
 
 Liquidity
is essential to our business.An
inability to raise funds through deposits, borrowings, the sale of loans and
other sources could have a substantial negative effect on our liquidity and our
ability to operate effectively. Our access to funding sources in amounts
adequate to operate on terms that are acceptable to us could be impaired by
factors that affect us specifically or the financial services industry or
economy in general. Brokered deposits were a reliable and stable source of funds
for us, but due to regulatory pressures and the fact that our capital ratios
have dropped below being “adequately capitalized” we are no longer permitted to
access this source of funds. We have agreed to reduce the level of our brokered
deposits to levels that are more consistent with our peer group and are
replacing them with local certificate of deposits.
 
  31
 FLORIDA
COMMUNITY BANKS, INC.
 September
30, 2009
  Also as a
result of our current financial condition, the Bank is subject to the
restrictions on the interest rates it may offer to its depositors. Under the
applicable restrictions, the Bank cannot pay interest rates higher than 75 basis
points above the local average rates for each deposit type. In light of the
Bank’s historical practice of paying above average rates to attract deposits,
the Bank’s liquidity may be negatively impacted, possibly materially, due to
deposit run-off to the extent that it is unable to continue offering above
average rates.
 
 Our business is subject to the
success of the local economies where we operate.
 
 Our
success depends upon the growth in population, income levels, deposits and the
real estate market in each of our primary and secondary markets. Over the past
two years, each of these four factors have decreased. If the communities in
which we operate do not grow or if the prevailing economic conditions locally or
nationally continue to remain challenged, our business may be adversely
affected. Our specific market areas have recently experienced economic
contraction, which has affected the ability of our customers to repay their
loans and generally affected our financial condition and results of operation.
We are less able than a larger institution to spread the risks of unfavorable
local economic conditions across a large number of diversified markets and
economies. We cannot give any assurances that we will benefit from any market
growth or favorable economic conditions in our primary market areas if they do
occur.
 
 Changes in interest rates may
negatively affect our earnings and the value of our assets.
 
 Our
earnings and cash flows are largely dependent upon our net interest income. Net
interest income is the difference between interest income earned on
interest-earning assets, such as loans and investment securities, and
interest-bearing liabilities, such as deposits and borrowed funds. Interest
rates are sensitive to many factors that are beyond our control, including
general economic conditions, competition and policies of various governmental
and regulatory agencies and in particular the policies of the Board of Governors
of the Federal Reserve. Changes in monetary policy, including changes in
interest rates, could influence not only the interest our Banks receive on loans
and investment securities and the amount of interest they pay on deposits and
borrowings, but such changes could also affect (i) the Bank’s ability
to
 originate
loans and obtain deposits, (ii) the fair value of our financial assets and
liabilities, including the available for sale securities portfolio, and (iii)
the average duration of our interest-earning assets. This also includes the risk
that interest-earning assets may be more responsive to changes in interest rates
than interest-bearing liabilities, or vice versa (repricing risk), the risk that
the individual interest rates or rates indices underlying various
interest-earning assets and interest-bearing liabilities may not change in the
same degree over a given time period (basis risk), and the risk of changing
interest rate relationships across the spectrum of interest-earning asset and
interest-bearing liability maturities (yield curve risk), including a prolonged
flat or inverted yield curve environment. Any substantial, unexpected, prolonged
change in market interest rates could have a material adverse affect on our
financial condition and results of operations.
 
 Our cost
of funds may increase as a result of general economic conditions, interest rates
and competitive pressures. We have traditionally obtained funds through local
deposits (non-interest checking, now and money market accounts) and have a base
of lower cost transaction deposits; but we have also obtained funds from the
brokered market, which are usually cheaper than the local certificate of deposit
specials that we have to compete against. Generally, we believe local deposits
are a less expensive and are a more stable source of funds, as other borrowings
including brokered deposits are subject to regulatory limits and conditions. Our
costs of funds and our profitability are likely to be adversely affected, if and
to the extent we have to rely solely upon higher cost local certificate of
deposits and borrowings from other institutional lenders to fund loan demand or
liquidity needs.
 
 Higher
FDIC deposit insurance premiums and assessments could adversely affect our
financial condition.
 
 FDIC
insurance premiums have increased substantially in 2009 already and we may have
to pay significantly higher FDIC premiums in the future. Market developments
have significantly depleted the insurance fund of the FDIC and reduced the ratio
of reserves to insured deposits. The FDIC adopted a revised risk-based deposit
insurance assessment schedule on February 27, 2009, which raised deposit
insurance premiums. On May 22, 2009, the FDIC also implemented a five basis
point special assessment of each insured depository institution's assets minus
Tier I capital as of June 30, 2009, limited to 10 basis points times the
institution's assessment base for the second quarter of 2009, to be collected on
September 30, 2009. Additional special assessments may be imposed by the FDIC
for future periods. We participate in the FDIC's Temporary Liquidity Guarantee
Program, or TLG, for noninterest-bearing transaction deposit accounts. Banks
that participate in the TLG's noninterest-bearing transaction account guarantee
will pay the FDIC an annual assessment of 10 basis points on the amounts in such
accounts above the amounts covered by FDIC deposit insurance. To the extent that
these TLG assessments are insufficient to cover any loss or expenses arising
from the TLG program, the FDIC is authorized to impose an emergency special
assessment on all FDIC-insured depository institutions. The FDIC has authority
to impose charges for the TLG program upon depository institution holding
companies, as well.
 
 These
changes may cause the premiums and TLG assessments charged by the FDIC to
increase. These actions could significantly increase our noninterest expense in
2009 and for the foreseeable future.
 
 Competition
from financial institutions and other financial service providers may adversely
affect our profitability.
 
 The
banking business is highly competitive and we experience competition in each of
our markets from many other financial institutions. We compete with commercial
banks, credit unions, savings and loan associations, mortgage banking firms,
consumer finance companies, securities brokerage firms, insurance companies,
money market funds, and other mutual funds, as well as other super-regional,
national and international financial institutions that operate offices in our
primary market areas and elsewhere.  We compete with these
institutions both in attracting deposits and assets under management, and in
making loans. In addition, we have to attract our customer base from other
existing financial institutions and from new residents. Many of our competitors
are well-established, larger financial institutions. While we believe we can and
do successfully compete with these other financial institutions in our primary
markets, we may face a competitive disadvantage as a result of our smaller size,
lack of geographic diversification and inability to spread our marketing costs
across a broader market. Although we compete by concentrating our marketing
efforts in our primary markets with local advertisements, personal contacts, and
greater flexibility and responsiveness in working with local customers, we can
give no assurance this strategy will always be successful.
 
 We
are subject to extensive regulation that could limit or restrict our
activities.
 
 We
operate in a highly regulated industry and are subject to examination,
supervision, and comprehensive regulation by various federal and state agencies.
Our compliance with these regulations is costly and restricts certain of our
activities, including payment of dividends, mergers and acquisitions,
investments, loans and interest rates charged, interest rates paid on deposits
and locations of offices. We are also subject to capitalization guidelines
established by our regulators, which require us to maintain adequate capital to
support our growth.
 
 The laws
and regulations applicable to the banking industry could change at any time, and
we cannot predict the effects of these changes on our business and
profitability. Because government regulation greatly affects the business and
financial results of all commercial banks and bank holding companies, our cost
of compliance could adversely affect our ability to operate
profitably.
 
 We
      are dependent upon the services of our management
  team
 
 Our
future success and profitability is substantially dependent upon the management
and banking abilities of our senior executives. We believe that our future
results will also depend in part upon our attracting and retaining highly
skilled and qualified management and sales and marketing personnel. Competition
for such personnel is intense, and we cannot assure you that we will be
successful in retaining such
 personnel.
We also cannot guarantee that members of our executive management team will
remain with us. Changes in key personnel and their responsibilities may be
disruptive to our business and could have a material adverse effect on our
business, financial condition and results of operations.
  
  32
 FLORIDA
COMMUNITY BANKS, INC.
 September
30, 2009
  Hurricanes
or other adverse weather events would negatively affect our local economies or
disrupt our operations, which would have an adverse effect on our business or
results of operations.
 
 Our
market areas in Florida are susceptible to hurricanes and tropical storms and
related flooding and wind damage. Such weather events can disrupt operations,
result in damage to properties and negatively affect the local economies in the
markets where they operate. We cannot predict whether or to what extent damage
that may be caused by future hurricanes will affect our operations or the
economies in our current or future market areas, but such weather events could
result in a decline in loan originations, a decline in the value or destruction
of properties securing our loans and an increase in delinquencies, foreclosures
or loan losses. Our business or results of operations may be adversely affected
by these and other negative effects of future hurricanes or tropical storms,
including flooding and wind damage. Many of our customers have incurred
significantly higher property and casualty insurance premiums on their
properties located in our markets, which may adversely affect real estate sales
and values in those markets.
 
 Risks
Related to Our Common Stock
 
 Market
conditions and other factors may affect the value of our common
stock.
 
 The
trading price of the shares of our common stock will depend on many factors,
which may change from time to time, including:
 
  ·
              conditions
      in the regional and national credit, mortgage and housing markets, the
      markets for securities relating to mortgages
or
  ·
              housing
      and developments with respect to financial institutions
      generally;
  ·
              market
      interest rates;
  ·
              the
      market for similar securities;
  ·
              government
      action or regulation;
  ·
              general
      economic conditions or conditions in the financial
  markets;
  ·
              changes
      in global financial markets and global economies and general market
      conditions, such as interest or foreign exchange rates, stock, commodity
      or real estate valuations or
volatility;
  ·
              our
      past and future dividend practice;
and
  ·
              our
      financial condition, performance, creditworthiness and
      prospects.
  
 The
trading volume in our common stock has been low and the sale of substantial
amounts of our common stock in the public market could depress the price of our
common stock.
 
 Our
common stock is thinly traded. The average daily trading volume of our shares on
the Over the Counter Market during the first nine months of 2009 was
approximately 250 shares. Thinly traded stock can be more volatile than stock
trading in an active public market. In recent years, the stock market has
experienced a high level of price and volume volatility, and market prices for
the stock of many companies have experienced wide price fluctuations that have
not necessarily been related to their operating performance. Therefore, our
shareholders may not be able to sell their shares at the volumes, prices, or
times that they desire.
 
  33
 FLORIDA
COMMUNITY BANKS, INC.
 September
30, 2009
  We cannot
predict the effect, if any, that future sales of our common stock in the market,
or availability of shares of our common stock for sale in the market, will have
on the market price of our common stock. We therefore can give no assurance
sales of substantial amounts of our common stock in the market, or the potential
for large amounts of sales in the market, would not cause the price of our
common stock to decline or impair our ability to raise capital through sales of
our common stock.
 
 Our
ability to pay dividends is limited and we have stopped paying cash
dividends.
 
 Holders
of our common stock are only entitled to receive such dividends as our board of
directors may declare out of funds legally available for such payments.
Furthermore, holders of our common stock are subject to the prior dividend
rights of any holders of our preferred stock at any time outstanding or
depositary shares representing such preferred stock then outstanding. The
Company has no preferred stock outstanding at this time.
 
 In our
Agreement with the Federal Reserve Bank of Atlanta, we are prohibited in paying
any dividends to our shareholders without first getting their approval. In
December 2008, we suspended our interest payments on our Trust Preferred
Securities with the understanding that we could not pay any cash dividends to
anyone until the full amount of suspended interest was paid. The ability of our
bank subsidiary to pay dividends to us has been restricted by the OFR to ensure
that the bank’s capital is not depleted any further. Accordingly, the Company
has not paid a cash dividend since the second quarter of 2007, and do not
anticipate paying cash dividends for the foreseeable future.
 
 Item
5 - Other Information
 
 The
Company did not fail to file any Form 8-K to disclose any information required
to be disclosed therein during the second quarter of 2009.
 
 As
disclosed as exhibit 10.10 to the Company’s Form 10-K/A filed with the SEC on
April 15, 2009, the FCBI entered into a Written Agreement with the Federal
Reserve Bank of Atlanta (together with the Board of Governors of the Federal
Reserve System, the “FRB”) on February 13, 2009. Pursuant to this Agreement, the
Company has agreed to: (i) not pay any dividends without the consent of
the                      FRB;
(ii) not accept any dividends or distributions from the Bank which would serve
to reduce
the                     Bank’s
capital without the approval of the FRB; (iii) not make any payments on its
subordinated                     debentures
or trust preferred securities without the FRB’s consent; (iv) not incur or
guarantee any
debt                     without
the FRB’s consent; (v) not purchase or redeem any Company stock; (vi) prepare
and submit
to                     the
FRB a plan to provide sufficient capital to the Company and the Bank; (vii)
ensure
ongoing                     compliance
by the Bank with FRB regulations related to transactions between the Bank and
its                     affiliates;
(viii) prepare and submit to the FRB procedures to ensure compliance with the
FRB’s                     reporting
requirements; (ix) obtain the FRB’s non-objection to the appointment of any new
directors
or                     senior
executive officers; (x) limit indemnification and severance payments in
accordance
with                     applicable
law; and (xi) submit monthly progress reports to the FRB.
 
 As of
this filing management believes that it is in compliance with most of the items
in this Agreement
 
  34
 FLORIDA
COMMUNITY BANKS, INC.
 September
30, 2009
  Item
6 - Exhibits
 
 The
following Exhibits are filed with this report:
 
 Exhibit No.
              
              Exhibit
              Page3.1
              
              Articles
      of Incorporation of FCBI (included as Exhibit 3.1 to FCBI's Registration
      Statement on Form 8-A filed with the SEC on April 15, 2002, and
      incorporated herein by reference).3.2
              
              By-laws
      of FCBI (included as Exhibit 3.2 to FCBI's Registration Statement on Form
      8-A filed with the SEC on April 15, 2002, and incorporated herein by
      reference).4.1
              
              Subordinated
      Promissory Note dated December 24, 2001, between Florida Community Bank
      and Independent Bankers Bank of Florida (included as Exhibit 4.1 to the
      Bank's Form 10-KSB for the year ended December 31, 2001, and incorporated
      herein by reference).4.2
              
              Specimen
      Common Stock Certificate of FCBI (included as Exhibit 4.1 to FCBI's
      Registration Statement on Form 8-A filed with the SEC on April 15, 2002,
      and incorporated herein by reference).10.1
              
              2002
      Key Employee Stock Compensation Program of FCBI (included as Appendix D to
      the Bank's Definitive Schedule 14-A filed with the FDIC on March 22, 2002,
      and incorporated herein by reference).10.2
              
              Amended
      and Restated Trust Agreement among Florida Community Banks, Inc. as
      depositor, Wilmington Trust Company as property trustee, Wilmington Trust
      Company, as Delaware trustee, and Stephen L. Price, and Thomas V. Ogletree
      as administrators, dated as of June 21, 2002 (included as Exhibit 10.3 to
      the Company's Form 10-Q for the quarter ended June 30, 2002, and
      incorporated herein by reference).10.3
              
              Guarantee
      Agreement between Florida Community Banks, Inc. as guarantor, and
      Wilmington Trust Company as guarantee trustee, dated as of June 21, 2002
      (included as Exhibit 10.4 to the Company's Form 10-Q for the quarter ended
      June 30, 2002, and incorporated herein by reference).10.4
              
              Junior
      Subordinated Indenture between Florida Community Banks, Inc. (as Company)
      and Wilmington Trust Company (as trustee), dated as of June 21, 2002
      (included as Exhibit 10.5 to the Company's Form 10-Q for the quarter ended
      June 30, 2002, and incorporated herein by reference).10.5
              
              Employee
      Stock Ownership Plan (included as Exhibit 10.5 to the Company's Form S-8
      filed May 6, 2004, and incorporated herein by reference).10.6
              
              Amended
      and Restated Declaration of Trust, dated as of May 12, 2006, by and among
      the Company, as Depositor, Wells Fargo Bank, National Association, as
      Institutional Trustee and Delaware Trustee, and the Administrators named
      therein (included as Exhibit 10.3 to the Company's Form 8-K filed with the
      SEC on May 12, 2006, and incorporated herein by
reference).
 
 Exhibit No.
              
              Exhibit
              
              Page10.7
              
              Guarantee
      Agreement, dated as of May 12, 2006, by and between the Company, as
      Guarantor, and Wells Fargo Bank, National Association, as Guarantee
      Trustee (included as Exhibit 10.2 to the Company's Form 8-K filed with the
      SEC on May 12, 2006, and incorporated herein by
reference).10.8
              
              Indenture,
      dated as of May 12, 2006, by and between the Company and Wells Fargo Bank,
      National Association, as Trustee (included as Exhibit 10.1 to the
      Company's Form 8-K filed with the SEC on May 12, 2006, and incorporated
      herein by reference).10.9
              
              Stipulation
      and Consent of Entry to Cease and Desist. Dated October 17, 2008 (included
      as Exhibit 10.9 to the Company’s Form 8-K filed with the SEC on November
      4, 2008, and incorporated herein by reference).10.10
              
              Written
      Agreement with the Federal Reserve Bank of Atlanta. Dated February 13,
      2009 (included as Exhibit 10.10 to the Company’s Form 10-K filed with the
      SEC on April 15, 2009, and incorporated herein by
    reference).11
              
              Statement
      re: computation of earnings per common share
              
              
              5414
              
              Code
      of Ethics (included as Exhibit 99.1 to the Company's Form 8-K filed on
      March 3, 2003, and incorporated herein by reference.)31.1
              
              Chief
      Executive Officer - Certification of principal executive officer pursuant
      to the Exchange Act Rule 13(a)-14(a) or 15(d)-14(a).
              
              
              5531.2
              
              Chief
      Financial Officer - Certification of principal financial officer pursuant
      to the Exchange Act Rule 13(a)-14(a) or 15(d)-14(a).
              
              
              5632.1
              
              Chief
      Executive Officer - Certification pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.
              
              
              5732.2
              
              Chief
      Financial Officer - Certification pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.
              
              
              58
 
  35
 FLORIDA
COMMUNITY BANKS, INC.
 September
30, 2009
  SIGNATURES
 
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
 
 
 FLORIDA COMMUNITY BANKS, INC.
 
 
 By:  /s/ Stephen L.
      Price
              November 16,
      2009Stephen
      L. Price
              DatePrincipal
      Executive Officer
                President,
      Chief Executive OfficerAnd
      Chairman of the Board of DirectorsBy:  /s/ Guy W.
      Harris
              November 16,
      2009Guy
      W. Harris
              DatePrincipal
      Financial Officer
                Senior
      Vice president  & Chief Financial Officer