UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934 (Amendment No. __)


Filed by the Registrant xþ

Filed by a Party other than the Registrant¨

Check the appropriate box:

 x¨Preliminary Proxy Statement
 
¨Confidential, Forfor Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
 ¨
þDefinitive Proxy Statement
 
¨Definitive Additional Materials
 
¨Soliciting Material Under Rule 14a-12Pursuant to § 240.14a-12

TIB FINANCIAL CORP.
(Name of Registrant as Specified inIn Its Charter)


(Name of Persons(s)Person(s) Filing Proxy Statement, if Other Thanother than the Registrant)Registrant)

Payment of Filing Fee (check(Check the appropriate box):

xþNo fee required.
  
¨Fee computed on table below per Exchange Act Rules 14a-6(i)(4)(1) and 0-11.
 1)(1)
Title of each class of securities to which transaction applies:

   
 2)(2)
Aggregate number of securities to which transaction applies:

 3)
(3)Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 4)
(4)Proposed maximum aggregate value of transaction:

5)
Total fee paid:

  
(5)Total fee paid:
  
¨Fee paid previously with preliminary materials.
  
¨Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the formForm or scheduleSchedule and the date of its filing.
 1)(1)
Amount previously paid:

Previously Paid:
 2)
(2)Form, Schedule or Registration Statement No.:

 3)
Filing Party:

 4)(3)
Filing Party:
(4)Date filed:

Filed:



 
 
 
Logo

599 9th Street North, Suite 101
Naples, Florida 34102-5624
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held on August 23, 2012
To Our Shareholders:

We cordially invite you to attend the 2012 Annual Meeting of Shareholders of TIB Financial Corp., which we are holding on Thursday, August 23, 2012, at 10:30 a.m. at the General Morgan Inn, located at 111 North Main Street, Greeneville, Tennessee 37743 for the following purposes:

(1)To elect three nominees to serve as directors with terms continuing until the Annual Meeting of Shareholders in 2014;
(2)To ratify the action of the Audit Committee of the Board of Directors in appointing PricewaterhouseCoopers LLP as the Company’s independent registered certified public accounting firm for the fiscal year ending December 31, 2012; and
(3)To transact such other business as may properly come before the Annual Meeting of Shareholders or any adjournment or postponement of the meeting.

Shareholders of record at the close of business on June 27, 2012 are entitled to notice and to vote at the Annual Meeting and any and all adjournments or postponements of the meeting.

It is important that your shares be represented at the meeting, regardless of the number of shares you may hold. Even though you may plan to attend the meeting in person, please vote by telephone or internet, or complete and return the enclosed proxy in the envelope provided. If you attend the meeting, you may revoke your proxy and vote in person.

By Order of the Board of Directors
/s/ R. Eugene Taylor
R. Eugene Taylor
Chairman and Chief Executive Officer
Naples, Florida
August 2, 2012

TABLE OF CONTENTS

Page No.
Meeting Information3
Voting Procedures3
Principal Shareholders5
Information about Our Board of Directors6
Proposal 1: Election of Directors8
Executive Compensation11
Compensation Discussion and Analysis11
Summary Compensation Table12
Director Compensation15
Audit Committee Report16
Section 16(a) Beneficial Ownership Reporting Compliance18
Proposal 2: Ratification of Appointment of Independent Registered Public Accounting Firm18
Submission of Shareholder Proposals for 2013 Meeting20
Additional Information20
Miscellaneous20

- 2 -
TIB FINANCIAL CORP.
599 9th Street North, Suite 101
Naples, Florida 34102-5624

November [●], 2010
PROXY STATEMENT
Dear Shareholder:
MEETING INFORMATION
It is a pleasure to invite you to attend a Special
Annual Meeting of Shareholders of TIB Financial Corp. The meeting will be held at [●],To Be Held on [●], December [●], 2010, at [●], Eastern time.August 23, 2012

At the special meeting, you will be asked to consider and vote upon an amendment to our Restated Articles of Incorporation to increase the number of authorized shares of the Company’s common stock from 750,000,000 to 5,000,000,000 shares.  The principal purposes of increasing the authorized shares of common stock are to ensure that we have sufficient authorized and unissued shares available to complete various share issuances contemplated by our Investment Agreement with North American Financial Holdings, Inc. and to provide additional authorized and unissued shares for future purposes.  Second, you will be asked to consider and vote upon an amendment to our Restated Articles of Incorporation to effect a reverse stock split of our common stock at a ratio between 1:10 to 1:100 to be determined by our Board of Dir ectors and at an effective date to be determined by our Board of Directors.  The principal purpose of this reverse stock split is to maintain the continued listing of our shares on the NASDAQ Global Select Market.  Third, you will be asked to consider and vote upon an amendment to our Restated Articles of Incorporation to allow our shareholders to act by written consent.  The principal purpose of this is to facilitate future corporate action without the expense of a shareholder meeting.
After careful consideration, our Board of Directors has unanimously approved the amendments to our certificate of incorporation to effect the increase in the amount of authorized shares of our common stock, the reverse stock split,This Proxy Statement and the ability for shareholders to act by written consent.  The approval and adoption of each of the amendments to our certificate of incorporation requires the affirmative vote of holders of at least a majority of the outstanding shares of our common stock as of the record date.  Failure to vote will be the equivalent of a “No” vote.  North American Financial Holdings, Inc. beneficially owns common stock and preferred stock entitling it to 99% of the voting rights of the Company and has indicated it will vote in favor of all of the proposals.
We urge you to read the proxy statement materials in their entirety and to consider them carefully.  If you hold stock in more than one account or name, you will receive aaccompanying proxy card for each.  Regardless of whether you planare being furnished to attend, please follow the instructions on the enclosed proxy card and vote your shares by telephone, by Internet or by dating, signing and returning the enclosed proxy card(s) as soon as possible.  Each card represents a separate number of votes.  Postage-paid envelopes are provided for your convenience.  This will not prevent you from voting at the meeting, but will assure that your vote is counted if you are unable to attend.  If you hold your shares in the name of a bank or broker, the availability of telephone and Internet voting will depend on the vo ting process of the applicable bank or broker.  Therefore, we recommend that you follow the voting instructions on the form that you receive.
The directors, management and staff thank you for your continued support and interest in TIB Financial Corp.
Very truly yours,


R. Eugene Taylor
 Chairman and Chief Executive Officer


THIS PROXY STATEMENT IS DATED NOVEMBER [●], 2010
AND IS FIRST BEING MAILED TO SHAREHOLDERS ON OR ABOUT NOVEMBER [●], 2010.


TIB FINANCIAL CORP.
the bank holding company for
TIB Bank and Naples Capital Advisors, Inc.
599 9th Street North, Suite 101
Naples, Florida  34102-5624

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER [●], 2010

To:                      The Shareholders of TIB Financial Corp.
A Special Meeting of Shareholders (the “Special Meeting”)shareholders of TIB Financial Corp. (the “Company”) will be held at [●], on [●], December [●], 2010, at [●] foror about August 2, 2012, in connection with the purposesolicitation of acting upon the following matters:
1.  
To approve an amendment to our Restated Articles of Incorporation to increase the number of authorized shares of the Company’s common stock from 750,000,000 to 5,000,000,000 shares (the “Authorized Share Increase”).
2.  
To approve an amendment to our Restated Articles of Incorporation to effect a reverse stock split of our common stock at a ratio between 1:10 to 1:100 to be determined by our Board of Directors, including reducing the number of authorized shares of our common stockproxies by the reverse split ratio, at an effective date to be determined by our Board of Directors (the “Reverse Stock Split”).
3.  To approve an amendment to our Restated Articles of Incorporation to authorize shareholders to act by written consent (the “Written Consent Authorization”).
The Board of Directors of the Company for use at the Annual Meeting of Shareholders (the “Board“Annual Meeting”) to be held on Thursday, August 23, 2012, at 10:30 a.m. Eastern Daylight Time at the General Morgan Inn, located at 111 North Main Street, Greeneville, Tennessee 37743, and at any adjournment or postponement. All expenses incurred in connection with this solicitation will be paid by the Company. In addition to solicitation by mail, certain officers, directors and regular employees of Directors”)the Company, who will receive no additional compensation for their services, may solicit proxies by telephone or other personal communication means.

Important Notice Regarding the Availability of Proxy Materials
for the Shareholder Meeting To Be Held on August 23, 2012

This Proxy Statement and our Annual Report on Form 10-K for the year ended December 31, 2011
are also available on the Internet at www.proxyvote.com.

Purposes of the Annual Meeting

The principal purposes of the meeting are:

•to elect three nominees to serve as directors with terms continuing until the Annual Meeting of Shareholders in 2014;
•to ratify the action of the Audit Committee of the Board of Directors in appointing PricewaterhouseCoopers LLP as the Company’s independent registered certified public accounting firm for the fiscal year ending December 31, 2012; and
•to transact such other business as may properly come before the Annual Meeting or any adjournment or postponement of the meeting.

VOTING PROCEDURES
How You Can Vote

You may vote shares by proxy or in person using one of the following methods:

•
Voting by Telephone. You can vote using the directions on your proxy card by calling the toll-free telephone number printed on the card. The deadline for voting by telephone is Wednesday, August 22, 2012, at 11:59 p.m. Eastern Daylight Time. If you vote by telephone, you need not return your proxy card.
•
Voting by Internet. You can vote over the Internet using the directions on your proxy card by accessing the website address printed on the card. The deadline for voting over the Internet is Wednesday, August 22, 2012, at 11:59 p.m. Eastern Daylight Time. If you vote over the Internet, you need not return your proxy card.
•
Voting by Proxy Card. You can vote by completing and returning your signed proxy card. To vote using your proxy card, please mark, date and sign the card and return it by mail in the accompanying postage-paid envelope. You should mail your signed proxy card sufficiently in advance for it to be received by Wednesday, August 22, 2012.
•
Voting in Person. You can vote in person at the annual meeting if you are the record owner of the shares to be voted. You can also vote in person at the annual meeting if you present a properly signed proxy that authorizes you to vote shares on behalf of the record owner.

- 3 -
Record Date and Voting Rights

The Board of Directors has set October 1, 2010fixed the close of business on June 27, 2012 as the record date for the Special Meeting.  Only shareholdersdetermination of record at the close of business on the record date will beshare-holders entitled to receive notice of and to vote at the SpecialAnnual Meeting and all adjournments or postponements of the Annual Meeting. As of the close of business on June 27, 2012, the Company had outstanding 12,349,935 shares of its common stock, par value $.10 per share (the “Common Stock”), the holders of which, or their proxies, are entitled to one vote per share. Unless otherwise stated in this Proxy Statement, the presence at the Annual Meeting, in person or by proxy, of the holders of a majority of the shares entitled to vote at the Annual Meeting will constitute a quorum.

Important Notice regardingHow You Can Vote Shares Held by a Broker, Bank or Other Nominee

If your shares are held in the availabilityname of proxy materialsa broker, bank or other nominee, you will receive instructions from the holder of record. You must follow the instructions of the holder of record in order for the special meeting of shareholdersyour shares to be voted. If your shares are not registered in your own name and you plan to vote your shares in person at the annual meeting, you should contact your broker or agent to obtain a legal proxy or broker’s proxy card and bring it to the annual meeting in order to vote.

For shares held in “street name” through a broker, bank or other nominee, the broker, bank or nominee may not be permitted to exercise voting discretion with respect to some of the matters to be acted upon. Thus, if shareholders do not give their broker, bank or nominee specific instructions, their shares may not be voted on December  [●] , 2010.those matters and will not be counted in determining the number of shares necessary for approval. Brokers are no longer permitted to vote in the election of directors if the broker has not received instructions from the beneficial owner. It is particularly important, if you are a beneficial owner, that you instruct your broker how you wish to vote your shares.

A copy of thisHow Your Proxy Will Be Voted

If you vote by proxy, statement, as well as TIB Financial Corp.’s Proxy Statement for the 2010 Annual Meeting of Shareholders and Annual Report on Form 10-K, are also available to shareholders viaproxy holders will vote your shares in the Internet at [●].
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE FOREGOING PROPOSALS.
YOUR VOTE IS IMPORTANT.  EACH SHAREHOLDER IS URGED TO VOTE PROMPTLY BY TELEPHONE, INTERNET OR BY SIGNING AND RETURNING THE ENCLOSED PROXY CARD.  IF A SHAREHOLDER DECIDES TO ATTEND THE MEETING, HE OR SHE MAY REVOKE THE PROXY AND VOTE THE SHARES IN PERSON.manner you indicate. You may specify whether your shares should be voted:

November [●], 2010By Order•for or against all, some or none of the Board of Directorsnominees for director; and
  
 R. Eugene Taylor
•Chairman and Chief Executive Officer
for or against the ratification of PricewaterhouseCoopers LLP as our independent registered certified public accounting firm for our fiscal year 2012.



TIB FINANCIAL CORP.
If the bank holding company for
TIB Bankproxy card is signed and Naples Capital Advisors, Inc.
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER [●], 2010
BACKGROUND, PROXY SOLICITATION AND VOTING
Thisreturned, but voting directions are not made, the proxy statement is being furnishedwill be voted in connection withfavor of the solicitation byproposals set forth in the Boardaccompanying “Notice of Directors of proxies from the shareholders of TIB Financial Corp. (“we,” “our,” or the “Company”) for use at a SpecialAnnual Meeting of Shareholders, (the “Special Meeting”).  This” and in such manner as the proxy statement andholders named on the enclosed proxy are being mailed to our shareholders oncard in their discretion determine upon such other business as may properly come before the Annual Meeting or about November [●], 2010.
Matters to Be Considered at the Special Meeting
At the Special Meeting, you will consider and vote upon the following:
Proposal One.  To approve an amendment to our Restated Articles of Incorporation to increase the number of authorized shares of the Company’s Common Stock from 750,000,000 to 5,000,000,000 shares (the “Authorized Share Increase”).any adjournment or postponement thereof.

Proposal Two.  To approve an amendment to our Restated Articles of Incorporation to effect a reverse stock split of our Common Stock at a ratio between 1:10 to 1:100 to be determined by our Board of Directors, including reducing the number of authorized shares of our Common Stock by the reverse split ratio, at an effective date to be determined by our Board of Directors (the “Reverse Stock Split”).How You Can Revoke Your Proxy and Change Your Vote

Proposal Three.  To approve an amendment to our Restated Articles of Incorporation to authorize shareholders to act by written consent (the “Written Consent Authorization”).
About Us
We are a bank holding company organized in February 1996 under the laws of the State of Florida.  Our operating subsidiaries consist of TIB Bank (which commenced its commercial banking operations in Islamorada, Florida in 1974) and Naples Capital Advisors, Inc. (which commenced its investment advisory services in Naples, Florida in 2007).
The NAFH Transaction
On June 29, 2010, the Company entered into an Investment Agreement (the “Investment Agreement”) with TIB Bank, a subsidiary of the Company (“TIB Bank”), and North American Financial Holdings, Inc. (“NAFH”),Any proxy given pursuant to which the Company sold to NAFH (i) 700,000,000 shares of the Company’s common stock (the “Common Stock”) at $0.15 per share, (ii) 70,000 shares of mandatorily convertible participating voting preferred stock (the “Preferred Stock”) for $1,000 per share and (iii) a warrant representing the right to purchase, during the 18-month period following the closing of the Share Purchase (as defined herein), up to 1,166,666,667 shares of Common Stock at $0.15 per share (or up to 175,000 shares of Preferred Stock for $1,000.00 per share) (the “Warrant”). 0; Following receipt of shareholder approval of the Authorized Share Increase, the Preferred Stock issued at the closing will mandatorily convert into a number of shares of Common Stock equal to the $70,000,000 purchase price divided by $0.15 per share, or 466,666,666 shares of Common Stock, subject to antidilution adjustments.  The sale of the Company Common Stock and Preferred Stock is referred to as the “Share Purchase.”
Upon the closing of the Share Purchase, which occurred on September 30, 2010, NAFH became the beneficial owner of 99% of the voting rights of the Company and effectively controls the operations of the Company.  Prior to the Share Purchase, the Company did not have any controlling shareholders.  NAFH paid an aggregate of $175 million in consideration for the Share Purchase, consisting of cash of $162.8 million and the exchange of all of our outstanding Series A Preferred Stock and the TARP Warrant (each as defined below) which NAFH previously purchased from the Treasury for $12.2 million.
The Regulatory Consent Order
Also as previously disclosed, on July 2, 2010, TIB Bank entered into a Consent Order (the “Consent Order”) with the FDIC and the State of Florida Office of Financial Regulation (collectively, the “Regulatory Agencies”).  Among other things, TIB Bank agreed with the Regulatory Agencies that (i) its board of directors will continue to increase its participation in the affairs of TIB Bank and establish a Directors’ Committee to oversee TIB Bank’s compliance with the Consent Order, (ii) it will continue to have and retain qualified management and notify the Regulatory Agencies of changes in directors or senior executive officers, and (iii) within 90 days it will have and maintain a Tier 1 capital ratio of at least 8% and a total risk based capital ratio of at least 12%.  TIB B ank also agreed that it will (i) continue to charge off assets classified “loss” and 50% of those classified “doubtful,” (ii) undertake over a two-year period a scheduled reduction of the balance of assets classified “substandard” and “doubtful” in its recent examination by at least 70%, (iii) restrict extensions of additional credit to certain borrowers whose loans have been classified by TIB Bank, (iv) update its risk segmentation analysis with respect to concentrations of credit listed in its recent examination report, (v) prepare an updated business/strategic plan, (vi) update its plan to improve and/or sustain Bank earnings, (vii) continue to maintain an adequate allowance for loan losses, (viii) revise and implement a policy for managing interest rate risk, (ix) revise its plan relating to liquidity to encompass recommendations of the Regulatory Agencies, (x) not declare or pay dividends without the prior approval of the Regulatory Agencies, (xi ) not accept, renew or rollover any broker deposits except in accordance with applicable FDIC regulations, (xii) notify the Regulatory Agencies prior to undertaking asset growth of 5% or more per annum, and (xiii) submit quarterly progress reports relating to the Consent Order to the Regulatory Agencies.  The Company believes that the closing of the Share Purchase and the other transactions contemplated by the Investment Agreement will bring TIB Bank into full compliance with the Consent Order.
Troubled Asset Relief Program and Securities Repurchase
On December 5, 2008, as part of the Troubled Asset Relief Program (“TARP”) Capital Purchase Program, the Company sold to the U.S. Department of the Treasury (the “Treasury”) $37 million of Series A preferred stock of TIB Financial Corp. (the “Series A Preferred Stock”), with a 5% cumulative annual dividend yield for the first five years, and 9% thereafter, and a ten-year warrant to purchase up to 1,106,389 shares of the Company’s voting Common Stock (the “TARP Warrant”), at an exercise price of $5.02 per share, for a purchase price of $5.5 million in cash.
Immediately following the closing of the Share Purchase, NAFH purchased all of the outstanding shares of the Series A Preferred Stock and the TARP Warrant from the Treasury for an aggregate consideration of approximately $12.2 million, and NAFH subsequently contributed those securities to the Company (the “TARP Exchange”), as part of the consideration for the Share Purchase.  As a result, we no longer expect to be subject to the restrictions imposed upon us by the terms of our Series A Preferred Stock, or certain regulatory provisions of the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act that were imposed on TARP recipients.
Appointments to the Board of Directors and Management
Upon the closing of the Share Purchase, the Company has appointed the designated representatives of NAFH to our Board of Directors and the board of directors of TIB Bank.  At the closing of the Share Purchase, the Company added experienced bankers R. Eugene Taylor, Christopher G. Marshall, Peter N. Foss, William A. Hodges, and R. Bruce Singletary to its Board of Directors, with Howard Gutman and Bradley Boaz remaining from the pre-closing Board of Directors.  TIB Bank added R. Eugene Taylor, Christopher G. Marshall, R. Bruce Singletary and Bradley Boaz to its board of directors, with Howard Gutman remaining from the pre-closing board of directors.  In addition, the Company has appointed several new executive officers:  R. Eugene Taylor as Chief Executive Officer, Christopher G. Marshall as Chief Fi nancial Officer, and Bruce Singletary as Chief Risk Officer.  Stephen J. Gilhooly will continue to serve as the Treasurer of the Company.
Additional Information
For additional background regarding the Company and the reasons for the individual proposals in this Special Meeting, please see “Proposal One—Reasons for the Authorized Share Increase,” “Proposal Two—Reasons for the Reverse Stock Split,” and “Proposal Three—Reasons for the Written Consent Authorization.”
Effect of Proxy
The enclosed proxy is for use at the Special Meeting if a shareholder is unable to attend the Special Meeting in person or wishes to have the holder’s shares voted by proxy, even if the holder attends the Special Meeting.  Any proxysolicitation may be revoked by the person giving it at any time before its exercise,it is voted by:

•attending the annual meeting and voting in person;
•timely delivering a written revocation to our Secretary;
•timely submitting another signed proxy card bearing a later date; or
•timely voting by telephone or over the Internet as described above.

Your most current proxy card or telephone or Internet proxy is the one that will be counted.

Vote Required

Directors will be elected by noticea plurality of the votes cast. Plurality means that the individuals who receive the largest number of votes cast, even if less than a majority, are elected as directors up to our Secretary, by submitting a proxy having a later date, or by such person appearingthe maximum number of directors chosen at the Special Meeting and electingmeeting per each class. Thus, the three nominees who receive the most votes will be elected to fill the available positions. Shareholders do not have the right to vote cumulatively in person.  All properly executed proxies delivered pursuantelecting directors. Withholding authority in your proxy to this solicitation (and not revoked later)vote for a nominee will result in the nominee receiving fewer votes. Abstentions and broker non-votes will have no effect on the election of the director nominees.

- 4 -
The remaining proposal will be voted atapproved if the Special Meeting in accordance withvotes cast for approval exceed the directions given in the proxy.  If a proxy is signedvotes cast against approval. Abstentions and no specification is made, the shares represented by the proxybroker non-votes will not be voted  in favorcounted for purposes of the Authorized Share Increase, Reverse Stock Split, and Written Consent Authorization.determining whether these proposals have received sufficient votes for approval.

Record Date and Outstanding Shares
Our Board of Directors has set October 1, 2010 as the record date for the Special Meeting.  Only shareholders of record at the close of business on the record date, which includes NAFH, will be entitled to notice of and to vote at the Special Meeting.  As of the record date, there were 714,887,922 shares of ourCapital Bank Financial Corp. (“CBF”) beneficially owns Common Stock outstanding, 700,000,000 sharesentitling them to approximately 94% of which are owned by NAFH, and well as 70,000 shares of Preferred Stock outstanding, which represent 466,666,666 votes on an as-converted basis, for a total of 1,181,554,588 votes outstanding with respect to voting on these matters.
Quorum and Voting Rights
A quorum for the Special Meeting consists of the holders of the majority of our outstanding votes entitled to be cast on a matter at the Special Meeting, present in person or represented by proxy.  Abstentions and broker non-votes will be counted as “shares present” in determining whether a quorum exists at the Special Meeting.
Each share of our Common Stock is entitled to one vote and each share of Preferred Stock is entitled to 6,666 votes on each matter to come before the Special Meeting.  If a quorum is present, the approval of the Authorized Share Increase, the Reverse Stock Split, and the Written Consent Authorization each requires the affirmative vote of a majority of the votes.
  North American Financial Holdings, Inc. beneficially owns Common Stock and Preferred Stock entitling them to 99% of the voting rightsall shareholders of the Company and has indicated that it will vote in favor of all of the proposals.

Solicitation of Proxies
In addition to this solicitation by mail, our officers and employees and those of TIB Bank, without additional compensation, may solicit proxies in favor of the proposals, if deemed necessary, by personal contact, letter, telephone or other means of communication.  Brokers, nominees and other custodians and fiduciaries will be requested to forward proxy solicitation material to the beneficial owners of the shares of our Common Stock where appropriate, and we will reimburse them for their reasonable expenses incurred in connection with such transmittals.  The costs of solicitation of proxies for the Special Meeting will be borne by us.
Internet Availability of Proxy Materials
Under rules adopted by the Securities and Exchange Commission (the “SEC”), we are now furnishing proxy materials on the Internet in addition to mailing paper copies of the materials to each shareholder of record.  Instructions on how to access and review the proxy materials on the Internet can be found on the Proxy Card or voting instruction form sent to shareholders of record.
PRINCIPAL SHAREHOLDERS


PROPOSAL ONE
APPROVAL OF AN AMENDMENT TO THE COMPANY’S RESTATED ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK FROM 750,000,000 TO 5,000,000,000 SHARES
On September 28, 2010, the BoardThe following table sets forth certain information as of Directors unanimously approved a resolution recommending that Article IV of its Restated Articles of Incorporation be amended to increase the number of shares of our authorized Common Stock to 5,000,000,000 shares from 750,000,000 shares, subject to the approval of the Company’s shareholders.  We refer to this proposal as the “Authorized Share Increase.”  No change is being proposed to the authorized number of shares of the Company’s preferred stock, which remains at 5,000,000 shares.  Like our existing Common Stock, the newly authorized Common Stock will not have any preemptive rights.
The Authorized Share Increase
The Authorized Share Increase would amend and restate Section A of Article IV of the Company’s Restated Articles of Incorporation to read in its entirety as follows to increase the totalAugust 2, 2012 regarding shares of Common Stock authorized:
A.  Number and Classowned of Shares Authorized; Par Value.
The Corporation is authorizedrecord or known by the Company to issue the following shares of capital stock:
(1)           Common Stock.  The aggregate number of shares of Common Stock (referred to in these Restated Articles of Incorporation as “Common Stock”) which the Corporation shall have authority to issue is 5,000,000,000 with a par value of $0.10 per share.
(2)           Preferred Stock.  The aggregate number of shares of preferred stock (referred to in these Restated Articles of Incorporation as “Preferred Stock”) which the Corporation shall have authority to issue is 5,000,000 with no par value.
Reasons for the Authorized Share Increase
The Investment Agreement
The Authorized Share Increase is required in connection with certain transactions containedbe owned beneficially by (i) each director, (ii) each director nominee, (iii) each executive officer named in the Investment Agreement, as described above in “Background, Proxy Solicitation and Voting—About Us.”   The Investment Agreement contemplated, in addition to a sale of Common Stock, (i) a sale of 70,000 shares of mandatorily convertible participating voting preferred stock for $1,000 per share and (ii) a warrant representing the right to purchase, during the 18-month period following the closing of the Share Purchase, up to 1,166,666,667 shares of Common Stock at $0.15 per share (or up to 175,000 shares of Preferred Stock for $1,000.00 per share).  Following receipt of shareholder approval of the Authorized Share Increase, the Preferred Stock issued at the closing will mandatorily convert into shares o f Common Stock equal to the $70,000,000 purchase price dividedSummary Compensation Table, (iv) all those known by $0.15 per share, or 466,666,666 shares of Common Stock, subject to antidilution adjustments.
The Company has agreed to call a special meeting of its shareholders following the closing of the Share Purchase to amend its Restated Articles of Incorporation to increase the authorized shares of Common Stock to at least such number as shall be sufficient to permit issuance of all of the shares of Common Stock contemplated upon conversion of the Preferred Stock, the exercise of NAFH’s Warrant and the consummation of the Rights Offering (as defined below) (the “Contemplated Issuances”).  The total number of shares of Common Stock issuable as a result of such transactions is 1,782,333,333.
Our Restated Articles of Incorporation currently authorize us to issue 750,000,000 shares of Common Stock, $0.10 par value per share, and 5,000,000 shares of Preferred Stock with no par value.  As of the record date for the Special Meeting, October 1, 2010, 714,887,922 shares of Common Stock were issued and outstanding, including 700,000,000 shares issued to NAFH in connection with the Share Purchase, and 70,000 shares of Preferred Stock, issued to NAFH in connection with the Share Purchase, were issued and outstanding.  Based on this number of outstanding shares of Common Stock, at least 2,497,221,255 shares of Common Stock must be authorized to assure that all shares of Common Stock issuable in connection with the Contemplated Issuances are authorized.
The Rights Offering
Our Investment Agreement with NAFH provides that as promptly as practicable following the closing of the Share Purchase, and subject to compliance with all applicable law, the Company will distribute to each holder of record of Common Stock (a “Legacy Shareholder”) as of the close of business on July 12, 2010 nontransferable rights (the “Rights”) to purchase Common Stock at a purchase price of $0.15 per share (such distribution, the “Rights Offering”).  Each Legacy Shareholder will receive 10 Rights for each share of Common Stock held by such Legacy Shareholder on the record date, provided that (i) the maximum number of shares of Common Stock with respect to which such Rights, in the aggregate, may be exercised is 149,000,000 shares and (ii) no Legacy Shareholder will be permitted to exercise any Rights to the extent that immediately following such exercise, such Legacy Shareholder (alone or acting in concert with any other holder of Common Stock) wouldbeneficially own control or have the power to vote in excess of 4.9% of the outstanding shares of Common Stock (assuming the conversion in full of the Preferred Stock).  The Rights Offering will not contain any oversubscription round or a backstop by any shareholder.  Completion of the Rights Offering will be conditioned upon the approval by the Company’s shareholders of the increase in the Company’s authorized shares of Common Stock as contemplated by the Investment Agreement.
Terms of the Preferred Stock
The 70,000 shares of Preferred Stock are convertible into 466,666,666 shares of Common Stock.  The Preferred Stock is designated as our Series B Convertible Participating Voting Preferred Stock.  The Preferred Stock with respect to dividend rights and rights on liquidation, rank junior to all our other preferred stock, unless otherwise specified by the terms of such other preferred stock.  It ranks on parity with the Common Stock on dividends and senior to the Common Stock on liquidation rights.  The Preferred Stock participates in any dividends declared by our Board of Directors on our Common Stock on an as-converted basis and are noncumulative.  Upon shareholder approval of an amendment to our Restated Articles of Incorporation to increase the authorized number of shares of our Common S tock, the Preferred Stock will mandatorily convert to Common Stock at a current ratio of 1 to 6,666.67, subject to any antidilution adjustments for events such as splits, share dividends and issuances on the Common Stock.  The Preferred Stock generally vote along with the Common Stock in the same class on an as-converted basis, except the Preferred Stock vote as a separate class on any amendments to our Restated Articles of Incorporation or certain share exchange, reclassification, or change-of-control transactions that would affect the rights of the Preferred Stock.  Upon liquidation or dissolution of the Company, the holders of the Preferred Stock would receive the greater of (i) $0.01 plus any declared but unpaid dividends, or (ii) the amount that the holder would have received had the holder’s Preferred Stock been converted into Common Stock prior to the liquidation or dissolution, plus any declared but unpaid dividends.  Such payments have priority before payments on the Common Stock.  The Preferred Stock is not subject to any redemption or sinking fund provisions and does not benefit from any preemption rights (except by operation of the antidilution provisions).  The Preferred Stock is also not registered and thus cannot be transferred, except as permitted by an applicable exemption or exception under the federal securities laws.
Because the Preferred Stock already shares in the voting and the dividend rightsmore than 5% of the Common Stock, the conversion from Preferred Stock to Common Stock, which will occur automatically if this Authorized Share Increase is approved, will not further dilute the voting or economic rights of the holders of Common Stock.  The Authorized Share Increase is being solicited, in part, to allow for the conversion into Common Stock, which would allow the Company to retire the outstanding shares of Preferred Stock and have those authorized shares of preferred stock available for use in future corporate purposes.
The Warrant
The Warrant represents the right for NAFH to purchase up to 1,166,666,667 shares of Common Stock at an exercise price of $0.15 per share.  However, until we obtain shareholder approval of an amendment to our Restated Articles of Incorporation to increase the authorized number of shares of our Common Stock (which this Authorized Share Increase constitutes), the Warrant may only be exercised for shares of Preferred Stock that would be convertible into such number of Common Shares otherwise receivable upon the Warrant’s exercise.  The Warrant is exercisable by the holder, NAFH, at any time from September 30, 2010 until March 30, 2012, upon which time the Warrant shall expire. The Warrant is not transferable by NAFH except to affiliates of NAFH.  The Warrant contains customary antidilution adjustments for events such as splits, share dividends(v) all directors and issuances on the Common Stock.  If NAFH exercised the Warrant in full, the aggregate exercise price would be $175 million.
Other Corporate Purposes
If the shareholders approve the proposal to increase the number of shares of Common Stock we are authorized to issue, additional shares of Common Stock, after giving effect to the Contemplated Issuances, would also be available which could be issued for valid corporate purposes, such as:
·  Raising working capital,
·  Stock splits or stock dividends,
·  Acquisitions and mergers,
·  Recruiting employees and executives,
·  Employee benefit plans,
·  Establishing strategic relationships, and
·  Other business purposes.
The Board of Directors believes that it is in the best interests of the Company to have additional shares of Common Stock authorized at this time in order to assure that the Contemplated Issuances can be completed successfully.  The additional shares of Common Stock authorized by the proposed amendment in excess of the shares used for the Contemplated Issuances would be available for the issuances described above or other issuances without further action by our shareholders.  However, our shareholders will be required to approve certain issuances of our Common Stock under the provisions of the Florida Business Corporation Act and the governance requirements of the NASDAQ Global Select Market or other stock market where our shares are listed.
Although our Board of Directors will authorize the issuance of additional Common Stock based on its judgment as to our best interests and that of our shareholders, future issuance of Common Stock could have adverse effects on current shareholders.  Such issuances could have a dilutive effect on the voting power and equity interest of existing shareholders.  If the Company ceases to be majority held by NAFH, the increase in the number of authorized shares of Common Stock could have an antitakeover effect against future acquirors, although this is not the intent of the Board of Directors in proposing the amendment.  For example, if the Board of Directors issues additional shares in the future, such issuance could dilute the voting power of a person seeking control of the Company without the approval of the Boa rd of Directors, thereby deterring or rendering more difficult a merger, tender offer, proxy contest or an extraordinary transaction opposed by the board, including transactions in which the shareholders might otherwise receive a premium for their shares over then-current market prices.  As of the date of this proxy statement, the Board of Directors is not aware of any such attempt or plan to obtain control of the Company other than pursuant to the recently closed Share Purchase.
Effect of the Authorized Share Increase
Adoption of the Authorized Share Increase would not affect the rights of the holders of currently outstanding Common Stock.  If additional authorized shares of Common Stock, or securities that are convertible into, or exchangeable or exercisable for shares of Common Stock are issued, our existing shareholders could, depending upon the price realized, experience dilution of book value per share, earnings per share and percentage ownership.  When and if additional shares of our Common Stock are issued, these new shares would have the same voting and other rights and privileges as the currently issued and outstanding shares of Common Stock, including the right to cast one vote per share and to participate in dividends when and to the extent declared and paid.
The Authorized Share Increase, if adopted, will ensure that the Company will continue to have an adequate number of authorized and unissued shares of Common Stock available for foreseeable future uses as described above.
Outstanding Common Stock and Shares of Common Stock Available for Issuance
  
As of
October 1, 2010
  
Upon Effectiveness of Amendment
 
Shares of Common Stock Authorized  750,000,000   5,000,000,000 
Shares of Common Stock Outstanding  714,887,922   1,181,554,5882
Shares of Common Stock Currently Reserved for Issuance  2,044,2521  1,317,710,9193
Shares of Common Stock Available for Future Issuance  33,067,826   2,500,734,493 

1. The number of shares of Common Stock reserved for issuance as of October 1, 2010 reflects 770,428 shares of Common Stock subject to outstanding options and 1,273,824 shares of Common Stock subject to outstanding stock purchase warrants (excluding the Warrant issued to NAFH in connection with the Investment Agreement, which is exercisable only for Preferred Stock prior to the approval of the Authorized Share Increase).
2. The number of shares outstanding after the effectiveness of the amendment reflects the conversion the shares to be issued upon conversion of the Preferred Stock.
3. The number of shares of Common Stock reserved for issuance upon effectiveness of amendment reflects the number of shares of Common Stock reserved for issuance as of October 1, 2010, plus the shares to be issued in the Rights Offering, and the shares to be issued upon exercise of the Warrant held by NAFH.
Required Vote
The affirmative vote of the holders of a majority of the outstanding votes represented by shares of Common Stock and Preferred Stock outstanding and entitled to vote at the Special Meeting is required to approve the proposed authorization for the Authorized Share Increase.  Abstentions and broker non-votes will have the effect of a vote against the proposal.
Amendment Effective Time
The effective date of the Authorized Share Increase will be the date on which the Articles of Amendment are accepted and recorded by the Florida Secretary of State (subject to any specific future time of effectiveness stated therein) in accordance with Section 607.1006 of the Florida Business Corporation Act.  It is expected that the Articles of Amendment to the Company’s Restated Articles of Incorporation setting forth the amendments contemplated by this Proposal No. 1 will be submitted for filing on the next business day after the Special Meeting.
Exchange Act Registration
The Company’s Common Stock is currently registered under Section 12 of the Exchange Act, and the Company is subject to the periodic reporting and other requirements of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”).  The amendment to the Company’s Certificate of Incorporation effecting the Authorized Share Increase will not affect the registration of the Common Stock under the Exchange Act.
Interests of Certain Persons in the Proposal
NAFH,executive officers as a majority shareholder in the Company, may be deemed to have an interest in this Proposal No. 1, because adoption of the Authorized Share Increase will allow the Company to consummate the conversion of Preferred Shares into Common Shares, and the future issuance of Common Shares to NAFH upon the exercise of the Warrant it holds, each as contemplated by the  Investment Agreement.  In addition, certain of the Company’s officers and directors have an interest in this Proposal No. 1 as a result of their ownership of shares of stock of the Company, as set forth in the section entitled “Beneficial Ownership of Directors, Executive Officers and Principal Shareholders” below.  However, the Company does not believe that its officers or directors have interests in the Authorized Share Increa se that are different from or greater than those of any other shareholder of the Company.
group. The Board of Directors unanimously recommends a vote “FOR” Proposal One.


PROPOSAL TWO
APPROVAL OF AN AMENDMENT TO THE COMPANY’S RESTATED ARTICLES OF INCORPORATION TO EFFECT A REVERSE STOCK SPLIT OF OUR COMMON STOCK AT A RATIO BETWEEN 1:10 to 1:100 TO BE DETERMINED BY OUR BOARD OF DIRECTORS
Our shareholders will also be asked to approve an amendment to our Restated Articles of Incorporation to effect a reverse stock split of the issued and outstanding shares of our Common Stock in a ratio to be selected by the Board of Directors within a range of 1:10 to 1:100 and at an effective date to be determined by our Board of Directors.  Such a reverse stock split may be necessary to meet a requirement that our Common Stock have a minimum closing price of $1.00 on the NASDAQ Global Select Market in order to maintain the listing of our Common Stock on the NASDAQ Global Select Market.  The Company expects that the Reserve Stock Split would be effective, assuming shareholders approve the Authorized Share Increase and the Company launches the Rights Offering, as soon as practicable after the consummation of the Right s Offering and in any case after the effective time of the Authorized Share Increase.   If shareholders approve this proposal, our Board of Directors will have the authority, but not the obligation, in its sole discretion and without further action on the part of the shareholders, to effect the Reverse Stock Split.
The Reverse Stock Split
A reverse stock split will be effected by filing an amendment to our Restated Articles of Incorporation which will specify the effective time of the Reverse Stock Split and the split ratio selected by the Board of Directors.  Subject to the completion of certain information by our Board of Directors, the Reverse Share Split would amend Article IV of our Restated Articles of Incorporation by:
(1)  Amending and restating Section A(1) of Article IV of the Company’s Restated Articles of Incorporation to read in its entirety as follows:
(1)           Common Stock.  The aggregate number of shares of Common Stock (referred to in these Restated Articles of Incorporation as “Common Stock”) which the Corporation shall have authority to issue is [____] with a par value of $0.10 per share.
(2)  Adding the following new Section F to Article IV of the Company’s Restated Articles of Incorporation:
F.           Reverse Stock Split.
Upon the effectiveness of the amendment to the Restated Articles of Incorporation (the “Reverse Split Effective Time”), each [____] shares of the Corporation’s Common Stock, par value $0.10 per share, issued and outstanding immediately prior to the Reverse Split Effective Time (the “Old Common Stock”) (including the number of shares of common stock issuable upon exercise or conversion of all issued and outstanding, options, warrants and convertible securities of every kind), will automatically and without any action on the part of the respective holders thereof, be combined and reclassified into one (1) share of Common Stock, par value $0.10 per share (the “New Common Stock”) (and such combination and conversion, the “Reverse Stock Split”). Notwithstanding the immediately preceding se ntence, no fractional shares of New Common Stock shall be issued to the holders of record of Old Common Stock in connection with the Reverse Stock Split, and the Corporation shall not recognize on its stock record books any purported transfer of any fractional share of New Common Stock. In lieu of such fraction of a share, any holder of such fractional share shall be entitled receive one whole share of Common Stock. Each stock certificate that, immediately prior to the Reverse Split Effective Time, represented shares of Old Common Stock shall, from and after the Reverse Split Effective Time, automatically and without the necessity of presenting the same for exchange, represent that number of whole shares of New Common Stock into which the shares of Old Common Stock represented by such certificate shall have been reclassified, provided, however, that each holder of record of a certificate that represented shares of Old Common Stock shall receive, upon surrender of such certificate, a new certificate represent ing the number of whole shares of New Common Stock into which the shares of Old Common Stock represented by such certificate shall have been reclassified.
Upon the effectiveness of the amendment to the articles of incorporation effecting the Reverse Stock Split, the issued and outstanding shares of our Common Stock immediately prior to the split effective time will be combined into a smaller number of shares such that a shareholder will own one new share of Common Stock for each 10 to 100 shares of issued Common Stock held by that shareholder immediately prior to the split effective time.  The exact split ratio within the 1:10 to 1:100 range will be determined by our Board of Directors prior to the reverse split effective time and will be publicly announced.  The Board of Directors’ decision will be based on a number of factors, including market conditions, existing and expected trading prices for our Common Stock and the listing requirements of the NASDAQ Global Select Market.  The Board of Directors may elect to not effect the Reverse Stock Split, despite the shareholder authorization, in its sole discretion.
Reasons for the Reverse Stock Split
The Reverse Stock Split is necessary in order to continue the listing of our Common Stock on NASDAQ Global Select Market.  On July 7, 2010, the Company received a delisting notice from The NASDAQ Stock Market LLC (“NASDAQ”), which was anticipated, due to the Company’s non-compliance with NASDAQ’s $1.00 per share bid price requirement.  The letter from NASDAQ notified the Company that it is in violation of NASDAQ Marketplace Rule 5505 in that the bid price for its Common Stock was below the required listing standard and that its Common Stock would be delisted from the NASDAQ Global Select Market on July 16, 2010 unless the Company asked for a hearing before a NASDAQ Listing Qualifications Hearing Panel (the “Panel”).  The Company made such a request and the hearing was held on August 5, 2010.  During the hearing the Company requested an extension to January 3, 2011 for the Company to demonstrate a closing bid price of $1 per share in accordance with the NASDAQ rules.  The Company has advised NASDAQ that the Company intends to call a special meeting of its shareholders following the closing of the NAFH investment to approve the adoption of an amendment to the Company’s Restated Articles of Incorporation to effect a reverse stock split and thereby regain compliance with the listing rules.  On September 2, 2010, the Company was advised by NASDAQ that its request for an extension to January 3, 2011 was granted.  Reducing the number of outstanding shares of our Common Stock through the Reverse Stock Split is intended, absent other factors, to increase the per share market price of our Common Stock, in order to comply with NASDAQ requirements.  We expect that the Board of Directors will consider the recent volatility of our Common Stock and will take this into account in determining a reverse split ratio, so that even if our stock price remains volatile, it might remain above a price necessary to meet the NASDAQ listing requirements although there can be no assurance that it will do so.
Although the Board of Directors anticipates that the market price of our Common Stock will rise in proportion to the reduction in the number of shares outstanding before the Reverse Stock Split, there can be no assurance of such result.  The market price of our Common Stock will also be based on our performance and other factors, some of which are unrelated to the number of shares outstanding.  If the Reverse Stock Split is effected and the market price of our Common Stock declines, the percentage decline as an absolute number and as a percentage of our overall market capitalization may be greater than would occur in the absence of a reverse stock split.  Furthermore, the liquidity of our Common Stock could be adversely affected by the reduced number of shares that would be outstanding after the Reverse Stoc k Split.
The long-term effects of the Reverse Stock Split on our share price are also uncertain.  The history of similar stock split combinations for companies in like circumstances is varied.  It is also possible that the per share price of the Company’s Common Stock after the Reverse Stock Split will not rise in proportion to the reduction in the number of shares of Common Stock outstanding resulting from the Reverse Stock Split, and there can be no assurance that the market price per share of the Company’s Common Stock after the Reverse Stock Split will either exceed or remain in excess of the $1.00 minimum bid price for a sustained period of time.  The market price of the Company’s Common Stock may be affected by other factors which may be unrelated to the number of shares outstanding, including the Company’s future performance.  In addition, although it currently satisfies all other current standards for continued listing on the NASDAQ Global Select Market, there can be no assurance that the Company will not be delisted due to a failure to meet other continued listing requirements, even if the market price per share of the Company’s Common Stock after the Reverse Stock Split remains in excess of $1.00.
Effect of the Reverse Stock Split
The proposed amendment to our articles of incorporation to effect the Reverse Stock Split will effect the Reverse Stock Split and will reduce the number of authorized shares of our Common Stock by the same percentage by which the issued shares were reduced as a result of the Reverse Stock Split.  For example, if the outstanding shares are subject to a 1:10 reverse stock split, the authorized shares of Common Stock will be reduced from 5,000,000,000 shares to 500,000,000 shares (assuming the approval of Proposal No. 1, which will authorize the increase in our authorized shares of Common Stock to 5,000,000,000).  All stock options and stock purchase warrants outstanding as of the effective time of the Reverse Stock Split will be appropriately adjusted to reflect the Reverse Stock Split by increasing the purchase price o f the option shares and reducing the number of shares which may be purchased.
The following table illustrates the effects on our authorized, outstanding and available shares of a Reverse Stock Split at various levels between 1:10 to 1:100, before and after giving effect to the Contemplated Issuances, assuming:
·  Approval of Proposal No. 1 for the increase in our authorized shares of Common Stock to 5,000,000,000 shares prior to the Reverse Stock Split;
·  Without giving effect to any adjustments for fractional shares on our authorized and outstanding shares of Common Stock; and
·  Without taking into account shares reserved for options and warrants (other than the Warrant held by NAFH).
  
Prior to Reverse Stock Split
  
After 1-for-10 Reverse Stock Split
  
After 1-for-50 Reverse Stock Split
  
After 1-for-100 Reverse Stock Split
 
Authorized Shares  5,000,000,000   500,000,000   100,000,000   50,000,000 
Currently Outstanding Shares  714,887,922   71,488,792   14,297,758   7,148,879 
Shares Available for Issuance Prior to the Contemplated Issuances  4,285,112,078   428,511,208   85,702,242   42,851,121 
Shares Issued in the Contemplated Issuances  1,782,333,333   178,233,333   35,646,666   17,823,333 
Shares Available for Issuance After the Contemplated Issuances  2,502,778,745   250,277,875   50,055,576   25,027,788 

If shareholders approve this proposal, our Board of Directors will have the authority, but not the obligation, in its sole discretion and without further action on the part of the shareholders, to effect the Reverse Stock Split.  The Reverse Stock Split will be effected simultaneously for all outstanding shares of Common Stock and the exchange ratio will be the same for all shares of Common Stock.  The Reverse Stock Split will affect all of our shareholders uniformly and will not affect any shareholder’s percentage ownership interests in the Company, except to the extent that the Reverse Stock Split results in any shareholders owning a fractional share.  For example, a holder of 2% of the voting power of the outstanding shares of Common Stock immediately prior to the Reverse Stock Split would continue to hold 2% of the voting power of the outstanding shares of Common Stock immediately after the Reverse Stock Split.  The number of shareholders of record would not be affected by the Reverse Stock Split.  Common Stock issued pursuant to the Reverse Stock Split will remain fully paid and nonassessable.  If the Reverse Stock Split is implemented, it will increase the number of shareholders of the Company who own “odd lots” of less than 100 shares of the Company’s Common Stock.  Brokerage commissions and other costs of transactions in odd lots may be higher than the costs of transactions of more than 100 shares of Common Stock.  We intend to effect the Reverse Stock Split after the consummation of the Rights Offering, and any shares of our Common Stock purchased in the Rights Offering will be subject, along with all other outstanding shares of our Common Stock, to the Reverse Stock Split.
Change in Number and Exercise Price of Employee and Director Equity Awards
The proposed Reverse Stock Split will reduce the number of shares of Common Stock available for issuance under the Company’s employee and director equity plans, including TIB Financial Corp. Employee Stock Ownership Plan with 401(k) Provisions, the 1994 Incentive Stock Option Plan and the 2004 Equity Incentive Plan, in proportion to the reverse stock split ratio determined by the Board within the limits set forth in this Proposal No. 2.  Under the terms of the Company’s outstanding equity awards, the Reverse Stock Split would cause a reduction in the number of shares of Common Stock issuable upon exercise or vesting of such awards in proportion to the exchange ratio of the Reverse Stock Split and would cause a proportionate increase in the exercise price of such awards to the extent they are stock options.  0;The number of shares authorized for future issuance under the Company’s equity plans will also be proportionately reduced.  The number of shares of Common Stock issuable upon exercise or vesting of outstanding equity awards will be rounded to the nearest whole share and no cash payment will be made in respect of such rounding.
Amendment Effective Time
The effective date of the Reverse Stock Split will be the date on which the Articles of Amendment to the Company’s Restated Articles of Incorporation to effect the amendments contemplated by this Proposal No. 2 are accepted and recorded by the Florida Secretary of State (subject to any specific future time of effectiveness stated therein) in accordance with Section 607.1006 of the Florida Business Corporation Act.  If the Reverse Stock Split is approved, the Company intends to make the Reverse Stock Split effective after the consummation of the Rights Offering (although the Reverse Stock Split is not conditioned upon the consummation of the Rights Offering).  The exact timing of the filing of the amendment will be determined by the Board based on its evaluation as to when such action will be the most advantageou s to the Company and its shareholders, but will be in any case after the effective time of the Authorized Share Increase, if it is also approved.  On the effective date of the amendment to effect the Reverse Stock Split, shares of Common Stock issued and outstanding immediately prior thereto will be combined and converted, automatically and without any action on the part of the shareholders, into new shares of Common Stock in accordance with the reverse stock split ratio determined by the Board within the limits set forth in this Proposal No. 2 and with fractional shares treated as specified below.
Procedure for Exchange of Stock Certificates
As soon as practicable after the effective date of the Reverse Stock Split, our shareholders will be notified that the Reverse Stock Split has been effected.  We expect that our transfer agent will act as exchange agent for purposes of implementing the exchange of stock certificates.  Holders of pre-split shares will be asked to surrender to the exchange agent certificates representing pre-split shares in exchange for certificates representing post-split shares in accordance with the procedures to be set forth in a letter of transmittal that we will send to our shareholders.  No new certificates will be issued to a shareholder until such shareholder has surrendered such shareholder’s outstanding certificate(s) together with the properly completed and executed letter of transmittal to the exchange agent .  Any pre-split shares submitted for transfer, whether pursuant to a sale or other disposition, or otherwise, will automatically be exchanged for post-split shares.  SHAREHOLDERS SHOULD NOT DESTROY ANY STOCK CERTIFICATE(S) AND SHOULD NOT SUBMIT ANY CERTIFICATE(S) UNTIL REQUESTED TO DO SO.
Fractional Shares
No fractional shares will be created or issued in connection with the Reverse Stock Split.  Shareholders of record who otherwise would be entitled to receive fractional shares because they hold a number of pre-split shares not evenly divisible by the number of pre-split shares for which each post-split share is to be exchanged, will be entitled to a number of post-split shares rounded up to the nearest whole number of shares.  The ownership of a fractional interest will not give the holder thereof any voting, dividend or other rights except to have the holder’s fractional interest rounded up to the nearest whole number when the post-split shares are issued.
Accounting Matters
The Reverse Stock Split will not affect the shareholders’ equity on our balance sheet.  However, because the par value of our Common Stock will remain unchanged on the effective date of the split, the components that make up the Common Stock capital account will change by offsetting amounts.  The per share net income or loss and net book value of the Company will be increased because there will be fewer shares of our Common Stock outstanding.  Prior periods’ per share amounts will be restated to reflect the Reverse Stock Split.
No Appraisal Rights
No appraisal rights are available under the Florida Business Corporation Act or under our Restated Articles of Incorporation as amended or our Bylaws to any shareholder who dissents from the proposal to approve the Reverse Stock Split.  There may exist other rights or actions under state law for shareholders who are aggrieved by reverse stock splits generally.  Although the nature and extent of such rights or actions are uncertain and may vary depending upon the facts or circumstances, shareholder challenges to corporate action in general are related to the fiduciary responsibilities of corporate officers and directors and to the fairness of corporate transactions.
Interests of Certain Persons in the Proposal
Certain of the Company’s officers and directors have an interest in this proposed Reverse Stock Split as a result of their ownership of shares of stock of the Company, as set forth in the section entitled “Security Ownership of Certain Beneficial Owners and Management” below.  However, the Company does not believe that its officers or directors have interests in the Reverse Stock Split that are different from or greater than those of any other shareholder of the Company.
Federal Income Tax Consequences of the Reverse Stock Split
The following is a summary of the material federal income tax consequences of the Reverse Stock Split.  The discussion below is based on current provisions of the Internal Revenue Code of 1986, as amended (the “Code”), currently applicable United States Treasury regulations promulgated thereunder, and judicial and administrative decisions and rulings.  This summary also assumes that the pre-reverse stock split shares were, and the post-reverse stock split shares will be, held as a “capital asset” (generally, property held for investment) within the meaning of Section 1221 of the Code.
This summary does not purport to be a complete discussion of all of the possible federal income tax consequences of the Reverse Stock Split and is included for general information only.  The discussion below does not purport to deal with all aspects of federal income taxation that may affect particular shareholders in light of their individual circumstances or that may affect shareholders subject to special treatment under federal income tax law.  Shareholders subject to special treatment include insurance companies, tax-exempt organizations, financial institutions, mutual funds, broker-dealers, traders in securities, investors in pass-through entities, foreign individuals and entities, and shareholders who hold their stock as part of a hedge, wash sale, appreciated financial position, straddle, conversion or other ri sk reduction transaction.  In addition, the discussion below does not consider the effect of any applicable state, local or foreign tax laws.  For example, the state and local tax consequences of the Reverse Stock Split may vary significantly as to each shareholder, depending upon the state in which he or she resides.  The tax treatment of a shareholder may vary depending upon the particular facts and circumstances of such shareholder.  Accordingly, you are urged to consult with your tax advisor as to the tax consequences of the Reverse Stock Split to you in light of your particular circumstances, including the applicability and effect of any state, local or foreign tax laws.
No gain or loss should be recognized by a shareholder upon such shareholder’s exchange of pre-reverse stock split shares for post-reverse stock split shares pursuant to the Reverse Stock Split.  The aggregate tax basis of the post-reverse stock split shares received in the Reverse Stock Split will be the same as the shareholder’s aggregate tax basis in the pre-reverse stock split shares exchanged therefore.  The shareholder’s holding period for the post-reverse stock split shares will include the period during which the shareholder held the pre-reverse stock split shares surrendered in the Reverse Stock Split.
Our view regarding the tax consequence of the Reverse Stock Split is not binding on the Internal Revenue Service or the courts.  Accordingly, each shareholder should consult with such shareholder’s own tax advisor with respect to all of the potential tax consequences to such shareholder of the Reverse Stock Split.
Regulatory Effects
The Company’s Common Stock is currently registered under Section 12(b) of the Exchange Act, and the Company is subject to the periodic reporting and other requirements of the Exchange Act.  The proposed Reverse Stock Split will not affect the registration of the Common Stock under the Exchange Act or the Company’s obligation to publicly file financial and other information with the SEC.  If the proposed Reverse Stock Split is implemented, the Company’s Common Stock will continue to trade on The NASDAQ Global Select Market under the symbol “TIBB” (although NASDAQ would likely add the letter “D” to the end of the trading symbol for a period of 20 trading days to indicate that the Reverse Stock Split has occurred).
Vote Required
The affirmative vote of the holders of a majority of the outstanding votes represented by shares of Common Stock and Preferred Stock outstanding and entitled to vote at the Special Meeting is required to approve the proposed authorization for a reverse stock split.  Abstentions and broker non-votes will have the effect of a vote against the proposal.
The Board of Directors unanimously recommends a vote “FOR” Proposal Two.


PROPOSAL THREE
APPROVAL OF AN AMENDMENT TO THE COMPANY’S RESTATED ARTICLES OF INCORPORATION TO PERMIT SHAREHOLDER ACTION BY WRITTEN CONSENT
Our shareholders will also be asked to approve a proposal to authorize future corporate actions by shareholders of the Company to be taken by written consent, rather than requiring a shareholder meeting.  This would facilitate future corporate action by shareholders.
The Written Consent Authorization
The Written Consent Authorization would delete in its entirety Section B of Article VI of the Company’s Restated Articles of Incorporation, and replace the text therein with “[Reserved].”
Reasons for the Written Consent Authorization
The Florida Business Corporation Act provides that, unless otherwise provided in the articles of incorporation of a company, any action which may be taken at any annual or special meeting of the shareholders may be taken without a meeting, without prior notice and without a vote, if the written consent is signed by the holders of shares having at least the minimum number of votes that would be necessary to take the action at a meeting of shareholders at which all shares were present and voting.  In order for the action to be effective, the minimum number of signed written consents must be delivered to the company within 60 days of the earliest dated written consent in the manner required by the Florida Business Corporation Act.  Further, prompt notice of the action without a meeting by less than unanimous written cons ent must be given to any shareholders who do not sign the written consent, summarizing the material features of such action.
Our current Restated Articles of Incorporation provide that shareholders may not act by written consent.  Therefore, in order for us to take advantage of the Florida Business Corporation Act provision permitting action to be taken by written consent of the shareholders, our Restated Articles of Incorporation must be amended.  Our Board of Directors considers such an amendment to be in our company’s and our shareholders’ best interests, because it will permit our shareholders to take actions without the expense and the timing problems associated with the necessity of calling special shareholders’ meetings or deferring actions until the next annual meeting.
Effect of the Written Consent Authorization
Adoption of the Written Consent Authorization would permit further shareholder actions to be taken by shareholders without a shareholder meeting.  As a result, if there are shareholders who possess sufficient voting power to take a certain corporate action, that action could be taken without the notice or procedural requirements of holding a special meeting of the shareholders.
As a result of the consummation of the Share Purchase, NAFH now holds a majority of the outstanding shares of our Common Stock and thus our voting power.  Whether or not this Written Consent Authorization is approved by the stockholders, NAFH has substantial control over the Company.  However, if this Written Consent Authorization is approved, NAFH would be able to more easily exercise that control because it could take actions unilaterally by written consent, without the need for calling a special shareholder meeting or waiting for an annual meeting.  Actions that NAFH would be able to take by written consent include, without limitation, amending our Bylaws, electing or removing any or all of our directors, amending our articles of incorporation (if also consented to by a majority of our Board of Directors) , and consenting to mergers, consolidations or other major corporate transactions.  Other shareholders of the Company, besides NAFH, would only receive notice of the shareholder action after it has already been approved.
Amendment Effective Time
The effective date of the Written Consent Authorization will be the date on which the Articles of Amendment are accepted and recorded by the Florida Secretary of State (subject to any specific future time of effectiveness stated therein) in accordance with Section 607.1006 of the Florida Business Corporation Act.  It is expected that the Articles of Amendment to the Company’s Restated Articles of Incorporation setting forth the amendments contemplated by this Proposal No. 3 will be submitted for filing on the next business day after the Special Meeting.
Exchange Act Registration
The Company’s Common Stock is currently registered under Section 12 of the Exchange Act, and the Company is subject to the periodic reporting and other requirements of the Exchange Act.  The amendment to the Company’s Certificate of Incorporation effecting the Written Consent Authorization will not affect the registration of the Common Stock under the Exchange Act.
Interests of Certain Persons in the Proposal
NAFH, as a majority shareholder in the Company, may be deemed to have an interest in this Proposal No. 3, because the Written Consent Authorization will facilitate its ability to cause the Company to take corporate actions.  See  “—Effect of the Written Consent Authorization” above.
Vote Required
The affirmative vote of the holders of a majority of the outstanding votes represented by shares of Common Stock and Preferred Stock outstanding and entitled to vote at the Special Meeting is required to approve the proposed authorization for ability to act by written consent.  Abstentions and broker non-votes will have the effect of a vote against the proposal.
The Board of Directors unanimously recommends a vote “FOR” Proposal Three.





CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement includes or incorporates by reference forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, and as such may involve known and unknown risk, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from future results described in such forward-looking statements.  Any statements about the Company’s expectations, beliefs, plans, objectives, assumptions, future events or performance are not historical facts and may be forward-looking.  These statements are often, but not always, made through the use of words or phrases such as “anticipate,”  “continuing,” “expects,” “believe,” “intend 221; and similar words or phrases.  Accordingly, these statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in them.  The Company’s actual results could differ materially from those anticipated in such forward-looking statements as a result of several factors more fully described elsewhere in this proxy statement and in the documents incorporated by reference herein.  All forward-looking statements are necessarily only estimates of future results and there can be no assurance that actual results will not differ materially from expectations, and, therefore, you are cautioned not to place undue reliance on such statements.  Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this proxy statement.
Actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation:  the volatility of the Company’s stock price and possible delisting of the Company’s Common Stock from the NASDAQ Global Select Market; inability to achieve the anticipated results of the Reverse Stock Split; inability to achieve the higher minimum capital ratios that are required by the Consent Order, as well as failure to maintain adequate levels of capital and liquidity to support our operations; the effect of other requirements of the Consent Order and any further regulatory actions; any effects of our recent change of control, in which NAFH acquired a majority ownership of our voting power, including any change in management, strategic direction, busin ess plan or operations; failure to continue as a going concern; the effects of future economic conditions; governmental monetary and fiscal policies, as well as legislative and regulatory changes; and the risks of changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral, and interest rate risks.
Many of the factors set forth above are described in greater detail in the Company’s filings with the SEC.  All forward-looking statements included in this proxy statement are expressly qualified in their entirety by the foregoing cautionary statements.  Although the Company believes the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect.  All future written and oral forward-looking statements attributable to the Company or persons acting on the Company’s behalf are expressly qualified in their entirety by the previous statements.  Except as may be required by law, the Company undertakes no obligation to update any forward- looking statement to reflect events or circumstances after the date on which the statement was made or to reflect the occurrence of unanticipated events.



FINANCIAL AND OTHER INFORMATION
Pro Forma Financial Information
Basis of Presentation
The unaudited pro forma consolidated balance sheet table for June 30, 2010, and the pro forma income statements and earnings per share tables for the fiscal year ended December 31, 2009 and the six months ended June 30, 2010 presented below have been prepared by management to illustrate the impact of:
·  the recently consummated Share Purchase, resulting in the issuance to NAFH of (i) 700,000,000 shares of the Company’s Common Stock at $0.15 per share, and (ii) 70,000 shares of mandatorily convertible participating voting preferred stock for $1,000 per share in exchange for cash of $162.8 million as well as the exchange of all of our outstanding Series A Preferred Stock and the TARP Warrant which NAFH recently purchased from the Treasury for $12.2 million.
·  (i) full exercise of the Warrant issued to NAFH representing the right to purchase, up to 1,166,666,667 shares of Common Stock at $0.15 per share (or up to 175,000 shares of Preferred Stock for $1,000.00 per share) (the “Warrant Exercise”), and (ii) full subscription in the Rights Offering required by the Investment Agreement whereby shareholders of the Company will be able to purchase up to 148,879,220 shares of Common Stock at a purchase price of $0.15 per share.
The information presented assumes that the 70,000 shares of Preferred Stock have been converted into 466,666,666 shares of Common Stock and the warrant has been exercised for 1,166,666,667 shares of Common Stock.
The pro forma financial information below do not present the impact of the potential Reverse Stock Split, whereby the number of outstanding and authorized shares of Common Stock will be reduced by a ratio between 1:10 to 1:100.



Consolidated Balance Sheets
(Unaudited)
The following table presents the Company's unaudited pro forma consolidated balance sheet adjusted for the pro forma impacts of both (1) the Share Purchase and the TARP Exchange and conversion of the 70,000 shares of Preferred Stock into 466,666,666 shares of Common Stock and (2) the full exercise of the Warrant issued to NAFH for Common Stock and a fully subscribed Rights Offering. The pro forma consolidated balance sheet as of June 30, 2010 assumes that the foregoing transactions occurred on June 30, 2010. The pro forma balance sheet adjustments for the Share Purchase reflect consideration received of $175 million comprised of $162.8 million of cash plus all of the 37,000 Series A Preferred Stock owned by the Treasury prior to the Share Purchase and the TARP Exchange. The pro forma balance sheet adjustments for the TARP Exchange reflec t cash paid to the Treasury of $12.2 million by NAFH and the exchange thereof for common shares with an equivalent value based upon the terms of the Share Purchase. Liabilities for direct costs of the Share Purchase of $3.9 million were deducted from the offering proceeds resulting in a net increase in Common Stock of $[171] million.
When substantially all of the common stock of a company is acquired, SEC Staff Accounting Bulletin Topic 5J generally requires that the purchase price be “pushed down” to the company's financial statements and that all retained earnings be eliminated. Regulation S-X, Rule 1-02(aa), defines “wholly owned subsidiary”, and this rule should be referred to for a definition of "substantially" all of the common stock. The SEC staff has indicated that an acquisition of 95% or more of the common stock of a company would result in the entity's being substantially wholly owned.  Accordingly, the Financial Accounting Standards Board Accounting Standards Codification Topic 805 – Business Combinations (“ASC 805”) requires the application of the acquisition method of accounting to the financial statem ents of the Company subsequent to the Share Purchase. The pro forma balance sheet adjustments include significant adjustments associated with the application of the acquisition method of accounting required due to the change in control caused by NAFH’s ownership of 99% of the outstanding common stock following the Share Purchase. These are estimated adjustments to balances as of June 30, 2010 and may differ significantly from the actual adjustments that take place as of September 30, 2010 as we are still in the process of completing the fair value analysis of assets and liabilities as of September 30, 2010.

(Dollars in thousands, except per share amounts)
 
 
June 30, 2010
(Actual)
  
Adjustment for Share Purchase and TARP Exchange
  
Adjustment for Change in Control
(ASC 805)
  
Adjustment for Warrant Exercise and Rights Offering
  
 
June 30, 2010 (Pro Forma)
 
Assets               
Cash and due from banks
 $157,876  $162,8401 $—  $197,0822 $517,798 
                     
Investment securities available for sale
  282,621   —   —   —   282,621 
                     
Loans, net of deferred loan costs and fees  1,101,672   —   (102,271)3  —   999,401 
Less:  Allowance for loan losses
  (27,710)  —   27,7104  —   — 
Loans, net
  1,073,962   —   (74,561)  —   999,401 
                     
Premises and equipment, net
  51,480   —   —5  —   51,480 
Goodwill and intangible assets
  6,510   —   48,6356  —   55,145 
Other real estate owned
  38,699   —   —   —   38,699 
Accrued interest receivable and other assets  47,917   —   2037  —   48,120 
Total Assets
 $1,659,065  $162,840  $(25,723) $197,082  $1,993,264 
                     
Liabilities and Shareholders’ Equity                    
Liabilities                    
Deposits:                    
Noninterest-bearing demand
 $178,159  $—  $—  $—  $178,159 
Interest-bearing
  1,163,572   —   5,7238  —   1,169,295 
Total deposits
  1,341,731   —   5,723   —   1,347,454 
               —     
Federal Home Loan Bank (FHLB) advances  125,000   —   6,9359  —   131,935 
Short-term borrowings
  73,894   —   (6)10  —   73,888 
Long-term borrowings
  63,000   —   (17,454)11  —   45,546 
Accrued interest payable and other liabilities  16,404   3,89112  —   —   20,295 
Total liabilities
 $1,620,029  $3,891  $(4,802) $—  $1,619,118 
                     
Preferred stock – $.10 par value
 $34,110  $(34,110)13 $—  $—  $— 
Common stock - $.10 par value
  1,496   116,66714  —   131,56715  249,730 
Additional paid in capital
  74,929   76,39216  (92,420)17  65,51518  124,416 
Retained Earnings (Accumulated deficit)  (69,524)  —   69,52419  —   — 
Accumulated other comprehensive loss
  (1,406)  —   1,40620  —   — 
Treasury stock, at cost, 73,454 shares
  (569)  —   56921  —   — 
Total shareholders’ equity
 $39,036  $158,94922 $(20,921)23 $197,08224 $374,146 
                     
Total Liabilities and Shareholders’ Equity $1,659,065  $162,840  $(25,723) $197,082  $1,993,264 

Notes:
1Adjustment hereon reflects cash proceeds received by the Company as a result of the Share Purchase.
2Adjustment hereon reflects net cash proceeds received by the Company as a result of the Warrant Exercise and Rights Offering.
    
 Proceeds of the Warrant Exercise $175,000 
 Gross proceeds of the Rights Offering  22,332 
 Estimated transaction costs associated with the Rights Offering  (250)
 Net proceeds of the Warrant Exercise and Rights Offering $197,082 

3Adjustment hereon reflects fair value recognition of loans outstanding as of June 30, 2010 in connection with a change in control as required by ASC 805.
4Adjustment hereon reflects reversal of allowance for loan losses required in connection with a change in control as required by ASC 805. Recognition of outstanding loans at fair value as of June 30, 2010 eliminates the need for a valuation allowance for credit losses as credit risk is taken into account in the fair value adjustment discussed in Note 3.
5For purposes of this pro forma income statement, no adjustment to occupancy expense was deemed necessary to adjust depreciation and amortization of property, equipment and leasehold improvement as these adjustments were deemed immaterial due to preliminary estimates resulting from expected offsetting differences between the fair values and depreciable bases of these assets.
6Adjustment hereon reflects recognition of estimated fair value of core deposit and customer relationship intangibles as well as goodwill in connection with a change in control as required by ASC 805. For purposes of this Pro Forma Balance Sheet, the core deposit and customer related intangibles were estimated to be approximately $10,000 and have amortization lives of 10 years. The remaining amount of this adjustment reflects estimated goodwill as of June 30, 2010.
7Adjustment hereon reflects recognition of deferred tax assets and liabilities associated with adjustments required by ASC 805. Current estimates of hypothetical adjustments as of June 30, 2010 result in a net deferred tax asset of $203. Due to limitations on the use of net operating losses and built in deductions prescribed by Internal Revenue Code Section 382 and other applicable limitations, no deferred tax assets were assumed to exist related to net operating losses for purposes of this pro forma balance sheet. Additionally, no deferred tax asset was assumed to result from the adjustment to fair value for loans other than that associated with the amount of such adjustment expected to be accreted into income.
8Adjustment hereon reflects recognition of a premium or discount on contractual deposits as required by ASC 805.
9Adjustment hereon reflects recognition of fair value of FHLB Advances in connection with a change in control as required by ASC 805.
10
Adjustment hereon reflects recognition of fair value of short term borrowings in connection with a change in control as required by ASC 805.
11Adjustment hereon reflects recognition of estimated fair value of long term borrowings in connection with a change in control as required by ASC 805. The adjustment includes an increase of $276 relating to long term repurchase agreements and a decrease of $(17,730) relating to outstanding subordinated debentures.
12Adjustment hereon reflects recognition of liability associated with transaction costs associated with the Share Purchase and TARP Exchange.
13Adjustment hereon represents the TARP exchange and cancellation of the Series A Preferred Stock.
14Adjustment hereon represents the par value of 1,166,666,667 shares of common stock issued to NAFH.
15Adjustment hereon represents the par value of 1,166,666,667 shares of common stock issued in connection with the Warrant Exercise and 148,879,220 shares of common stock issued in connection with the Rights Offering.
16Adjustment hereon represents $58,333 of additional paid in capital associated with the 1,166,666,667 shares of common stock issued to NAFH in addition to $21,950 relating to a reclassification from preferred stock to additional paid in capital – common stock – representing the impact of the repurchase and cancellation of the TARP Series A Preferred Stock partially offset by $3,891 of transaction costs discussed in Note 10 above.
17Adjustment hereon reflects the application of the estimated fair value of the net assets of the Company required due to the change in control as required by ASC 805. Adjustment hereon is a result of the elimination of accumulated deficit, accumulated other comprehensive loss and the historical cost of treasury stock offsetting additional paid in capital relating to common shareholders and a final adjustment to additional paid in capital relating to the reconciliation of total equity to the consideration from NAFH plus the fair value of the minority interest.
    
 Elimination of retained earnings $(69,524)
 Elimination of accumulated deficit  (1,406)
 Elimination of historical cost of treasury stock  (569)
 Recognition of change in net assets required by ASC 805  (20,921)
  $(92,420)

18Adjustment hereon reflects the recognition of paid in capital resulting from the Warrant Exercise and Rights Offering.
19Adjustment hereon reflects the elimination of accumulated deficit as required by ASC 805 and SAB Topic 5J.
20Adjustment hereon reflects the elimination of accumulated other comprehensive loss as required by ASC 805.
21Adjustment hereon reflects the elimination of the historical cost of treasury stock as required by ASC 805.
22Adjustment hereon reflects recognition of issuance of common shares in connection with the Share Purchase.
23Adjustment hereon reflects the application of the estimated fair value of the net assets of the Company required due to the change in control as required by ASC 805. The net change in equity is a result of the re-setting of retained earnings, accumulated other comprehensive loss and treasury stock to zero, offsetting additional paid in capital relating to common shareholders and a final adjustment to additional paid in capital relating to the reconciliation of total equity to the consideration from NAFH plus the fair value of the minority interest. Reconciliation of Total Shareholders’ Equity to the fair value of the net assets of the Company is as follows:
    
 Cash proceeds of Share Purchase $162,840 
 TARP Exchange  12,160 
 Fair value of minority interest  5,955 
 Offering costs  (3,891)
  $177,064 
     
 Actual June 30, 2010 Total Shareholders’ Equity $39,036 
 Adjustment for Share Purchase and Tarp Exchange  158,949 
 Adjustment for Change in Control required by ASC 805  (20,921)
 Pro forma Total Shareholders’ Equity before Adjustment for Warrant Exercise and Rights Offering $177,064 

24Adjustment hereon reflects recognition of issuance of common shares in connection with the Warrant Exercise and Rights Offering.



Pro Forma Income Statements and Earnings Per Share
(Unaudited)
The following tables present the Company's unaudited pro forma earnings per share adjusted for the pro forma impacts of the Share Purchase and the TARP Exchange for the periods shown. Pro forma earnings per share assume the Company completed the Share Purchase and the TARP Exchange on January 1, 2009, and the conversion of the 70,000 shares of Preferred Stock into 466,666,666 shares of Common stock occurred on January 1, 2009. The pro forma information below also includes certain adjustments associated with the hypothetical application of the acquisition method of accounting required due to the change in control caused by NAFH’s ownership of 99% of the outstanding common stock following the transaction.
The pro forma income statement adjustments include significant adjustments associated with the application of the acquisition method of accounting required due to the change in control caused the Share Purchase as discussed above. These are estimated adjustments to the income statements for the year ended December 31, 2009 and for the six months ended June 30, 2010 made solely for the purposes of these Pro Forma income statements and future results of operations may differ significantly.

(Dollars and shares in thousands, except per share amounts)
 
Year ended December 31, 2009
(Actual)
  
Adjustment for Share Purchase and TARP Exchange
  
Adjustment for Change in Control
(ASC 805)
  
Adjustment for Warrant Exercise and Rights Offering
  
Year ended
December 31, 2009
(Pro Forma)
 
Interest and dividend income               
Loans, including fees $68,925  $—  $3,1341 $—  $72,059 
Investment securities:                    
Taxable  11,750   —   —2  —   11,750 
Tax-exempt  299   —   —3  —   299 
Interest-bearing deposits in other banks  124   —   —   —   124 
Federal Home Loan Bank stock  24   —   —   —   24 
Federal funds sold and securities purchased under agreements to resell  5   —   —   —   5 
Total interest and dividend income  81,127   —   3,134   —   84,261 
       —   —   —   — 
Interest expense      —   —   —   — 
Deposits  27,646   —   (6,001)4  —   21,645 
Federal Home Loan Bank advances  5,199   —   (2,558)5  —   2,641 
Short-term borrowings  104   —   116  —   115 
Long-term borrowings  2,787   —   (345)7  —   2,442 
Total interest expense  35,736   —   (8,893)  —   26,843 
                     
Net interest income  45,391   —   12,027   —   57,418 
Provision for loan losses  42,256   —   (42,256)8  —   — 
Net interest income after provision for loan losses  3,135   —   54,283   —   57,418 
                     
Non-interest income                    
Service charges on deposit accounts  4,165   —   —   —   4,165 
Fees on mortgage loans originated and sold  1,143   —   —   —   1,143 
Investment advisory and trust fees  997   —   —   —   997 
Other income  3,510   —   —   —   3,510 
Investment securities gains, net  5,058   —   (2,167)9  —   2,891 
Other-than-temporary impairment losses on investments prior to April 1, 2009 adoption of ASC 320-10-65-1  (23)  —   2310  —   — 
Other-than-temporary impairment losses on investments subsequent to
    April 1, 2009
  —   —   —   —   — 
   Gross impairment losses  (740)  —   74011  —   — 
   Less: Impairments recognized in other comprehensive income  —   —   —   —   — 
Net impairment losses recognized in earnings subsequent to April 1, 2009  (740)  —   740   —   — 
Total non-interest income  14,110   —   (1,404)  —   12,706 
                     
Non-interest expense                    
Salaries and employee benefits  28,594   —   (381)12  —   28,213 
Net occupancy and equipment expense  9,442   —   —13  —   9,442 
Goodwill impairment  5,887   —   (5,887)14  —   — 
Other expense  21,419   —   (2,704)15  —   18,715 
Total non-interest expense  65,342   —   (8,972)  —   56,370 
                     
Net income (loss) before income taxes  (48,097)  —   61,851   —   13,754 
Income tax expense (benefit)  13,451   —   (8,275)16  —   5,176 
                     
Net loss
 $(61,548) $—  $70,126  $—  $8,578 
Preferred dividends earned by preferred shareholders and discount accretion  (2,662)  2,662   —   —   — 
Net loss allocated to common shareholders $(64,210) $2,662  $70,126  $—  $8,578 
                     
Book value per common share $1.42  $(1.24) $(0.02) $(0.01) $0.15 
Basic earnings (loss) per share  (4.33)  4.28   0.06   (0.01)  0.00 
Diluted earnings (loss) per share  (4.33)  4.28   0.06   (0.01)  0.00 
                     
Weighted average common shares  14,820   1,166,667   —   1,315,546   2,497,033 
Weighted average diluted shares  14,820   1,166,667   —   1,315,546   2,497,033 

Notes:
1Adjustment hereon reflects the estimated impact of accretion of interest resulting from the application of ASC 805.
2For purposes of this pro forma income statement, no adjustment to interest income on investment securities was deemed necessary as any required adjustments were deemed immaterial due to the significant restructuring of the investment portfolio which occurred during 2009.
3For purposes of this pro forma income statement, no adjustment to interest income on investment securities was deemed necessary as any required adjustments were deemed immaterial due to the significant restructuring of the investment portfolio which occurred during 2009.
4Adjustment hereon reflects the estimated impact of the fair value adjustments required by ASC 805 triggered by the change in control resulting from the Share Purchase on interest expense relating to contractual deposits. Based upon the footnote disclosures in Note 18 - Fair Value of Financial Instruments, a premium of $9,001 would have been recorded in the acquisition accounting adjustments on January 1, 2009. For purposes of this pro forma income statement, an assumed 18 month straight-line amortization assumption was used in deriving the adjustment hereon.
5Adjustment hereon reflects the estimated impact of the fair value adjustment required by ASC 805 triggered by the change in control on FHLB Advances and the impact of the related premium amortization on interest expense.
6Adjustment hereon reflects the estimated impact of the fair value adjustment required by ASC 805 triggered by the change in control on short-term borrowings and the impact of the related discount accretion on interest expense.
7Adjustment hereon reflects the estimated impact of the fair value adjustment required by ASC 805 triggered by the change in control on long-term borrowings and the impact of the related premium amortization and discount accretion on interest expense. Adjustment includes the impact of an estimated $719 of premium amortization associated with long term repurchase agreements, partially offset by $374 of discount accretion on subordinated debentures.
8Adjustment hereon reflects the estimated impact of the fair value adjustments required by ASC 805 triggered by the change in control and the application of ASC 310-30 for accounting for acquired loans with evidence of credit deterioration.
9Adjustment hereon reflects the impact of the application of ASC 805 relating to the elimination of unrealized gains existing as of January 1, 2009 due to the change in control. Accordingly, realized gains recorded during 2009 were reduced by the amount of gross unrealized gains on investment securities reported as of December 31, 2008. As these gains were realized in 2009 due to the restructuring of the investment portfolio, for purposes of this pro forma income statement, the related realized gains were reversed.
10Adjustment hereon reflects the impact of the application of ASC 805 relating to the reversal of losses realized on investment securities during 2009. The measurement period provided by ASC would have resulted in the reflection of significantly higher default assumptions in the estimation of the fair value of the CDO securities which were other than temporarily impaired during 2009. Accordingly, such impairment charges were reversed for purposes of this pro forma income statement.
11Adjustment hereon reflects the impact of the application of ASC 805 relating to the reversal of losses realized on investment securities during 2009. The measurement period provided by ASC would have resulted in the reflection of significantly higher default assumptions in the estimation of the fair value of the CDO securities which were other than temporarily impaired during 2009. Accordingly, such impairment charges were reversed for purposes of this pro forma income statement.
12Adjustment hereon reflects the impact of a reversal of compensation expense of $107 associated with restricted stock awards and $274 associated with stock options granted prior to January 1, 2009 which for purposes of this pro forma income statement are assumed to have vested upon the change of control triggered by the Share Purchase.
13For purposes of this pro forma income statement, no adjustment to occupancy expense was deemed necessary to adjust depreciation and amortization of property, equipment and leasehold improvement as these adjustments were deemed immaterial due to preliminary estimates resulting from expected offsetting differences between the fair values and depreciable bases of these assets.
14Adjustment hereon reflects the reversal of the goodwill impairment charge recorded during 2009. Due to the application of ASC 805, upon the change in control triggered by the Share Purchase, the goodwill that was impaired during 2009 would have been replaced with goodwill resulting from the Share Purchase and the related acquisition accounting adjustments required by ASC 805. While an annual impairment test would have been required, the financial results presented in this pro forma income statement are estimated to have resulted in no impairment of the goodwill recorded on January 1, 2009.
15Adjustment hereon reflects the impact of a reversal of certain stock based compensation expense and OREO write downs along with an adjustment to the amount of amortization of intangible assets. Stock based compensation expense of $287 associated with restricted stock awards and $7 associated with stock options was reversed relating to awards granted prior to January 1, 2009, which for purposes of this pro forma income statement are assumed to have vested upon the change of control triggered by the Share Purchase. OREO write downs recorded during 2009 were assumed to have been reflected in the acquisition method fair value estimate as the measurement period provided by ASC would have made evident and improved the underlying assumptions used in valuing these assets reflecting significantly longer holding periods and more significant declines in market values than were projected prior to January 1, 2009 in the histori cal financial statements. Amortization of intangibles was adjusted reflecting a reversal of the $1,430 of amortization recorded during 2009 and recognition of $1,000 of amortization based upon an estimate of amortizing intangibles of $10,000, primarily core deposit intangibles, with estimated useful lives of 10 years. Amortization life assumptions are longer than historical intangibles due to the customer and deposit relationships of the entire Company being valued as a result of the Share Purchase and, for purposes of this pro forma income statement, as of January 1, 2009 as opposed to the historical subset of acquired customer and deposit relationships resulting from previous acquisitions of the Company.
    
 Stock Based Compensation $(294)
 OREO write downs  (1,980)
 Amortization of Intangibles  (430)
  $(2,704)



16Adjustment hereon reflects the impact of the reversal of the recognition of a full valuation allowance of $30,392 recorded against deferred tax assets recorded in 2009 as well as recognition of tax expense associated with the adjusted pro forma net income before taxes assuming an effective rate equal to the blended federal and statutory rate of 37.6%.
    
 Reversal of valuation allowance $(30,392)
 Adjustment to reflect impact of acquisition accounting adjustments  22,117 
  $(8,275)



(Dollars and shares in thousands, except per share amounts)
 
Six Months Ended
June 30, 2010
(Actual)
  
Adjustment for Share Purchase and TARP Exchange
  
Adjustment for Change in Control (ASC 805)
  
Adjustment for Warrant Exercise and Rights Offering
  
Six Months Ended June 30, 2010
(Pro Forma)
 
Interest and dividend income               
Loans, including fees $30,635  $—  $2,4211 $—  $33,056 
Investment securities:                    
Taxable  4,373   —   —2  —   4,373 
Tax-exempt  108   —   —3  —   108 
Interest-bearing deposits in other banks  149   —   —   —   149 
Federal Home Loan Bank stock  10   —   —   —   10 
Federal funds sold and securities purchased under agreements to resell  —   —   —   —   — 
Total interest and dividend income  35,275   —   2,421   —   37,696 
       —   —   —   — 
Interest expense      —   —   —   — 
Deposits  9,411   —   (3,000)4  —   6,411 
Federal Home Loan Bank advances  2,395   —   (1,220)5  —   1,175 
Short-term borrowings  48   —   —   —   48 
Long-term borrowings  1,325   —   (160)6  —   1,165 
Total interest expense  13,179   —   (4,380)  —   8,799 
                     
Net interest income  22,096   —   6,801   —   28,897 
Provision for loan losses  12,625   —   (12,625)7  —   — 
Net interest income after provision for loan losses  9,471   —   19,426   —   28,897 
                     
Non-interest income                    
Service charges on deposit accounts  1,754   —   —   —   1,754 
Fees on mortgage loans originated and sold  764   —   —   —   764 
Investment advisory and trust fees  620   —   —   —   620 
Other income  1,135   —   —   —   1,135 
Investment securities gains, net  2,635   —   —8  —   2,635 
Other-than-temporary impairment losses on investments                    
Gross impairment losses  —   —   —   —   — 
 Less: Impairments recognized in other comprehensive income  —   —   —   —   — 
Net impairment losses recognized in earnings  —   —   —   —   — 
Total non-interest income  6,908   —   —   —   6,908 
                     
Non-interest expense                    
Salaries and employee benefits  13,249   —   (142)9  —   13,107 
Net occupancy and equipment expense  4,557   —   —10  —   4,557 
Other expense  17,723   —   (7,294)11  —   10,429 
Total non-interest expense  35,529   —   (7,436)  —   28,093 
                     
Net income (loss) before income taxes  (19,150)  —   26,862   —   7,712 
Income tax expense (benefit)  —   —   2,90212  —   2,902 
Net income (loss)
 $(19,150) $—  $23,960  $—  $4,810 
Preferred dividends earned by preferred shareholders and discount accretion  (1,329)  1,329   —   —   — 
Net loss allocated to common shareholders $(20,479) $1,329  $23,960   —  $4,810 
Book value per common share $0.22  $(0.05) $(0.01) $—  $0.17 
Basic earnings (loss) per share  (1.38)  1.36   0.02   0.00   0.00 
Diluted earnings (loss) per share  (1.38)  1.36   0.02   0.00   0.00 
                     
Weighted average common shares  14,844   1,166,667   —   1,315,546   2,497,057 
Weighted average diluted shares  14,844   1,166,667   —   1,315,546   2,497,057 

Notes:
1Adjustment hereon reflects the estimated impact of accretion of interest resulting from the application of ASC 805.
2For purposes of this pro forma income statement, no adjustment to interest income on investment securities was deemed necessary as any required adjustments were deemed immaterial due to the significant restructuring of the investment portfolio which occurred during 2009.
3For purposes of this pro forma income statement, no adjustment to interest income on investment securities was deemed necessary as any required adjustments were deemed immaterial due to the significant restructuring of the investment portfolio which occurred during 2009.
4Adjustment hereon reflects the estimated impact of the fair value adjustments required by ASC 805 triggered by the change in control resulting from the Share Purchase on interest expense relating to contractual deposits. Based upon the footnote disclosures in Note 18 - Fair Value of Financial Instruments, a premium of $9,001 would have been recorded in the acquisition accounting adjustments on January 1, 2009. For purposes of this pro forma income statement, an assumed 18 month straight-line amortization assumption was used in deriving the adjustment hereon.
5Adjustment hereon reflects the estimated impact of the fair value adjustment required by ASC 805 triggered by the change in control on FHLB Advances and the impact of the related premium amortization on interest expense.
6Adjustment hereon reflects the estimated impact of the fair value adjustment required by ASC 805 triggered by the change in control on long-term borrowings and the impact of the related premium amortization and discount accretion on interest expense. Adjustment includes the impact of an estimated $353 of premium amortization associated with long term repurchase agreements, partially offset by $193 of discount accretion on subordinated debentures.
7Adjustment hereon reflects the estimated impact of the fair value adjustments required by ASC 805 triggered by the change in control and the application of ASC 310-30 for accounting for acquired loans with evidence of credit deterioration.
8For purposes of this pro forma income statement, no adjustment to securities gains during the six months ended June 30, 2010 was deemed necessary as the gains reflected in the actual results resulted primarily from securities acquired subsequent to the January 1, 2009 assumed date of the change in control.
9Adjustment hereon reflects the impact of a reversal of compensation expense of $52 associated with restricted stock awards and $90 associated with stock options granted prior to January 1, 2009 which for purposes of this pro forma income statement are assumed to have vested upon the change of control triggered by the Share Purchase.
10For purposes of this pro forma income statement, no adjustment to occupancy expense was deemed necessary to adjust depreciation and amortization of property, equipment and leasehold improvement as these adjustments were deemed immaterial due to preliminary estimates resulting from expected offsetting differences between the fair values and depreciable bases of these assets.
11Adjustment hereon reflects the impact of a reversal of certain stock based compensation expense and OREO write downs along with an adjustment to the amount of amortization of intangible assets, elimination of expenses associated with capital raising activities and an adjustment to the amount of FDIC insurance expense. Stock based compensation expense of $130 associated with restricted stock awards and $3 associated with stock options was reversed relating to awards granted prior to January 1, 2009, which for purposes of this pro forma income statement are assumed to have vested upon the change of control triggered by the Share Purchase. OREO write downs recorded during 2010 were assumed to have been reflected in the acquisition method fair value estimate as the measurement period provided by ASC would have made evident and improved the underlying assumptions used in valuing these assets reflecting significantly lon ger holding periods and more significant declines in market values than were projected prior to January 1, 2009 in the historical financial statements. Amortization of intangibles was adjusted reflecting a reversal of the $779 of amortization recorded during 2010 and recognition of $500 of amortization based upon an estimate of amortizing intangibles of $10,000, primarily core deposit intangibles, with estimated useful lives of 10 years. Amortization life assumptions are longer than historical intangibles due to the customer and deposit relationships of the entire Company being valued as a result of the Share Purchase and, for purposes of this pro forma income statement, as of January 1, 2009 as opposed to the historical subset of acquired customer and deposit relationships resulting from previous acquisitions of the Company. Additionally, amounts associated with the Company’s capital raising efforts and related costs incurred during the six months ended June 30, 2010 were eliminated herein. Finally, a n adjustment was included to reflect the difference in FDIC insurance costs associated with the Company’s subsidiary, TIB Bank, reflecting an assumption that it would have been well capitalized during the second quarter of 2010.
    
 Stock Based Compensation $(133)
 OREO write downs  (4,887)
 Amortization of Intangibles  (279)
 Capital raise expenses  (1,598)
 FDIC insurance assessment adjustment  (397)
  $(7,294)

12Adjustment hereon reflects recognition of tax expense associated with the adjusted pro forma net income before taxes assuming an effective rate equal to the blended federal and statutory rate of 37.6%.


Historical Financial Statements and Supplementary Data
For our audited financial statements as of December 31, 2009 and 2008, and for the years ended December 31, 2009, 2008, and 2007, and the notes thereto, see Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2009 (the “Form 10-K”), which is attached as Appendix A to this proxy statement.  For our unaudited financial statements as of June 30, 2009, and for the six month periods ended June 30, 2010 and 2009, and the notes thereto, see Item 1 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 (the “Form 10-Q”), which is attached as Appendix B to this proxy statement.
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
For our management’s discussion and analysis of financial condition and results of operation, see Item 7 of the Form 10-K and Item 2 of the Form 10-Q, which are attached as Appendix C and Appendix D, respectively, to this proxy statement.
Changes In And Disagreements With Accountants On Accounting And Financial Disclosure
Not applicable.
Quantitative And Qualitative Disclosures About Market Risk
For our quantitative and qualitative disclosures about market risk, see Items 7A of the Form 10-K and Item 3 of the Form 10-Q, which are attached as Appendix E and Appendix F, respectively, to this proxy statement.
Public Accountant
Representatives of Crowe Horwath LLP, independent registered public accountant for the Company for fiscal year 2009 and the current fiscal year, will be present at the Special Meeting, will have an opportunity to make a statement, and will be available to respond to appropriate questions.


BENEFICIAL OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS
AND PRINCIPAL SHAREHOLDERS
The following table presents information regarding beneficial ownership of our Common Stock as of October 1, 2010 by:
·  Each person known by us to own more than 5% of our voting Common Stock;
·  Each of our directors;
·  Each of our executive officers; and
·  All of our executive officers and directors as a group.
Except as otherwise indicated, the persons named in the tablelisted below have sole voting and investment power with respect to all shares shown as beneficiallyof Common Stock owned by them.  Information relatingthem, except to beneficial ownership of the shares is based upon “beneficial ownership” conceptsextent that such power may be shared with a spouse or as otherwise set forth in the rules promulgated underfootnotes. The mailing address of Mr. Boaz and Mr. Gutman and each of the Exchange Act.  Under such rules, a personnamed executive officers is deemed to be a “beneficial owner”in care of a security if that person has orthe Company’s address, which is 599 9th Street North, Suite 101, Naples, FL 34102-5624599 9th Street North, Suite 101, Naples, FL 34102-5624. The mailing address of the remaining directors is in care of Capital Bank Financial Corp.’s address, which is 121 Alhambra Plaza, Suite 1601, Coral Gables, FL 33134.

The percentages shown below have been calculated based on 12,349,935 total shares “voting power” with respect to such security.  A person may be deemed to be the “beneficial owner” of a security if that person also has the right to acquire beneficial ownershipCommon Stock outstanding as of such security within 60 days.  Under the “beneficial ownership” rules, moreAugust 2, 2012.

Name of Beneficial Owner
Aggregate Number
of Shares Beneficially
Owned (1)
Number of Shares
Acquirable
within 60 Days (2)
Percent
of Class
    
5% Shareholders   
Capital Bank Financial Corp.11,666,667–94.47%
    
Directors and Director Nominees   
Bradley A. Boaz142–*
Peter N. Foss––*
Howard B. Gutman (3)
9,530–*
William A. Hodges––*
Christopher G. Marshall (4)
11,666,667–94.47%
R. Bruce Singletary (4)
11,666,667–94.47%
R. Eugene Taylor (4)
11,666,667–94.47%
    
Named Executive Officers   
Christopher G. Marshall (4)
11,666,667–94.47%
R. Bruce Singletary (4)
11,666,667–94.47%
R. Eugene Taylor (4)
11,666,667–94.47%
Michael D. Carrigan (5)
1,200–*
Alma R. Shuckhart (6)
3,797–*
    
All directors and executive officers as a group (9 persons) (7)
11,681,336–94.59%
     

  * Less than one person may be deemed to be a beneficial owner of the same securities, and a person may be deemed to be a beneficial owner of securities as to which he or she may disclaim any beneficial interest.  The information as to beneficial ownership has been furnished by the respective persons listed in the below table.percent

Name
 
Common Stock (includes Preferred Stock on an as converted basis)
  
Preferred Stock (also included under Common Stock on an as converted basis)
  
Percent of
Votes
 
  
Number of shares
  
Percentage ownership(1)
  
Number of shares
  
Percentage ownership
  
(All Classes)
 
5% Shareholders               
North American Financial Holdings, Inc.
4725 Piedmont Row Drive
Charlotte, North Carolina 28210 (2)
  2,333,333,334   99%  245,000   100%  99%
                     
Directors and Executive Officers                    
R. Eugene Taylor (2)(3)
  2,333,333,334   99%  245,000   100%  99%
Christopher G. Marshall (2)(3)
  2,333,333,334   99%  245,000   100%  99%
R. Bruce Singletary (2)(3)
  2,333,333,334   99%  245,000   100%  99%
Peter N. Foss (4)
  —   —   —   —   — 
William A. Hodges (4)
  —   —   —   —   — 
Bradley A. Boaz  1,298   *   —   —   * 
Howard B. Gutman (5)
  171,151   *   —   —   * 
Thomas J. Longe (6)
  99,225   *   —   —   * 
Stephen J. Gilhooly (7)
  38,240   *   —   —   * 
Michael D. Carrigan (8)
  70,832   *   —   —   * 
Michael H. Morris (9)
  17,822   *   —   —   * 
Alma R. Shuckhart (10)
  90,770   *   —   —   * 
                     
All directors and executive officers as a group (12 persons)  2,333,822,672   99%  245,000   100%  99%

*Percent share ownership is less than 1% of total shares outstanding.

(1)For NAFH and Messrs. Taylor, Marshall and Singletary, based on 714,887,922 shares outstanding asThe securities “beneficially owned” by an individual are determined in accordance with the definition of October 1, 2010, 466,666,666 shares to be issued upon conversion“beneficial ownership” set forth in the regulations of the Preferred Stock,Securities and 1,166,666,667 shares to be issued upon exerciseExchange Commission (“SEC”). Accordingly, they may include securities owned by or for, among others, the spouse and/or minor children of the Warrant.  For allindividual and any other directors and officers, based on 714,887,922relative who has the same home as such individual, as well as other securities as to which the individual has or shares outstandingvoting or investment power. Beneficial ownership may be disclaimed as to certain of October 1, 2010, plus 157,546the securities.
(2)Any shares not outstanding but which are subject to granted but unexercised options providing the holdersthat a person has the right to acquire shares within 60 days throughare deemed to be outstanding for the purpose of computing the percentage ownership of such person but are not deemed outstanding for the purpose of computing the percentage ownership of any other person. This column reflects the number of shares of Common Stock that could be purchased by exercise of the options plus outstanding warrants of 82,140, held by the directors and officers listed herein.  Unless otherwise indicated, the beneficial owners listed below may be contacted at our corporate headquarters at 599 9th Street North, Suite 101, Naples, Florida, 34102-5624.to purchase Common Stock on August 2, 2012 or within 60 days thereafter.

(2)NAFH’s beneficial ownership of common stock consists of:  (1)  700,000,000 shares of common stock held as of October 1, 2010, (2) 466,666,666 shares of common stock representing the conversion of the Preferred Stock held by NAFH, which shall automatically occur upon the shareholder approval of the Authorized Share Increase, and (3) 1,166,666,667 shares of common stock representing exercise of the Warrant, which will become exercisable for common stock upon the shareholder approval of the Authorized Share Increase.  NAFH’s beneficial ownership of Preferred Stock consists of:  (1)  70,000 shares of Preferred Stock held as of October 1, 2010, which shall automatically convert to common stock upon the shareholder approval of the Authorized Share Increase, and (2) 175,000 shares of Preferred Stock representing ex ercise of the Warrant, which is currently exercisable for shares of Preferred Stock but will cease to be exercisable for shares of Preferred Stock upon shareholder approval of the Authorized Share Increase.

(3)
Each of Messrs. Taylor, Marshall, and Singletary hereby disclaims beneficial ownership of the securities owned directly or indirectly by NAFH, except to the extent of his pecuniary interest therein, if any.

(4)Excludes securities owned directly or indirectly by NAFH, beneficial ownership of which is hereby disclaimed by each of Messrs. Foss and Hodges, except to the extent of his pecuniary interest therein, if any.

(5)Includes (a) 19,4622,091 shares and 18,955 shares representing exercisable warrants held jointly with his spouse, (b) 2,121Mr. Gutman’s wife, 22 shares held in hisan IRA, account, and (c) 63,1846,950 shares and 63,185 shares representing exercisable warrants held by Premier Insurance, LLC. He is the sole shareholder of HBG Insurance, Inc., a member of Premier Insurance LLC and is the Managing Member of Premier Insurance. He disclaims beneficial ownership of these securities, except to the extent of his pecuniary interest therein.herein.
(4)
Each of Messrs. Marshall, Singletary and Taylor hereby disclaims beneficial ownership of the securities owned directly or indirectly by CBF, except to the extent of his pecuniary interest therein, if any.

(6)Includes (a) 3,607 shares in the Patrick J. Longe Revocable Trust, (b) 32,926 shares in the Patrick J. Longe Roth IRA, (c) 530 shares held by his spouse in custody for Andrew T. Longe, (d) 9,913 shares held in his IRA, and(e) 26,539 shares representing exercisable options.

(7)Includes (a) 36,119 shares representing exercisable options and (b) 2,121 shares held in his IRA.

(8)Includes (a) 4,244 shares held jointly with his spouse, (b) 4,244 shares held in his IRA, (c) 50,952 shares representing exercisable options.

(9)Includes (a) 137 shares fully vested in his individual ESOP account, (b) 13,599 shares fully vested in the Michael H. Morris Trust.

(10)Includes (a) 30,696 shares held jointly with her spouse, (b) 12,302 shares fully vested in her individual ESOP account, and (c) 43,936 shares representing exercisable options.






 
- 5 -
 

(5)Includes 1,157 shares held jointly with Mr. Carrigan’s wife, and 43 shares held in an IRA.
(6)Includes 3,376 shares held jointly with Mrs. Shuckhart’s husband.
(7)Includes all shares reflected in this table as beneficially owned by each director of the Company, and by Mr. Carrigan and Mrs. Shuckhart, each of whom is a named executive officer of the Company.

COSTINFORMATION ABOUT OUR BOARD OF THIS PROXY STATEMENTDIRECTORS

The entire cost of furnishing this proxy statement will be borne by us.  The Company must pay brokerage firms and other persons representing beneficial owners of shares held in street name their reasonable out-of-pocket expenses incurred in connection with sending the proxy materials to beneficial owners and obtaining beneficial owners’ voting instructions.General
SHAREHOLDER PROPOSALS

Shareholder ProposalsOn September 30, 2010, pursuant to an agreement with North American Financial Holdings, Inc. (“NAFH”) (the “Investment Agreement”), the Company issued and sold to NAFH 7,000,000 shares of Common Stock, 70,000 shares of Series B Preferred Stock and a warrant to purchase up to 11,666,667 shares of Common Stock of the Company for aggregate consideration of $175 million (the “Investment”). AnyThe warrant was not exercised and expired on March 31, 2012. NAFH’s funds for the Investment came from its working capital. As a result of the Investment and the Company’s rights offering on January 18, 2011, NAFH currently owns approximately 94% of the Company’s common stock. Upon closing of the Investment, R. Eugene Taylor, NAFH’s Chief Executive Officer, Christopher G. Marshall, NAFH’s Chief Financial Officer, and R. Bruce Singletary, NAFH’s Chief Risk Officer, were named as the Company’s CEO, CFO and CRO, respectively, and as members of the Company’s Board of Directors. In addition, the Company’s Board of Directors was reconstituted with a combination of the three aforementioned executive officers, two existing members (Bradley A. Boaz and Howard B. Gutman) and two additional NAFH-designated members (Peter N. Foss and William A. Hodges).

On January 11, 2012, NAFH changed its name to Capital Bank Financial Corp. (“CBF”).

As the Company’s controlling shareholder, entitledCBF has the power to vote forcontrol the election of the Company’s directors, determine our corporate and management policies and determine the outcome of any corporate transaction or other matter submitted to the Company’s shareholders for approval. CBF also has sufficient voting power to amend the Company’s organizational documents. In addition, five of our seven directors, including our Chief Executive Officer, our Chief Financial Officer, and our Chief Risk Officer are affiliated with CBF.

The Board of Directors may nominateis divided into two classes, as nearly equal in number as feasible. The term of office of the Class I directors expires at the 2013 Annual Meeting of Shareholders (the “Annual Meeting”), and the term of office of the Class II directors expires at the 2012 Annual Meeting, or in any event at such time as their respective successors are duly elected (or appointed) and qualified or their earlier resignation, death or removal from office.

Director Independence
Because CBF holds approximately 94% of the voting power of the Company, under NASDAQ Listing Rules, the Company qualifies as a “controlled company” and, accordingly, is exempt from the requirement to have a majority of independent directors, as well as certain other governance requirements. However, as required under NASDAQ Listing Rules, the Audit Committee of the Board of Directors is comprised entirely of independent directors. Our Board of Directors has determined that Messrs. Boaz, Foss, Gutman and Hodges meet the definition of “Independent Director” as that term is defined in NASDAQ Listing Rules. In determining director independence, the Board considers all relevant facts and circumstances, and the Board considers the issue not merely from the standpoint of a director, but also from that of persons or organizations with which the director has an affiliation. As members of management, Messrs. Taylor, Marshall and Singletary would not be considered independent under current NASDAQ Listing Rules.

Board of Directors Meetings

The Board of Directors met seven times during 2011. No director attended fewer than 75% of the total number of Board of Directors meetings held during 2011 and the total number of meetings held by committees of the board on which he served.

Policy on Attendance at Annual Meetings of Shareholders. The Company does not have a stated policy, but encourages its directors to attend each Annual Meeting of Shareholders. At last year’s Annual Meeting of Shareholders, held on May 24, 2011, three of the Company’s seven directors were present and in attendance.

Board of Directors Committees

The Board of Directors currently has two standing committees, the Executive Committee and the Audit Committee.

- 6 -
Executive Committee. Subject to applicable law, the Executive Committee has the authority to exercise all powers of the Board of Directors during intervals between meetings of the board. The Executive Committee did not meet during 2011. The members of the Executive Committee for election2012 are R. Eugene Taylor (Chairman), Christopher G. Marshall and R. Bruce Singletary.

Audit Committee. The Audit Committee was established by the Board of Directors to oversee the Company’s accounting and financial reporting process, including the Company’s internal control over financial reporting and audits of the Company’s financial statements. In connection with such oversight responsibilities, the Audit Committee reviews the results and scope of the audit and other services provided by the Company’s independent registered public accounting firm. The Audit Committee also has the sole authority and responsibility to select, determine compensation of, evaluate and, when appropriate, replace the Company’s independent registered public accounting firm. The Audit Committee operates pursuant to a charter that is available on our website at www.capitalbank-us.com or free of charge upon written request to the attention of Christopher G. Marshall, TIB Financial Corp., 599 9th Street North, Suite 101, Naples, FL 34102-5624. During 2011, the Audit Committee met six times.

The members of the Audit Committee for 2012 are Peter N. Foss (Chairman), Bradley A. Boaz and William A. Hodges. The Board of Directors, in its business judgment, has made an affirmative determination that each of Messrs. Foss, Boaz and Hodges are “Independent Directors” as that term is defined by NASDAQ Listing Rules, including the special independence requirements applicable to audit committee members. The Board of Directors also has determined, in its business judgment, that Mr. Boaz is an “audit committee financial expert” as such term is defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Nominations of Directors
The Company does not have a nominating committee or a nominating committee charter. The Board of Directors has decided against establishing a nominating committee because its policy is to have the full Board of Directors perform the functions that might otherwise be performed by such a committee.

In identifying candidates for the Company’s Board of Directors, the directors consider the composition of the board, the operating requirements of the Company and the long-term interests of the Company’s shareholders. In conducting this assessment, the directors consider diversity, age, skills, and such other factors as they deem appropriate given the current needs of the board and the Company to maintain a balance of knowledge, experience and capability. The directors believe that candidates for director should have certain minimum qualifications, including being able to read and understand basic financial statements, having business experience, and having high moral character; however, they retain the right to modify these minimum qualifications from time to time. Although the Company has not adopted a formal policy with regard to the consideration of diversity in identifying candidates for the Board of Directors, the directors do consider diversity in business, industry and professional experience, differences of viewpoint, education, specific skills and perspectives. The directors believe that the consideration of diversity as a factor in selecting members of the Board of Directors will enable the Company to create an assorted Board of Directors that effectively serves the needs of the Company and the interests of its shareholders. With respect to directors who are nominated for re-election, the directors also consider the director’s previous contributions to the Board of Directors.  In accordance with our Bylaws, nominations must be made in writing and must be delivered to or mailed to and received by the Secretary of the Company not less than 120 days prior to the first anniversary of the date on which the Company first mailed its proxy materials for the preceding year’s Annual Meeting of Shareholders.  The proxy statement for our annual meeting was first mailed to Company shareholders on or about April 29, 2010.  Therefore, shareholder nominations for election at next year’s Annual Meeting must be received no later than the close of business on December 30, 201 0.  Nominations must be in accordance with the procedures and include the information required by the Company’s Bylaws.

Shareholder Communications
A shareholder who desires to have his or her proposal included in next year’s proxy statement for the 2011 annual meeting must deliver the proposal to the Secretary of the Company no later than the close of business on December 30, 2010.  This submission should include the proposal and a brief statement of the reasons for it, the name and address of the shareholder (as they appear in the Company’s stock transfer records), the number of Company shares beneficially owned by the shareholder and a description of any material direct or indirect financial or other interest that the shareholder (or any affiliate or associate) may have in the proposal.  Submissions must be in accordance with the procedures and include the information required by the Company’s Bylaws.
SEC rules provide that the Company must receive shareholders’ proposals intended to be presented at the Special Meeting a reasonable time before it begins to print and send the proxy statement to be eligible for inclusion in the proxy materials relating to the Special Meeting.
OTHER MATTERS
At the time of the preparation of this proxy statement, we were not aware of any matters to be presented for action at the Special Meeting other than the Proposals referred to herein.  If other matters are properly presented for action at the Special Meeting, it is intended that the persons named as Proxies will vote or refrain from voting in accordance with their best judgment on such matters.
HOUSEHOLDING OF PROXY MATERIALS
Some banks, brokers and other nominee record holders may be participating in the practice of “householding” shareholder materials, such as proxy statements, information statements and annual reports.  This means that only one copy of this proxy statement may have been sent to multiple shareholders in your household.  To obtain a separate copy of this proxy statement, contact the Company’s information agent, Broadridge, by telephone at 1-800-542-1061 or by writing to Broadridge Financial Solutions, Inc., Householding Department, 51 Mercedes Way, Edgewood, New York 11717.  If you want to receive separate copies of shareholder materials in the future, or if you are receiving multiple copies and would like to receive only one copy for your household, you should contact your bank, broker, or oth er nominee record holder, or, if you are a record holder, you may contact the Company’s information agent, Broadridge, by telephone at 1-800-542-1061 or by writing to Broadridge Financial Solutions, Inc., Householding Department, 51 Mercedes Way, Edgewood, New York 11717.
WHERE YOU CAN FIND MORE INFORMATION
The Company files annual, quarterly and current reports, proxy statements and other information with the SEC.  The Company strongly encourages you to read the relevant communications related to the Investment Agreement that have been filed with the SEC.  You may read or copy any document the Company files at the public reference room maintained by the SEC at 100 F Street, N.E., Washington, D.C.  20549.  You may obtain information on the operation of the SEC’s public reference room by calling the SEC at 1-800-SEC-0330.  In addition, the SEC maintains an internet site at www.sec.gov from which you may obtain copies of reports, proxy statements, communications related to the registrants that file electronically, including us.  The Company is not incorporating the contents of the SEC website into this proxy statement.

The Company’s Common Stock is traded onshareholders may communicate directly with the NASDAQ Global Select Market undermembers of the symbol “TIBB.”
The Company’s SEC filings are also availableBoard of Directors or the individual Chairperson of standing board committees by writing directly to the public on its websitethose individuals at www.tibfinancialcorp.com.  Information contained on the Company’s internet website is not a part of this proxy statement.  The Company will provide, without charge, to each person to whom a copy of this proxy statement has been delivered, upon written or oral request of such person, a copy of any SEC filing.  Requests for such copies should be directed to Ms. Vicki L. Walker, Secretary, TIB Financial Corp., 599 9th Street North, Suite 101, Naples, FloridaFL 34102-5624.
The Company’s general policy is to forward, and not to intentionally screen, any mail received at the Company’s corporate office that is sent directly to an individual unless the Company believes the communication may pose a security risk.

Code of Ethics

The Company’s Board of Directors has adopted a code of business conduct and ethics (the “Code of Ethics”) that applies to all of the Company’s directors, officers and employees, including its principal executive officer, principal financial officer, principal accounting officer, and persons performing similar functions. The Code of Ethics is available at www.capitalbank-us.com or free of charge upon written request to Nancy A. Snow, Capital Bank, 333 Fayetteville Street, Suite 700, Raleigh, NC 27601. If we amend or grant any waiver from a provision of our Code of Ethics that applies to our executive officers, we will publicly disclose such amendment or waiver as required by applicable law, including by posting such amendment or waiver on our website at www.capitalbank-us.com or by filing a Current Report on Form 8-K.

 
- 7 -
 
Board Leadership Structure and Role in Risk Oversight

Appendix A
Information included under “Financial Statements and Supplementary Data” in TIB Financial Corp.’s Annual Report on Form 10-K for the year ended December 31, 2009.
ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Company’s Board of Directors has no policy with respect to the separation of the offices of Chairman and Shareholders
TIB Financial Corp.
Naples, FloridaChief Executive Officer. It is the Board’s view that rather than having a rigid policy, the Board, and upon consideration of all relevant factors and circumstances, will determine, as and when appropriate, whether the offices of Chairman and Chief Executive Officer should be separate. Prior to completion of the Investment on September 30, 2010, the positions of Chairman and Chief Executive Officer were not held by the same individual. Since September 30, 2010, R. Eugene Taylor has served as both the Chairman of the Board and the Chief Executive Officer. While the Company does not have a “lead” independent director, all of the Directors serving on the Audit Committee are independent.

We have auditedThe Board of Directors oversees risk, principally through the accompanying consolidated balance sheets of TIB Financial Corp. as of December 31, 2009 and 2008, andAudit Committee, which reports directly to the related consolidated statements of operations, changes in shareholders' equity, and cash flowsBoard. The Audit Committee is primarily responsible for eachoverseeing the Company’s risk management processes on behalf of the years infull Board of Directors. The Audit Committee focuses on, and has oversight responsibility of, risk associated with the three-year period ended December 31, 2009.  We also have audited the Company's internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The Company's management is responsible for these financial statements, for maintaining effectiveCompany’s internal control over financial reporting and for its assessment ofaudits. In particular, the effectiveness ofAudit Committee discusses with management, the internal control over financial reporting, included in Management's Annual Repo rt on Internal Control Over Financial Reporting contained in Item 9A.(b) of the accompanying Form 10-K.  Our responsibility is to express an opinion on these financial statements and an opinion on the Company's internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financia l reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances.  We believe that our audits provide a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingauditors, and the preparation of financial statements for external purposes in accordanceindependent registered public accountants the Company’s policies with generally accepted accounting principles.  A company's internal control over financial reporting includes those policiesrespect to risk assessment and procedures that (1) pertainrisk management, including risks related to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of ma nagement and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TIB Financial Corp. as of December 31, 2009 and 2008, and the results of itsfraud, liquidity, credit operations and its cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).regulatory compliance.

The accompanying financial statements have been prepared assuming thatAudit Committee also assists the Board in fulfilling its duties and oversight responsibilities relating to the Company’s compliance and ethics programs, including compliance with legal and regulatory requirements.

While the Board of Directors oversees the Company’s risk management, management is responsible for the day-to-day risk management processes. The Company believes this division of responsibility is the most effective approach for addressing the risks the Company faces and that its board leadership structure supports this approach. The Company understands that different board leadership structures may be suitable for companies in different situations. The Board of Directors will continue as a going concern.  The Company incurred net losses in 2009, 2008 and 2007, primarily from loan and investment impairments.  In addition, as discussed in Note 2,to reexamine the Company’s bank subsidiary is operating undercorporate governance policies and leadership structures on an informal agreement with bank regulatory agenciesongoing basis to ensure that requires, among other provisions, higher regulatory capital requirements.  The Bank did notthey continue to meet the higher capital requirement as of December 31, 2009 and therefore is not in compliance with the regulatory agreement.  Failure to comply with the regulatory agreement may result in additional regulatory enforcement actions.  These events raise substantial doubt about the Company’s ability to continue as a going conc ern.  Management’s plans are also discussed further in Note 2.  These financial statements do not include any adjustments that might result from the outcome of this uncertainty.needs.



 /s/Crowe Horwath LLP
Crowe Horwath LLP

Fort Lauderdale, Florida
March 31, 2010


TIB Financial Corp. and SubsidiariesPROPOSAL 1:  ELECTION OF DIRECTORS
Consolidated Balance Sheets
As of December 31,

(Dollars in thousands, except  per share data) 2009  2008 
Assets
      
Cash and due from banks $167,402  $69,607 
Federal funds sold and securities purchased under agreements to resell  -   4,127 
Cash and cash equivalents  167,402   73,734 
         
Investment securities available for sale  250,339   225,770 
         
Loans, net of deferred loan costs and fees  1,197,516   1,224,975 
Less: Allowance for loan losses  29,083   23,783 
Loans, net  1,168,433   1,201,192 
         
Premises and equipment, net  40,822   38,326 
Goodwill  622   5,160 
Intangible assets, net  6,667   3,010 
Other real estate owned  21,352   4,323 
Accrued interest receivable and other assets  49,770   58,599 
Total assets $1,705,407  $1,610,114 
         
Liabilities and Shareholders’ Equity        
Liabilities        
Deposits:        
Noninterest-bearing demand $171,821  $128,384 
Interest-bearing  1,197,563   1,007,284 
Total deposits  1,369,384   1,135,668 
         
Federal Home Loan Bank (FHLB) advances  125,000   202,900 
Short-term borrowings  80,475   71,423 
Long-term borrowings  63,000   63,000 
Accrued interest payable and other liabilities  12,030   16,009 
Total liabilities  1,649,889   1,489,000 
         
Commitments and Contingencies (Notes 1, 6 and 16)        
         
Shareholders’ Equity        
Pref Preferred stock – $.10 par value: 5,000,000 shares authorized, 37,000 shares issued and outstanding, liquidation preference of $37,702  and $37,134, respectively  33,730   32,920 
ComCommon stock - $.10 par value: 100,000,000 and 40,000,000 shares authorized, 14,961,376 and 14,968,597 shares issued, 14,887,922 and 14,895,143 shares outstanding, respectively  1,496   1,497 
Additional paid in capital  74,673   73,148 
Retained earnings (accumulated deficit)  (49,994)  14,737 
Accumulated other comprehensive loss  (3,818)  (619)
Treasury stock, at cost, 73,454 shares  (569)  (569)
Total shareholders’ equity  55,518   121,114 
         
Total Liabilities and Shareholders’ Equity $1,705,407  $1,610,114 
         
See accompanying notes to consolidated financial statements 



TIB Financial Corp. and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31,

(Dollars in thousands, except per share data) 2009  2008  2007 
Interest and dividend income         
Loans, including fees $68,925  $77,875  $84,773 
Investment securities:            
U.S. Treasury securities  -   -   152 
U.S. Government agencies and corporations  11,395   7,610   5,404 
States and political subdivisions, tax-exempt  299   316   396 
States and political subdivisions, taxable  143   150   157 
Other investments  212   385   1,193 
Interest-bearing deposits in other banks  124   104   19 
Federal Home Loan Bank stock  24   350   503 
F Federal funds sold and securities purchased under agreements to resell  5   1,374   2,144 
Total interest and dividend income  81,127   88,164   94,741 
             
Interest expense            
Interest-bearing demand and money market  4,052   6,581   12,721 
Savings  2,142   669   968 
Time deposits of $100 or more  8,587   10,296   12,622 
Other time deposits  12,865   15,050   11,549 
Long-term debt - subordinated debentures  1,578   2,267   2,708 
Federal Home Loan Bank advances  5,199   6,058   6,197 
Short-term borrowings  104   1,392   1,664 
Long-term borrowings  1,209   1,191   292 
Total interest expense  35,736   43,504   48,721 
             
Net interest income  45,391   44,660   46,020 
Provision for loan losses  42,256   28,239   9,657 
Net interest income after provision for loan losses  3,135   16,421   36,363 
             
Non-interest income            
Service charges on deposit accounts  4,165   2,938   2,692 
Fees on mortgage loans originated and sold  1,143   775   1,446 
Investment advisory and trust fees  997   555   - 
Other income  3,510   1,865   2,884 
Investment securities gains, net  5,058   1,077   1 
Other-than-temporary impairment losses on investments prior to
   April 1, 2009 adoption of ASC 320-10-65-1
  (23)  (6,426)  (5,661)
Other-than-temporary impairment losses on investments subsequent
   to April 1, 2009
            
   Gross impairment losses  (740)  N/A   N/A 
   Less: Impairments recognized in other comprehensive income  -   N/A   N/A 
Net impairment losses recognized in earnings subsequent to April 1, 2009  (740)  N/A   N/A 
Total non-interest income  14,110   784   1,362 
             
Non-interest expense            
Salaries and employee benefits  28,594   24,534   22,550 
Net occupancy and equipment expense  9,442   8,539   7,979 
Goodwill impairment  5,887   -   - 
Other expense  21,419   17,915   11,392 
Total non-interest expense  65,342   50,988   41,921 
TIB Financial Corp. and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31,
(Continued)

(Dollars in thousands, except per share data) 2009  2008  2007 
Loss before income taxes  (48,097)  (33,783)  (4,196)
Income tax expense (benefit)  13,451   (12,853)  (1,775)
             
Net Loss $(61,548) $(20,930) $(2,421)
             
Preferred dividends earned by preferred shareholders and discount accretion  2,662   165   - 
             
Net loss allocated to common shareholders $(64,210) $(21,095) $(2,421)
             
             
Basic and diluted loss per common share $(4.33) $(1.45) $(0.19)
             
See accompanying notes to consolidated financial statements 


TIB Financial Corp. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands except per share data)


 
  Preferred Shares  Preferred Stock  Common Shares  Common Stock  
Additional
Paid in
Capital
  Retained Earnings  Accumulated Other Comprehensive Income (Loss)  
Treasury
Stock
  Total Shareholders’ Equity 
Balance, January 1, 2007  -  $-   12,440,372  $1,244  $40,442  $44,620  $(444) $-  $85,862 
Comprehensive loss:                                    
Net loss                      (2,421)          (2,421)
O Other comprehensive income, net of tax:                                    
Net  Net market valuation adjustment on securities available for sale                          (2,846)        
AddAdd: reclassification adjustment for losses net of tax benefit of 2,130                          3,530         
Oth  Other comprehensive income, net of tax expense of $429                                  684 
Comprehensive loss                                 $(1,737)
R Restricted stock grants, net of 208 cancellations          38,912   4   (4)              - 
The The Bank of Venice acquisition          1,002,498   100   13,855               13,955 
Exercise of stock options          160,049   16   1,092               1,108 
P Purchase of treasury stock          (73,454)                  (569)  (569)
StStock-based compensation and related tax effect                  669               669 
C Cash dividends declared, $.2284 per common share                      (3,048)          (3,048)
Balance, December 31, 2007  -  $-   13,568,377  $1,364  $56,054  $39,151  $240  $(569) $96,240 
C Cumulative-effect adjustment for split-dollar life insurance postretirement benefit                      (141)          (141)
Comprehensive loss:                                    
Net loss                      (20,930)          (20,930)
O Other comprehensive loss, net of tax:                                    
Net  Net market valuation adjustment on securities available for sale                          (4,195)        
AddAdd: reclassification adjustment for losses net of tax benefit of 2,013                          3,336         
Oth Other comprehensive loss, net of tax benefit of $523                                  (859)
Comprehensive loss                                 $(21,789)
R Restricted stock grants, net of 1,476 cancellations          37,233   4   (4)              - 
Private placement of common shares          1,273,824   127   9,809               9,936 
Exercise of stock options          15,709   2   96               98 
PrPreferred stock issued with common stock warrants  37,000  $32,889           4,103               36,992 
Pref Prefrred stock discount accretion      31               (31)          - 
StocStock-based compensation and related tax effect                  655               655 
C Common stock dividends declared                  2,435   (2,437)          (2)
C Cash dividends declared, $.0589 per common share                      (875)          (875)
Balance, December 31, 2008  37,000  $32,920   14,895,143  $1,497  $73,148  $14,737  $(619) $(569) $121,114 
TIB Financial Corp. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands except per share data)
(Continued)

  
 
Preferred Shares
  Preferred Stock  Common Shares  Common Stock  Additional Paid in Capital  Retained Earnings (Accumulated Deficit)  Accumulated Other Comprehensive Income (Loss)  
Treasury
Stock
  Total Shareholders’ Equity 
Balance, December 31, 2008  37,000  $32,920   14,895,143  $1,497  $73,148  $14,737  $(619) $(569) $121,114 
Comprehensive loss:                                    
Net loss                      (61,548)          (61,548)
O Other comprehensive loss:                                    
Net Net market valuation adjustment on securities available for sale                          1,096         
LessLess : reclassification adjustment for gains                          (4,295)        
O Other comprehensive loss                                  (3,199)
Comprehensive loss                                 $(64,747)
R Restricted stock cancellations          (7,221)  (1)  1               - 
Is Issuance costs associated with preferred stock issued                  (48)              (48)
PrPreferred stock discount accretion      810               (810)          - 
StocStock-based compensation and related tax effect                  484               484 
C Common stock dividends declared                  1,088   (1,088)          - 
C Cash dividends declared, preferred stock                      (1,285)          (1,285)
Balance, December 31, 2009  37,000  $33,730   14,887,922  $1,496  $74,673  $(49,994) $(3,818) $(569) $55,518 
                                     
                              See accompanying notes to consolidated financial statements



TIB Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands except per share data)

      
  Years Ended December 31, 
  2009  2008  2007 
Cash flows from operating activities:         
Net loss $(61,548) $(20,930) $(2,421)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:            
 Depreciation and amortization  4,516   4,008   3,328 
 Provision for loan losses  42,256   28,239   9,657 
 Deferred income tax benefit (loss)  10,998   (4,848)  (4,472)
 Investment securities net realized gains  (5,058)  (1,077)  (1)
 Net amortization of investment premium/discount  2,031   (31)  (99)
 Write-down of investment securities  763   6,426   5,661 
 Goodwill impairment  5,887   -   - 
 Stock based compensation  690   737   646 
 (Gain) loss on sale of OREO  168   (2)  - 
 Other  140   (247)  (735)
Mortgage loans originated for sale  (60,439)  (42,518)  (90,818)
Proceeds from sales of mortgage loans  57,778   46,836   91,218 
Fees on mortgage loans sold  (1,105)  (767)  (1,434)
Change in accrued interest receivable and other asset  1,894   (5,750)  (5,022)
Change in accrued interest payable and other liabilities  (4,118)  (869)  (1,738)
Net cash provided by operating activities  (5,147)  9,207   3,770 
             
Cash flows from investing activities:            
Purchases of investment securities available for sale  (728,578)  (160,943)  (71,669)
Sales of investment securities available for sale  525,359   51,135   5,491 
R Prepayments of principal and maturities of investment securities available for sale  209,566   37,696   34,863 
A Acquisition of Naples Capital Advisors business  (148)  (1,378)  - 
Cash equivalents acquired from The Bank of Venice acquisition  -   -   10,176 
Cash paid for The Bank of Venice  -   -   (888)
Net cash received in acquisition of operations-Riverside Bank of the Gulf Coast  271,397   -   - 
Net (purchase) sale of FHLB stock  1,277   (2,843)  (673)
Loans originated or acquired, net of principal repayments  (30,111)  (117,411)  (14,809)
Purchases of premises and equipment  (2,760)  (1,041)  (5,265)
Proceeds from sales of loans  3,500   -   624 
Proceeds from sales of OREO  5,934   837   - 
Proceeds from disposal of premises, equipment and intangible assets  51   39   1,822 
Net cash provided by (used) investing activities  255,487   (193,909)  (40,328)
             
Cash flows from financing activities:            
N Net increase (decrease)  in demand, money market and savings accounts  82,350   (90,211)  9,614 
Net increase (decrease) in time deposits  (61,122)  98,890   (104,499)
N Net change in brokered time deposits  (106,577)  77,031   57,671 
N Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase  8,116   (6,499)  55,672 
Net change short term FHLB advances  (70,000)  70,000   - 
Increase in long term FHLB advances  -   92,900   60,000 
Repayment of long term FHLB advances  (7,900)  (100,000)  (50,000)
Proceeds from long term repurchase agreements  -   -   30,000 
Repayment of notes payable  -   -   (4,000)
Income tax effect related to  stock-based compensation  (206)  (82)  21 
Net proceeds from issuance costs of preferred stock and common warrants  (48)  36,992   - 
Net proceeds from issuance of common shares  -   10,033   1,108 
Repurchase of company common stock  -   -   (569)
Cash dividends paid  (1,285)  (1,677)  (2,953)
Net cash provided by (used in) financing activities  (156,672)  187,377   52,065 


TIB Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands except per share data)
                                        (Continued)
  Years Ended December 31, 
  2009  2008  2007 
Net increase in cash and cash equivalents  93,668   2,675   15,507 
Cash and cash equivalents at beginning of period  73,734   71,059   55,552 
Cash and cash equivalents at end of period $167,402  $73,734  $71,059 
             
Supplemental disclosures of cash paid:            
Interest $38,291  $44,504  $50,678 
Income taxes  -   125   4,193 
             
Supplemental disclosures of non-cash transactions:            
Financing of sale of premises and equipment to third parties $-  $60  $- 
Fair value of noncash assets acquired  49,193   1,416   68,458 
Fair value of liabilities assumed  320,594   40   63,882 
Transfer of loans to OREO  27,547   6,961   1,875 
Transfer of OREO to Premises and Equipment  2,941   2,391   - 
Fair value of common stock and stock options issued  -   -   13,992 
             
See accompanying notes to consolidated financial statements 




TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)

Note 1—Summary of Significant Accounting Policies

Principles of Consolidation and Nature of Operations

TIB Financial Corp. is a bank holding company headquartered in Naples, Florida, whose business is conducted primarily through our wholly-owned subsidiaries, TIB Bank (the “Bank) and Naples Capital Advisors, Inc.  Together with its subsidiaries, TIB Financial Corp. (collectively the “Company”) has a total of twenty-eight full service banking offices. On February 13, 2009, TIB Bank acquired the deposits (excluding brokered deposits), branch office operations and certain assets from the FDIC as receiver of the former Riverside Bank of the Gulf Coast (“Riverside”). On September 25, 2009, The Bank of Venice, acquired by the Company in April 2007, was merged into TIB Bank. The consolidated financial statements include the accounts of TIB Financial Corp. (Parent Company) and its wholly-owned subsidiaries, TIB Bank and subsidiaries, and Naples Capital Advisors, Inc.  All significant inter-company accounts and transactions have been eliminated in consolidation.  Additionally, TIBFL Statutory Trust I, TIBFL Statutory Trust II and TIBFL Statutory Trust III were formed in conjunction with the issuance of trust preferred securities as further discussed in Note 10.

TIB Bank is the Company’s primary operating subsidiary.  The Bank provides banking services from its twenty eight branch locations in Monroe, Miami-Dade, Collier, Lee, and Sarasota counties, Florida.  The Bank offers a wide range of commercial and retail banking and financial services to businesses and individuals.  Account services include checking, interest-bearing checking, money market, certificates of deposit and individual retirement accounts.  The Bank offers all types of commercial loans, including: owner-operated commercial real estate; acquisition, development and construction; income-producing properties; working capital; inventory and receivable facilities; and equipment loans.  Consumer loan products include residential real estate, installment loans, home equity, home equity lines, and indirect auto loans.

The share and per share amounts discussed throughout this document have been adjusted to account for the effects of six one percent stock dividends declared by the Board of Directors during 2008 and 2009 which were distributed July 17, 2008, October 10, 2008, January 10, 2009, April 10, 2009, July 10, 2009 and October 10, 2009 to all TIB Financial Corp. common shareholders of record as of July 7, 2008, September 30, 2008, December 31, 2008, March 31, 2009, June 30, 2009 and September 30, 2009 respectively.

        The accounting and reporting policies of TIB Financial Corp. and subsidiaries conform to generally accepted accounting principles and to general practices within the banking industry.  The following is a summary of the more significant of these policies.


Use of Estimates and Assumptions

To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information.  These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.  A material estimate that is particularly susceptible to significant change in the near term is the allowance for loan losses.  Another material estimate is the fair value and impairment of financial instruments.  Changes in assumptions or in market conditions could significantly affect the fair value estimates.


Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold, and interest-bearing deposits at the Federal Home Loan Bank of Atlanta and the Federal Reserve Bank of Atlanta.  Net cash flows are reported for customer loan and deposit transactions and short term borrowings.
Investment Securities and Other than Temporary Impairment

Investment securities which may be sold prior to maturity are classified as available for sale and are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income. Other securities such as Federal Home Loan Bank stock are carried at cost and are included in other assets on the balance sheets.

Interest income includes amortization of purchase premium or discount.  Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method based on the amortized cost of the security sold.

Management regularly reviews each investment security for impairment based on criteria that include the extent to which cost exceeds fair value, the duration of that market decline, the financial health of and specific prospects for the issuer(s) and our ability and intention with regard to holding the security. Future declines in the fair value of these or other securities may result in additional impairment charges which may be material to the financial condition and results of operations of the Company.

TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
        Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities classified as available for sale or held-to-maturity are generally evaluated for OTTI under FASB Accounting Standards Codification (“ASC”) 320-10-35. However, certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase of below AAA are evaluated using the model outlined in ASC 325-40-35.
In determining OTTI under the ASC 320-10-35 model, management considers many factors, including but not limited 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, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

The second segment of the portfolio uses the OTTI guidance provided by ASC 325-10-35 that is specific to purchased beneficial interests that are rated below “AAA”. Under this model, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

When OTTI occurs under either model, the amount of the impairment recognized in earnings depends on whether we intend to sell the security or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If we intend to sell or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the impairment is required to be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis less any current-perio d loss, the impairment is separated into the amount representing the credit loss and the amount related to all other factors. The amount of impairment related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the impairment related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.


Loans

Loans are reported at the principal balance outstanding, net of deferred loan fees and costs, and an allowance for loan losses.  Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term.  If the collectibility of interest appears doubtful, the accrual of interest is discontinued and all unpaid interest is reversed.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.


Loans Held for Sale

The majority of residential fixed rate mortgage loans originated by TIB Bank are sold servicing released to third parties immediately with temporary recourse provisions. The recourse provisions may require the repurchase of the outstanding balance of loans which default within a limited period of time subsequent to the sale of the loan. The recourse periods vary by investor and extend up to seven months subsequent to the sale of the loan.  All fees are recognized as income at the time of the sale. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. TIB Bank has not historically experienced significant losse s resulting from the recourse provisions described above. Accordingly, management believes that no such provision or allowance is necessary as of December 31, 2009 or 2008.


Allowance for Loan Losses

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

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

A loan is considered impaired when it is probable that not all principal and interest amounts will be collected according to the loan contract or when the loan contract terms have been modified resulting in a concession of terms and where the borrower is experiencing financial difficulty.  Individual commercial, commercial real estate and residential loans exceeding certain size thresholds established by management are individually evaluated for impairment.  If a loan is considered to be impaired, a portion of the allowance is allocated so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the lesser of the recorded investment in the loan or the fair value of collateral if repayment is expected solely from the collateral.  Generally, large groups of smaller balance homogeneous loans, such as consumer, indirect, and residential real estate loans (other than those evaluated individually), are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)

Premises and Equipment

Land is carried at cost.  Premises and equipment are reported at cost less accumulated depreciation. For financial reporting purposes, building and related components are depreciated using the straight-line method with useful lives ranging from 3 to 40 years.  Furniture, fixtures and equipment are depreciated using straight-line method with useful lives ranging from 1 to 40 years. Expenditures for maintenance and repairs are charged to operations as incurred, while major renewals and betterments are capitalized. For Federal income tax reporting purposes, depreciation is computed using primarily accelerated methods.


Foreclosed Assets

Assets acquired through, or in lieu of, loan foreclosure or repossession are generally held for sale and are initially recorded at fair value less cost to sell when acquired, establishing a new cost basis.  If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense.  Costs incurred after acquisition are generally expensed.


Goodwill and Other Intangible Assets

Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired.  Goodwill resulting from business combinations after January 1, 2009 represents the future economic benefits arising from other assets acquired that are not individually identified and separately recognized.  Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually.  The Company performed a review of goodwill for potential impairment as of December 31, 2009.  Based on the review, it was determined that impairment existed as of December 31, 2009.  The amount of the goodwill impairment cha rge was $5,887.

Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values.  The only intangible assets with indefinite lives on our balance sheet are goodwill and a trade name. Other intangible assets include core deposit base premiums and customer relationship intangibles arising from acquisitions and are initially measured at fair value.  The intangibles are being amortized using the straight-line method over estimated lives ranging from 5 to 15 years.


Long-lived Assets

Long-lived assets, including premises and equipment, core deposit and other intangible assets, are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows.  If impaired, the assets are recorded at fair value.


Loan Commitments and Related Financial Instruments

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and letters of credit, issued to meet customer financing needs.  The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay.  Such financial instruments are recorded when they are funded.



TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Company Owned Life Insurance

The Company has purchased life insurance polices on certain key executives.  These policies are recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement, if applicable.


Income Taxes

Income tax expense (or benefit) is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method.  Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.


Stock Splits and Stock Dividends

Stock splits and stock dividends in excess of 20% are reported by transferring the par value of  the  stock  issued  from retained earnings to common stock. Stock  dividends  for  20%  or  less  are reported by transferring the fair value,  as  of  the  ex-dividend  date,  of  the stock issued from retained earnings  to common stock and additional paid-in capital.  Fractional share amounts are paid in cash with a reduction in retained earnings.


Earnings (Loss) Per Common Share

Basic earnings (loss) per share is net income (loss) allocated to common shareholders divided by the weighted average number of common shares and vested restricted shares outstanding during the period. Diluted earnings per share includes the dilutive effect of additional potential common shares issuable under stock options, warrants and restricted shares computed using the treasury stock method.

Since we reported a net loss for each of the three periods reported all outstanding stock options, restricted stock awards and warrants are considered anti-dilutive.  Loss per share has been computed based on 14,819,954, 14,545,827 and 13,055,735 basic and diluted shares for the years ended December 31, 2009, 2008 and 2007, respectively.  The dilutive effect of stock options and warrants and the dilutive effect of unvested restricted shares are the only common stock equivalents for purposes of calculating diluted earnings per common share.

Weighted average anti-dilutive stock options and warrants and unvested restricted shares excluded from the computation of diluted earnings per share are as follows:

  2009  2008  2007 
Anti-dilutive stock options  738,172   736,659   681,930 
Anti-dilutive restricted stock awards  73,091   100,780   82,949 
Anti-dilutive warrants  2,380,213   1,119,233   N/A 


Stock-Based Compensation

    Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of grant.  A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period.  For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.


Comprehensive Income

Comprehensive income consists of net income and other comprehensive income.  Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as separate components of equity.


TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase

Securities purchased under agreements to resell and securities sold under agreements to repurchase are generally accounted for as collateralized financing transactions and are recorded at the amounts at which the securities were acquired or sold plus accrued interest. The fair value of collateral either received from or provided to a third party is regularly monitored, and additional collateral is obtained, provided or requested to be returned as appropriate.


Loss Contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.  Management does not believe there are currently any such matters that will have a material effect on the financial statements.


Operating Segments

While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company wide basis. As operating results for all segments are similar, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.


Fair Value of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 18. Fair value estimates include uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.


Recent Accounting Pronouncements

In December 2007, the FASB issued ASC 805 which revises pre-codification Statement 141. FAS 141(R) requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information needed to evaluate and understand the nature and financial effect of the business combination. ASC 805 is effective for fiscal years beginning after December 15, 2008. Adoption on January 1, 2009, as required, did not have a material effect on the Company’s financial condition, results of operations or liquidity. ASC 805 was applied in accounting for the Riverside acquisition and w ill impact future acquisitions.

In December 2007, the FASB issued ASC 810-10-65-1 which requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. Additionally, this pronouncement requires that transactions between an entity and noncontrolling interests be treated as equity transactions and is effective for fiscal years beginning after December 15, 2008. Adoption on January 1, 2009, as required, did not have a material effect on the Company’s financial condition, results of operations or liquidity.

In March 2008, the FASB issued ASC 815-1 which requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related items are accounted for and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The new standard is effective for the Company on January 1, 2009 and adoption, as required, did not have a material effect on the Company’s financial condition, results of operations or liquidity.

In April 2009, the FASB issued ASC 320-10-65 which amends existing guidance for determining whether impairment is other-than-temporary for debt securities.  This guidance requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis.  If either of these criteria is met, the entire difference between amortized cost and fair value is recognized in earnings.  For securities that do not meet the aforementioned criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income. Additionally, the guidance expands and increases the frequency of exi sting disclosures about other-than-temporary impairments for debt and equity securities.  ASC 320-10-65 is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  The adoption of ASC 320-10-65 on April 1, 2009 did not have a material impact on the results of operations or financial position of the Company. During the twelve months ended December 31, 2009, the Company recognized $763 of OTTI charges in income. Had the standard not been issued, there would not have been a material difference in the amount of OTTI that would have been recognized.

TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
In April 2009, the FASB issued ASC 820-10 which emphasizes that even if there has been a significant decrease in the volume and level of activity, the objective of a fair value measurement remains the same.  Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants. ASC 820-10 provides a number of factors to consider when evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity. In addition, when transactions or quoted prices are not considered orderly, adjustments to those prices based on the weight of available information may be needed to determine the appropriate fair value. & #160;ASC 820-10 also requires increased disclosures and is effective for interim and annual reporting periods ending after June 15, 2009, and is required to be applied prospectively.  Adoption at June 30, 2009, as required, did not have a material impact on the results of operations or financial position of the Company.

       In April 2009, the FASB issued ASC 825-10 which requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies that were previously only required in annual financial statements. ASC 825-10 is effective for interim reporting periods ending after June 15, 2009.  The adoption of ASC 825-10 at June 30, 2009, as required, did not have a material impact on the results of operations or financial position as it only required disclosures which are included in Note 18.
       In April 2009, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 111 (“SAB 111”). SAB 111 amends Topic 5.M. in the Staff Accounting Bulletin series entitled “Other Than Temporary Impairment of Certain Investments Debt and Equity Securities.” On April 9, 2009, the FASB issued ASC 320-10-65 to provide guidance for assessing whether an impairment of a debt security is other than temporary. SAB 111 maintains the previous views related to equity securities and amends Topic 5.M. to exclude debt securities from its scope. SAB 111 is effective for the Company beginning April 1, 2009. The adoption of this SAB on April 1, 2009 did not have a material impact on the results of operations or financial position of the Company.
In June 2009, the FASB issued Statement No. 166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140 (ASC 810). This statement removes the concept of a qualifying special-purpose entity from Statement 140 and removes the exception from applying FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities”, to qualifying special-purpose entities. The objective in issuing this Statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial asset s. This Statement must be applied as of the beginning of each reporting entity’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. Adoption did not have a material impact on the results of operations or financial position of the Company.

In June 2009, the FASB issued ASC 105-10 which establishes the FASB Accounting Standards Codification as the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification became non-authoritative. ASC 105-10 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. Adoption, as required, did not have a materia l impact on the results of operations or financial position of the Company.


Reclassifications

Some items in the prior year financial statements were reclassified to conform to the current presentation.


Note 2—Going Concern Considerations and Management's Plans
          The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the foreseeable future. However, the events and circumstances described below create an uncertainty about the Company’s ability to continue as a going concern.
     The Company recorded net losses of $61,548, $20,930 and $2,421 in 2009, 2008 and 2007, respectively, for a three year total of $84,899.  It is important for us to reduce our rate of credit loss and execute the following plans.
Our losses are largely a result of loan and investment impairments.  From 2007 to 2009, we recorded total provisions for loan losses of $80,152 and other than temporary losses on investments of $12,854.  While our net losses also included a charge off of goodwill of $5,887 and charges to establish an allowance against the realization of our deferred tax asset of $30,392, these latter charges may not have been required had we not incurred the losses on loans and investments.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Despite these losses, TIB Bank remained adequately capitalized at December 31, 2009 under the regulatory capital guidelines.  On July 2, 2009, TIB Bank entered into a Memorandum of Understanding, which is an informal agreement, with Bank regulatory agencies that it will move in good faith to increase its Tier 1 leverage capital ratio to not less than 8% and its total risk-based capital ratio to not less than 12% by December 31, 2009 and maintain these higher ratios for as long as this agreement is in effect. Late during the second quarter of 2009, we retained a nationally recognized investment banking firm to assist us in raising capital. On August 14, 2009, we filed a registration statement with the U.S. Securities and Exchange Commission (“SEC”) on Form S-1 with the intent of issuing up to 40,250,000 shares of our common stock for maximum proceeds of $75,670,000. On September 23, 2009 we held a special meeting of shareholders at which an amendment to the Company’s Restated Articles of Incorporation was approved to increase the number of authorized shares of the Company’s common stock from 40,000,000 to 100,000,000 was approved. Due in part to the timing of this action, we believed that investors would require us to update our registration statement with third quarter financial results prior to commencing an offering. As discussed in our December 23, 2009 letter to shareholders, during this process, we received a comment letter from the SEC which indicated that our Annual Report for the year ended December 31, 2008 on Form 10-K and our March 31, 2009 and June 30, 2009 quarterly reports on Form 10-Q were under a routine review by the Division of Corporation Finance. The SEC staff periodically reviews filings of all publicly owned companies. As our timeline drew near the holiday and year-end period, we recei ved notification that the SEC staff concluded their review on December 17, 2009 without requiring any adjustments to our reported financial results. However, as advised by our investment banking firm noting that the financial markets traditionally are not receptive to offerings during this time period, we withdrew our registration statement on December 23, 2009 and intend to pursue our capital efforts in March and into the early second quarter of 2010. Due to the timing of our plans to raise capital, we requested an extension of time to April 30, 2010 to comply with the informal agreement. The Florida Office of Financial Regulation (“OFR”) agreed to the extension provided the FDIC also were to agree. We have not yet received the FDIC's response to our request.

At December 31, 2009, these elevated capital ratios were not met.  We notified the bank regulatory agencies priorAnnual Meeting, shareholders will consider the election of three nominees to December 31, 2009, thatserve as Class II directors until the increased capital levels would not be achieved2014 Annual Meeting of Shareholders (or until such time as their respective successors are elected and as we remain in regular contact withqualified or their earlier resignation, death or removal from office). The following table lists the FDIC and OFR, we expect the agencies will reevaluate our progress toward the higher capital ratios at March 31, 2010.
Our Board of Directors and management team have determined to take the following courses of action to improve our capital ratios:

·  First and foremost, to file a registration statement with the SEC for the offering of up to 80,000,000 shares of our common stock in a follow on public offering or in a public offering of common shares with a concurrent private placement of common and preferred shares. This is the main focus of our Board of Directors and management team over the coming months.

·  Second, to continue to operate the Company and to maintain the bank at adequately capitalized until we complete our planned capital raise. This will most likely require us to reduce lending, potentially sell loans, and take significant operating expense reductions and other cost cutting measures aimed at lowering expenses. Additionally we would adjust the mix of our assets to reduce the total risk weight of our assets, reduce total assets over time and potentially sell branches, deposits and loans.

·  Third, in the event the issuance of additional capital is not possible in the near term, seek strategic alternatives including but not limited to the sale of certain assets, all or a portion of the Company, or seeking a complementary partner in a merger of equals or where the Company is acquired.

     These financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Note 3—Cash and Due From Banks

Cash on hand or on deposit with the Federal Reserve Bank of $3,682 and $2,539 was required to meet regulatory reserve and clearing requirements at December 31, 2009 and 2008, respectively. Balances on deposit at the Federal Reserve Bank did not earn interest prior to October 19, 2008; subsequently they became interest bearing. The total on deposit was approximately $147,709 and $47,613 at December 31, 2009 and 2008, respectively.

The Bank maintains an interest bearing account at the Federal Home Loan Bank of Atlanta.  The total on deposit was approximately $52 and $356 at December 31, 2009 and 2008, respectively.


Note 4—Investment Securities
The amortized cost, estimated fair value, and the related gross unrealized gains and losses recognized in accumulated other comprehensive income of investment securities available for sale at December 31, 2009 and December 31, 2008 are presented below:


December 31, 2009 Amortized Cost  Unrealized Gains  Unrealized Losses  Estimated Fair Value 
U.S. Government agencies and corporations $29,232  $24  $84  $29,172 
States and political subdivisions—tax exempt  7,754   307   -   8,061 
States and political subdivision—taxable  2,313   -   101   2,212 
Marketable equity securities  12   -   4   8 
Mortgage-backed securities - residential  207,344   2,083   1,312   208,115 
Corporate bonds  2,878   -   866   2,012 
Collateralized debt obligations  4,996   -   4,237   759 
  $254,529  $2,414  $6,604  $250,339 
                 


December 31, 2008 Amortized Cost  Unrealized Gains  Unrealized Losses  Estimated Fair Value 
U.S. Government agencies and corporations $50,892  $776  $-  $51,668 
States and political subdivisions—tax exempt  7,751   59   21   7,789 
States and political subdivision—taxable  2,407   -   70   2,337 
Marketable equity securities  12   -   -   12 
Mortgage-backed securities - residential  157,066   1,332   421   157,977 
Corporate bonds  2,870   -   1,158   1,712 
Collateralized debt obligations  5,763   -   1,488   4,275 
  $226,761  $2,167  $3,158  $225,770 
                 

TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Securities with unrealized losses not recognized in income, and the period of time they have been in an unrealized loss position, are as follows:

  Less than 12 Months  12 Months or Longer  Total 
December 31, 2009 Estimated Fair Value  Unrealized Losses  Estimated Fair Value  Unrealized Losses  Estimated Fair Value  Unrealized Losses 
U.U.S. Government agencies and corporations $5,034  $84  $-  $-  $5,034  $84 
StStates and political subdivisions—tax exempt  -   -   275   -   275   - 
StStates and political subdivisions—taxable  -   -   2,212   101   2,212   101 
MMarketable equity securities  8   4   -   -   8   4 
Mortgage-backed securities - residential  98,746   1,206   10,542   106   109,288   1,312 
Corporate bonds  -   -   2,012   866   2,012   866 
Collateralized debt obligations  -   -   759   4,237   759   4,237 
Total temporarily impaired $103,788  $1,294  $15,800  $5,310  $119,588  $6,604 
                         


  Less than 12 Months  12 Months or Longer  Total 
December 31, 2008 Estimated Fair Value  Unrealized Losses  Estimated Fair Value  Unrealized Losses  Estimated Fair Value  Unrealized Losses 
U.U.S. Government agencies and corporations $-  $-  $-  $-  $-  $- 
StStates and political subdivisions—tax exempt  2,413   20   274   1   2,687   21 
StStates and political subdivisions-taxable  2,247   70   -   -   2,247   70 
Mortgage-backed securities - residential  14,045   83   17,015   338   31,060   421 
Corporate bonds  -   -   1,712   1,158   1,712   1,158 
Collateralized debt obligations  -   -   3,512   1,488   3,512   1,488 
Total temporarily impaired $18,705  $173  $22,513  $2,985  $41,218  $3,158 
                         

The Company views the unrealized losses in the above table to be temporary in nature for the following reasons.  First, the declines in fair values are mostly due to an increase in spreads due to risk and volatility in financial markets. Excluding the taxable state and political subdivision securities, corporate bonds and collateralized debt obligations, these securities are primarily AAA rated securities and have experienced no significant deterioration in value due to credit quality concerns and the magnitude of the unrealized losses of approximately 3% or less of the amortized cost of those securities with losses is consistent with normal fluctuations of value due to the volatility of market interest rates. The nature of what makes up the security portfolio is determined by the overall balance sheetdirectors of the Company and curren tly it is suitable for the Company’s security portfolio to be primarily comprised of fixed rate securities. Fixed rate securities will by their nature reactclasses in price inversely to changes in market rates and that is liable to occur in both directions.

 We own a municipal bond guaranteed by a state housing finance agency which is currently rated “A-”, a corporate bond of a large financial institution which is currently rated “BB” and a collateralized debt obligation secured by debt obligations of banks and insurance companies which was rated “B” at December 31, 2009, whose fair values have declined more than 5% below their original cost.  We believe these declines in fair value relate to a significant widening of interest rate spreads associated with these securities.  While these securities have experienced deterioration in credit quality, we have evaluated these securities and have determined that these securities have not experienced a credit loss.  As we have the intent and ability to hold these securities until their fair market value recovers, they are not other than temporarily impairedserve as of December 31, 2009.

As of December 31, 2009, the Company owned three collateralized debt obligation investment securities (backed primarily by corporate debt obligations of homebuilders, REITs, real estate companies and commercial mortgage backed securities) with an aggregate original cost of $9,996.  Through December 31, 2009, the Company has recorded cumulative other than temporary impairment losses of $9,996 on these securities.  In determining the estimated fair value of these securities, management utilizes a discounted cash flow modeling valuation approach which is discussed in greater detail in Note 18 - Fair Value. These securities are floating rate securities which were rated "A" or better by an independent and nationally recognized rating agency at the time of purchase. In late December 2007, these securities were downgraded be low investment grade by a nationally recognized rating agency. Due to the ratings downgrade and the amount of unrealized loss, management concluded that the loss of value was other than temporary under generally accepted accounting principles and the Company wrote these investment securities down to their estimated fair value. This resulted in the recognition of an other than temporary impairment loss of $3,885 in 2007. During 2008, the estimated fair value of these securities declined further due to the occurrence of additional defaults by certain underlying issuers and changes in the cash flow and discount rate assumptions used to estimate the value of these securities. During 2008, management concluded that the further declines in values were other than temporary under generally accepted accounting principles. Accordingly, the Company wrote-down these investment securities by an additional $5,348. These additional write downs included the complete write off of two of the three securities, with a combined original cost of $3,996. The third security, with an original cost of $6,000 was valued at an estimated fair value of $763 as of December 31, 2008. During 2009, additional defaults by underlying issuers and corresponding changes in estimated future cash flow assumptions resulted in the write-downdate of this third security to $0.
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Additionally, during 2007, the market value of an investment in equity securities, which the Company originally acquired in 2003 for $3,000 to obtain community reinvestment credit, of a publicly owned company declined significantly. During 2007, management determined that the decline was other than temporary; accordingly, we wrote this investment down by $1,776. Due to significant further declines in market value during 2008, the Company wrote this investment down further by $1,078 in 2008 and decided to sell a portion of this investment in December 2008 to ensure the full realization of the associated capital loss carryback potential for Federal income tax purposes. In doing so, the Company recognized an additional realized loss of approximately $124 upon the partial disposition of this investment.

The write downs described above resulted in total recognized other than temporary impairment losses of $763, $6,426 and $5,661 during 2009, 2008 and 2007, respectively.

Management regularly reviews each investment security for impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer(s) and our ability and intention with regard to holding the security. Future declines in the fair value of these or other securities may result in additional impairment charges which may be material to the financial condition and results of operations of the Company.

As of December 31, 2009, the Company’s security portfolio consisted of 55 securities positions, 20 of which were in an unrealized loss position. The majority of unrealized losses are related to the Company’s collateralized debt obligation, corporate bonds and mortgage-backed and other securities, as discussed below:

State and political subdivision-taxable securities

     At December 31, 2009, the Company owned taxable municipal revenue bonds issued by Florida Housing Financial Corporation (FHFC). These bonds were currently rated “AA" at year end 2009 and were subsequently downgraded to an underlying rating of “A-“ by nationally recognized ratings agencies. The Company has held this position since November 2001. These bonds were issued in 2001 for the purpose of financing the acquisition and construction of a multifamily residential development located within Collier County to be occupied by persons and families of low, moderate or middle income, as determined by Florida Housing and other applicable regulatory agency guidelines. The bonds become continuously callable at par each year after December 1, 2011. The FHFC/HUD guarantee provides protection and collection of the mortgage note balance, which approximates the amount of the bonds outstanding.  These bonds are insured by a third party bond-insurer who insures the principal and any unpaid interest on the bonds. During 2009, the bond insurer was downgraded to “AA” by a nationally recognized rating agency. The fair value of these bonds has declined since we acquired them due to the ratings downgrades, wider spreads required by the market, the overall decline in the Florida real estate market and the underlying development experiencing a decrease in rents and negative cash flows. As the guarantee and bond insurance offer additional credit enhancement to this security, we believe we will continue to be paid principal and interest as scheduled on these bonds and/or the bonds will be called at their full par value. As the Company does not have the intent to sell these bonds and it is likely t hat it will not be required to sell the bonds before their anticipated recovery, the Company does not consider these bonds to be other-than-temporarily impaired at December 31, 2009.

Mortgage-backed securities

At December 31, 2009, the Company owned residential mortgage backed securities guaranteed by U.S. Government agencies and corporations. The fair values of certain of these securities have declined since we acquired them due to wider spreads required by the market.
Corporate bonds

At December 31, 2009, the Company owned corporate bonds issued by one of the largest banking and financial institutions in the United States. These bonds had been downgraded to “B” due to increased credit concerns, however recently the rating agencies upgraded these bonds to “BB.”  The institution has received significant capital investment from the United States Treasury under the Capital Purchase Program/TARP and its financial performance is beginning to improve. As the Company does not have the intent to sell these bonds and it is likely that it will not be required to sell the bonds before their anticipated recovery, the Company does not consider these bonds to be other-than-temporarily impaired at December 31, 2009.

Collateralized debt obligation

The Company owns a collateralized debt security collateralized by trust preferred securities issued primarily by banks and several insurance companies. Our analysis of this investment falls within the scope of ASC 325-40. This security was rated high quality “AA” at the time of purchase, but at December 31, 2009, nationally recognized rating agencies rated this security as “B.” The Company compares the present value of expected cash flows to the previous estimate to ensure there are no adverse changes in the expected cash flows. The Company utilizes a discounted cash flow valuation model which considers the structure and term of the CDO and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the timing and amo unt of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults by issuers of the underlying trust preferred securities. Assumptions used in the model include expected future default rates. Interest payment deferrals are generally treated as defaults even though they may not actually result in defaults. As of December 31, 2009, we engaged an independent third party valuation firm to estimate the fair value and credit loss potential of this security. Management reviewed the assumptions and methodology employed in this analysis and while the assumptions differed somewhat from those used in prior quarters to estimate the fair value of the security, the general premise of the methodology of discounting estimated future cash flows based upon the expected performan ce of the underlying issuers collateralizing the security was consistent with management’s previous approach. Based upon this analysis, as of December 31, 2009, management concluded that the further decline in value does not meet the definition of other than temporary under generally accepted accounting principles because no credit loss has been incurred. Additionally, we used the model to evaluate alternative scenarios with higher than expected default assumptions to evaluate the sensitivity of our default assumptions and the level of additional defaults required before a credit loss would be incurred.  This security remained classified as available for sale at December 31, 2009, and accounted for the $4,237 of unrealized loss in the collateralized debt obligation category at December 31, 2009.

TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
The table below presents a rollforward of the credit losses recognized in earnings for the period from April 1, 2009 (the effective date of ASC 325-40 which requires the recognition of unrealized credit losses determined as a result of other than temporary impairment charges through the income statement and the unrealized losses related to all other factors through accumulated other comprehensive income) through December 31, 2009:

  2009 
Beginning balance, April 1, 2009 $9,256 
Additions/subtractions    
Credit losses recognized during the period  740 
Ending balance, December 31, 2009 $9,996 

The estimated fair value of investment securities available for sale at December 31, 2009, by contractual maturity, are shown as follows. Expected maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations without call or prepayment penalties.  Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

December 31, 2009 
Due in one year or less $- 
Due after one year through five years  8,257 
Due after five years through ten years  23,942 
Due after ten years  10,017 
Marketable equity securities  8 
Mortgage-backed securities  208,115 
  $250,339 
     

At December 31, 2009, securities with a fair value of approximately $21,338 are subject to call during 2010.

Sales of available for sale securities were as follows:

  2009  2008  2007 
Proceeds $525,359  $51,135  $5,491 
Gross gains  5,003   1,217   1 
Gross losses  6   140   - 
             

The tax expense related to net realized gains was $405 during 2008.  In 2009, no associated tax expense was recorded due to the net loss for 2009 and a full valuation allowance against deferred income taxes that was recorded in 2009 which is discussed in greater detail in Note 11.

Maturities, principal repayments, and calls of investment securities available for sale during 2009, 2008 and 2007 were $209,566, $37,696, and $34,863, respectively.  Net gains realized from calls and mandatory redemptions of securities during 2009, 2008 and 2007 were $61, $72, and $0, respectively.

Investment securities having carrying values of approximately $207,353 and $156,773 at December 31, 2009 and 2008, respectively, were pledged to secure public funds on deposit, securities sold under agreements to repurchase, and for other purposes as required by law.


TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)

Note 5—Loans

Major classifications of loans are as follows:

December 31, 2009  2008 
Real estate mortgage loans:      
 Commercial $680,409  $658,516 
 Residential  236,945   205,062 
 Farmland  13,866   13,441 
 Construction and vacant land  97,424   147,309 
Commercial and agricultural loans  69,246   71,352 
Indirect auto loans  50,137   82,028 
Home equity loans  37,947   34,062 
Other consumer loans  10,190   11,549 
Total loans  1,196,164   1,223,319 
         
Net deferred loan costs  1,352   1,656 
Loans, net of deferred loan costs $1,197,516  $1,224,975 
         


In 1998, TIB Bank made a $10,000 loan to construct a lumber mill in northern Florida. Of this amount, $6,400 had been sold by TIB Bank to other lenders. The loan was 80% guaranteed as to principal and interest by the U.S. Department of Agriculture (USDA). In addition to business real estate and equipment, the loan was collateralized by the business owner’s interest in a trust. Under provisions of the trust agreement, beneficiaries cannot receive trust assets until November 2010.

The portion of this loan guaranteed by the USDA and held by us was approximately $1,600 at December 31, 2007. The loan was accruing interest until December 2006 when TIB Bank ceased the accrual of interest pursuant to a ruling made by the USDA. Accrued interest on this loan totaled approximately $941 at December 31, 2007. During the second quarter of 2008, the USDA paid the Company the principal and accrued interest and allowed the Company to apply other proceeds previously received to capitalized liquidation costs and protective advances.

The non-guaranteed principal and interest (approximately $2,000 at December 31, 2009 and December 31, 2008) and the reimbursable capitalized liquidation costs and protective advance costs totaling approximately $126 and $112 at December 31, 2009 and 2008, respectively, are included as “other assets” in the financial statements.

Florida law requires a bank to liquidate or charge off repossessed real property within five years, and repossessed personal property within six months.  Since the property had not been liquidated during this period, TIB Bank charged-off the non guaranteed principal and interest totaling approximately $2,000 at June 30, 2003, for regulatory purposes.  Since the Company believes this amount is ultimately realizable, it did not write off this amount for financial statement purposes under generally accepted accounting principles.

Activity in the allowance for loan losses is as follows:

Years ended December 31, 2009  2008  2007 
Balance, beginning of year $23,783  $14,973  $9,581 
Acquisition of The Bank of Venice  -   -   667 
Provision for loan losses charged to expense  42,256   28,239   9,657 
Loans charged off  (37,266)  (19,509)  (5,202)
Recoveries of loans previously charged off  310   80   270 
Balance, end of year $29,083  $23,783  $14,973 
             

Impaired loans are as follows:

Years ended December 31, 2009  2008 
Year end loans with no specifically allocated allowance for loan losses $60,629  $8,344 
Year end loans with allocated allowance for loan losses  87,823   53,765 
Total $148,452  $62,109 
Amount of the allowance for loan losses allocated to impaired loans $9,040  $6,116 
         

TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
     The average balance of impaired loans during 2009, 2008 and 2007 was $114,297, $35,928 and $4,464, respectively. The amounts of interest income recognized during impairment and cash basis interest income recognized was not meaningful during 2009, 2008 and 2007.  As of December 31, 2009, the balances of impaired loans reflect cumulative charge-downs of approximately $17,768. Impaired loans as of December 31, 2009 and 2008, also include $35,906 and $16,755, respectively, of restructured loans which are in compliance with modified terms and not reported as non-performing. No additional funding availability was committed to restructured loans as of December 31, 2009.

Non-performing loans include nonaccrual loans and accruing loans contractually past due 90 days or more.  Nonaccrual loans are comprised principally of loans 90 days past due as well as certain loans, which are current but where serious doubt exists as to the ability of the borrower to comply with the repayment terms.  Generally, interest previously accrued and not yet paid on nonaccrual loans is reversed during the period in which the loan is placed in a nonaccrual status.  Non-performing loans are as follows:

Years ended December 31, 2009  2008 
Nonaccrual loans $72,833  $39,776 
Loans past due over 90 days still on accrual  -   - 
         

     Non-performing loans and impaired loans are defined differently.  Some loans may be included in both categories, whereas other loans may only be included in one category.


Note 6—Premises and Equipment

A summary of the cost and accumulated depreciation of premises and equipment follows:

December 31, 2009  2008 Estimated Useful Life
Land $12,955  $12,171  
Buildings and leasehold improvements  29,376   26,272 3 to 40 years
Furniture, fixtures and equipment  16,044   15,426 1 to 40 years
Construction in progress  1,824   1,590  
   60,199   55,459  
Less accumulated depreciation  (19,377)  (17,133) 
Premises and equipment, net $40,822  $38,326  
          

     Depreciation expense for the years ended December 31, 2009, 2008, and 2007, was approximately $3,085, $3,355, and $2,887, respectively.


TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
           The Bank is obligated under operating leases for office and banking premises which expire in periods varying from one to seventeen years.  Future minimum lease payments, before considering renewal options that generally are present, are as follows at December 31, 2009:


Years Ending December 31,   
2010 $884 
2011  816 
2012  460 
2013  260 
2014  257 
Thereafter  1,804 
  $4,481 
     

Rental expense for the years ended December 31, 2009, 2008, and 2007, was approximately $1,615, $1,422, and $1,128, respectively.


Note 7—Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the years ended December 31, 2009, 2008 and 2007 are as follows:

  2009  2008  2007 
Balance January 1, $5,160  $4,686  $106 
Goo Goodwill associated with the acquisition of Naples Capital Advisors, Inc.  148   474   - 
Goo Goodwill associated with the acquisition of The Bank of Venice  -   -   4,580 
Goo Goodwill associated with the acquisition of Riverside Bank of the Gulf Coast  1,201   -   - 
Goodwill impairment  (5,887)  -   - 
Balance December 31, $622  $5,160  $4,686 
             


The Company performed a review of goodwill for potential impairment as of December 31, 2009.  Based on this review, which included valuing the Company considering a variety of methodologies including using the Company’s stock price as of year end 2009, transaction multiples of recent comparable transactions and the expected present value of future cash flows, it was determined that impairment existed as of December 31, 2009.  Accordingly, the Company wrote off $5,887 of goodwill relating primarily to the acquisitions of The Bank of Venice and Riverside.

Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value, which is determined through a two-step impairment test.  Step 1 includes the determination of the carrying value of a reporting unit, including the existing goodwill and intangible assets, and estimating the fair value of the reporting unit.  We determine the fair value of the reporting unit and compare it to its carrying amount.  If the carrying amount of a reporting unit exceeds its fair value, we are required to perform a second step to the impairment test.

Our annual impairment analysis as of December 31, 2009, indicated that the Step 2 analysis was necessary.  Step 2 of the goodwill impairment test is performed to measure the impairment loss.  Step 2 requires that the implied fair value of the reporting unit goodwill be compared to the carrying amount of that goodwill.  As the carrying amount of the reporting unit goodwill exceeded the implied fair value of that goodwill, an impairment loss was required to be recognized in an amount equal to that excess.

Intangible assets consist of the following:Proxy Statement:

 Class IDecember 31, 2009December 31, 2008
Gross Carrying AmountAccumulated AmortizationNet Book ValueGross Carrying AmountAccumulated AmortizationNet Book Value
Core deposit intangible $8,733  $2,826  $5,907  $5,091  $3,027  $2,064  
Customer relationship intangible  1,095   382   713   1,095   197   898  
Trade Name and Other  57   10   47   57   9   48  
Total $9,885  $3,218  $6,667  $6,243  $3,233  $3,010  
                          

Aggregate intangible asset amortization expense was $1,431, $653, and $440 for 2009, 2008, and 2007, respectively.

TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Estimated amortization expense for each of the next five years is as follows:

Years Ending December 31,   
2010 $1,552 
2011  1,418 
2012  1,418 
2013  1,249 
2014  359 
     



Note 8—Time Deposits

Time deposits of $100 or more were $288,021 and $241,011 at December 31, 2009 and 2008, respectively.

At December 31, 2009, the scheduled maturities of time deposits are as follows:

Years Ending December 31,   
2010 $466,880 
2011  153,798 
2012  38,013 
2013  2,987 
2014  3,059 
Thereafter  43 
  $664,780 
     



TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)

Note 9—Short-Term Borrowings and Federal Home Loan Bank Advances

Short-term borrowings include federal funds purchased, securities sold under agreements to repurchase, advances from the Federal Home Loan Bank, and a Treasury, tax and loan note option.

At December 31, 2009, the Bank had an unsecured overnight federal funds purchased accommodation up to a maximum of $25,000 from its correspondent bank. On February 17, 2010, the Bank was notified that the maximum amount of the accommodation was changed to $7,500 and a secured repurchase agreement was entered into with a maximum accommodation of $24,388. Additionally, the Bank has agreements with various financial institutions under which securities can be sold under agreements to repurchase.  TIB Bank also has securities sold under agreements to repurchase with commercial account holders whereby TIB Bank sweeps the customer’s accounts on a daily basis and pays interest on these amounts. These agreements are collateralized by investment securities chosen by TIB Bank.

The Bank accepts Treasury, tax and loan deposits from certain commercial depositors and remits these deposits to the appropriate government authorities. TIB Bank can hold up to $1,700 of these deposits more than a day under a note option agreement with its regional Federal Reserve Bank and pays interest on those funds held. TIB Bank pledges certain investment securities against this account.

As of December 31, 2009, collateral availability under our agreement with the Federal Reserve Bank of Atlanta (“FRB”) provided for up to approximately $98,646 of borrowing availability from the FRB discount window.

The Bank invests in Federal Home Loan Bank stock for the purpose of establishing credit lines with the Federal Home Loan Bank. The credit availability to the Bank is based on a percentage of the Bank’s total assets as reported on the most recent quarterly financial information submitted to the regulators subject to the pledging of sufficient collateral.  On January 7, 2010, the Federal Home Loan Bank notified the Bank that the credit availability has been rescinded and the rollover of existing advances outstanding is limited to twelve months or less. At December 31, 2009, in addition to $25,150 in letters of credit used in lieu of pledging securities to the State of Florida and $150 in letters of credit on behalf of customers, there was $125,000 in advances outstanding. At December 31, 2008, the amount of outstanding adva nces was $202,900.  The outstanding amount at December 31, 2009 consists of:


Amount 
 
Issuance Date
 
Maturity Date
Repricing Frequency 
Rate at
December 31, 2009
 
$50,000 April 2008        April 2013 (a)Fixed  3.80%
 50,000 December 2006December 2011 (a)Fixed  4.18%
 10,000 September 2007September 2012 (a)Fixed  4.05%
 10,000 September 2008March 2010Fixed  3.12%
 5,000 March 2007     March 2012 (a)Fixed  4.29%

(a) These advances have quarterly conversion dates beginning six months to one year from date of issuance.  If the FHLB chooses to convert the advance, the   Bank has the option of prepaying the entire balance without penalty.  Otherwise, the advance will convert to an adjustable rate, repricing on a quarterly basis.  If the FHLB does not convert the advance, it will remain at the contracted fixed rate until the maturity date.

The Bank’s collateral with the FHLB consists of a blanket floating lien pledge of the Bank’s residential 1-4 family mortgage and commercial real estate secured loans.  The amount of eligible collateral at December 31, 2009 was $258,465.


TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
The following table reflects the average daily outstanding, year-end outstanding, maximum month-end outstanding and the weighted average rates paid for each of the categories of short-term borrowings and FHLB advances:

Year Ended December 31, 2009  2008 
Federal funds purchased:      
Balance:      
 Average daily outstanding $68  $600 
 Year-end outstanding  -   - 
 Maximum month-end outstanding  -   6 
Rate:        
 Weighted average for year  0.7%  2.4%
 Weighted average interest rate at December 31,  N/A   N/A 
         
Securities sold under agreements to repurchase:        
Balance:        
 Average daily outstanding $71,073  $75,271 
 Year-end outstanding  78,893   69,593 
 Maximum month-end outstanding  83,610   85,654 
Rate:        
 Weighted average for year  0.1%  1.8%
 Weighted average interest rate at December 31,  0.1%  0.1%
         
Treasury, tax and loan note option:        
Balance:        
 Average daily outstanding $1,001  $1,111 
 Year-end outstanding  1,582   1,830 
 Maximum month-end outstanding  1,760   1,830 
Rate:        
 Weighted average for year  0.0%  1.5%
 Weighted average interest rate at December 31,  0.0%  0.0%
         
Advances from the Federal Home Loan Bank-Short Term:        
Balance:        
 Average daily outstanding $14,842  $32,111 
 Year-end outstanding  -   70,000 
 Maximum month-end outstanding  76,650   85,000 
Rate:        
 Weighted average for year  0.8%  1.9%
 Weighted average interest rate at December 31,  N/A   1.2%
         
Advances from the Federal Home Loan Bank-Long Term:        
Balance:        
 Average daily outstanding $125,599  $133,118 
 Year-end outstanding  125,000   132,900 
 Maximum month-end outstanding  126,250   157,900 
Rate:        
 Weighted average for year  4.0%  4.1%
 Weighted average interest rate at December 31,  3.9%  3.9%
         

TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)

Note 10—Long-Term Borrowings


Securities Sold Under Agreements to Repurchase

     During 2007, the Company entered into agreements with another financial institution for the sale of certain securities to be repurchased at a future date.  The interest rates on these repurchase agreements are fixed for the remaining term of the agreement.  The financial institution has the ability to terminate these agreements on a quarterly basis. The outstanding amount at December 31, 2009 was $30,000 and consists of:

Amount Maturity Date 
Rate at
December 31, 2009
 
$20,000 September 2010  4.18%
 10,000 December 2010  3.46%


Subordinated Debentures

On September 7, 2000, the Company participated in a pooled offering of trust preferred securities.  The Company formed TIBFL Statutory Trust I (the “Trust”) a wholly-owned statutory trust subsidiary for the purpose of issuing the trust preferred securities.  The Trust used the proceeds from the issuance of $8,000 in trust preferred securities to acquire junior subordinated deferrable interest debentures of the Company.  The trust preferred securities essentially mirror the debt securities, carrying a cumulative preferred dividend at a fixed rate equal to the 10.6% interest rate on the debt securities. The debt securities and the trust preferred securities each have 30-year lives. The trust preferred securities and the debt securities are callable by the Company or the Trust, at their respective o ption after ten years, and at varying premiums and sooner in specific events, subject to prior approval by the Federal Reserve Board, if then required.

On July 31, 2001, the Company participated in a pooled offering of trust preferred securities.  The Company formed TIBFL Statutory TrustClass II (the “Trust II”) a wholly-owned statutory trust subsidiary for the purpose of issuing the trust preferred securities.  The Trust II used the proceeds from the issuance of $5,000 in trust preferred securities to acquire junior subordinated deferrable interest debentures of the Company.  The trust preferred securities essentially mirror the debt securities, carrying a cumulative preferred dividend at a variable rate equal to the interest rate on the debt securities (three month LIBOR plus 358 basis points).  The initial rate in effect at the time of issuance was 7.29% and is subject to change quarterly.  The rate in effect at December 31, 20 09 was 3.86%. The debt securities and the trust preferred securities each have 30-year lives.  The trust preferred securities and the debt securities are callable by the Company or the Trust, at their respective option after five years, and at varying premiums and sooner in specific events, subject to prior approval by the Federal Reserve Board, if then required.

On June 23, 2006, the Company issued $20,000 of additional trust preferred securities through a private placement. The Company formed TIBFL Statutory Trust III (the “Trust III”), a wholly-owned statutory trust subsidiary for the purpose of issuing the trust preferred securities. The Trust III used the proceeds from the issuance of $20,000 in trust preferred securities to acquire junior subordinated deferrable interest debentures of the Company. The trust preferred securities essentially mirror the debt securities, carrying a cumulative preferred dividend at a variable rate equal to the interest rate on the debt securities (three month LIBOR plus 155 basis points). The rate in effect at December 31, 2009 was 1.83%.  The debt securities and the trust preferred securities each have 30-year lives. The trust preferred se curities and the debt securities are callable by the Company or the Trust, at their respective option at par after five years, and sooner, at a 5% premium, if specific events occur, subject to prior approval by the Federal Reserve Board, if then required.

The Company received a request from the Federal Reserve Bank of Atlanta for the Company’s Board of Directors to adopt a resolution that it will not make any payments or distributions on the outstanding trust preferred securities without the prior written approval of the Reserve Bank.  The Board adopted this resolution on October 5, 2009.  The Company has notified the trustees of its $20,000 trust preferred securities due July 7, 2036 and its $5,000 trust preferred securities due July 31, 2031 of its election to defer interest payments on the trust preferred securities beginning with the payments due in October 2009.  The Company also notified the trustees of its $8,000 trust preferred securities due September 7, 2030 of its election to defer interest payments on the trust preferred securities beginning with the payments due in March 2010.  Deferral of the trust preferred securities is allowed for up to 60 months without being considered an event of default.

The Company has treated the trust preferred securities as Tier 1 capital up to the maximum amount allowed, and the remainder as Tier 2 capital for federal regulatory purposes (see Note 14).

TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Contractual Maturities

At December 31, 2009, the contractual maturities of long-term borrowings were as follows:

  Fixed Rate  Floating Rate  Total 
Due in 2010 $30,000  $-  $30,000 
Due in 2011  -   -   - 
Due in 2012  -   -   - 
Due in 2013  -   -   - 
Thereafter  8,000   25,000   33,000 
Total long-term debt $38,000  $25,000  $63,000 
             


Note 11—Income Taxes

Income tax expense (benefit) from continuing operations was as follows:

Years ended December 31, 2009  2008  2007 
Current income tax provision:         
 Federal $(188) $(7,515) $2,798 
 State  (32)  (572)  436 
   (220)  (8,087)  3,234 
Deferred tax benefit:            
 Federal  (14,292)  (3,395)  (4,334)
 State  (2,429)  (1,371)  (675)
   (16,721)  (4,766)  (5,009)
             
Valuation allowance  30,392   -   - 
             
Total $13,451  $(12,853) $(1,775)
             


TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)

A reconciliation of income tax computed at applicable Federal statutory income tax rates to total income taxes reported is as follows:

Years ended December 31, 2009  2008  2007 
Pretax income from continuing operations $(48,097) $(33,783) $(4,196)
Income taxes computed at Federal statutory tax rate $(16,353) $(11,486) $(1,427)
Effect of:            
 Tax-exempt income, net  (685)  (253)  (322)
 State income taxes, net  (1,624)  (1,282)  (156)
 Non-deductible goodwill  1,557   -   - 
 Stock based compensation expense, net  96   90   92 
 Other, net  68   78   38 
 Change in valuation allowance  30,392   -   - 
Total income tax expense (benefit) $13,451  $(12,853) $(1,775)
             

A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. In assessing the need for a valuation allowance, management considered various factors including the significant cumulative losses incurred by the Company over the last three years coupled with the expectation that our future realization of deferred taxes will be limited as a result of the planned capital offering discussed in Note 2 above. These factors represent the most significant negative evidence that management considered in concluding that a full valuation allowance was necessary at December 31, 2009. As of December 31, 2008, management considered the need for a valuation allowance and, based upon its assessment of the relative weight of the positi ve and negative evidence available at the time, concluded that no valuation allowance was necessary at such time.

The details of the net deferred tax asset as of December 31, 2009 and 2008 are as follows:

Years ended December 31, 2009  2008 
Allowance for loan losses $10,983  $9,053 
Recognized impairment losses on available for sale securities  560   2,529 
Net operating loss and AMT carryforward  18,315   1,165 
Recognized impairment of other real estate owned  299   474 
Acquisition related intangibles  1,043   330 
Deferred compensation  906   2,051 
Net unrealized losses on securities available for sale  1,577   373 
Other  706   450 
Total gross deferred tax assets  34,389   16,425 
         
Accumulated depreciation  (1,187)  (1,013)
Deferred loan costs  (905)  (833)
Acquisition related intangibles  (639)  (758)
Other  (63)  (151)
Total gross deferred tax liabilities  (2,794)  (2,755)
         
Net temporary differences  31,595   13,670 
         
Valuation allowance  (31,595)  - 
         
Net deferred tax asset $-  $13,670 
         


At December 31, 2009, the Company had a State net operating loss carryforward of approximately $22,427 which expires in 2028 if unused and Federal and state net operating loss carryforwards of $46,553 and $45,223, respectively, which expire in 2029 if unused.

The Company and its subsidiaries are subject to U.S. federal income tax, as well as income tax of the State of Florida. The Company is no longer subject to examination by taxing authorities for years before 2006.

There were no unrecognized tax benefits at December 31, 2009, and the Company does not expect the total of unrecognized tax benefits to significantly increase in the next twelve months.


TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Note 12—Employee Benefit Plans

The Company maintains an Employee Stock Ownership Plan with 401(k) provisions that covers all employees who are qualified as to age and length of service. Three types of contributions can be made to the Plan by the Company and participants: basic voluntary contributions which are discretionary contributions made by all participants; a matching contribution, whereby the Company will match 50 percent of salary reduction contributions up to 5 percent of compensation; and an additional discretionary contribution which may be made by the Company and allocated to the accounts of participants on the basis of total relative compensation.  The Company contributed $334, $327, and $307, to the plan in 2009, 2008 and 2007, respectively. As of December 31, 2009, the Plan contained approximately 331,000 shares of the Company’s common s tock.

        In 2001, TIB Bank entered into salary continuation agreements with three of its executive officers.  Two additional TIB Bank executive officers entered into salary continuation agreements in 2003, another in 2004 and two additional TIB Bank executives entered into salary continuation agreements in 2008. In 2007, an additional two pre-existing salary continuation agreements with The Bank of Venice’s executive officers were assumed as part of the acquisition. The plans are nonqualified deferred compensation arrangements that are designed to provide supplemental retirement income benefits to participants.  The Company expensed $227, $351, and $811 for the accrual of fu ture salary continuation benefits in 2009, 2008 and 2007, respectively.  The Bank has purchased single premium life insurance policies on several of these individuals.  Cash value income (net of related insurance premium expense) totaled $328, $236, and $266 in 2009, 2008 and 2007, respectively.  In addition, a $1,186 gain was recognized on the policy of a deceased former employee. Other assets included $6,347 and $7,652 in surrender value and other liabilities included salary continuation benefits payable of $1,070 and $3,071 at December 31, 2009 and 2008, respectively. Three of these executive officers terminated employment in 2008 and two terminated employment in 2009. In 2009 a total of $2,229 of salary continuation benefits were paid to terminated executives in accordance with their agreements.

        In 2001, TIB Bank established a non qualified retirement benefit plan for eligible Bank directors.  Under the plan, the Bank pays each participant, or their beneficiary, the amount of directors fees deferred and interest in 120 equal monthly installments, beginning the month following the director’s normal retirement date.  TIB Bank expensed $42, $214, and $239 for the accrual of current and future retirement benefits in 2009, 2008 and 2007, respectively, which included $0, $112, and $160 in 2009, 2008 and 2007 related to the annual director retainer fees and monthly meeting fees that certain directors elected to defer. TIB Bank has purchased single premium split dollar life insurance policies on these individuals.& #160; Cash value income (net of related insurance premium expense) totaled $170, $162, and $152 in 2009, 2008 and 2007, respectively.  Other assets included $4,621 and $4,451 in surrender value in other assets and other liabilities included retirement benefits payable of $653 and $1,627 at December 31, 2009 and 2008, respectively. In connection with changes made to bring the plan agreements into compliance with section 409A of the Internal Revenue Code the four current directors participating in the plan each elected to receive a lump sum distribution in 2009 of the amount vested, accrued and earned through December 31, 2008.

Note 13—Related Party Transactions

The Bank had loans outstanding to certain of the Company’s executive officers, directors, and their related business interests as follows:

Beginning balance, January 1, 2009 $270 
New loans  223 
Repayments  (227)
Change in Parties  - 
Ending balance, December 31, 2009 $266 
     

Unfunded loan commitments to these individuals and their related business interests totaled $206 at December 31, 2009.  Deposits from these individuals and their related interests were $3,215 and $2,081 at December 31, 2009 and 2008, respectively.


Note 14—Shareholders’ Equity and Minimum Regulatory Capital Requirements

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements results in certain discretionary and required actions by regulators that could have an effect on the Company’s operations. The regulations require the Company and the Bank to meet specific capital adequacy guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Capital Adequacy and Ratios

To be considered well capitalized and adequately capitalized (as defined) under the regulatory framework for prompt corrective action, the Banks must maintain minimum Tier 1 leverage, Tier 1 risk-based, and total risk-based ratios. At December 31, 2009 the Company and the Bank maintained capital ratios to be considered adequately capitalized.  In September, our Bank of Venice subsidiary was merged into TIB Bank. Therefore capital ratios for The Bank of Venice are not reported for December 31, 2009. These minimum amounts and ratios along with the actual amounts and ratios for the Company and the Bank at of December 31, 2009 and 2008 are presented in the following tables.
December 31, 2009 Well Capitalized Requirement  Adequately Capitalized Requirement  Actual 
  Amount  Ratio  Amount  Ratio  Amount  Ratio 
Tier 1 Capital (to Average Assets)                  
 Consolidated  N/A   N/A  $
³ 68,316
   
³ 4.0
% $69,450   4.1%
 TIB Bank $
³ 85,321
   
³ 5.0
%  
³ 68,256
   
³ 4.0
%  82,696   4.8%
                         
Tier 1 Capital ( to Risk Weighted Assets)                        
 Consolidated  N/A   N/A  $
³ 48,347
   
³ 4.0
% $69,450   5.7%
 TIB Bank $
³ 72,504
   
³ 6.0
%  
³ 48,336
   
³ 4.0
%  82,696   6.8%
                         
Total Capital (to Risk Weighted Assets)                        
 Consolidated  N/A   N/A  $
³ 96,694
   
³ 8.0
% $98,362   8.1%
 TIB Bank $
³ 120,840
   
³ 10.0
%  
³ 96,672
   
³ 8.0
%  97,975   8.1%
                         

December 31, 2008 Well Capitalized Requirement  Adequately Capitalized Requirement  Actual 
  Amount  Ratio  Amount  Ratio  Amount  Ratio 
Tier 1 Capital (to Average Assets)                  
 Consolidated  N/A   N/A  $
³ 63,303
   
³ 4.0
% $140,396   8.9%
 TIB Bank $
³ 75,032
   
³ 5.0
%  
³ 60,026
   
³ 4.0
%  109,254   7.3%
 The Bank of Venice  
³ 4,072
   
³ 5.0
%  
³ 3,258
   
³ 4.0
%  6,555   8.1%
                         
Tier 1 Capital ( to Risk Weighted Assets)                        
 Consolidated  N/A   N/A  $
³ 49,521
   
³ 4.0
% $140,396   11.3%
 TIB Bank $
³ 70,676
   
³ 6.0
%  
³ 47,117
   
³ 4.0
%  109,254   9.3%
 The Bank of Venice  
³ 3,528
   
³ 6.0
%  
³ 2,351
   
³ 4.0
%  6,555   11.2%
                         
Total Capital (to Risk Weighted Assets)                        
 Consolidated  N/A   N/A  $
³ 99,042
   
³ 8.0
% $155,977   12.6%
 TIB Bank $
³ 117,793
   
³ 10.0
%  
³ 94,234
   
³ 8.0
%  124,070   10.5%
 The Bank of Venice  
³ 5,880
   
³ 10.0
%  
³ 4,704
   
³ 8.0
%  7,301   12.4%
                         

Other than compliance with the request to attain elevated capital ratios as defined in the informal agreement discussed in Note 2 above, management believes, as of December 31, 2009, that the Company and the Bank meet all capital requirements to which they are subject.  Tier 1 Capital for the Company includes the trust preferred securities that were issued in September 2000, July 2001 and June 2006 to the extent allowable.

If a bank is classified as adequately capitalized, the bank is subject to certain restrictions.  One of the restrictions is that the bank may not accept, renew or roll over any brokered deposits (including CDARs deposits) without being granted a waiver of the prohibition by the FDIC. As of December 31, 2009, we had $95,028 of brokered deposits consisting of $46,827 of reciprocal CDARs deposits and $48,201 of traditional brokered and one-way CDARs deposits representing approximately 6.9% of our total deposits. $59,802 of CDARs deposits and $21,193 of traditional brokered deposits mature within the next twelve months. An inability to roll over or raise funds through CDARs deposits or brokered deposits could have a material adverse impact on our liquidity. Additional restrictions include limitations on deposit pricing, the preclus ion from paying “golden parachute” severance payments and the requirement to notify the bank regulatory agencies of certain significant events.


Subsidiary Dividend Limitations

Under state banking law, regulatory approval will be required if the total of all dividends declared in any calendar year by a bank exceeds the bank’s net profits to date for that year combined with its retained net profits for the preceding two years. Based on the losses incurred for the prior two years, declaration of dividends by TIB Bank to the Company, during 2009, would have required regulatory approval.


TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
Private Placement Transaction

On March 7, 2008, we consummated a private placement transaction whereby two of Southwest Florida’s prominent families, their representatives and their related business interests purchased 1.3 million shares of common stock and warrants to purchase an additional 1.3 million shares of common stock. The warrants have an exercise price of $7.91 per share and may be exercised at any time prior to March 7, 2011. This private placement resulted in gross proceeds of $10,080. The terms of the transaction limits the ownership of each of the two groups to 9.9% of outstanding shares.


Issuance of Preferred Stock TARP

On December 5, 2008, under the U.S. Department of Treasury’s (the “Treasury”) Capital Purchase Program (the “CPP”) established under the Troubled Asset Relief Program (the “TARP”) that was created as part of the Emergency Economic Stabilization Act of 2008 (the “EESA”), the Company issued to Treasury 37,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, $0.10 par value, having a liquidation amount of $1,000 per share, and a ten-year warrant to purchase 1,106,389 shares of common stock at an exercise price of $5.02 per share, for aggregate proceeds of $37,000. Approximately $32,889 was allocated to the initial carrying value of the preferred stock and $4,111 to the warrant based on their relative estimated fair values on the issue date. The fair value of the prefe rred stock was determined using a discount rate of 13% and an assumed life of 10 years and resulted in an estimated fair value of $23,095. The fair value of the warrant was determined using the Black-Scholes Model utilizing a 0% dividend yield, a 2.67% risk-free interest rate, a 43% volatility assumption and 10 year expected life. These assumptions resulted in an estimated fair value of $2,887 for the warrant. The $37,000 of proceeds received were allocated between the preferred stock and the warrant based on their relative fair values. This resulted in the preferred stock being recognized at a discount from its $37,000 liquidation preference by an amount equal to the relative fair value of the warrant. The discount is currently being accreted using the constant effective yield method over the first five years. During 2009, $810 of accretion and $1,285 of dividends were recorded. During 2008, $31 of accretion was recorded. The total capital raised through this issue qualifies as Tier 1 regulatory capital and can be used in calculating all regulatory capital ratios.
Cumulative preferred stock dividends are payable quarterly at a 5% annual rate on the per share liquidation amount for the first five years and 9% thereafter. Under the original terms of the CPP, the Company may not redeem the preferred stock for three years unless it finances the redemption with the net cash proceeds from sales of common or preferred stock that qualify as Tier 1 regulatory capital (qualified equity offering), and only once such proceeds total at least $9,250. All redemptions, whether before of after the first three years, would be at the liquidation amount per share plus accrued and unpaid dividends and are subject to prior regulatory approval. The Company received a request from the Federal Reserve Bank of Atlanta for the Company’s Board of Directors to adopt a resolution that it will not make any payments or dis tributions on the outstanding trust preferred securities without the prior written approval of the Reserve Bank.  The Board adopted this resolution on October 5, 2009. The Company has also notified the Treasury of its election to defer the dividend payment on the Series A preferred stock issued under TARP beginning in November 2009.
The Company may not declare or pay dividends on its common stock or, with certain exceptions, repurchase common stock without first having paid all accrued cumulative preferred dividends that are due. For three years from the issue date, the Company also may not increase its common stock dividend rate above a quarterly rate of $0.0589 per share or repurchase its common shares without Treasury’s consent, unless Treasury has transferred all the preferred shares to third parties or the preferred stock has been redeemed.

Treasury could only transfer or exercise an aggregate of one-half of the original number of shares underlying the warrant before December 31, 2009. If, before that date, the Company had received aggregate gross cash proceeds of not less than $37,000 from a qualified equity offering, then the remaining number of shares issuable to Treasury upon exercise of the warrant would have been reduced by one-half of the original number of shares under warrant. Both the number of shares of common stock underlying the warrant and the exercise price are subject to adjustment in accordance with customary anti-dilution provisions and upon certain issuances of the Company’s common stock or stock rights at less than 90% of market value.
To be eligible for the CPP, the Company has also agreed to comply with certain executive compensation and corporate governance requirements of the EESA, including a limit on the tax deductibility of executive compensation above $500. The specific rules covering these requirements were recently developed by Treasury and other government agencies. Additionally, under the EESA, Congress has the ability to impose “after-the-fact” terms and conditions on participants in the CPP. As a participant in the CPP, the Company may be subject to any such retroactive terms and conditions. The Company cannot predict whether, or in what form, additional terms or conditions may be imposed.
The American Recovery and Reinvestment Act (the “ARRA”) became law on February 17, 2009. Among its many provisions, the ARRA imposes certain new executive compensation and corporate expenditure limits on all current and future TARP recipients, including the Company, that are in addition to those previously announced by the Treasury. These limits are effective until the institution has repaid the Treasury, which is now permitted under the ARRA without penalty and without the need to raise new capital, subject to the Treasury’s consultation with the recipient’s appropriate regulatory agency.

TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)

Note 15 – Stock-Based Compensation

As of December 31, 2009, the Company has one compensation plan under which shares of its common stock are issuable in the form of stock options, restricted shares, stock appreciation rights, performance shares or performance units. This is its 2004 Equity Incentive Plan (the “2004 Plan”), which was approved by the Company’s shareholders at the May 25, 2004 annual meeting. Pursuant to the merger agreement, upon the April 30, 2007 closing of its acquisition of The Bank of Venice, the Company granted 87,840 stock options in exchange for the options outstanding for the purchase of shares of common stock of The Bank of Venice at such date. The options were fully vested at the grant date and ranged in price from $8.64 to $9.93 per share as determined by the conversion ratio specified in the merger agreement. Previously, the C ompany had granted stock options under the 1994 Incentive Stock Option and Nonstatutory Stock Option Plan (the “1994 Plan”) as amended and restated as of August 31, 1996. Under the 2004 Plan, the Board of Directors of the Company may grant nonqualified stock–based awards to any director, and incentive or nonqualified stock-based awards to any officer, key executive, administrative, or other employee including an employee who is a director of the Company. Subject to the provisions of the 2004 Plan, the maximum number of shares of common stock of the Company that may be optioned or awarded through the 2014 expiration of the plan is 849,215 shares, no more than 282,364 of which may be issued pursuant to awards granted in the form of restricted shares.  Such shares may be treasury, or authorized but unissued, shares of common stock of the Company.  If options or awards granted under the Plan expire or terminate for any reason without having been exercised in full or released from restriction, the corresponding shares shall again be available for option or award for the purposes of the Plan as long as no dividends have been paid to the holder in accordance with the provisions of the grant agreement.
The following table summarizes the components and classification of stock-based compensation expense for the years ended December 31,

  2009  2008  2007 
Stock options $296  $280  $284 
Restricted stock  394   457   364 
Total stock-based compensation expense $690  $737  $648 
             
Salaries and employee benefits $381  $436  $417 
Other expense  309   301   231 
Total stock-based compensation expense $690  $737  $648 
             

The tax benefit related to stock-based compensation expense arising from restricted stock awards and non-qualified stock options was approximately $177 and $142 for the years ended December 31, 2008 and 2007, respectively. No tax benefit was recorded for the year ended December 31, 2009 due to the recognition of a full valuation allowance against deferred income tax assets as discussed in greater detail in Note 11 above.

The fair value of each option is estimated as of the date of grant using the Black-Scholes Option Pricing Model. This model requires the input of subjective assumptions that will usually have a significant impact on the fair value estimate. The assumptions for the current period grants were developed based on ASC 718 and SEC guidance contained in Staff Accounting Bulletin (SAB) No. 107, “Share-Based Payment.” The following table summarizes the weighted average assumptions used to compute the grant-date fair value of options granted for the years ended December 31,

  2009  2008  2007 
Dividend yield  0.00%  2.31%  1.63%
Risk-free interest rate  3.06%  2.99%  4.18%
Expected option life 6.5 years  6.4 years  4.6 years 
Volatility  80%  26%  21%
Weighted average grant-date fair value of options granted $1.16  $1.72  $3.81 
             

·  The dividend yield was estimated using historical dividends paid and market value information for the Company’s stock. An increase in dividend yield will decrease stock compensation expense.

·  The risk-free interest rate was developed using the U.S. Treasury yield curve for periods equal to the expected life of the options on the grant date. An increase in the risk-free interest rate will increase stock compensation expense.

·  The expected option life for the current period grants was estimated using the vesting period, the term of the option and estimates of future exercise behavior patterns.  An increase in the option life will increase stock compensation expense.

·  The volatility was estimated using historical volatility for periods approximating the expected option life. An increase in the volatility will increase stock compensation expense.

ASC 718 requires the recognition of stock-based compensation for the number of awards that are ultimately expected to vest. During 2007, 2008 and 2009, stock based compensation expense was recorded based upon estimates that we would experience no forfeitures. Our estimate of forfeitures will be reassessed in subsequent periods based on historical forfeiture rates and may change based on new facts and circumstances. Any changes in our estimates will be accounted for prospectively in the period of change.

TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
As of December 31, 2009, unrecognized compensation expense associated with stock options and restricted stock was $650 and $346 which is expected to be recognized over weighted average periods of approximately 2 years and 1 year, respectively.


Stock Options

Under the 2004 Plan, the exercise price for common stock must equal at least 100 percent of the fair market value of the stock on the day an option is granted.  The exercise price under an incentive stock option granted to a person owning stock representing more than 10 percent of the common stock must equal at least 110 percent of the fair market value at the date of grant, and such option is not exercisable after five years from the date the incentive stock option was granted.  The Board of Directors may, at its discretion, provide that an option not be exercised in whole or in part for any period or periods of time as specified in the option agreements. No option may be exercised after the expiration of ten years from the date it is granted. Stock options vest over varying service periods which range from vesting i mmediately to up to nine years.
A summary of the stock option activity in the plans is as follows:

  Shares  
Weighted Average
Exercise Price
 
Balance, January 1, 2007  751,068  $8.65 
 Granted  159,396   8.79 
 Exercised  (160,049)  6.93 
 Expired or forfeited  (32,340)  11.21 
Balance, December 31, 2007  718,075  $8.95 
 Granted  103,917   7.43 
 Exercised  (15,712)  6.26 
 Expired or forfeited  (106,109)  7.86 
Balance, December 31, 2008  700,171  $8.95 
 Granted  231,392   1.62 
 Exercised  -   - 
 Expired or forfeited  (112,668)  9.49 
Balance, December 31, 2009  818,895  $6.81 
         


Options exercisable at December 31, 2009  2008 
  Shares  
Weighted Average
Exercise Price
  Shares  
Weighted Average
Exercise Price
 
   363,226  $8.87   330,482  $8.94 
                 


The weighted average remaining terms for outstanding stock options and for exercisable stock options were 6.2 years and 4.3 years at December 31, 2009, respectively. The aggregate intrinsic value at December 31, 2009 was $0 for stock options outstanding and $0 for stock options exercisable. The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of the Company’s common stock as of the reporting date.

TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
            Options outstanding at December 31, 2009 were as follows:

   Outstanding Options  Options Exercisable 
Range of Exercise Prices  Number  Weighted Average Remaining Contractual Life  Weighted Average Exercise Price  Number  Weighted Average Exercise Price 
$1.58 – $5.84   363,116   6.81  $3.07   90,567  $5.51 
 6.02 – 10.72   273,872   6.15   8.02   151,385   8.01 
 10.72 – 14.90   181,907   5.07   12.44   121,274   12.46 
$1.58 – $14.90   818,895   6.20  $6.81   363,226  $8.87 
                       

Proceeds received from the exercise of stock options were $0, $98 and $1,108 during the years ended December 31, 2009, 2008 and 2007, respectively. The intrinsic value related to the exercise of stock options was $0, $13 and $1,194, during the years ended December 31, 2009, 2008 and 2007, respectively. The intrinsic value related to exercises of non-qualified stock options and disqualifying dispositions of incentive stock options resulted in the realization of tax benefits of $3 and $51, during the years ended December 31, 2008 and 2007, respectively. No tax benefit was recorded for the year ended December 31, 2009 as there were no exercises of non-qualified stock options or disqualifying dispositions.


Restricted Stock

Restricted stock provides the grantee with voting, dividend and anti-dilution rights equivalent to common shareholders, but is restricted from transfer until vested, at which time all restrictions are removed. Vesting for restricted shares is generally on a straight-line basis and ranges from one to five years. The value of the restricted stock, estimated to be equal to the closing market price on the date of grant, is being amortized on a straight-line basis over the respective service periods.  The fair market value of restricted stock awards that vested was $101, $185 and $202 during the years ended December 31, 2009, 2008 and 2007, respectively. Tax benefits related to the vesting of restricted shares of $33 and $10 were realized during the years ended December 31, 2008 and 2007, respectively. No tax benefit was recorded fo r the year ended December 31, 2009 due to the recognition of a full valuation allowance against deferred income tax assets as discussed in greater detail in Note 11 above.

A summary of the restricted stock activity in the plan is as follows:

  2009  2008  2007 
  Shares  
Weighted Average Grant-Date
Fair Value
  Shares  
Weighted Average Grant-Date
Fair Value
  Shares  
Weighted Average Grant-Date
Fair Value
 
Balance, January 1,  96,736  $10.87   90,723  $13.58   70,984  $14.76 
 Granted  -   -   38,707   6.91   39,120   12.01 
 Vested  (40,409)  11.53   (31,218)  13.68   (19,173)  14.77 
 Expired or forfeited  (7,225)  7.32   (1,476)  13.95   (208)  13.38 
Balance, December 31,  49,102  $10.86   96,736  $10.87   90,723  $13.58 


Note 16—Loan Commitments and Other Related Activities

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs.  These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates.  Commitments may expire without being used.  Off-balance-sheet risk of credit loss exists up to the face amount of these instruments, although material losses are not anticipated.  The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.

The contractual amount of financial instruments with off-balance-sheet risk was as follows at December 31:

  2009  2008 
  Fixed Rate  Variable Rate  Fixed Rate  Variable Rate 
Commitments to make loans $13,496  $1,350  $10,786  $4,919 
Unfunded commitments under lines of credit  3,890   52,887   8,181   79,577 
                 

Commitments to make loans are generally made for periods of 30 days.  As of December 31, 2009, the fixed rate loan commitments have interest rates ranging from 4.25% to 18.00% and maturities ranging from 1 year to 30 years.

  As of December 31, 2009 and 2008, the Company was subject to letters of credit totaling $1,896 and $2,542, respectively.

TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)

Note 17—Supplemental Financial Data

Components of other expense in excess of 1 percent of total interest and non-interest income are as follows:

Years Ended December 31, 2009  2008  2007 
Goodwill impairment $5,887  $-  $- 
FDIC & State assessments  3,962   1,153   629 
Legal and professional fees  3,270   2,558   1,372 
OREO Expenses  3,149   1,694   14 
Computer services  2,708   2,093   2,172 
Amortization of intangibles  1,431   653   440 
Marketing and community relations  1,128   1,246   1,151 
Collection Expense  353   1,341   772 
Operational Charge-offs  155   1,528   74 
Net (gain) loss on disposition of repossessed assets  (244)  1,387   986 
             



TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)

Note 18—Fair Values of Financial Instruments

ASC 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair values of securities available for sale are determined by 1) obtaining quoted prices on nationally recognized securities exchanges when available (Level 1 inputs), 2) matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs) and 3) for collateralized debt obligations, custom discounted cash flow modeling (Level 3 inputs).

Valuation of Collateralized Debt Securities

As of December 31, 2009, the Company owned three collateralized debt obligations where the underlying collateral is comprised primarily of corporate debt obligations of homebuilders, REITs, real estate companies and commercial mortgage backed securities. The company also owned a collateralized debt security where the underlying collateral is comprised primarily of trust preferred securities of banks and insurance companies. The inputs used in determining the estimated fair value of these securities are Level 3 inputs. In determining their estimated fair value, management utilizes a discounted cash flow modeling valuation approach. Discount rates utilized in the modeling of these securities are estimated based upon a variety of factors including the market yields of publicly traded trust preferred securities of larger financial institutio ns and other non-investment grade corporate debt. Cash flows utilized in the modeling of these securities were based upon actual default history of the underlying issuers and issuer specific assumptions of estimated future defaults of the underlying issuers. As of December 31, 2009, we engaged an independent third party valuation firm to estimate the fair value and credit loss potential of this security. Management reviewed the assumptions and methodology employed in this analysis and while the assumptions differed from those used in prior quarters to estimate the fair value of the security, the general premise of the methodology of discounting estimated future cash flows based upon the expected performance of the underlying issuers collateralizing the security was consistent with management’s previous approach. The most significant difference in assumptions used as of December 31, 2009 as compared to those used as of December 31, 2008 was that no prepayments were assumed in the 2009 analysis as compar ed to the 2008 valuation where future prepayment assumptions were utilized in the expected cash flow assumptions.

Valuation of Impaired Loans and Other Real Estate Owned

The fair value of collateral dependent impaired loans with specific allocations of the allowance for loan losses and other real estate owned is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.


TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)

Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below:

     Fair Value Measurements Using 
December 31, 2009  
Quoted Prices in Active Markets for Identical Assets
(Level 1)
  Significant Other Observable Inputs (Level 2)  
Significant Unobservable Inputs
(Level 3)
 
Assets:            
U.S. U.S. Government agencies and corporations $29,172  $-  $29,172  $- 
Stat States and political subdivisions—tax exempt  8,061   -   8,061   - 
Stat States and political subdivisions—taxable  2,212   -   2,212   - 
Mar Marketable equity securities  8   -   8   - 
MorMortgage-backed securities - residential  208,115   -   208,115   - 
Cor  Corporate bonds  2,012   -   2,012   - 
Coll Collateralized debt obligations  759   -   -   759 
 A Available for sale securities $250,339  $-  $249,580  $759 
                 

     Fair Value Measurements Using 
December 31, 2008  
Quoted Prices in Active Markets for Identical Assets
(Level 1)
  Significant Other Observable Inputs (Level 2)  
Significant Unobservable Inputs
(Level 3)
 
Assets:            
U.S. U.S. Government agencies and corporations $51,668  $-  $51,668  $- 
Stat States and political subdivisions—tax exempt  7,789   -   7,789   - 
Stat States and political subdivisions—taxable  2,337   -   2,337   - 
Mar Marketable equity securities  12   -   12   - 
Mor Morttgage-backed securities - residential  157,977   -   157,977   - 
Cor  Corporate bonds  1,712   -   1,712   - 
Coll Collateralized debt obligations  4,275   -   -   4,275 
 AAvailable for sale securities $225,770  $-  $221,495  $4,275 
                 


TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)

The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2009 and still held at December 31, 2009.

  
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
 
  Collateralized Debt Obligations 
B Beginning balance, January 1, 2009 $4,275 
Included in earnings – other than temporary impairment  (763)
Included in other comprehensive income  (2,753)
Transfer in to Level 3  - 
E  Ending balance, December 31, 2009 $759 
     

The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2008 and still held at December 31, 2008.

  
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
 
  Collateralized Debt Obligations 
B Beginning balance, January 1, 2008 $6,111 
Included in earnings – other than temporary impairment  (5,348)
Included in other comprehensive income  (1,206)
Transfer in to Level 3  4,718 
E  Ending balance, December 31, 2008 $4,275 
     
     


Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

     Fair Value Measurements Using 
December 31, 2009  
Quoted Prices in Active Markets for Identical Assets
(Level 1)
  
Significant Other Observable Inputs
(Level 2)
  
Significant Unobservable Inputs
(Level 3)
 
Assets:            
I   Impaired loans with specific allocations of the allowance for loan losses $52,122  $-  $-  $52,122 
Other real estate owned  21,352   -   -   21,352 
Other repossessed assets  326   -   326   - 
                 


TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)


     Fair Value Measurements Using 
December 31, 2008  
Quoted Prices in Active Markets for Identical Assets
(Level 1)
  
Significant Other Observable Inputs
(Level 2)
  
Significant Unobservable Inputs
(Level 3)
 
Assets:            
I   Impaired loans with specific allocations of the allowance for loan losses $47,649  $-  $-  $47,649 
                 

Collateral dependent impaired loans, which are measured for impairment using the fair value of the collateral, had a carrying amount of $60,413, with a valuation allowance of $8,291 as of December 31, 2009. During the year ended December 31, 2009, $26,085 of the allowance for loan losses was specifically allocated to collateral dependent impaired loans. The amounts of the specific allocations for impairment are considered in the overall determination of the reserve and provision for loan losses. As of December 31, 2008, impaired loans had a carrying amount of $53,765, with a valuation allowance of $6,116. Other real estate owned which is measured at the lesser of fair value less costs to sell or our recorded investment in the foreclosed loan had a carrying amount of $22,147, less a valuation allowance of $795 as of December 31, 2009. As a result of sales of foreclosed properties, receipt of updated appraisals, reduced listing prices or entering into contracts to sell these properties, write downs of fair value of $1,980 were recognized in our statements of operations during the year ended December 31, 2009. Other repossessed assets are primarily comprised of repossessed automobiles and are measured at fair value as of the date of repossession. As a result of the disposition of repossessed vehicles, gains of $244 were recognized in our statements of operations during the year ended December 31, 2009.
Carrying amount and estimated fair values of financial instruments were as follows at December 31:

  2009  2008 
  Carrying Value  Estimated Fair Value  Carrying Value  Estimated Fair Value 
Financial assets:            
Cash and cash equivalents $167,402  $167,402  $73,734  $73,734 
Investment securities available for sale  250,339   250,339   225,770   225,770 
Loans, net  1,168,433   1,101,080   1,201,192   1,164,238 
F  Federal Home Loan Bank and Independent Bankers’ Bank stock  10,735   N/A   12,012   N/A 
Accrued interest receivable  5,790   5,790   6,839   6,839 
                 
Financial liabilities:                
Non-contractual deposits  704,604   704,604   446,993   446,993 
Contractual deposits  664,780   669,073   688,675   697,676 
Federal Home Loan Bank Advances  125,000   131,924   202,900   211,827 
Short-term borrowings  80,475   80,472   71,423   71,412 
Long-term repurchase agreements  30,000   30,737   30,000   31,248 
Subordinated debentures  33,000   11,482   33,000   15,588 
Accrued interest payable  5,457   5,457   8,012   8,012 
                 


The methods and assumptions used to estimate fair value are described as follows:

Carrying amount is the estimated fair value for cash and cash equivalents, accrued interest receivable and payable, non-contractual demand deposits and certain short-term borrowings. As it is not practicable to determine the fair value of Federal Home Loan Bank stock and other bankers’ bank stock due to restrictions placed on its transferability, the estimated fair value is equal to their carrying amount.  Security fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer including estimates of discounted cash flows when necessary. For fixed rate loans or contractual deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using cu rrent market rates applied to the estimated life, adjusted for the allowance for loan losses. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of long-term debt is based on current rates for similar financing.  The fair value of off-balance sheet items that includes commitments to extend credit to fund commercial, consumer, real estate construction and real estate-mortgage loans and to fund standby letters of credit is considered nominal.


TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)

Note 19—Condensed Financial Information of TIB Financial Corp.

Condensed Balance Sheets
(Parent Only)

December 31, 2009  2008 
Assets:      
Cash on deposit with subsidiary $874  $23,559 
Dividends receivable from subsidiaries  -   20 
Investment in bank subsidiaries  86,960   128,351 
Investment in other subsidiaries  2,017   2,107 
Other assets  844   1,791 
Total Assets $90,695  $155,828 
         
Liabilities and Shareholders’ Equity:        
Dividends payable $-  $- 
Interest payable  564   653 
Notes payable  34,022   34,022 
Other liabilities  591   39 
Shareholders’ equity  55,518   121,114 
Total Liabilities and Shareholders’ Equity $90,695  $155,828 
         


Condensed Statements of Income
(Parent Only)

Year Ended December 31, 2009  2008  2007 
Operating income:         
Interest Income $97  $83  $- 
Dividends from bank subsidiaries  -   -   11,340 
Dividends from other subsidiaries  31   70   83 
Total operating income  128   153   11,423 
             
Operating expense:            
Interest expense  1,626   2,336   2,798 
Other expense  1,660   1,908   1,298 
Total operating expense  3,286   4,244   4,096 
             
InIncome (loss) before income tax benefit and equity in undistributed earnings of subsidiaries  (3,158)  (4,091)  7,327 
Income tax benefit  540   1,537   1,509 
InIncome (loss) before equity in undistributed earnings of subsidiaries  (2,618)  (2,554)  8,836 
Equity in losses of subsidiaries  (58,930)  (18,376)  (11,257)
             
Net loss $(61,548) $(20,930) $(2,421)
             


Note 19—Condensed Financial Information of TIB Financial Corp. (Continued)

Condensed Statements of Cash Flows
(Parent Only)


Year Ended December 31, 2009  2008  2007 
Cash flows from operating activities:         
Net loss $(61,548) $(20,930) $(2,421)
Equity in losses of subsidiaries  58,930   18,376   11,257 
Stock-based compensation expense  287   274   231 
Increase (decrease) in net income tax obligation  997   (1,047)  157 
(Increase) decrease in other assets  128   7,190   (7,416)
Increase (decrease) in other liabilities  307   2   (175)
Net cash provided by (used in) operating activities  (899)  3,865   1,633 
             
Cash flows from investing activities:            
Investment in bank subsidiaries  (20,500)  (25,750)  (888)
Investment in other subsidiaries  (148)  (1,378)  - 
Net cash used in investing activities  (20,648)  (27,128)  (888)
             
Cash flows from financing activities:            
Repayment of note payable  -   -   (4,000)
Net proceeds from issuance of common shares  (48)  10,033   1,108 
Income tax effect of stock based compensation  (206)  (82)  21 
Proceeds from issuance of preferred stock and common warrants  -   36,992   - 
Proceeds from subsidiaries for equity awards  401   464   417 
Payment to repurchase stock  -   -   (569)
Cash dividends paid  (1,285)  (1,677)  (2,953)
Net cash provided by (used in) financing activities  (1,138)  45,730   (5,976)
             
Net increase (decrease) in cash  (22,685)  22,467   (5,231)
Cash, beginning of year  23,559   1,092   6,323 
Cash, end of year $874  $23,559  $1,092 
             



TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)

Note 20—Quarterly Financial Data (Unaudited)

The following is a summary of unaudited quarterly results for 2009 and 2008:

  2009  2008 
  Fourth  Third  Second  First  Fourth  Third  Second  First 
Condensed income statements:                        
Interest income $19,120  $20,327  $20,858  $20,822  $21,223  $22,242  $21,777  $22,922 
Net interest income  11,177   11,763   11,694   10,757   10,719   11,676   11,409   10,856 
Provision for loan losses  16,428   14,756   5,763   5,309   15,101   4,768   5,716   2,654 
Investment securities gain (loss), net  2,477   1,127   95   596   (4,221)  (126)  (1,912)  910 
Loss from continuing operations  (45,106)  (8,097)  (4,887)  (3,458)  (13,255)  (2,196)  (4,034)  (1,445)
Income earned by preferred shareholders  654   650   650   708   165   -   -   - 
Net  loss allocated to common shareholders  (45,760)  (8,747)  (5,537)  (4,166)  (13,420)  (2,196)  (4,034)  (1,445)
                                 
Net  Net loss per common share – Basic and diluted
 $(3.08) $(0.59) $(0.37) $(0.28) $(0.91) $(0.15) $(0.27) $(0.11)
                                 

The net loss for the fourth quarter of 2009 was primarily due to the provision for income taxes of $24,032 resulting from the recognition of a full valuation allowance against deferred income tax assets of $30,392, the provision for loan losses of $16,428 and a goodwill impairment charge of $5,887.  The net loss for the fourth quarter of 2008 was primarily due to the provision for loan losses of $15,101 and $4,221 in non-cash charges relating to the other than temporary impairment of investment securities brought about by a deepening of the economic downturn on a national and local basis during the quarter.


Note 21—Acquisitions

The Bank of Venice

On April 30, 2007, the Company completed the acquisition of The Bank of Venice, a Florida chartered commercial bank in exchange for consideration consisting of 1,002,499 shares of the Company’s common stock valued at approximately $13,628, cash of $568 and stock options valued at $364. The total purchase price, which includes certain direct acquisition costs of $194, totaled $14,754. Under the purchase method of accounting, the assets and liabilities of The Bank of Venice were recorded at their respective estimated fair values as of April 30, 2007 and are included in the accompanying balance sheets as of December 31, 2009 and 2008. Purchase accounting adjustments will be amortized or accreted into income over the estimated lives of the related assets and liabilities. Goodwill and other intangible assets identified were approximatel y $6,980 and are not deductible for income tax purposes.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition:

Cash and cash equivalents $10,176 
Securities available for sale  2,292 
Federal Home Loan Bank Stock and other equity securities  496 
Loans, net  55,373 
Fixed assets  2,714 
Goodwill  4,580 
Core deposit intangible  2,150 
Customer relationship intangible  250 
Other  605 
 Total assets acquired  78,636 
     
Deposits  57,715 
FHLB advances  5,000 
Other liabilities  1,167 
 Total liabilities assumed  63,882 
     
Total consideration paid for The Bank of Venice $14,754 
     

TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
        The acquisition of The Bank of Venice provided an established entry point into the Sarasota County market and allowed us to significantly accelerate the rate of franchise growth of the combined entity which was expected to be greater than the Company could achieve on a de novo basis. On September 25, 2009, The Bank of Venice was merged into TIB Bank.
Naples Capital Advisors

On January 2, 2008, the Company completed the acquisition of Naples Capital Advisors, Inc., a registered investment advisor in exchange for consideration consisting of $1,333 in cash.  In addition, the sellers are entitled to receive additional cash consideration up to $148 on each of the first three anniversaries of TIB Bank receiving a trust department license under the Florida Financial Institutions Codes subject to the achievement of certain total revenue milestones.  On December 8, 2008, TIB Bank received authority to exercise trust powers from the FDIC and the State of Florida. In December 2009, the first $148 additional payment was made to the sellers.  The total purchase price, which includes certain direct acquisition costs of $45, totaled $1,526.

 Under the purchase method of accounting, the assets and liabilities of Naples Capital Advisors, Inc. were recorded at their respective estimated fair value as of January 2, 2008 and are included in the accompanying balance sheet as of December 31, 2009 and 2008.  Purchase accounting adjustments will be amortized or accreted into income over the estimated lives of the related assets and liabilities.  Goodwill and other intangible assets identified were approximately $1,513 and are deductible for income tax purposes.

        The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition as adjusted for the additional payment of $148 in 2009:

Cash and cash equivalents $2 
Fixed assets  10 
Goodwill  622 
Trade name  46 
Customer relationship intangible  845 
Other  41 
 Total assets acquired  1,566 
     
Other liabilities  40 
 Total liabilities assumed  40 
     
Total consideration paid for Naples Capital Advisors Inc. $1,526 
     


This acquisition of Naples Capital Advisors, Inc. was the beginning of the Company’s entry into the new business lines of private banking, trust services and wealth management.  Naples Capital Advisors, Inc .had $145,648 in assets under advisement as of December 31, 2009.

Riverside

      On February 13, 2009, the Company purchased the deposits and operations of the former Riverside Bank of the Gulf Coast, a failed bank based in Cape Coral, Florida, from the Federal Deposit Insurance Corporation for a deposit premium of $4,126, representing 1.3% of deposits.  Under the acquisition method of accounting, the acquired assets and assumed liabilities of Riverside were recorded at their respective estimated fair values and are included in the accompanying balance sheet as of December 31, 2009.  Acquisition accounting adjustments will be amortized or accreted into income over the estimated lives of the related assets and liabilities. Goodwill and intangible assets identified were approximately $6,288 and are deductible for income tax purposes.

     The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in connection with the acquisition:

Cash and cash equivalents $271,398 
Securities available for sale  31,850 
Loans  10,737 
Intangible assets  5,087 
Goodwill  1,201 
Other  321 
 Total assets acquired $320,594 
     
Deposits (including deposit premium on certificates of deposit) $319,232 
Other liabilities  1,362 
 Total liabilities assumed $320,594 

      Riverside operated from nine branch banking offices of which eight were owned and one was leased.  Subsequent to the acquisition, the Company had an option to assume the lease for the leased office and to purchase the eight owned offices for fair value which was determined by appraisal.  Currently, the Company has elected to assume the lease and purchase six offices.  Of the two offices the Company did not acquire, one was closed and the operations of the other were moved to a nearby location in March 2010.  As a result of this acquisition, the Company has expanded its customer base and market presence in Southwest Florida.



Appendix B
Information included under “Financial Statements” in TIB Financial Corp.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010.
PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements

TIB FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
                                            (Dollars in thousands, except per share amounts)
 
 
  June 30, 2010  December 31, 2009 
       
Assets
      
Cash and due from banks $157,876  $167,402 
Investment securities available for sale  282,621   250,339 
Loans, net of deferred loan costs and fees  1,101,672   1,197,516 
Less: Allowance for loan losses  27,710   29,083 
Loans, net  1,073,962   1,168,433 
         
Premises and equipment, net  51,480   40,822 
Goodwill  622   622 
Intangible assets, net  5,888   6,667 
Other real estate owned  38,699   21,352 
Accrued interest receivable and other assets  47,917   49,770 
Total Assets $1,659,065  $1,705,407 
         
Liabilities and Shareholders’ Equity        
Liabilities        
Deposits:        
Noninterest-bearing demand $178,159  $171,821 
Interest-bearing  1,163,572   1,197,563 
Total deposits  1,341,731   1,369,384 
         
Federal Home Loan Bank (FHLB) advances  125,000   125,000 
Short-term borrowings  73,894   80,475 
Long-term borrowings  63,000   63,000 
Accrued interest payable and other liabilities  16,404   12,030 
Total liabilities  1,620,029   1,649,889 
         
Shareholders’ equity        
PrPreferred stock – $.10 par value: 5,000,000 shares authorized, 37,000 shares issued and outstanding, liquidation preference of $38,645 and $37,697, respectively  34,110   33,730 
C Common stock - $.10 par value: 750,000,000 and 100,000,000 shares authorized, 14,961,376 shares issued, 14,887,922 shares outstanding  1,496   1,496 
Additional paid in capital  74,929   74,673 
Accumulated deficit  (69,524)  (49,994)
Accumulated other comprehensive loss  (1,406)  (3,818)
Treasury stock, at cost, 73,454 shares  (569)  (569)
Total shareholders’ equity  39,036   55,518 
         
Total Liabilities and Shareholders’ Equity $1,659,065  $1,705,407 
         
See accompanying notes to consolidated financial statements 



TIB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
  
Three Months Ended
June 30
  
Six Months Ended
June 30
 
  2010  2009  2010  2009 
Interest and dividend income            
Loans, including fees $14,636  $17,352  $30,635   35,191 
Investment securities:                
Taxable  2,229   3,410   4,373   6,314 
Tax-exempt  41   74   108   149 
Interest-bearing deposits in other banks  75   20   149   40 
Federal Home Loan Bank stock  7   -   10   (19)
F  Federal funds sold and securities purchased under agreements to resell  -   2   -   5 
Total interest and dividend income  16,988   20,858   35,275   41,680 
                 
Interest expense                
Deposits  4,509   7,151   9,411   15,050 
Federal Home Loan Bank advances  1,181   1,279   2,395   2,685 
Short-term borrowings  25   26   48   50 
Long-term borrowings  671   708   1,325   1,444 
Total interest expense  6,386   9,164   13,179   19,229 
                 
Net interest income  10,602   11,694   22,096   22,451 
                 
Provision for loan losses  7,700   5,763   12,625   11,072 
Net interest income after provision for loan losses  2,902   5,931   9,471   11,379 
                 
Non-interest income                
Service charges on deposit accounts  839   1,202   1,754   2,168 
Fees on mortgage loans originated and sold  481   318   764   433 
Investment advisory and trust fees  313   228   620   421 
Loss on sale of indirect auto loans  -   -   (346)  - 
Other income  868   489   1,481   998 
Investment securities gains (losses), net  993   835   2,635   1,454 
O Other-than-temporary impairment losses on investments prior to April 1, 2009 adoption of ASC 320-10-65-1  -   -   -   (23)
O Other-than-temporary impairment losses on investments subsequent to April 1, 2009                
Gross impairment losses  -   (740)  -   (740)
Less: Impairments recognized in other comprehensive income  -   -   -   - 
N Net impairment losses recognized in earnings subsequent to April 1, 2009  -   (740)  -   (740)
Total non-interest income  3,494   2,332   6,908   4,711 
                 
Non-interest expense                
Salaries and employee benefits  6,413   7,068   13,249   14,448 
Net occupancy and equipment expense  2,273   2,438   4,557   4,590 
Foreclosed asset related expense  5,149   1,086   6,249   1,406 
Other expense  6,660   5,566   11,474   9,081 
Total non-interest expense  20,495   16,158   35,529   29,525 
                 
Loss before income taxes  (14,099)  (7,895)  (19,150)  (13,435)
                 
Income tax benefit  -   (3,008)  -   (5,090)
                 
Net Loss $(14,099) $(4,887) $(19,150) $(8,345)
PrPreferred dividends earned by preferred shareholders and discount accretion  669   650   1,329   1,358 
Net loss allocated to common shareholders $(14,768) $(5,537) $(20,479) $(9,703)
                 
Basic and diluted loss per common share $(0.99) $(0.37) $(1.38) $(0.66)
                 
See accompanying notes to consolidated financial statements


TIB FINANCIAL CORP.
Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
(Dollars in thousands, except share and per share amounts)

 
  
 
Preferred
Shares
  
 
Preferred
Stock
  Common Shares  Common Stock  Additional Paid in Capital  Accumulated Deficit  Accumulated Other Comprehensive Loss  
Treasury
Stock
  Total Shareholders’ Equity 
Balance, April 1, 2010  37,000  $33,919   14,887,922  $1,496  $74,823  $(55,234) $(3,649) $(569) $50,786 
Comprehensive loss:                                    
Net loss                      (14,099)          (14,099)
O Other comprehensive income                                    
Net  Net market valuation adjustment on securities available for sale                          3,236         
LessLess: reclassification adjustment for gains                          (993)        
Other comprehensive income:                                  2,243 
Comprehensive loss                                  (11,856)
Preferred stock   discount accretion      191               (191)          - 
StStock-based compensation                  106               106 
Balance, June 30, 2010  37,000  $34,110   14,887,922  $1,496  $74,929  $(69,524) $(1,406) $(569) $39,036 
                                     

TIB FINANCIAL CORP.
Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
(Dollars in thousands, except share and per share amounts)

  
 
Preferred
Shares
  
 
Preferred
Stock
  Common Shares  Common Stock  Additional Paid in Capital  Retained Earnings  Accumulated Other Comprehensive Loss  
Treasury
Stock
  Total Shareholders’ Equity 
Balance, April 1, 2009  37,000  $33,166   14,895,143  $1,497  $73,768  $10,204  $(214) $(569) $117,852 
Comprehensive loss:                                    
Net loss                      (4,887)          (4,887)
Other comprehensive loss, net of tax:                                    
N Net market valuation adjustment on securities available for sale                          (608)        
L  Less: reclassification adjustment for gains, net of tax expense of $36                          (59)        
Other comprehensive loss, net of tax benefit of $403                                  (667)
Comprehensive loss                                  (5,554)
Preferred stock discount accretion      188               (188)          - 
Stock-based compensation and related tax effect                  133               133 
C Common stock dividends declared, 1%                  407   (407)          - 
Cash dividends declared, preferred stock                      (463)          (463)
Balance, June 30, 2009  37,000  $33,354   14,895,143  $1,497  $74,308  $4,259  $(881) $(569) $111,968 
                                     





TIB FINANCIAL CORP.
Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
(Dollars in thousands, except share and per share amounts)



  
 
Preferred
Shares
  
 
Preferred
Stock
  Common Shares  Common Stock  Additional Paid in Capital  Accumulated Deficit  Accumulated Other Comprehensive Loss  
Treasury
Stock
  Total Shareholders’ Equity 
Balance, January 1, 2010  37,000  $33,730   14,887,922  $1,496  $74,673  $(49,994) $(3,818) $(569) $55,518 
Comprehensive loss:                                    
Net loss                      (19,150)          (19,150)
O Other comprehensive income                                    
Net  Net market valuation adjustment on securities available for sale                          5,047         
LessLess: reclassification adjustment for gains                          (2,635)        
Other comprehensive income:                                  2,412 
Comprehensive loss                                  (16,738)
Preferred stock discount accretion      380               (380)          - 
StStock-based compensation                  256               256 
Balance, June 30, 2010  37,000  $34,110   14,887,922  $1,496  $74,929  $(69,524) $(1,406) $(569) $39,036 
                                     

TIB FINANCIAL CORP.
Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
(Dollars in thousands, except share and per share amounts)

  
 
Preferred
Shares
  
 
Preferred
Stock
  Common Shares  Common Stock  Additional Paid in Capital  Retained Earnings  Accumulated Other Comprehensive Loss  
Treasury
Stock
  Total Shareholders’ Equity 
Balance, January 1, 2009  37,000  $32,920   14,895,143  $1,497  $73,148  $14,737  $(619) $(569) $121,114 
Comprehensive loss:                                    
Net loss                      (8,345)          (8,345)
Other comprehensive loss, net of tax benefit:                                    
N Net market valuation adjustment on securities available for sale                          169         
L  Less: reclassification adjustment for gains, net of tax expense of $260                          (431)        
Other comprehensive loss, net of tax benefit of $158                                  (262)
Comprehensive loss                                  (8,607)
Is Issuance costs associated with preferred stock issued                  (48)              (48)
Preferred stock discount accretion      434               (434)          - 
Stock-based compensation and related tax effect                  332               332 
C Common stock dividends declared, 1%                  876   (876)          - 
Cash dividends declared, preferred stock                      (823)          (823)
Balance, June 30, 2009  37,000  $33,354   14,895,143  $1,497  $74,308  $4,259  $(881) $(569) $111,968 
                                     



TIB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(Unaudited)
(Dollars in thousands)
 
  Six Months Ended June 30, 
  2010  2009 
Cash flows from operating activities:      
Net loss $(19,150) $(8,345)
 Adjustments to reconcile net loss to net cash provided by operating activities:        
 Depreciation and amortization  2,267   2,216 
 Provision for loan losses  12,625   11,072 
 Deferred income tax benefit (loss)  -   (6,461)
 Investment securities net realized gains  (2,635)  (1,454)
 Net amortization of investment premium/discount  1,588   847 
 Write-down of investment securities  -   763 
 Stock-based compensation  256   370 
 (Gain)/Loss on sales of OREO  111   182 
 OREO valuation adjustments  4,776   801 
 Loss on the sale of indirect auto loans  346   - 
 Other  264   260 
Mortgage loans originated for sale  (37,650)  (23,297)
Proceeds from sales of mortgage loans  36,264   21,706 
Fees on mortgage loans sold  (764)  (395)
Change in accrued interest receivable and other assets  3,819   647 
Change in accrued interest payable and other liabilities  4,834   1,772 
Net cash provided by operating activities  6,951   684 
         
Cash flows from investing activities:        
Purchases of investment securities available for sale  (265,628)  (497,814)
Sales of investment securities available for sale  188,601   290,916 
Repayments of principal and maturities of investment securities available for sale  48,202   105,489 
Net cash received in acquisition of operations - Riverside Bank of the Gulf Coast  -   271,398 
Net (purchase) sale of FHLB stock  -   1,277 
Principal repayments on loans, net of loans originated or acquired  29,752   (22,490)
Purchases of premises and equipment  (12,350)  (1,252)
Proceeds from sales of loans  25,767   - 
Proceeds from sale of OREO  3,604   2,038 
Proceeds from disposal of equipment  41   18 
Net cash provided by investing activities  17,989   149,580 
         
Cash flows from financing activities:        
Net increase (decrease) in demand, money market and savings accounts  (87,461)  85,803 
Net increase (decrease) in time deposits  96,853   (52,486)
N Net change in brokered time deposits  (37,277)  (93,399)
N Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase  (6,581)  11,755 
Repayment of long term FHLB advances  -   (7,900)
Net change in short term FHLB advances  -   (70,000)
Income tax effect related to stock-based compensation  -   (38)
Net proceeds from issuance costs of preferred stock and common warrants  -   (48)
Cash dividends paid to preferred shareholders  -   (823)
Net cash used in financing activities  (34,466)  (127,136)
         
Net increase in cash and cash equivalents  (9,526)  23,128 
Cash and cash equivalents at beginning of period  167,402   73,734 
Cash and cash equivalents at end of period $157,876  $96,862 
         
Supplemental disclosures of cash paid:        
Interest $10,999  $18,857 
Income taxes  -   - 
Supplemental information:        
Fair value of noncash assets acquired $-  $49,193 
Fair value of liabilities assumed  -   320,594 
Transfer of loans to OREO  25,702   8,780 
Transfer of OREO to Premises and Equipment  -   2,941 
See accompanying notes to consolidated financial statements 


TIB Financial Corp.
Unaudited Notes to Consolidated Financial Statements
(Dollars in thousands except for share and per share amounts)



Note 1 – Basis of Presentation & Accounting Policies

TIB Financial Corp. is a bank holding company headquartered in Naples, Florida, whose business is conducted primarily through our wholly-owned subsidiaries, TIB Bank and Naples Capital Advisors, Inc. Together with its subsidiaries, TIB Financial Corp. (collectively the “Company”) has a total of twenty-eight full service banking offices in Monroe, Miami-Dade, Collier, Lee, and Sarasota counties, Florida. On February 13, 2009, TIB Bank acquired the deposits (excluding brokered deposits), branch office operations and certain assets from the FDIC as receiver of the former Riverside Bank of the Gulf Coast (“Riverside”).  On September 25, 2009, The Bank of Venice, acquired by the Company in April 2007, was merged into TIB Bank.

The accompanying unaudited consolidated financial statements for the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statement presentation.  For further information and an additional description of the Company’s accounting policies, refer to the Company’s annual report on Form 10-K for the year ended December 31, 2009.

The consolidated statements include the accounts of TIB Financial Corp. and its wholly-owned subsidiaries, TIB Bank and subsidiaries and Naples Capital Advisors, Inc. All significant inter-company accounts and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  The share and per share amounts discussed throughout this document have been adjusted to account for the effects of three one percent stock dividends declared by the Board of Directors during 2009 which were distributed April 10, 2009, July 10, 2009 and October 10, 2009 to all TIB Financial Corp. common shareholders of record as of March 31, 2009, June 30, 2009 and September 30, 2009, respectively.

As used in this document, the terms “we,” “us,” “our,” “TIB Financial,” and “Company” mean TIB Financial Corp. and its subsidiaries (unless the context indicates another meaning) and the term “Bank” means TIB Bank.

Recent losses, Regulatory Agreements and Definitive Investment Agreement
           The unaudited consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the foreseeable future. However, the events and circumstances described below create uncertainty about the Company’s ability to continue as a going concern.
The Company recorded net losses of $61,548, $20,930 and $2,421 in 2009, 2008 and 2007, respectively, for a three year total of $84,899. During the first half of 2010, additional net losses of $19,150 were recorded.  It is important for us to reduce our rate of credit loss, strengthen the financial position of the Company and TIB Bank and execute the following plans.
On July 2, 2009, the Bank entered into a Memorandum of Understanding, which is an informal agreement, with bank regulatory agencies that it would move in good faith to increase its Tier 1 leverage capital ratio to not less than 8% and its total risk-based capital ratio to not less than 12% by December 31, 2009 and maintain these higher ratios for as long as this agreement is in effect.  At December 31, 2009, these elevated capital ratios were not met.  As of June 30, 2010, the Company and Bank were considered undercapitalized under the regulatory capital guidelines.

On July 2, 2010, the Bank entered a Consent Order with the bank regulatory agencies under which, among other things, the Bank has agreed to maintain a Tier 1 Capital ratio of at least 8% of total assets and a Total Risk Based Capital ratio of at least 12% within 90 days. The Consent Order also governs certain aspects of the Bank’s operations including a requirement that it reduce the balance of assets classified substandard and doubtful by at least 70% over a two-year period, and not undertake asset growth of 5% or more per year without prior approval from the regulatory agencies. The Consent Order supersedes the Memorandum of Understanding.

On June 29, 2010, the Company and the Bank entered into a definitive agreement with North American Financial Holdings, Inc. (“NAFH”) for the investment of up to $350,000 in TIB through the purchase of common stock, preferred stock and warrant.  Pursuant to the definitive agreement, the Company agreed to sell to NAFH, at the closing of the investment, 700 million shares of its common stock at a purchase price of $0.15 per share and 70,000 shares of newly created mandatorily convertible participating voting preferred stock at a purchase price of $1,000 per share for a cumulative total of $175,000.  The preferred stock will have a liquidation preference of $1,000 per share and each share of preferred stock will be convertible into a number of shares of the Company’s common stock equal to the liquidation preference divided by $0.15 (subject to customary anti-dilution adjustments).  After giving effect to the NAFH investment, it is expected that NAFH would own approximately 99% of the Company’s common stock (on an as-converted basis).  The Company also intends to conduct a rights offering to legacy shareholders of rights to purchase up to 149 million shares of common stock at a price of $0.15 per share, which would raise up to $22,400, which would equate to 12% of the Company’s pro-forma fully diluted equity.  The record date for the rights offering was July 12, 2010.  In addition, during the 18-month period following the closing, NAFH will have the right to invest up to an additional $175,000 in preferred stock and/or common stock on the above terms.  Upon closing of the investment, each of the Company and the Bank will add experienced bankers R. Eugene (Gene) Taylor, Christopher (Chris) G. Marshall, R. Bruce Singletary and Kenneth (Ken) A. Posne r to its board of directors, along with other directors to be designated by NAFH.  The investment is subject to satisfaction or waiver of certain closing conditions, including reaching an agreement with the U.S. Department of the Treasury (Treasury) to repurchase the preferred stock and warrant issued under the Troubled Asset Relief Program Capital Purchase Program on terms acceptable to NAFH, the receipt by NAFH and the Company of the requisite governmental and regulatory approvals as well as the approval of the NASDAQ Stock Market to issue the common stock, preferred stock and warrant in reliance on the shareholder approval exemptions set forth in NASDAQ Rule 5635(f). While the NAFH investment is expected to close in the third quarter of 2010, there is no assurance it will close during the quarter, or ever.  At this time, all the applications required to be filed with regulatory agencies have been filed and we have reached an agreement on the significant terms on the repurchase of the P referred Stock and warrant issued to the Treasury under the TARP Capital Purchase Program. Upon consummation of the investment it is estimated that both the Company and the Bank will be well capitalized and the Bank will be in compliance with the required capital ratios of the Consent Order.

TIB Financial Corp.
Unaudited Notes to Consolidated Financial Statements
(Dollars in thousands except for share and per share amounts)

If the investment by NAFH is not consummated, the Board of Directors and management team intend to seek other strategic alternatives including but not limited to the sale of certain assets, all or a portion of the Company, or seeking a complementary partner in a merger of equals or where the Company is acquired. There is no assurance the Company will be successful in entering into any agreement or closing such an alternative transaction.

These financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Critical Accounting Policies

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted within the United States of America and conform to general practices within the banking industry.

Allowance for Loan Losses

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

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

A loan is considered impaired when it is probable that not all principal and interest amounts will be collected according to the loan contract.  Individual commercial, commercial real estate and residential loans exceeding certain size thresholds established by management are individually evaluated for impairment. If a loan is considered to be impaired, a portion of the allowance is allocated so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.  Generally, large groups of smaller balance homogeneous loans, such as consumer, indirect, and residential real estate loans (other than those evaluated individually), are collectively evaluated for impairment, and accordi ngly, they are not separately identified for impairment disclosures.

Investment Securities and Other Than Temporary Impairment

Investment securities which may be sold prior to maturity are classified as available for sale and are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income. Other securities such as Federal Home Loan Bank stock are carried at cost and are included in other assets on the balance sheets.

Interest income includes amortization of purchase premium or discount.  Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method based on the amortized cost of the security sold.

Management regularly reviews each investment security for impairment based on criteria that include the extent to which cost exceeds fair value, the duration of that market decline, the financial health of and specific prospects for the issuer(s) and our ability and intention with regard to holding the security. Future declines in the fair value of these or other securities may result in additional impairment charges which may be material to the financial condition and results of operations of the Company.

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities classified as available for sale or held-to-maturity are generally evaluated for OTTI under FASB Accounting Standards Codification (“ASC”) 320-10-35. However, certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase of below AAA are evaluated using the model outlined in ASC 325-40-35.

In determining OTTI under the ASC 320-10-35 model, management considers many factors, including but not limited 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, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

The second segment of the portfolio uses the OTTI guidance provided by ASC 325-40-35 that is specific to purchased beneficial interests that are rated below “AAA”. Under this model, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected present value of the remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

When OTTI occurs under either model, the amount of the impairment recognized in earnings depends on whether we intend to sell the security or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If we intend to sell or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the impairment is required to be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If we do not intend to sell the security and it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis less any current-perio d loss, the impairment shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of impairment related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the impairment related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

TIB Financial Corp.
Unaudited Notes to Consolidated Financial Statements
(Dollars in thousands except for share and per share amounts)

Earnings (Loss) Per Common Share

Basic earnings (loss) per share is net income (loss) allocated to common shareholders divided by the weighted average number of common shares and vested restricted shares outstanding during the period. Diluted earnings per share includes the dilutive effect of additional potential common shares issuable under stock options, warrants and restricted shares computed using the treasury stock method.

Additional information with regard to the Company’s methodology and reporting of investment securities,  the allowance for loan losses and earnings per common share is included in the 2009 Annual Report on Form 10-K.

Acquisitions

The Company accounts for its business combinations based on the acquisition method of accounting. The acquisition method of accounting requires the Company to determine the fair value of the tangible net assets and identifiable intangible assets acquired. The fair values are based on available information and current economic conditions at the date of acquisition. The fair values may be obtained from independent appraisers, discounted cash flow present value techniques, management valuation models, quoted prices on national markets or quoted market prices from brokers. These fair value estimates will affect future earnings through the disposition or amortization of the underlying assets and liabilities. While management believes the sources utilized to arrive at the fair value estimates are reliable, different sources or methods could ha ve yielded different fair value estimates. Such different fair value estimates could affect future earnings through different values being utilized for the disposition or amortization of the underlying assets and liabilities acquired.


Goodwill and Other Intangible Assets

Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired.  Goodwill resulting from business combinations after January 1, 2009 represents the future economic benefits arising from other assets acquired that are not individually identified and separately recognized.  Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually.  The Company performed a review of goodwill for potential impairment as of December 31, 2009.  Based on the review, it was determined that impairment existed as of December 31, 2009.  The amount of the goodwill impairment charge in De cember 2009 was $5,887.

Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values.  The only intangible assets with indefinite lives on our balance sheet are goodwill and a trade name related to the acquisition of Naples Capital Advisors, Inc. Other intangible assets include core deposit base premiums and customer relationship intangibles arising from acquisitions and are initially measured at fair value.  The intangibles are being amortized using the straight-line method over estimated lives ranging from 5 to 15 years.

Income Taxes

Income tax expense (or benefit) is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method.  Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.

A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. In assessing the need for a valuation allowance, management considered various factors including the significant cumulative losses incurred by the Company over the last three years coupled with the expectation that our future realization of deferred taxes will be limited as a result of the planned investment by NAFH. These factors represent the most significant negative evidence that management considered in concluding that a full valuation allowance was necessary at June 30, 2010 and December 31, 2009.

Recent Accounting Pronouncements

In June 2009, the FASB issued Statement No. 166 (not yet integrated into the ASC), “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140.” This statement removes the concept of a qualifying special-purpose entity from Statement 140 and removes the exception from applying FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities”, to qualifying special-purpose entities. The objective in issuing this Statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This Statement must be applied as of the beginning of each reporting entity’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. Adoption did not have a material impact on the results of operations or financial position of the Company.

In June 2009, the FASB issued ASC 105-10 which establishes the FASB Accounting Standards Codification as the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification became non-authoritative. ASC 105-10 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. Adoption, as required, did not have a materia l impact on the results of operations or financial position of the Company.

TIB Financial Corp.
Unaudited Notes to Consolidated Financial Statements
(Dollars in thousands except for share and per share amounts)

Note 2 – Investment Securities

The amortized cost, estimated fair value and the related gross unrealized gains and losses recognized in accumulated other comprehensive income of investment securities available for sale at June 30, 2010 and December 31, 2009 are presented below:

  June 30, 2010 
  Amortized Cost  Unrealized Gains  Unrealized Losses  Estimated Fair Value 
U.S. Government agencies and corporations $28,774  $64  $-  $28,838 
States and political subdivisions—tax exempt  2,992   86   -   3,078 
States and political subdivisions—taxable  2,311   -   45   2,266 
Marketable equity securities  12   164   -   176 
Mortgage-backed securities—residential  242,439   3,085   40   245,484 
Corporate bonds  2,880   -   859   2,021 
Collateralized debt obligation  4,992   -   4,234   758 
  $284,400  $3,399  $5,178  $282,621 

  December 31, 2009 
  Amortized Cost  Unrealized Gains  Unrealized Losses  Estimated Fair Value 
U.S. Government agencies and corporations $29,232  $24  $84  $29,172 
States and political subdivisions—tax exempt  7,754   307   -   8,061 
States and political subdivisions—taxable  2,313   -   101   2,212 
Marketable equity securities  12   -   4   8 
Mortgage-backed securities—residential  207,344   2,083   1,312   208,115 
Corporate bonds  2,878   -   866   2,012 
Collateralized debt obligation  4,996   -   4,237   759 
  $254,529  $2,414  $6,604  $250,339 

Proceeds from sales and calls of securities available for sale were $118,645 and $208,603 for the three and six months ended June 30, 2010, respectively. Gross gains of approximately $993 and $2,635 were realized on these sales and calls during the three and six months ended June 30, 2010, respectively.

The estimated fair value of investment securities available for sale at June 30, 2010 by contractual maturity, are shown as follows. Expected maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations without call or prepayment penalties.  Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

          June 30, 2010 
  Fair Value  Amortized Cost 
Due in one year or less $276  $275 
Due after one year through five years  22,538   22,476 
Due after five years through ten years  1,681   1,637 
Due after ten years  12,466   17,561 
Marketable equity securities  176   12 
Mortgage-backed securities - residential  245,484   242,439 
  $282,621  $284,400 
         



TIB Financial Corp.
Unaudited Notes to Consolidated Financial Statements
(Dollars in thousands except for share and per share amounts)


Securities with unrealized losses not recognized in income, and the period of time they have been in an unrealized loss position, are as follows:

  Less than 12 Months  12 Months or Longer  Total 
June 30, 2010 Estimated Fair Value  Unrealized Losses  Estimated Fair Value  Unrealized Losses  Estimated Fair Value  Unrealized Losses 
U.U.S. Government agencies and corporations $-  $-  $-  $-  $-  $- 
StStates and political subdivisions—tax exempt  -   -   -   -   -   - 
StStates and political subdivisions—taxable  -   -   2,266   45   2,266   45 
MMortgage-backed securities - residential  21,917   40   -   -   21,917   40 
Corporate bonds  -   -   2,021   859   2,021   859 
Collateralized debt obligation  -   -   758   4,234   758   4,234 
Total temporarily impaired $21,917  $40  $5,045  $5,138  $26,962  $5,178 
                         


  Less than 12 Months  12 Months or Longer  Total 
December 31, 2009 Estimated Fair Value  Unrealized Losses  Estimated Fair Value  Unrealized Losses  Estimated Fair Value  Unrealized Losses 
U.U.S. Government agencies and corporations $5,034  $84  $-  $-  $5,034  $84 
StStates and political subdivisions—tax exempt  -   -   275   -   275   - 
StStates and political subdivisions-taxable  -   -   2,212   101   2,212   101 
MMarketable equity securities  8   4   -   -   8   4 
MMortgage-backed securities - residential  98,746   1,206   10,542   106   109,288   1,312 
Corporate bonds  -   -   2,012   866   2,012   866 
Collateralized debt obligation  -   -   759   4,237   759   4,237 
Total temporarily impaired $103,788  $1,294  $15,800  $5,310  $119,588  $6,604 
                         


Other-Than-Temporary-Impairment

The Company views the unrealized losses in the above table to be temporary in nature for the following reasons.  First, the declines in fair values are mostly due to an increase in spreads due to risk and volatility in financial markets.  Excluding the taxable state and political subdivision securities, corporate bonds and collateralized debt obligation, these securities are primarily AAA rated securities and have experienced no significant deterioration in value due to credit quality concerns and the magnitude of the unrealized losses of approximately 3% or less of the amortized cost of those securities with losses is consistent with normal fluctuations of value due to the volatility of market interest rates.  The nature of what makes up the security portfolio is determined by the overall balance sheet of t he Company and currently it is suitable for the Company’s security portfolio to be primarily comprised of fixed rate securities. Fixed rate securities will by their nature react in price inversely to changes in market rates and that is liable to occur in both directions.

We own a municipal bond guaranteed by a state housing finance agency which is currently rated “A-”, a corporate bond of a large financial institution which is currently rated “BB” and a collateralized debt obligation secured by debt obligations of banks and insurance companies which was rated “CC” at June 30, 2010, whose fair values have declined more than 4% below their original cost.  We believe these declines in fair value relate to a significant widening of interest rate spreads associated with these securities.  While these securities have experienced deterioration in credit quality, we have evaluated these securities and have determined that these securities have not experienced a credit loss.  As we have the intent to hold and it is not more likely than not that we will be required to sell these securities before their fair market value recovers, they are not other than temporarily impaired as of June 30, 2010 or December 31, 2009.

Management regularly reviews each investment security for impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer(s) and our intention with regard to holding the security and whether it is more likely than not that we will be required to sell the security. Future declines in the fair value of these or other securities may result in impairment charges which may be material to the financial condition and results of operations of the Company.

As of June 30, 2010, the Company’s security portfolio consisted of 50 security positions, 6 of which were in an unrealized loss position. The majority of unrealized losses are related to the Company’s collateralized debt obligation, corporate bonds and mortgage-backed and other securities, as discussed below:


TIB Financial Corp.
Unaudited Notes to Consolidated Financial Statements
(Dollars in thousands except for share and per share amounts)


Mortgage-backed securities

At June 30, 2010, the Company owned residential mortgage backed securities guaranteed by U.S. Government agencies and corporations. The fair values of certain of these securities have declined since we acquired them due to wider spreads required by the market or changes in market interest rates.

Corporate bonds

At June 30, 2010, the Company owned corporate bonds issued by one of the largest banking and financial institutions in the United States. These bonds had been downgraded to “B” due to increased credit concerns, however recently the rating agencies upgraded these bonds to “BB”.  The institution has received significant capital investment from the United States Treasury under the Capital Purchase Program/TARP and its financial performance is beginning to improve and it recently repaid the capital investment from the United States Treasury. As the Company does not have the intent to sell these bonds and it is likely that it will not be required to sell the bonds before their anticipated recovery, the Company does not consider these bonds to be other-than-temporarily impaired at June 30, 2010.

Collateralized debt obligation

The Company owns a collateralized debt security collateralized by trust preferred securities issued primarily by banks and several insurance companies. Our analysis of this investment falls within the scope of ASC 325-40. This security was rated high quality “AA” at the time of purchase, but at June 30, 2010, nationally recognized rating agencies rated this security as “CC.” The Company compares the present value of expected cash flows to the previous estimate to ensure there are no adverse changes in the expected cash flows. The Company utilizes a discounted cash flow valuation model which considers the structure and term of the CDO and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults by issuers of the underlying trust preferred securities. Assumptions used in the model include expected future default rates. Interest payment deferrals are generally treated as defaults even though they may not actually result in defaults. As of June 30, 2010 and December 31, 2009, we engaged an independent third party valuation firm to estimate the fair value and credit loss potential of this security. Management reviewed the assumptions and methodology employed in these analyses and while the assumptions differ somewhat from period to period, the methodology of discounting estimated future cash flows based upon the expected performance of the underlying issuers collateralizing the security has no t changed during 2010. Based upon the most recent analysis, as of June 30, 2010, management concluded that the unrealized loss does not meet the definition of other than temporary impairment under generally accepted accounting principles because no credit loss has been incurred. Additionally, we used the model to evaluate alternative scenarios with higher than expected default assumptions to evaluate the sensitivity of our default assumptions and the level of additional defaults required before a credit loss would be incurred.  This security remained classified as available for sale at June 30, 2010, and accounted for the $4,234 of unrealized loss in the collateralized debt obligation category at June 30, 2010. In arriving at the estimate of fair value for this security as of June 30, 2010, the model used a discount margin of 11% above the LIBOR forward interest rate curve and a projected cumulative default assumption of approximately 40%. As of June 30, 2010, the trustee’s most recent report indicated actual defaults and deferrals of approximately 33% net of assumed recoveries.

The table below presents a rollforward of the credit losses recognized in earnings for the three and six month period ended June 30, 2010:

  Three Months Ended June 30, 2010  Six Months Ended June 30, 2010 
Balance at beginning of period $9,996  $9,996 
Additions/Subtractions        
 Credit losses recognized during the period  -   - 
Ending balance, June 30, 2010 $9,996  $9,996 
         


TIB Financial Corp.
Unaudited Notes to Consolidated Financial Statements
(Dollars in thousands except for share and per share amounts)


Note 3 – Loans

Major classifications of loans are as follows:

  
June 30,
 2010
  
December 31,
2009
 
Real estate mortgage loans:      
Commercial $649,679  $680,409 
Residential  235,423   236,945 
Farmland  13,571   13,866 
Construction and vacant land  60,698   97,424 
Commercial and agricultural loans  68,696   69,246 
Indirect auto loans  25,918   50,137 
Home equity loans  36,856   37,947 
Other consumer loans  9,759   10,190 
Total loans  1,100,600   1,196,164 
         
Net deferred loan costs  1,072   1,352 
Loans, net of deferred loan costs $1,101,672  $1,197,516 



Note 4 – Allowance for Loan Losses

Activity in the allowance for loan losses for the three and six months ended June 30, 2010 and 2009 follows:

  Three Months Ended June 30,  Six Month Ended June 30, 
  2010  2009  2010  2009 
Balance, beginning of period $27,829  $25,488  $29,083  $23,783 
Provision for loan losses charged to expense  7,700   5,763   12,625   11,072 
Loans charged off  (8,634)  (5,911)  (14,987)  (9,533)
Recoveries of loans previously charged off  815   106   989   124 
Balance, June 30 $27,710  $25,446  $27,710  $25,446 



Nonaccrual loans were as follows:

  As of June 30, 2010  As of December 31, 2009 
Collateral Type 
Number of
Loans
  Outstanding Balance  
Number of
Loans
  Outstanding Balance 
Residential 1-4 family  42  $11,116   36  $9,250 
H Home equity loans  9   1,377   8   1,488 
C Commercial 1-4 family investment  12   7,273   19   8,733 
C Commercial and agricultural  9   1,982   7   2,454 
C Commercial real estate  35   39,733   29   24,392 
L  Land development  16   14,643   13   25,295 
G Government guaranteed loans  1   137   2   143 
InIndirect auto, auto and consumer loans  38   371   97   1,078 
      $76,632      $72,833 

Impaired loans were as follows:

  June 30, 2010  December 31, 2009 
Loans with no allocated allowance for loan losses $23,415  $60,629 
Loans with allocated allowance for loan losses  88,354   87,823 
Total $111,769  $148,452 
         
Amount of the allowance for loan losses allocated $7,358  $9,040 


TIB Financial Corp.
Unaudited Notes to Consolidated Financial Statements
(Dollars in thousands except for share and per share amounts)


Note 5 – Earnings Per Share and Common Stock

Since we reported a net loss for each period reported, all outstanding stock options, restricted stock awards and warrants are considered anti-dilutive.  Loss per share has been computed based on 14,849,681 and 14,815,798 basic and diluted shares for the three months ended June 30, 2010 and 2009, respectively and 14,844,426 and 14,808,498 basic and diluted shares for the six months ended June 30, 2010 and 2009, respectively.  The dilutive effect of stock options, warrants and unvested restricted shares are the only common stock equivalents for purposes of calculating diluted earnings per common share.

Weighted average anti-dilutive stock options and warrants and unvested restricted shares excluded from the computation of diluted earnings per share are as follows:

  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
  2010  2009  2010  2009 
Anti-dilutive stock options  793,690   681,907   804,529   690,884 
Anti-dilutive unvested restricted stock awards  38,108   76,827   43,419   86,752 
Anti-dilutive warrants  2,380,213   2,380,213   2,380,213   2,380,213 


Note 6 – Capital Adequacy

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements result in certain discretionary and required actions by regulators that could have an effect on the Company’s operations. The regulations require the Company and the Bank to meet specific capital adequacy guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
To be considered well capitalized and adequately capitalized (as defined) under the regulatory framework for prompt corrective action, the Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based, and total risk-based capital ratios. At June 30, 2010, the Company and the Bank’s leverage capital ratios and total risk-based capital ratios fell below the levels required to be considered adequately capitalized.  At December 31, 2009, both the Bank and the Company maintained capital ratios to be considered adequately capitalized. These minimum ratios along with the actual ratios for the Company and the Bank at June 30, 2010 and December 31, 2009, are presented in the following table.

  Well Capitalized Requirement  Adequately Capitalized Requirement  
June 30,
2010
Actual
  
December 31, 2009
Actual
 
Tier 1 Capital (to Average Assets)            
 Consolidated  N/A   
³ 4.0
%  2.7%  4.1%
 TIB Bank  
³ 5.0
%  
³ 4.0
%  3.9%  4.8%
                 
Tier 1 Capital (to Risk Weighted Assets)                
 Consolidated  N/A   
³ 4.0
%  4.0%  5.7%
 TIB Bank  
³ 6.0
%  
³ 4.0
%  5.9%  6.8%
                 
Total Capital (to Risk Weighted Assets)                
 Consolidated  N/A   
³ 8.0
%  7.1%  8.1%
 TIB Bank  
³ 10.0
%  
³ 8.0
%  7.1%  8.1%
                 

On July 2, 2009, the Bank entered into a Memorandum of Understanding, which is an informal agreement, with bank regulatory agencies that it would move in good faith to increase its Tier 1 leverage capital ratio to not less than 8% and its total risk-based capital ratio to not less than 12% by December 31, 2009 and maintain these higher ratios for as long as this agreement is in effect.  At December 31, 2009, these elevated capital ratios were not met.  On July 2, 2010, the Bank entered a Consent Order, which is a formal agreement, with the bank regulatory agencies under which, among other things, the Bank has agreed to maintain a Tier 1 capital ratio of at least 8% of total assets and a total risk based capital ratio of at least 12% within 90 days. The Consent Order also governs certain aspects of the Bank’s ope rations including a requirement that it reduce the balance of assets classified substandard and doubtful by at least 70% over a two-year period, and not undertake asset growth of 5% or more per year without prior approval from the regulatory agencies. The Consent Order supersedes the Memorandum of Understanding.

TIB Financial Corp.
Unaudited Notes to Consolidated Financial Statements
(Dollars in thousands except for share and per share amounts)

On June 29, 2010, the Company and the Bank entered into a definitive agreement with NAFH for the investment of up to $350,000 in TIB through the purchase of common stock, preferred stock and a warrant.  Pursuant to the definitive agreement, the Company agreed to sell to NAFH, at the closing of the investment, 700 million shares of its common stock at a purchase price of $0.15 per share and 70,000 shares of newly created mandatorily convertible participating voting preferred stock at a purchase price of $1,000 per share for a cumulative total of $175,000.  The preferred stock will have a liquidation preference of $1,000 per share and each share of preferred stock will be convertible into a number of shares of the Company’s common stock equal to the liquidation preference divided by $0.15 (subject to customary ant i-dilution adjustments).  After giving effect to the NAFH investment, it is expected that NAFH would own approximately 99% of the Company’s common stock (on an as-converted basis).  The Company also intends to conduct a rights offering to legacy shareholders of rights to purchase up to 149 million shares of common stock at a price of $0.15 per share, which would raise up to $22,400, which would equate to 12% of the Company’s pro-forma fully diluted equity.  The record date for the rights offering was July 12, 2010.  In addition, during the 18-month period following the closing, NAFH will have the right to invest up to an additional $175,000 in preferred stock and/or common stock on the above terms.  Upon closing of the investment, each of the Company and the Bank will add experienced bankers R. Eugene (Gene) Taylor, Christopher (Chris) G. Marshall, R. Bruce Singletary and Kenneth (Ken) A. Posner to its board of directors, along with other director s to be designated by NAFH.  The investment is subject to satisfaction or waiver of certain closing conditions, including reaching an agreement with the  Treasury to repurchase the preferred stock and warrant issued under the Troubled Asset Relief Program Capital Purchase Program on terms acceptable to NAFH, the receipt by NAFH and the Company of the requisite governmental and regulatory approvals as well as the approval of the NASDAQ Stock Market to issue the common stock, preferred stock and warrant in reliance on the shareholder approval exemptions set forth in NASDAQ Rule 5635(f).  While the NAFH investment is expected to close in the third quarter of 2010, there is no assurance it will close during such quarter, or ever.  At this time, all the applications required to be filed with regulatory agencies have been filed and we have reached an agreement on the significant terms on the repurchase of the Preferred Stock and warrant issued to the Treasury under the TARP Capital Purchase Program.

On July 16, 2010, the Company received a letter from the Treasury (the “Treasury Letter”) that indicated that the Treasury would be willing to consent to a proposal made by the Company to repurchase the Treasury Preferred Stock and the Warrant subsequent to the closing of the NAFH investment. The Company’s proposal provides for consideration for the repurchase of the Treasury Preferred Stock in the amount of 31% of the sum of (i) the aggregate liquidation preference ($37,000) and (ii) all accrued but unpaid dividends on the Treasury Preferred Stock as of the day prior to the signing of final documents. The consideration for the repurchase of the Warrant would be $40. Total consideration relating to the proposed repurchase would be approximately $12,070. The Treasury’s consent to the repurchase is subject to enteri ng into final definitive documentation acceptable to the Treasury in its sole discretion. The Treasury Letter does not constitute an amendment to or modification or waiver of any term or provision of the Securities Purchase Agreement previously entered into between Treasury and the Company.

The Company has been advised by NAFH that the Treasury’s consent to the Company’s redemption of the Treasury Preferred Stock and repurchase of the Warrant for the consideration proposed by the Company as set forth in the Treasury Letter will satisfy the maximum price requirement specified in the definitive investment agreement for the repurchase of the Treasury Preferred Stock and the Warrant.  Upon consummation of the NAFH investment, it is estimated that both the Company and the Bank will be well capitalized and the Bank will be in compliance with the required capital ratios of the Consent Order.

If the investment by NAFH is not consummated, the Board of Directors and management team intend to seek other strategic alternatives including but not limited to the sale of certain assets, all or a portion of the Company, or seeking a complementary partner in a merger of equals or where the Company is acquired. There is no assurance the Company will be successful in entering into any agreement or closing such an alternative transaction.

Note 7 – Fair Values of Financial Instruments

ASC 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair values of securities available for sale are determined by 1) obtaining quoted prices on nationally recognized securities exchanges when available (Level 1 inputs), 2) matrix pricing, which is a mathematical technique widely used in the financial markets to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs) and 3) for collateralized debt obligations, custom discounted cash flow modeling (Level 3 inputs).

Valuation of Collateralized Debt Securities

As of June 30, 2010, the Company owned a collateralized debt security where the underlying collateral is comprised primarily of trust preferred securities of banks and insurance companies. The inputs used in determining the estimated fair value of this security are Level 3 inputs. In determining its estimated fair value, management utilizes a discounted cash flow modeling valuation approach. Discount rates utilized in the modeling of this security are estimated based upon a variety of factors including the market yields of publicly traded trust preferred securities of larger financial institutions and other non-investment grade corporate debt. Cash flows utilized in the modeling of this security were based upon actual default history of the underlying issuers and issuer specific assumptions of estimated future defaults of the underlying issuers. Since the fourth quarter of 2009, we have engaged an independent third party valuation firm to estimate the fair value and credit loss potential of this security. Management reviewed the assumptions and methodology employed in this analysis. The valuation approach for the collateralized debt security did not change during the first six months of 2010.

TIB Financial Corp.
Unaudited Notes to Consolidated Financial Statements
(Dollars in thousands except for share and per share amounts)

Valuation of Impaired Loans and Other Real Estate Owned

The fair value of collateral dependent impaired loans with specific allocations of the allowance for loan losses and other real estate owned is generally based on recent real estate appraisals and other available observable market information. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below:
     Fair Value Measurements at June 30, 2010 Using 
  June 30, 2010  
Quoted Prices in Active Markets for Identical Assets
(Level 1)
  Significant Other Observable Inputs (Level 2)  
Significant Unobservable Inputs
(Level 3)
 
Assets:            
U.U.S. Government agencies and corporations $28,838  $-  $28,838  $- 
StStates and political subdivisions—tax exempt  3,078   -   3,078   - 
StStates and political subdivisions—taxable  2,266   -   2,266   - 
Marketable equity securities  176   -   176   - 
Mortgage-backed securities—residential  245,484   -   245,484   - 
Corporate bonds  2,021   -   2,021   - 
Collateralized debt obligations  758   -   -   758 
 A Available for sale securities $282,621  $-  $281,863  $758 
                 


     Fair Value Measurements at December 31, 2009 Using 
  December 31, 2009  
Quoted Prices in Active Markets for Identical Assets
(Level 1)
  Significant Other Observable Inputs (Level 2)  
Significant Unobservable Inputs
(Level 3)
 
Assets:            
U U..S. Government agencies and corporations $29,172  $-  $29,172  $- 
StStates and political subdivisions—tax exempt  8,061   -   8,061   - 
StStates and political subdivisions—taxable  2,212   -   2,212   - 
Marketable equity securities  8   -   8   - 
Mortgage-backed securities—residential  208,115   -   208,115   - 
Corporate bonds  2,012   -   2,012   - 
Collateralized debt obligations  759   -   -   759 
 A Available for sale securities $250,339  $-  $249,580  $759 
                 

The tables below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2010 and 2009 and  held at June 30, 2010 and 2009, respectively.

  Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Collateralized Debt Obligations 
  2010  2009 
B Beginning balance, April 1, $769  $3,958 
Included in earnings – other than temporary impairment  -   (740)
Included in other comprehensive income  (11)  (1,114)
Transfer in to Level 3  -   - 
E  Ending balance June 30, $758  $2,104 
         


TIB Financial Corp.
Unaudited Notes to Consolidated Financial Statements
(Dollars in thousands except for share and per share amounts)




  Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Collateralized Debt Obligations 
  2010  2009 
B Beginning balance, January 1, $759  $4,275 
Included in earnings – other than temporary impairment  -   (763)
Included in other comprehensive income  (1)  (1,408)
Transfer in to Level 3  -   - 
E  Ending balance June 30, $758  $2,104 
         

Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:
     Fair Value Measurements at June 30, 2010 Using 
  June 30, 2010  
Quoted Prices in Active Markets for Identical Assets
(Level 1)
  
Significant Other Observable Inputs
(Level 2)
  
Significant Unobservable Inputs
(Level 3)
 
Assets:            
 I   Impaired loans with specific allocations of the allowance for loan losses $57,325  $-  $-  $57,325 
Other real estate owned  38,699   -   -   38,699 
Other repossessed assets  204   -   204   - 
                 

     Fair Value Measurements at December 31, 2009 Using 
  December 31, 2009  
Quoted Prices in Active Markets for Identical Assets
(Level 1)
  
Significant Other Observable Inputs
(Level 2)
  
Significant Unobservable Inputs
(Level 3)
 
Assets:            
 I   Impaired loans with specific allocations of the allowance for loan losses $52,122  $-  $-  $52,122 
 Other real estate owned  21,352   -   -   21,352 
 Other repossessed assets  326   -   326   - 
                 

Collateral dependent impaired loans, which are measured for impairment using the fair value of the collateral, had a carrying amount of $64,007, with a valuation allowance of $6,682, as of June 30, 2010.  During the six months ended June 30, 2010, $5,884 of the allowance for loan losses was specifically allocated to collateral dependent impaired loans. The amounts of the specific allocations for impairment are considered in the overall determination of the reserve and provision for loan losses. Other real estate owned which is measured at the lesser of fair value less costs to sell or our recorded investment in the foreclosed loan had a carrying amount of $43,959, less a valuation allowance of $5,260 as of June 30, 2010. As a result of sales of foreclosed properties, receipt of updated appraisals, reduced listing prices or ente ring into contracts to sell these properties, valuation adjustments of $4,250 and $4,887 were recognized in our statements of operations during the three and six months ended June 30, 2010, respectively. Other repossessed assets are primarily comprised of repossessed automobiles and are measured at fair value as of the date of repossession. As a result of the disposition of repossessed vehicles, gains/(losses) of $(6)  and $46 were recognized in our statements of operations during the three and six months ended June 30, 2010, respectively. Collateral dependent impaired loans had a carrying amount of $60,413, with a valuation allowance of $8,291 as of December 31, 2009. Other real estate owned had a carrying amount of $22,147, less a valuation allowance of $795 as of December 31, 2009.


TIB Financial Corp.
Unaudited Notes to Consolidated Financial Statements
(Dollars in thousands except for share and per share amounts)


The carrying amounts and estimated fair values of financial instruments, at June 30, 2010 are as follows:

  June 30, 2010 
  Carrying Value  Estimated Fair Value 
Financial assets:      
Cash and cash equivalents $157,876  $157,876 
Investment securities available for sale  282,621   282,621 
Loans, net  1,073,962   1,049,001 
F Federal Home Loan Bank and Independent Bankers’ Bank stock  10,735  NM 
Accrued interest receivable  5,104   5,104 
         
Financial liabilities:        
Non-contractual deposits $617,376  $617,376 
Contractual deposits  724,355   730,078 
Federal Home Loan Bank Advances  125,000   131,935 
Short-term borrowings  73,894   73,888 
Long-term repurchase agreements  30,000   30,276 
Subordinated debentures  33,000   12,162 
Accrued interest payable  7,637   7,637 
         

The methods and assumptions used to estimate fair value are described as follows:

Carrying amount is the estimated fair value for cash and cash equivalents, interest bearing deposits, accrued interest receivable and payable, demand deposits or deposits that reprice frequently and fully.  The methods for determining the fair values for securities and impaired loans were described previously.  For loans, fixed rate deposits and for deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates. For loans, these market rates reflect significantly wider current credit spreads applied to the estimated life.  Fair value of debt is based on current rates for similar financing.  It was not practicable to determine the fair value of FHLB and IBB stock due to restrictions placed on their transferability.  The fair value of off balance sheet items is not considered material.

Note 8 – Other Real Estate Owned

     Activity in other real estate owned for the three and six months ended June 30, 2010 and 2009 is as follows:

  Three Months Ended June 30,  Six Months Ended June 30, 
  2010  2009  2010  2009 
Other real estate owned            
 Balance, beginning of period $42,236  $6,327  $22,147  $5,582 
 Real estate acquired  4,293   7,727   25,702   8,646 
 Properties sold  (2,011)  (2,859)  (4,026)  (3,042)
 Transfer to facilities used in operations  -   (2,941)  -   (2,941)
 Other  (559)  3   136   12 
 Balance, June 30, $43,959  $8,257  $43,959  $8,257 
                 
Valuation allowance                
 Balance, beginning of period $(1,158) $(1,295) $(795) $(1,259)
 Additions charged to expense  (4,264)  (690)  (4,776)  (801)
 Relieved due to sale of property  162   870   311   945 
 Balance, June 30, $(5,260) $(1,115) $(5,260) $(1,115)
                 
Expenses related to foreclosed assets during period                
 Net loss (gain) on sales $(13) $181  $111  $182 
 Provision for unrealized losses  4,264   690   4,776   801 
 Operating expenses  898   215   1,362   423 
  $5,149  $1,086  $6,249  $1,406 
                 




Appendix C
Information included under “Management’s Discussion And Analysis Of Financial Condition And Results Of Operations” in TIB Financial Corp.’s Annual Report on Form 10-K for the year ended December 31, 2009.
ITEM 7:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

TIB Financial Corp. is a bank holding company in the Southern Florida marketplace and the parent company of TIB Bank and Naples Capital Advisors, Inc.  The Bank operates primarily as a real estate secured commercial lender, focusing on middle-market businesses in our Southern Florida markets.  The Bank funds its lending activity primarily by gathering retail and commercial deposits from our service area.  TIB Bank was formed in 1974 and has a substantial market presence in the Florida Keys.  In recent years, TIB Bank has expanded into the adjacent Florida counties of Miami-Dade, Collier, Lee and Sarasota.
Recent Losses, Memorandum of Understanding and Future Plans

     The Company recorded net losses of $61.5 million, $20.9 million and $2.4 million in 2009, 2008 and 2007, respectively, for a three year total of $84.9 million.  It is important for us to reduce our rate of credit loss and execute the following plans.
Our losses are largely a result of loan and investment impairments.  From 2007 to 2009, we recorded total provisions for loan losses of $80.2 million and other than temporary losses on investments of $12.9 million.  While our net losses for 2009 also included a charge off of goodwill of $5.9 million and charges to establish an allowance against the realization of our deferred tax asset of $30.4 million, these latter charges may not have been required had we not incurred the losses on loans and investments.
Despite these losses, TIB Bank remained adequately capitalized at December 31, 2009 under the regulatory capital guidelines.  On July 2, 2009, TIB Bank entered into a Memorandum of Understanding, which is an informal agreement, with Bank regulatory agencies that it will move in good faith to increase its Tier 1 leverage capital ratio to not less than 8% and its total risk-based capital ratio to not less than 12% by December 31, 2009 and maintain these higher ratios for as long as this agreement is in effect. Late during the second quarter of 2009, we retained a nationally recognized investment banking firm to assist us in raising capital. On August 14, 2009, we filed a registration statement with the U.S. Securities and Exchange Commission (“SEC”) on Form S-1 with the intent of issuing up to 40,250,000 shares of our common stock for maximum proceeds of $75.7 million. On September 23, 2009 we held a special meeting of shareholders at which an amendment to the Company’s Restated Articles of Incorporation was approved to increase the number of authorized shares of the Company’s common stock from 40,000,000 to 100,000,000. Due in part to the timing of this action, we believed that investors would require us to update our registration statement with third quarter financial results prior to commencing an offering. As discussed in our December 23, 2009 letter to shareholders, during this process, we received a comment letter from the SEC which indicated that our Annual Report for the year ended December 31, 2008 on Form 10-K and our March 31, 2009 and June 30, 2009 quarterly reports on Form 10-Q were under a routine review by the Division of Corporation Finance. The SEC staff periodically reviews filings of all publicly owned companies.  As our timeline drew near the holiday and year-end period, we recei ved notification that the SEC staff concluded their review on December 17, 2009 without requiring any adjustments to our reported financial results. However, as advised by our investment banking firm noting that the financial markets traditionally are not receptive to offerings during this time period, we withdrew our registration statement on December 23, 2009 and intend to pursue our capital efforts in March and into the early second quarter of 2010. Due to the timing of our plans to raise capital, we requested an extension of time to April 30, 2010 to comply with the informal agreement. The Florida Office of Financial Regulation (“OFR”) agreed to the extension provided the FDIC also were to agree. We have not yet received the FDIC's response to our request.

At December 31, 2009, the capital ratios specified in the Memorandum of Understanding were not met.  We notified the bank regulatory agencies prior to December 31, 2009, that the increased capital levels would not be achieved and as we remain in regular contact with the FDIC and OFR, we expect the agencies will reevaluate our progress toward the higher capital ratios at March 31, 2010.

Our Board of Directors and management team have determined to take the following courses of action to improve our capital ratios:

·  First and foremost, to file a registration statement with the SEC for the offering of up to 80,000,000 shares of our common stock in a follow on public offering or in a public offering of common shares with a concurrent private placement of common and preferred shares. This is the main focus of our Board of Directors and management team over the coming months.

·  Second, to continue to operate the Company and to maintain the bank at adequately capitalized, for regulatory purposes, until we complete our planned capital raise. This will most likely require us to reduce lending, potentially sell loans, and take significant operating expense reductions and other cost cutting measures aimed at lowering expenses. Additionally we would adjust the mix of our assets to reduce the total risk weight of our assets, reduce total assets over time and potentially sell branches, deposits and loans.

·  Third, in the event the issuance of additional capital is not possible in the near term, seek strategic alternatives including but not limited to the sale of certain assets, all or a portion of the Company, or seeking a complementary partner in a merger of equals or where the Company is acquired.


Recent Capital Investments

On March 7, 2008, the Company consummated a transaction whereby two of Southwest Florida’s prominent families, their representatives and their related business interests purchased 1.2 million shares of the Company’s common stock and warrants to purchase an additional 1.2 million shares of common stock at an exercise price of $7.91 per share at any time prior to March 7, 2011. Gross proceeds from the investment provided additional capital of $10.1 million.

On December 5, 2008, the Company issued $37 million of preferred stock and a related warrant to the U.S. Treasury under the U.S. Treasury’s Capital Purchase Program. This increase in capital allows the Company to remain highly competitive and provide the added capital to support our continued capacity to provide new loans to creditworthy individual and commercial customers.


Historical Expansion and Recent Acquisitions

Historically we have been utilizing a de novo branching strategy of evaluating and selecting sites and building new bank branch locations to enter and grow in these new markets. While de novo expansion has a negative effect on short-term earnings, we believe the resulting growth will continue to add significant value to our franchise.  By timing our expansion, we plan to balance earnings, growth and expense.

On January 2, 2008 we completed our acquisition of Naples Capital Advisors, Inc. a registered investment advisor.  This acquisition was the beginning of the Company’s initiative into the new business lines of private banking, trust services and wealth management.  On December 8, 2008, TIB Bank received authority to exercise trust powers from the FDIC and the State of Florida.  Staffing, operations, market presence and existing revenues will support the expansion of these integrated and complementary services going forward.

On February 13, 2009, TIB Bank assumed all the deposits (excluding brokered deposits) of Riverside Bank of the Gulf Coast from the FDIC.  Riverside Bank’s nine offices reopened on February 17, 2009 as branches of TIB Bank.  The assumption of the deposits increases our market presence in Ft. Myers and Venice, and expands our banking operations into the contiguous market of Cape Coral.  This transaction also provides the Company with additional funding for loan growth, the potential for new customer relationships and the opportunity to improve and increase our brand awareness throughout all of the markets we serve.

On September 25, 2009, The Bank of Venice, acquired by the Company in April 2007, was merged into TIB Bank. This merger will provide further operational cost savings and improve product availability for our Sarasota County customers.
Performance Overview

For the year ended December 31, 2009, our operations resulted in a net loss before dividends and accretion on preferred stock of $61.5 million compared to a net loss of $20.9 million for the prior year. The net loss allocated to common shareholders was $64.2 million, or $4.33 per share, for the year ended December 31, 2009 compared to a net loss of $21.1 million, or $1.45 per share, for the prior year. The most significant factors contributing to the 2009 loss were a $42.3 million provision for loan losses, a $13.5 million provision for income taxes and a $5.9 million goodwill impairment charge, partially offset by $4.3 million in net gains from investment securities and a $1.2 million gain resulting from the death benefit received from a bank owned life insurance policy covering a former employee.

(Dollars in thousands)
 For the year ended December 31, 
  2009  2008 
Net interest income $45,391  $44,660 
Provision for loan losses  (42,256)  (28,239)
Non-interest income (1)  8,629   6,133 
Life insurance gain  1,186   - 
Investment securities gains (losses)  4,295   (5,349)
Non-interest expense (2)  (59,455)  (50,988)
Goodwill impairment charge  (5,887)  - 
Loss before income taxes $(48,097) $(33,783)
         
Net lNet loss before income taxes excluding life insurance conversion gain, investment securities gains (losses) and goodwill impairment charge $(47,691) $(28,434)

(1)
Non-interest income excludes a gain on the conversion of a life insurance policy covering a former employee and investment securities gains and losses.
(2)           Non-interest expense excludes goodwill impairment charges


Our operating environment remains challenging. During this period of slower economic activity, our loans decreased 2% from last year.  Our strategy of building relationships with small and middle-market business customers coupled with our recent initiative in private banking and wealth management continues to be our operating focus.

Deteriorating credit quality and the interest rate environment continue to be the dominant forces affecting our industry and our main challenges are managing asset quality and efficiently funding our loan portfolio. We are leveraging our current product and delivery advantages along with our sustainable customer service quality advantages in our efforts to increase market share and plan to continue to capitalize on the opportunities in our markets.

Net interest income on a tax-equivalent basis was $45.6 million for 2009, an increase of 2% from $44.8 million a year ago. The monetary policy pursued by the Federal Reserve affects market interest rates including the prime rate, our loan yields, our deposit and borrowing costs and our net interest margin. The principal reason for the increase was the increase in earning assets and deposits, partially offset by the increase in non-performing loans during the year which reduced our net interest income by an estimated $3.2 million.

Non-interest income, which includes service charges on deposit accounts, investment securities gains and losses, real estate fees and other operating income, increased approximately $13.3 million to $14.1 million in 2009 from $784,000 in 2008.  The increase was due primarily to $4.3 million in net gains on investment securities and a gain of $1.2 million resulting from the death benefit received from a Bank owned life insurance policy covering a former employee. Adding to the current year increase were $5.3 million in net securities losses from the prior year. The former Riverside operations contributed $1.6 million of service charge and other income during 2009. Investment advisory fees and trust fees from Naples Capital Advisors, Inc. contributed $997,000 to the current year.

Non-interest expense for 2009 was $65.3 million, compared with $51.0 million a year ago. The increase in non-interest expense for 2009 is primarily attributable to $6.2 million of expense related to the acquired former Riverside operations and a $5.9 million goodwill impairment charge.  Excluding the effect of the former Riverside operations, salaries and employee benefits increased by $2.2 million. Severance costs accounted for approximately $545,000 of the increase and employee benefits increased by $391,000 largely due to employee medical insurance costs. The addition of new positions to manage the higher level of problem assets and additional Riverside branches plus merit adjustments for certain employees resulted in approximately $928,000 of increased compensation related expenses. Additionally, due to the lower level of l oan origination activity during 2009, the amount of salary and benefit costs capitalized as direct loan origination costs decreased by approximately $301,000 as compared to 2008. Excluding the effect of the former Riverside operations, net occupancy expenses decreased approximately 7% due to our continued focus on consolidating facilities and containing operating costs.  Excluding the effect of the former Riverside of $2.8 million, other expenses increased 4% compared to 2008.  FDIC insurance costs increased $2.8 million primarily due to a special assessment of $800,000, higher deposit insurance premium rates and growth of deposits due to the acquisition of Riverside. The special assessment was charged to all FDIC insured institutions during 2009 based on assets. Information system conversion costs of $223,000 were incurred in merging the operations of The Bank of Venice and OREO write-downs and expenses increased due to higher levels of foreclosed assets.
Total assets increased 6% during 2009 to $1.71 billion as of December 31, 2009, compared with $1.61 billion a year ago. Total loans decreased 2% to $1.20 billion as of December 31, 2009, compared with $1.22 billion a year ago. A $49.9 million, or 34%, decline in construction and land loans and a $31.9 million, or 39%, decline in indirect auto loans offset growth in the commercial loan and residential loan portfolios. Asset growth was funded in part by an increase of $ 233.7 million in total deposits to $1.37 billion as of December 31, 2009, representing deposit growth of 21% from $1.14 billion in the prior year. In 2009, the acquisition of the operations of the former Riverside Bank contributed $288.0 million to the 2009 growth in deposits. The Private Banking group contributed $12 million in net new relationship-based deposits in 2 009.

In response to slowing economic activity, continued softness in residential real estate in our markets and the increase in non-performing loans, we increased our reserve for loan losses.  As of December 31, 2009 the allowance for loan losses totaled $29.1 million, or 2.43% of total loans. The allowance represents 40% of non-performing loans at December 31, 2009. Annual net charge-offs represented 3.01% of average loans for the year ended December 31, 2009, compared with 1.64% for the year ended December 31, 2008.


Economic and Operating Environment Overview

During 2009 the national economic recession deepened with rapidly increasing unemployment and declining levels of economic activity.  In our local markets the economic contraction that began in late 2006 and early 2007 accelerated with sharp increases in unemployment in Collier and Lee Counties in Southwest Florida to over 12% by the end of 2009.  Declining retail sales and lower personal income also reflect the contracting economic environment in our local markets.

While global and national financial market volatility and liquidity concerns receded towards the end of the year and the banking system began to stabilize along with economic fundamentals, the level of non-performing loans and investment securities in banks continued to increase. Due largely to the accommodative monetary policy maintained by the Federal Reserve system, liquidity concerns in the national banking system lessened during the second half of the year.

In response to the continuing economic stress, the Federal Reserve maintained an accommodating monetary policy through open market transactions and maintained the targeted fed funds rate at 0% to 0.25% throughout 2009.  Accordingly, the prime rate remained at 3.25% during the year.  The Federal Reserve also implemented several liquidity facilities to provide added liquidity to financial institutions and other financial intermediaries.

The Emergency Economic Stabilization Act (“EESA”) authorized the FDIC to increase the amount of insured deposit accounts to $250,000 and provide unlimited deposit insurance on non-interest bearing deposits through 2009.  On May 20, 2009, the provisions increasing the insured deposit limit to $250,000 were extended through December 31, 2013. On August 26, 2009, the unlimited account insurance on non-interest bearing accounts was extended through June 30, 2010. The EESA also authorized the U.S. Treasury to provide up to $700 billion of financial support to the U.S. banking industry.  The Capital Purchase Program, as part of the Troubled Asset Relief Program, was one of the initiatives that provided additional capital to banks.

The deepening economic downturn on a national and local basis has continued to adversely impact our individual and business customers.  The markets we serve continue to be among the most severely impacted in the country.  The continuing economic stress to consumers and local businesses was apparent during 2009 as we continued to experience a pronounced increase in non-performing loans, which resulted in a significant level of loan charge-offs and a significant increase of our reserve for loan losses.

We believe we are seeing encouraging signs of improvement in our local real estate markets. We are beginning to observe the return of sophisticated, fundamentals-driven investors who see the long term value of southern Florida real estate and enterprises. On a monthly basis in 2009 compared to 2008, we have observed increases in unit volume sales of residential real estate in our markets ranging from 27% to 80% per month in the Naples area and 40% to well over 100% in the Fort Myers-Cape Coral market. While property values have declined markedly during this severe recession, the significant increase in unit sales signals improved buyer interest and increasing liquidity in our residential real estate markets which should begin to stabilize values. While we expect a local economic recovery to be muted and to lag the national recovery, we b elieve positive signs are beginning to emerge.


Analysis of Financial Condition

Our assets totaled $1.71 billion at December 31, 2009 compared to $1.61 billion at the end of 2008, an increase of $95.3 million, or 6%.  The increase in assets during 2009 was primarily due to the assumption of the deposits of Riverside.

Total loans decreased $27.5 million or 2%, to $1.20 billion at December 31, 2009.  In a continuing focus to reduce our exposure to higher risk loans, construction and land development loans declined $49.9 million and indirect auto loans declined $31.9 million. Partially offsetting these declines were growth in commercial real estate loans of $21.9 million and residential real estate loans of $31.9 million. The net decline in the loan portfolio was primarily attributed to loans secured by real estate transferred to OREO of $27.5 million, write-downs of impaired loans of $17.8 million and net charge-offs of $19.2 million.
Total deposits increased $233.7 million or 21%, from $1.14 billion at the end of 2008 to $1.37 billion at December 31, 2009.  This increase is due primarily to the assumption of $317.0 million of deposits from the operations of former Riverside and is net of the $106.6 million reduction of brokered time deposits.  Non-interest-bearing deposits increased $43.4 million or 34%, and interest-bearing deposits increased $190.3 million or 19%.

Borrowed funds, consisting of Federal Home Loan Bank (FHLB) advances, short-term borrowings, notes payable and subordinated debentures, totaled $268.5 million at year end 2009 compared to $337.3 million at the end of 2008.  During 2009, as a result of the receipt of proceeds from the Riverside acquisition, we decreased our FHLB advances by $77.9 million.

Shareholders’ equity decreased $65.6 million or 54%, from $121.1 million on December 31, 2008 to $55.5 million at the end of 2009.  The decrease in shareholder’s equity was due to the net loss for year of $61.5 million.  The net loss for the year was primarily due to the provision for loan loss of $42.3 million, valuation allowance against deferred income tax assets of $30.4 million and a goodwill impairment charge of $5.9 million.

Book value per common share decreased to $1.42 at December 31, 2009, from $5.92 at December 31, 2008.

Results of Operations

Net income

2009 compared with 2008:

The net loss for 2009 was $61.5 million compared to a net loss of $20.9 million for 2008.  Basic and diluted loss per common share for 2009 was $4.33, as compared to basic and diluted loss per common share of $1.45 in 2008.

The loss on average assets for 2009 was 3.47% compared to a loss on average assets of 1.36% for 2008. On the same basis, the loss on average shareholders’ equity was 53.92% for 2009 compared to 20.4% for 2008.

Contributing significantly to the loss during 2009 were the $42.3 million provision for loan losses, the valuation allowance against deferred income tax assets of $30.4 million and the goodwill impairment charge of $5.9 million, partially offset by $5.1 million in net gains on securities sold and a $1.2 million gain resulting from the death benefit received from a Bank owned life insurance policy covering a former employee.  In response to continued slowing economic activity and softening real estate values in our markets, our allowance for loan losses increased to $29.1 million or 2.43% of total loans, resulting from our provision for loan losses of $42.3 million exceeding net charge-offs of $37.0 million for the period. For additional information on these items, see the sections that follow entitled “Allowance and Provi sion for Loan Losses” and “Investment Portfolio”, respectively.


2008 compared with 2007:

The net loss for 2008 was $20.9 million compared to a net loss of $2.4 million for 2007.  Basic and diluted loss per common share for 2008 was $1.45, as compared to basic and diluted loss per common share of $0.19 in 2007.

The loss on average assets for 2008 was 1.36% compared to a loss on average assets of 0.18% for 2007. The loss on average shareholders’ equity was 20.4% for 2008 compared to 2.5% for 2007.

Contributing significantly to the loss during 2008 were the $28.2 million provision for loan losses and the write-down of $6.4 million of investment securities, partially offset by a $1.1 million in net gains on securities sold. In response to continued slowing economic activity and softening real estate values in our markets, our allowance for loan losses increased to $23.8 million or 1.94% of total loans, resulting from our provision for loan losses of $28.2 million exceeding net charge-offs for the period by 45%.


Net interest income

Net interest income represents the amount by which interest income on interest-earning assets exceeds interest expense incurred on interest-bearing liabilities.  Net interest income is the largest component of our income, and is affected by the interest rate environment, and the volume and the composition of interest-earning assets and interest-bearing liabilities.  Our interest-earning assets include loans, federal funds sold and securities purchased under agreements to resell, interest-bearing deposits in other banks, and investment securities.  Our interest-bearing liabilities include deposits, federal funds purchased, subordinated debentures, advances from the FHLB and other short-term borrowings.


2009 compared with 2008:

Net interest income was $45.4 million for the year ended December 31, 2009, compared to $44.7 million for the same period in 2008.  The $731,000 or 2% increase was due to the significant increase in interest earning assets and interest bearing liabilities as a result of the assumption of the Riverside deposits and investment of the proceeds and the growth of the Company.  The 34 basis point decrease in the net interest margin from 3.10% to 2.76% substantially offset the effect of the growth of the balance sheet.

The net interest margin continues to be adversely impacted by the level of nonaccrual loans and non-performing assets which reduced the margin by an estimated 19 basis points during the twelve months ended December 31, 2009. The utilization of the proceeds from the Riverside transaction to reduce borrowings and brokered time deposits and purchase investment securities further reduced the net interest rate spread because a greater portion of the Company’s assets were comprised of lower yielding investment securities and short-term money market investments. We continue to maintain a higher level of short-term investments in light of the continuing economic stress and elevated volatility of financial markets, which has also reduced the margin.

The $7.0 million decrease in interest and dividend income compared to 2008 was mainly attributable to decreased average rates on loan balances and investment securities due primarily to the 400 basis point decrease in prime rate and the significant decline in other interest rates combined with a higher level of non-performing loans.  Partially offsetting this decline were decreases in the interest cost of transaction accounts, time deposits and borrowings due to decreases in deposit interest rates paid and other market interest rates.  Increases in balances and changes in product mix, favoring higher yielding products, led to an increase in interest expense on savings deposits.

Interest rates during 2009 were significantly lower than the prior year period due to the highly stimulative monetary policies undertaken by the Federal Reserve beginning in the third quarter of 2007. As a result of the actions taken by the Federal Reserve, the prime rate declined from 7.25% in the first quarter of 2008 to 3.25% by the fourth quarter of 2008 and has remained at that level in 2009.
Due to the rapid and significant decline in the prime rate, the overall lower interest rate environment and the higher level of non-performing loans, the yield on our loans declined 93 basis points. The yield of our interest earning assets declined 117 basis points in 2009 compared to 2008 due to the reduction in the yield on our loans and the significant increase in lower yielding investment securities and short-term money market investments.

The lower interest rate environment also resulted in a significant decline in the interest cost of interest bearing liabilities.  The average interest cost of interest bearing deposits declined by 105 basis points and the overall cost of interest bearing liabilities declined by 99 basis points.  Due to the rapidly declining interest rate environment and highly competitive deposit pricing on a local and national basis, we were not able to reduce the cost of our deposits as quickly and to the same extent as the decline in our earning asset yield.

Going forward, we expect market short-term interest rates to remain low for an extended period of time.  We expect deposit costs to continue to decline but they may decrease more slowly or to a lesser extent than loan yields, or they could increase due to strong demand in the financial markets and banking system for liquidity which is reflected in elevated pricing competition for deposits. The predominant drivers affecting net interest income are the composition of earning assets, the interest rates paid on our deposits and the net change in non-performing assets.

2008 compared with 2007:

Net interest income was $44.7 million for the year ended December 31, 2008, compared to $46.0 million for the same period in 2007.  The $1.4 million or 3% decrease in net interest income was due principally to the increase in non-accrual loans and investment securities during the year which reduced interest income and net interest income by $3.2 million and reduced the net interest margin by an estimated 21 basis points.

The $6.6 million decrease in interest and dividend income compared to 2007 is due principally to a lower interest rate environment in 2008 and the higher level of non-accrual loans and investment securities.  As discussed previously, the Federal Reserve, in response to increasing economic weakness and contraction, reduced the targeted fed funds rate by 400 basis points during the year.

The prime rate declined by a similar amount to 3.25% as well.  Interest rates throughout the interest rate yield curve declined in response to the Federal Reserve’s monetary policy and the flight to lower risk fixed income securities (principally U.S. Treasuries and U.S. Agency securities) due to the volatility and uncertainty in the financial markets that persisted during the year.

As a consequence, the yield on loans with rates tied to the prime rate declined, new loans were originated at rates lower than those that prevailed during 2007 and reinvestment of the proceeds of maturing investment securities and purchases of new investment securities were also at lower rates.

The positive effect on net interest income of the $162 million increase of average earning assets was more than offset by the effect of the 129 basis point reduction in the yield of average earning assets.

The lower interest rate environment also resulted in a significant decline in the interest cost of interest bearing liabilities.  The average interest cost of interest bearing deposits declined by 93 basis points and the overall cost of interest bearing liabilities declined by 103 basis points.  Due to the rapidly declining interest rate environment and highly competitive deposit pricing on a local and national basis, we were not able to reduce the cost of our deposits as quickly and to the same extent as the decline in our earning asset yield.  As a consequence, the net interest margin declined.

As an additional consequence of the contracting economic conditions, our customers maintained lower levels of transaction account and short-term investment account balances which resulted in a reduction of non-interest bearing demand deposits and money market accounts.  In the lower interest rate environment, customers also shifted deposits to higher rate certificates of deposit.

We have also maintained a higher level of investment securities and cash and equivalents due to the volatile and uncertain financial market conditions.  All of these factors adversely impacted the net interest margin which declined 50 basis points to 3.10% from 3.60% in 2007.

On the basis of economic and financial market conditions that we observed during the second quarter of 2008, we began to shorten the maturity structure of our interest bearing liabilities by increasing the amount of FHLB borrowings with maturities of one month and by originating wholesale CD deposits with terms of 3 months to 6 months.  This funding tactic was initiated to generate lower cost and shorter-term liabilities to improve our net interest margin and position our balance sheet for stable or declining short-term interest rates.  This position was maintained through the fourth quarter and at December 31, 2008, we had $70 million of FHLB borrowings that matured in the first quarter of 2009 and over $96 million of wholesale CD’s that had original maturities of 3 months to 6 months.


The following table presents the average balances and yields for interest earning assets and interest bearing liabilities for the years ending December 31, 2009, 2008 and 2007.

Average Balance Sheets

 
  2009  2008  2007 
 
(Dollars in thousands)
 Average Balances  
Income/
Expense
  
Yields/
Rates
  Average Balances  
Income/
Expense
  
Yields/
Rates
  Average Balances  
Income/
Expense
  
Yields/
Rates
 
ASSETS                           
In Interest-earning assets:                           
 L  Loans (a)(b) $1,225,804  $68,960   5.63% $1,186,839  $77,877   6.56% $1,088,751  $84,775   7.79%
 In Investment securities (b)  327,963   12,071   3.68%  183,649   8,629   4.70%  146,376   7,633   5.21%
 MMoney Market Mutual Funds  31,277   132   0.42%  -   -   -   -   -   - 
 In Interest bearing deposits in other banks  50,947   124   0.24%  12,131   104   0.85%  383   19   4.96%
 F  FHLB stock  10,771   24   0.23%  10,012   350   3.50%  8,408   503   5.98%
 FeFederal funds sold/Repo  2,940   5   0.17%  55,525   1,374   2.47%  42,187   2,144   5.08%
T Total interest-earning assets  1,649,702   81,316   4.93%  1,448,156   88,334   6.10%  1,286,105   95,074   7.39%
                                     
N Non-interest earning assets:                                    
 C  Cash and due from banks  30,182           17,507           20,394         
 Pr Premises and equipment, net  39,759           37,596           36,609         
 A Allowances for loan losses  (24,967)          (16,111)          (10,174)        
 OtOther assets  78,128           54,395           41,167         
T  Total non-interest earning assets  123,102           93,387           87,996         
T  Total Assets $1,772,804          $1,541,543          $1,374,101         
                                     
LIABILITIES & SHAREHOLDERS’ EQUITY                                    
In Interest bearing liabilities:                                    
Interest bearing deposits:                                    
 NOW accounts $182,398   1,235   0.68% $172,520   2,932   1.70% $151,745   4,967   3.27%
 Money market  196,469   2,817   1.43%  151,273   3,649   2.41%  186,996   7,753   4.15%
 Savings deposits  116,956   2,142   1.83%  52,896   669   1.26%  55,360   968   1.75%
 Time deposits  696,606   21,452   3.08%  591,723   25,346   4.28%  486,658   24,172   4.97%
Tot  Total interest-bearing deposits  1,192,429   27,646   2.32%  968,412   32,596   3.37%  880,759   37,860   4.30%
                                     
 S  Short-term borrowings and FHLB advances  212,585   5,303   2.49%  242,210   7,450   3.08%  174,583   7,861   4.50%
 Long-term borrowings 63,000   2,787   4.42%  63,000   3,458   5.49%  39,860   3,000   7.53%
Tot  Total interest bearing  liabilities  1,468,014   35,736   2.43%  1,273,622   43,504   3.42%  1,095,202   48,721   4.45%
                                     
N Non-interest bearing liabilities and shareholders’ equity:                                    
Demand deposits  173,083           146,158           163,478         
Other liabilities  17,557           19,196           19,338         
Shareholders’ equity  114,150           102,567           96,083         
T  Total non-interest bearing liabilities and shareholders’ equity    304,790             267,921             278,899         
T  Total liabilities and shareholders’ equity $1,772,804          $1,541,543          $1,374,101         
In Interest rate spread          2.50%          2.68%          2.94%
N Net interest income     $45,580          $44,830          $46,353     
N Net interest margin (c)          2.76%          3.10%          3.60%
                                     
__________
(a)  
Average loans include non-performing loans.  Interest on loans includes loan fees of $498 in 2009, $420 in 2008, and $706 in 2007.
(b)  
Interest income and rates include the effects of a tax equivalent adjustment using applicable Federal tax rates in adjusting tax exempt interest on tax exempt investment securities and loans to a fully taxable basis.

(c)  Net interest margin is net interest income divided by average total interest-earning assets.
Changes in net interest income

The table below details the components of the changes in net interest income for the last two years.  For each major category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes due to average volumes and changes due to rates, with the changes in both volumes and rates allocated to these two categories based on the proportionate absolute changes in each category.


  
2009 compared to 2008
Due to changes in
  
2008 compared to 2007
Due to changes in
 
(Dollars in thousands) Average Volume  Average Rate  Net Increase (Decrease)  Average Volume  Average Rate  Net Increase (Decrease) 
In Interest income                  
L  Loans (a)(b) $2,489  $(11,406) $(8,917) $7,200  $(14,098) $(6,898)
In Investment securities (a)  5,629   (2,187)  3,442   1,805   (809)  996 
MMoney Market Mutual Funds  132   -   132   -   -   - 
In Interest-bearing deposits in other banks  138   (118)  20   113   (28)  85 
F  FHLB stock  25   (351)  (326)  83   (236)  (153)
FeFederal funds sold  (690)  (679)  (1,369)  545   (1,315)  (770)
T  Total interest income  7,723   (14,741)  (7,018)  9,746   (16,486)  (6,740)
                         
In Interest expense                        
N NOW accounts  159   (1,856)  (1,697)  608   (2,643)  (2,035)
MMoney market  903   (1,735)  (832)  (1,287)  (2,817)  (4,104)
SaSavings deposits  1,075   398   1,473   (41)  (258)  (299)
Ti Time deposits  4,004   (7,898)  (3,894)  4,780   (3,606)  1,174 
S  Short-term borrowings and FHLB advances  (844)  (1,303)  (2,147)  2,514   (2,925)  (411)
L  Long-term borrowings  -   (671)  (671)  1,420   (962)  458 
Total interest expense  5,297   (13,065)  (7,768)  7,994   (13,211)  (5,217)
                         
Change in net interest income $2,426  $( 1,676) $750  $1,752  $( 3,275) $(1,523)
                         
__________
(a) Interest income includes the effects of a tax equivalent adjustment using applicable federal tax rates in adjusting tax exempt interest on tax
     exempt investment securities and loans to a fully taxable basis.
 
(b) Average loan volumes include non-performing loans which results in the impact of the nonaccrual of interest being reflected in the
      change in average rate on loans.
 

Non-interest income

The following table presents the principal components of non-interest income for the years ended December 31:

(Dollars in thousands) 2009  2008  2007 
Service charges on deposit accounts $4,165  $2,938  $2,692 
Investment securities gains (losses), net  4,295   (5,349)  (5,660)
Fees on mortgage loans sold  1,143   775   1,446 
Investment advisory and trust fees  997   555   - 
Debit card income  1,066   747   733 
Earnings on bank owned life insurance policies  546   463   445 
Life insurance gain  1,186   -   - 
Gain on sale of assets  14   30   957 
Other  698   625   749 
Total non-interest income $14,110  $784  $1,362 
             


2009 compared to 2008:

Excluding the effect of investment security gains, non-interest income was $9.8 million in 2009 compared to $6.1 million 2008.  The increase is due primarily to a gain of $1.2 million resulting from the death benefit received from a bank owned life insurance policy covering a former employee and the acquisition of Riverside  which contributed $1.6 million of service charge and other income during the period.

Residential mortgage originations were $126 million in 2009 compared to $154 million in 2008.  Residential loans originated and sold increased from $46.8 million in 2008 to $60.4 million in 2009 and fees on mortgage loans sold increased from $775,000 to $1.1 million for the respective periods.

Investment advisory and trust fees from Naples Capital Advisors and the Bank’s trust department increased from $555,000 in 2008 to $997,000 in 2009.


2008 compared to 2007:

Excluding the effect of investment security losses, non-interest income was $6.1 million in 2008 compared to $7.0 million 2007.  Due to the other than temporary impairment of three collateralized debt obligation investment securities and an equity investment security, we wrote down these securities by $6.4 million in 2008 and $5.7 million in 2007. Partially offsetting the loss in 2008 were net gains from the sale of investment securities of $1.1 million. See the section of management’s discussion and analysis entitled “Other than Temporary Impairment of Available for Sale Securities” for additional information.

Residential mortgage originations were $154 million in 2008 compared to $124 million in 2007.  However, as a result of the lack of a secondary market for jumbo mortgages in 2008 we originated and retained jumbo mortgages in our loan portfolio as part of a strategy of generating loans on a relationship basis for customers with whom we can provide private banking and wealth management services.  As a consequence, residential loans originated and sold declined from $91.2 million in 2007 to $46.8 million in 2008 and fees on mortgage loans sold declined from $1.4 million to $775,000 for the respective periods.

Naples Capital Advisors generated $555,000 of investment advisory fees since its acquisition in January 2008.

In 2007 as part of our operating cost reduction and containment, we sold an office building and land no longer necessary for our operations and recognized a gain of $957,000.

Non-interest expenses

The following table represents the principal components of non-interest expenses for the years ended December 31:

(Dollars in thousands) 
 
2009
  
2009
Riverside
  2009 Without Riverside  
 
2008
  
 
2007
 
SaSalary and employee benefits $28,594  $1,896  $26,698  $24,534  $22,550 
N Net occupancy expense  9,442   1,517   7,925   8,539   7,979 
A Accounting, legal, and other professional  3,271   94   3,177   2,558   1,372 
In Information system conversion costs  344   121   223   -   - 
C Computer services  2,708   427   2,281   2,093   2,172 
C Collection costs  353   -   353   1,341   772 
P  Postage, courier and armored car  1,084   149   935   887   837 
MMarketing and community relations  1,128   112   1,016   1,246   1,151 
O Operating supplies  716   166   550   548   581 
DiDirectors’ fees  873   -   873   825   568 
TrTravel expenses  368   7   361   345   396 
F  FDIC and state assessments  3,163   529   2,634   1,153   629 
S  Special FDIC assessment  800   169   631   -   - 
A Amortization of intangibles  1,430   890   540   648   440 
N Net (gain) loss on disposition of repossessed assets  (244)  -   (244)  1,387   986 
O Operational charge-offs  155   56   99   1,528   74 
In Insurance, nonbuilding  870   2   868   287   226 
 OOREO write downs and expenses  3,149   -   3,149   1,694   14 
G Goodwill impairment  5,887   1,201   4,686   -   - 
O Other operating expenses  1,251   54   1,197   1,347   1,174 
T Total non-interest expenses $65,342  $7,390  $57,952  $50,988  $41,921 
                     


2009 compared to 2008:

Non-interest expense increased $14.4 million, or 28%, to $65.3 million compared to $51.0 million in 2008. Of this increase, $6.2 million is attributed to the assumed former Riverside operations and $5.9 million is attributable to a goodwill impairment charge, which includes $1.2 million of goodwill relating to the Riverside acquisition. Excluding the effect of the former Riverside operations and goodwill impairment charge, FDIC insurance costs increased primarily due to a one-time special assessment, higher deposit insurance premium rates and growth of deposits. Information system conversion costs were incurred in merging the operations of The Bank of Venice and OREO write-downs and expenses increased due to higher levels of foreclosed assets. Salaries and employee benefits costs in 2009 included severance costs, increased employee medic al insurance benefits costs, incremental cost of additional staff to manage the higher level of problem assets and the impact of merit adjustments for certain employees.

Salaries and employee benefits increased $4.1 million in 2009 relative to 2008.  Salaries and employee benefits of $1.9 million reflect the hiring of new employees in connection with the Riverside transaction.  Severance costs accounted for approximately $545,000 of the increase and employee benefits increased by $391,000 largely due to employee medical insurance costs. The addition of new positions to manage the higher level of problem assets and additional Riverside branches plus merit adjustments for certain employees resulted in approximately $928,000 of increased compensation related expenses. Additionally, due to the lower level of loan origination activity during 2009, the amount of salary and benefits costs capitalized as direct loan origination costs decreased by approximately $301,000 as compared to 2008.

There was a $903,000 increase in occupancy expense in 2009 as compared to 2008.  Excluding the $1.5 million of occupancy costs related to the operations of the former Riverside branch network and facilities, the Company would have had a $614,000 decrease in occupancy costs for 2009.  This decrease is a result of our continued focus on consolidating facilities and containing operating costs.

The first quarter of 2008 included $1.2 million in write-downs of repossessed vehicles and related assets attributable to the restructuring of our indirect lending operations.

Other operating expense for 2009 includes $2.8 million attributable to the former Riverside operations including $890,000 in amortization of acquisition related intangibles and $698,000 of FDIC insurance assessments.

Legal and professional fees in 2009 increased by $713,000 due principally to higher legal fees incurred in managing and resolving non-performing loans and assets.
An increase in the cost of FDIC insurance assessments of $2.8 million relative to 2008 is due primarily to a special assessment of approximately $800,000, higher deposits and a higher deposit insurance premium rate.  The special assessment was charged to all FDIC insured institutions during 2009 based on assets.
Other operating expense also includes $223,000 of information system conversion costs related to The Bank of Venice merger and non-facility related insurance costs increased by $571,000 to $870,000 in 2009.

OREO write downs and expenses of $3.1 million during 2009 included approximately $1.8 million of valuation adjustments on nine properties due to the decline in real estate values reflected in updated appraisals as well as net losses of $168,000 recognized on the sales of thirteen properties.

2008 compared to 2007:

Non-interest expenses were $51.0 million in 2008 compared to $41.9 million in 2007.  A significant portion of the increase relates to additional costs that were incurred in 2008 due to the contracting economic environment in our markets and the increase in nonperforming loans and assets that we experienced during the year. The restructuring of our indirect auto financing business line also had a significant impact on expenses in 2008.

Salaries and employee benefits increased $2.0 million, reflecting the increase in staffing for our new initiative in private banking, wealth management and trust services ($1.4 million) and annual raises and an increase in personnel to support the growth and expansion of our operations. Severance costs of approximately $455,000 were included in salaries and employee benefits expenses during 2008.

Occupancy costs includes the added facilities cost of a new branch opened by The Bank of Venice, and our new IT facility that became operational in 2008 ($448,000). Unamortized leasehold improvements of $224,000 were written-off in 2008 due to the non-renewal of an office building lease and the closing of our Sebring branch in January 2009.

Accounting, legal and professional fees in 2008 include $387,000 of consulting fees related to the restructuring of our indirect auto finance business line and higher legal fees related to the restructuring and collection of nonperforming loans.

The increase in collection expenses reflects principally the increased collection costs related to the significantly higher delinquent and nonperforming loans in our indirect auto loan portfolio in 2008.

The FDIC assessed higher deposit insurance premiums on all banks in 2008 and the $524,000 increase over the 2007 expense is due to this higher deposit insurance premium and the growth of our deposits.

The restructuring of our indirect auto finance operations resulted in the acceleration of the disposition of repossessed vehicles from a retail sales strategy to a wholesale auction strategy. As a consequence, we wrote down the value of repossessed vehicles and related assets by $1.2 million to the lower wholesale values at March 31, 2008. This write-down is the principal component of repossessed asset expenses in 2008. Subsequently, repossessed vehicles were valued at the estimated wholesale auction values and were sold through the wholesale auction process.

Operational charge-offs increased significantly in 2008 due to the write-off of a non-loan account receivable, which remains the subject of litigation.

OREO expenses and write-downs include $1.3 million of write downs due to the decline in estimated market value of the foreclosed properties since they were acquired and $359,000 of ownership related expenses such as insurance, real estate taxes and maintenance on these properties.

Provision for income taxes

The provision for income taxes includes federal and state income taxes and the impact of the recognition of a full valuation allowance against our deferred tax assets in 2009.  The effective income tax rates for the years ended December 31, 2009, 2008, and 2007 were (28%), 38% and 42%, respectively.  Historically, the fluctuations in effective tax rates reflect the effect of the differences in the inclusion or deductibility of certain income and expenses, respectively, for income tax purposes. The income tax expense reported during 2009 was due to the recognition of a full valuation allowance against our deferred tax assets as of December 31, 2009, of which $30.4 million was recorded as income tax expense and the $1.2 million relating to unrealized losses on available for sale securities was recorded as an adjustment to equity through accumulated other comprehensive income. A valuation allowance related to deferred tax assets is required when it is considered more likely than not (greater than 50% likelihood) that all or part of the benefit related to such assets will not be realized. In assessing the need for a valuation allowance, management considered various factors including the significant cumulative losses we have incurred over the last three years coupled with the expectation that our future realization of deferred taxes will be limited as a result of our planned capital offering. These factors represent the most significant negative evidence that management considered in concluding that a full valuation allowance was necessary at December 31, 2009.  As of December 31, 2008, management considered the need for a valuation allowance and, based upon its assessment of the relative weight of the positive and negative evidence available at the time, concluded that no valuation allowance was necessary at such time.

Excluding the impact of the valuation allowance, the effective tax benefit would have been approximately 35% for 2009. This benefit was reduced by the impairment charge recorded against non-deductible goodwill which was partially offset by the impact of a non-taxable gain resulting from the receipt of proceeds from a life insurance policy covering a former employee. The benefit during 2008 was higher than statutory rates primarily due to the recognition of a state income tax credit related to the Company’s funding of affordable housing construction costs for local charitable organizations. The primary factor resulting in the higher effective tax benefit rate during 2007 was the greater relative impact of the effect of tax exempt interest income on the pretax loss.

Our future effective income tax rate will fluctuate based on the mix of taxable and tax free investments we make and, to a greater extent, the impact of changes in the required amount of valuation allowance recorded against our net deferred tax assets and our overall level of taxable income. See Notes 1 and 11 of our consolidated financial statements for additional information about the calculation of income tax expense and the various components thereof. Additionally, there were no unrecognized tax benefits at December 31, 2009, and we do not expect the total of unrecognized tax benefits to significantly increase in the next twelve months.


Loan Portfolio

Prior to our entrance into the Southwest Florida market in 2001, our primary locations were in the Florida Keys (Monroe County) and south Miami-Dade County.  As this region’s primary industry is tourism, commercial loan demand is primarily for resort, hotel, restaurant, marina, and related real estate secured property loans.   We serve this market by offering long-term, adjustable rate financing to the owners of these types of properties for acquisition and improvements.  As our business has expanded in Southwest Florida, the resulting geographic diversification is expected to provide more industry-based diversity to our loan portfolio.  As of December 31, 2009, we had approximately $684.4 million of loans outstanding (including indirect auto loans) in Southwest Florida.

The cost of living in Monroe County is higher in comparison to other counties in Florida due in large part to the limited and expensive real estate with various construction restrictions and environmental considerations.  Accordingly, collateral values on loans secured by property in this market are greater. Collier and Lee counties in Southwest Florida have historically been higher growth communities and the majority of the growth of our commercial loan portfolio in recent years has been generated by serving this market.

Loans are expected to produce higher yields than investment securities and other interest-earning assets.  The absolute volume of loans and the volume as a percentage of total earning assets are important determinants of the net interest margin.  Total loans outstanding decreased to $1.20 billion at the end of 2009 as compared to $1.22 billion at year end 2008, a decrease of 2%.  Of this amount, real estate mortgage loans increased 0.4% from $1.02 billion to $1.03 billion.  Commercial real estate mortgage loans accounted for some of this increase, growing from $658.5 million to $680.4 million at the respective year ends.  Residential loans also increased from $205.1 million at December 31, 2008 to $236.9 million at December 31, 2009. Construction and vacant land decreased from $147.3 mill ion in 2008 to $97.4 million in 2009 offsetting the commercial real estate and residential loan growth. The indirect auto portfolio also decreased from $82.0 million at December 31, 2008 to $50.1 million at December 31, 2009.  We generally originate commercial loans with rates that fluctuate with the prime lending rate or may be fixed for initial periods of 3 to 5 years and residential loans held in the portfolio with rates that adjust periodically and are tied to an index such as the one year treasury or one year LIBOR rate.  At December 31, 2009, 82% of the total loan portfolio had floating or adjustable rates.


The following table presents the composition our loan portfolio at December 31:

(Dollars in thousands) 2009  2008  2007  2006  2005 
Real estate mortgage loans:               
 Commercial $680,409  $658,516  $612,084  $546,276  $451,969 
 Residential  236,945   205,062   112,138   82,243   76,003 
 Farmland  13,866   13,441   11,361   24,210   4,660 
 Construction and vacant land  97,424   147,309   168,595   157,672   125,207 
Commercial and agricultural loans  69,246   71,352   72,076   84,905   80,055 
Indirect auto loans  50,137   82,028   117,439   141,552   118,018 
Home equity loans  37,947   34,062   21,820   17,199   17,232 
Other consumer loans  10,190   11,549   12,154   9,795   9,228 
Subtotal  1,196,164   1,223,319   1,127,667   1,063,852   882,372 
Less:  deferred loan costs (fees)  1,352   1,656   1,489   1,616   1,652 
Less:  allowance for loan losses  (29,083)  (23,783)  (14,973)  (9,581)  (7,546)
Net loans $1,168,433  $1,201,192  $1,114,183  $1,055,887  $876,478 
                     

      Two of the most significant components of our loan portfolio are commercial real estate and construction and vacant land. Our goal of maintaining high standards of credit quality include a strategy of diversification of loan type and purpose within these categories. The following charts illustrate the composition of these portfolios as of December 31:

  2009  2008 
(Dollars in thousands) 
Commercial
Real Estate
  
Percentage
Composition
  
Commercial
Real Estate
  
Percentage
Composition
 
             
Mixed Use Commercial/Residential $102,901   15% $85,580   13%
Office Buildings  103,426   15%  105,238   16%
Hotels/Motels  78,992   12%  90,091   14%
1-4 Family and Multi Family  75,342   11%  88,334   13%
Guesthouses  94,663   14%  84,993   13%
Retail Buildings  78,852   12%  71,184   11%
Restaurants  50,395   7%  47,680   7%
Marinas/Docks  19,521   3%  20,130   3%
Warehouse and Industrial  32,328   5%  27,541   4%
Other  43,989   6%  37,745   6%
Total $680,409   100% $658,516   100%
                 


  2009  2008 
(Dollars in thousands) 
Construction and
 Vacant Land
  
Percentage
Composition
  
Construction and
 Vacant Land
  
Percentage
Composition
 
             
Construction:            
 Residential – owner occupied $6,024   6% $11,866   8%
 Residential – commercial developer  6,574   7%  21,052   14%
 Commercial structure  13,127   13%  18,629   13%
Total construction  25,725   26%  51,547   35%
                 
Land:                
 Raw land  20,684   21%  25,890   18%
 Residential lots  12,773   13%  13,041   9%
 Land development  16,877   17%  19,975   13%
 Commercial lots  21,365   23%  36,856   25%
Total land  71,699   74%  95,762   65%
                 
Total $97,424   100% $147,309   100%
                 
                 


The contractual maturity distribution of our loan portfolio at December 31, 2009 is indicated in the table below.  The majority of these are amortizing loans.

  Loans maturing 
(Dollars in thousands) 
Within
1 Year
  
1 to 5
Years
  
After
5 Years
  Total 
Real estate mortgage loans:            
 Commercial $65,479  $180,176  $434,754  $680,409 
 Residential  3,341   2,183   231,421   236,945 
 Farmland  74   2,458   11,334   13,866 
 Construction and vacant land (a)  69,976   12,548   14,900   97,424 
Commercial and agricultural loans  27,406   21,719   20,121   69,246 
Indirect auto loans  3,519   42,139   4,479   50,137 
Home equity loans  1,599   4,069   32,279   37,947 
Other consumer loans  949   7,954   1,287   10,190 
Total loans $172,343  $273,246  $750,575  $1,196,164 
                 
__________
(a) $6,  (a)  $6,024 of this amount relates to residential real estate construction loans that have been approved for permanent financing but are still under construction. The remaining amount relates to vacant land and commercial real estate construction loans, some of which have been approved for permanent financing but are still under construction.
 


  Loans maturing 
(Dollars in thousands) 
Within
1 Year
  
1 to 5
Years
  
After
5 Years
  Total 
Loans with:            
 Predetermined interest rates $64,808  $119,403  $33,639  $217,850 
 Floating or adjustable rates  107,535   153,843   716,936   978,314 
Total loans $172,343  $273,246  $750,575  $1,196,164 
                 

Allowance and Provision for Loan Losses

The allowance for loan losses is a valuation allowance for probable incurred credit losses in the loan portfolio.  Our formalized process for assessing the adequacy of the allowance for loan losses and the resultant need, if any, for periodic provisions to the allowance charged to income, includes both individual loan analyses and loan pool analyses.  Individual loan analyses are periodically performed on loan relationships of a significant size, or when otherwise deemed necessary, and primarily encompass commercial real estate and other commercial loans.  The result is that commercial real estate loans and commercial loans are divided into the following risk categories: Pass, Special Mention, Substandard and Loss. The allowance consists of specific and general components. When appropriate, a specific reserv e will be established for individual loans based upon the risk classifications and the estimated potential for loss  The specific component relates to loans that are individually classified as impaired.  Otherwise, we estimate an allowance for each risk category.  The general allocations to each risk category are based on factors including historical loss rate, perceived economic conditions (local, national and global), perceived strength of our management, recent trends in loan loss history, and concentrations of credit.

Home equity loans, indirect auto loans, residential loans and consumer loans generally are not analyzed individually and or separately identified for impairment disclosures. These loans are grouped into pools and assigned risk categories based on their current payment status and management’s assessment of risk inherent in the various types of loans. The allocations are based on the same factors mentioned above.

Senior management and the Board of Directors review this calculation and the underlying assumptions on a routine basis not less frequently than quarterly.

The allowance for loan losses amounted to $29.1 million and $23.8 million at December 31, 2009 and December 31, 2008, respectively.  Based on an analysis performed by management at December 31, 2009, the allowance for loan losses is considered to be adequate to cover estimated incurred loan losses in the portfolio as of that date.   However, management’s judgment is based upon our recent historical loss experience, the level of non-performing and delinquent loans, current information and a number of assumptions about future events, which are believed to be reasonable, but which may or may not prove valid.  Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that significant additional increases in the allowance for loan losses will no t be required.  In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses.  Such agencies may require us to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

The provision for loan losses is a charge to income in the current period to replenish the allowance and maintain it at a level that management has determined to be adequate to absorb estimated incurred losses in the loan portfolio.  Our provision for loan losses was $42.3 million, $28.2 million and $9.7 million for the years ended December 31, 2009, 2008 and 2007, respectively. The higher provision for loan losses in 2009 and 2008 was primarily attributable to the national and local market economic recession and the continued financial challenges of our consumer and commercial customers as well as the increase in our nonperforming loans, delinquencies and charge-offs. While there recently has been an increase in the number of real estate unit sales as compared to the prior year period in our markets, the impact of foreclosures and distressed sales is impacting the value of real estate and the economy broadly. Net charge-offs were $37.0 million, or 3.01% of average loans during 2009, compared to $19.4 million and $4.9 million, or 1.64% and 0.45% of average loans in 2008 and 2007, respectively. Of the 2009 net charge offs, approximately $17.8 million were related to loans classified as nonaccrual or impaired as of December 31, 2009.

Our provision for loan losses in future periods will be influenced by the loss potential of impaired loans, non-performing loans and net charge offs, which cannot be reasonably predicted.

Management continuously monitors and actively manages the credit quality of the entire loan portfolio and will continue to recognize the provision required to maintain the allowance for loan losses at an appropriate level. Due to the economic slowdown discussed above, our individual and business customers are exhibiting increasing difficulty in timely payment of their loan obligations. We believe that this trend will continue in the near term. Consequently, we may experience higher levels of delinquent and non-performing loans, which may require higher provisions for loan losses, higher charge-offs and higher collection related expenses in future periods.

As discussed in Note 2 to the consolidated financial statements, TIB Bank has entered into a Memorandum of Understanding with bank regulatory agencies. In addition to increasing capital ratios, the Bank has agreed to improve its asset quality by reducing the balance of assets classified substandard and doubtful in the report from the most recent regulatory examination through collection, disposition, charge-off or improvement in the credit quality of the loans. Further, the Bank has agreed to make every effort to reduce its risk in its concentration in commercial real estate consistent with the Interagency Guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices. In addition, the Bank agreed to establish appropriate concentration limits and sublimits by types of loans and collateral and adopt appropri ate timelines to achieve those limits as a percent of capital and to report our progress to the regulators on a quarterly basis.

    Changes affecting the allowance for loan losses are summarized for the years ended December 31,

(Dollars in thousands) 2009  2008  2007  2006  2005 
Balance at beginning of year $23,783  $14,973  $9,581  $7,546  $6,243 
                     
Charge-offs:                    
 Real estate mortgage loans:                    
 Commercial  10,418   1,577   118   -   - 
 Residential  3,815   1,897   63   -   - 
 Farmland  -   -   -   -   - 
 Construction and vacant land  11,967   4,324   1,251   -   - 
 C Commercial and agricultural loans  3,028   587   278   12   107 
 Indirect auto loans  7,292   10,674   3,110   1,557   1,045 
 Home equity loans  504   270   331   -   - 
 Other consumer loans  242   180   51   4   67 
Total charge-offs  37,266   19,509   5,202   1,573   1,219 
                     
Recoveries:                    
Real estate mortgage loans:                    
Commercial  21   -   -   -   - 
Residential  153   10   -   -   - 
Farmland  -   -   -   -   - 
Construction and vacant land  13   2   -   -   - 
 C Commercial and agricultural loans  45   -   -   20   6 
Indirect auto loans  66   54   262   55   65 
Home equity loans  11   -   2   2   8 
Other consumer loans  1   14   6   40   30 
Total recoveries  310   80   270   117   109 
                     
Net charged off  36,956   19,429   4,932   1,456   1,110 
                     
Provision for loan losses  42,256   28,239   9,657   3,491   2,413 
                     
Acquisition of The Bank of Venice  -   -   667   -   - 
                     
Allo Allowance for loan losses at end of year $29,083  $23,783  $14,973  $9,581  $7,546 
                     
R Ratio of net charge-offs to average net loans outstanding  3.01%  1.64%  0.45%  0.15%  0.14%
                     

While no portion of the allowance is in any way restricted to any individual loan or group of loans and the entire allowance is available to absorb probable incurred credit losses from any and all loans, the following table represents management’s best estimate of the allocation of the allowance for loan losses to the various segments of the loan portfolio based on information available as of December 31. Qualitative factors used in determining the allowance for loan losses resulted in the establishment of an unallocated reserve totaling approximately $652,000 and $1.1 million as of December 31, 2009 and 2007, respectively.  Due to the ongoing evaluation and changes in the basis for the allowance for loan losses, actual future charge offs will not necessarily follow the allocations described below.


  2009  2008  2007  2006  2005 
(Dollars in thousands) Allowance  % of Total Loans  Allowance  % of Total Loans  Allowance  % of Total Loans  Allowance  % of Total Loans  Allowance  % of Total Loans 
R Real estate mortgage loans:                              
Commercial $13,895   57% $11,143   54% $5,250   54% $3,764   51% $2,971   51%
Residential  3,897   20%  2,393   17%  381   10%  191   8%  168   9%
Farmland  198   1%  134   1%  84   1%  161   2%  30   1%
 Construction and vacant land  2,868   8%  1,313   12%  1,218   15%  922   15%  743   14%
C  Commercial and agricultural loans  3,033   6%  2,256   6%  1,547   6%  1,002   8%  912   9%
In Indirect auto loans  3,244   4%  5,708   6%  5,072   11%  3,352   13%  2,523   13%
H Home equity loans  1,011   3%  694   3%  213   2%  87   2%  85   2%
O Other consumer loans  285   1%  142   1%  113   1%  102   1%  114   1%
U Unallocated  652       -       1,095       -       -     
  $29,083   100% $23,783   100% $14,973   100% $9,581   100% $7,546   100%
                                         
Impaired Loans

Non-performing loans and impaired loans are defined differently.  Some loans may be included in both categories, whereas other loans may only be included in one category. A loan is considered impaired when it is probable that not all principal and interest amounts will be collected according to the loan contract. Generally, residential mortgage, commercial and commercial real estate loans exceeding certain size thresholds established by management are individually evaluated for impairment. Nonaccrual loans and restructured loans where loan term concessions benefitting the borrowers have been made are generally designated as impaired. As of December 31, 2009 and 2008, impaired loans presented in the table below include the $72.8 million and $39.8 million, respectively, of nonperforming loans, other than indirect and consumer loa ns. Impaired loans as of December 31, 2009 and 2008, also include $35.9 million and $17.3 million, respectively, of restructured loans which are in compliance with modified terms and not reported as non-performing. Impaired loans also include loans which are not currently classified as non-accrual, but otherwise meet the criteria for classification as an impaired loan (i.e. loans for which the collection of all principal and interest amounts as specified in the original loan contract are not expected, or where management has substantial doubt that the collection will be as specified, but is still expected to occur in its entirety). Collectively, these loans comprise the potential problem loans individually considered along with historical portfolio loss experience and trends and other quantitative and qualitative factors applied to the balance of our portfolios in our evaluation of the adequacy of the allowance for loan losses.

If a loan is considered to be impaired, a portion of the allowance is allocated so that the carrying value of the loan is reported at the present value of estimated future cash flows discounted using the loan’s original rate or at the fair value of collateral, less disposition costs, if repayment is expected solely from the collateral. Impaired loans are as follows:

(Dollars in thousands) 2009  2008 
Year end loans with no specifically allocated allowance for loan losses $60,629  $8,344 
Year end loans with allocated allowance for loan losses  87,823   53,765 
Total $148,452  $62,109 
         
Amount of the allowance for loan losses allocated to impaired loans $9,040  $6,116 
         
Amount of nonaccrual loans classified as impaired $71,755  $37,881 
         

  December 31, 2009 
(Dollars in thousands) Total Impaired Loans  Impaired Loans With Allocated Allowance  Amount of Allowance Allocated  Impaired Loans With No Allocated Allowance 
Commercial $6,210  $4,847  $1,455  $1,363 
Commercial Real Estate  123,452   70,868   5,455   52,584 
Residential  16,261   10,158   1,704   6,103 
Consumer  699   699   274   - 
HELOC  1,830   1,251   152   579 
Total $148,452  $87,823  $9,040  $60,629 


  December 31, 2008 
(Dollars in thousands) Total Impaired Loans  Impaired Loans With Allocated Allowance  Amount of Allowance Allocated  Impaired Loans With No Allocated Allowance 
Commercial $1,654  $1,219  $1,183  $435 
Commercial Real Estate  52,924   47,251   3,963   5,673 
Residential  6,307   4,312   838   1,995 
Consumer  50   44   -   6 
HELOC  1,174   939   132   235 
Total $62,109  $53,765  $6,116  $8,344 


Non-Performing Assets

Non-performing assets include non-accrual loans and investments securities, repossessed personal property, and other real estate.  Loans and investments in debt securities are placed on non-accrual status when management has concerns relating to the ability to collect the principal and interest and generally when such assets are 90 days past due.  Non-performing assets were as follows for the periods ending December 31:

(Dollars in thousands) 2009  2008  2007  2006  2005 
Total non-accrual loans (a) $72,833  $39,776  $16,086  $4,223  $956 
Accruing loans delinquent 90 days or more (a)  -   -   -   -   - 
Total non-performing loans  72,833   39,776   16,086   4,223   956 
                     
Non-accrual investment securities(b)  759   763   3,154   -   - 
Repossessed personal property (primarily indirect auto loans)  326   601   3,136   1,958   962 
Other real estate owned  21,352   4,323   1,846   -   190 
Other assets (c)  2,090   2,076   2,915   2,861   2,815 
Total  non-performing assets $97,360  $47,539  $27,137  $9,042  $4,923 
                     
Allowance for loan losses $29,083  $23,783  $14,973  $9,581  $7,546 
                     
Non-performing assets as a percent of total assets  5.71%  2.95%  1.88%  0.69%  0.46%
Non-performing loans as a percent of total loans  6.09%  3.25%  1.43%  0.40%  0.11%
Allowance for loan losses as a percent of non-performing loans (a)  39.93%  59.79%  93.08%  226.88%  789.33%
                     
__________
(a)  
   Non-performing loans during 2005 excluded the $1.6 million loan discussed below that was guaranteed for both principal and interest by the USDA. In December 2006, the Bank stopped accruing interest on this loan pursuant to a ruling made by the USDA. Accordingly, the loan was included in total non-accrual loans as of December 31, 2006 and 2007. During 2008, the USDA repaid the guaranteed portion of the loan in accordance with the provisions of the guarantee agreement. Other non-accrual loans at December 31, 2005 through December 31, 2006 are primarily indirect auto loans.

     Non-accrual loans as of December 31, 2009, 2008 and 2007 are comprised of the following:

                         
(Dollars in thousands) December 31, 2009  December 31, 2008  December 31, 2007 
Collateral Description Number of Loans  Outstanding Balance  Number of Loans  Outstanding Balance  Number of Loans  Outstanding Balance 
 RResidential 1-4 family  44  $10,738   18  $4,014   19  $4,566 
C Commercial 1-4 family investment  19   8,733   9   7,943   3   1,122 
C Commercial and agricultural  7   2,454   2   64   4   293 
C Commercial real estate  29   24,392   18   13,133   4   2,619 
R Residential land development  13   25,295   4   12,584   1   2,686 
G Government guaranteed loans  2   143   3   143   1   1,641 
InIndirect auto, auto and consumer loans  97   1,078   155   1,895   238   3,159 
      $72,833      $39,776      $16,086 
(b)  
   In December 2007, we placed a collateralized debt obligation (“CDO”) collateralized primarily by homebuilders, REITs, real estate companies and commercial mortgage backed securities on non-accrual. This security had an original cost of $6.0 million. During 2008, two additional similarly secured collateralized debt obligations with original costs of $2.0 million each were also placed on nonaccrual. As of December 31, 2007 and throughout 2008, the estimated fair value of these securities declined further and management has periodically deemed such declines other than temporary. Through December 31, 2008, we had recorded cumulative realized losses totaling $9.2 million relating to these securities. During 2009, the remaining balance of these securities was writt en off and an additional CDO with an original cost of $5.0 million, collateralized by trust preferred securities of banks and insurance companies, was placed on nonaccrual. As this security has been downgraded and interest payments are currently being deferred, the estimated fair value of this security has declined to approximately $759,000 as of December 31, 2009. This estimated fair value is based upon an analysis performed by an independent third-party engaged by the Company as of December 31, 2009 which estimated the fair value and credit loss potential of the security. Based upon our review of the analysis and the assumptions used therein, we believe this decline to be temporary in nature based upon current projections of the performance of the underlying collateral which indicate that the entirety of principal and interest owed will be collected at maturity.  For additional details on these and other investment securities, see the section of management’s discussion and analysis tha t follows entitled “Investment Portfolio”.

(c)  
   In 1998, TIB Bank made a $10.0 million loan to construct a lumber mill in northern Florida. Of this amount, $6.4 million had been sold by the Bank to other lenders. The loan was 80% guaranteed as to principal and interest by the U.S. Department of Agriculture (USDA). In addition to business real estate and equipment, the loan was collateralized by the business owner’s interest in a trust. Under provisions of the trust agreement, beneficiaries cannot receive trust assets until November 2010.

 The portion of this loan guaranteed by the USDA and held by us was approximately $1.6 million. During the second quarter of 2008, the USDA paid the Company the principal and accrued interest and allowed the Company to apply other proceeds previously received to reduce capitalized liquidation costs and protective advances. The non-guaranteed principal and interest ($2.0 million at December 31, 2009 and December 31, 2008) and the reimbursable capitalized liquidation costs and protective advance costs totaling approximately $126,000 and $112,000 at December 31, 2009 and 2008, respectively, are included as “other assets” in the financial statements.

 Florida law requires a bank to liquidate or charge off repossessed real property within five years, and repossessed personal property within six months. Since the property had not been liquidated during this period, the Bank charged-off the non guaranteed principal and interest totaling $2.0 million at June 30, 2003, for regulatory purposes.  Since we believe this amount is ultimately realizable, we did not write off this amount for financial statement purposes under generally accepted accounting principles.



An expanded analysis of the more significant loans classified as nonaccrual during the fourth quarter of 2009 and remaining classified as of December 31, 2009, is as follows:

Significant Nonaccrual Loans (Other Than Indirect Auto and Consumer) 
(Dollars in thousands)
 
Collateral Description Original Loan Amount  Original Loan to Value (Based on Original Appraisal)  Current Loan Amount  Specific Allocation of Reserve in Allowance for Loan Losses at December 31, 2009  Amount Charged Against Allowance for Loan Losses During the Quarter Ended December 31, 2009  Impact on the Provision for Loan Losses (*) During the Quarter Ended December 31, 2009 
Arising in Fourth Quarter 2009                  
Commercial 1-4 family residential SW Florida $2,175   66% $1,520  $647  $163  $97 
Vacant land SW Florida  5,826  ��60%  5,450   191   61   121 
Commercial 1-4 family residential SW Florida  1,933   73-83%  1,391   195   259   210 
ComCommercial real estate, business assets and accounts receivable  3,392   80%  3,358   1,438   -   1,438 
Luxury boutique hotel in SW Florida  9,775   88%  7,000   245   2,775   2,608 
Bayfront land in FL Keys  5,622   54%  5,459   -   -   - 
Nu  Numerous smaller balance primarily 1-4 family residential and commercial real estate loans          8,169   851   1,154   1,185 
                         
      Total  $32,347  $3,567  $4,412  $5,659 
                         
Nonaccrual Prior to Fourth Quarter 2009 Remaining on Nonaccrual at December 31, 2009                        
                         
Commercial 1-4 family residential $3,778   72-78% $3,401  $273  $-  $(229)
Mixed use – developer  3,602   80%  2,300   -   1,363   18 
Commercial real estate  1,720   78%  1,676   -   -   - 
Commercial real estate  1,408   80%  940   75   360   73 
Residential 1-4 family home  1,008   80%  665   53   336   - 
Vacant land – residential development  10,000   61%  5,385   188   4,615   (196)
Two restaurants SW Florida  5,099   57-70%  4,949   717   -   352 
Two office buildings – developer  4,807   75%  2,200   176   2,485   2,286 
Vacant land – residential development  4,750   42%  4,750   -   -   - 
Office Building  1,118   66%  1,118   20   -   20 
N Numerous smaller balance primarily 1-4 family residential and commercial real estate loans          12,024   775   1,438   531 
          $39,408  $2,277  $10,597  $2,855 
      Total  $71,755  $5,844  $15,009  $8,514 
                         

(*)Impact on the provision for loan losses during the quarter represents the increase (decrease) in specific reserves.


Of the $32.3 million of loans placed on nonaccrual during the fourth quarter and remaining on nonaccrual as of December 31, 2009, $8.1 million related to loans which we reviewed during the quarter and determined that no specific reserves were necessary at such time. The remaining loans which were also reviewed during the quarter required a $5.7 million increase in the allocation of specific reserves which resulted in specific reserves of $3.6 million as of December 31, 2009 after recognizing $4.4 million of partial charge-downs.  Loans classified as nonaccrual prior to the fourth quarter of 2009 required additional specific reserves of $2.9 million during the fourth quarter of 2009 and required specific reserves of $2.2 million as of December 31, 2009 after recognizing partial charge-downs of $10.6 million during the fourth qua rter. As of December 31, 2009, the balances of nonaccrual and impaired loan are net of cumulative charge-downs of approximately $17.8 million.



An expanded analysis of the significant components of other real estate owned as of December 31, 2009 is as follows:

OREO Analysis as of December 31, 2009
(Dollars in thousands)
 
Property Description Original Loan Amount  Original LTV  Carrying Value at December 31, 2009 
Seven developed commercial lots $13,500   50% $9,422 
Si Six 1-4 family residential condominiums (new construction)  7,066   72%  4,939 
Luxury 1-4 family residence in Southwest Florida  2,493   67%  2,494 
Commercial real estate (3 loans)          2,243 
Other land (4 lots – 3 loans)          1,611 
Other 1-4 family residential (3 loans)          643 
      Total  $21,352 
Liquidity and Rate Sensitivity

Liquidity represents the ability to provide steady sources of funds for loan commitments and investment activities, as well as to provide sufficient funds to cover deposit withdrawals and payments of debt, off-balance sheet obligations and operating obligations.  Funds can be obtained from operations by converting assets to cash, by attracting new deposits, by borrowing, by raising capital and other ways.  We manage the levels, types and maturities of earning assets in relation to the sources available to fund current and future needs to ensure that adequate funding will be available at all times.

Major sources of net increases in cash and cash equivalents are as follows for the three years ending December 31:

(Dollars in thousands) 2009  2008  2007 
Provided by (used in) operating activities $(5,147) $9,207  $3,770 
Provided by (used in) investing activities  255,487   (193,909)  (40,328)
Provided by (used in) financing activities  (156,672)  187,377   52,065 
Net increase in cash and cash equivalents $93,668  $2,675  $15,507 
             
As discussed in Note 16 of the Consolidated Financial Statements, the Company had unfunded loan commitments and unfunded letters of credit totaling $73.5 million at December 31, 2009.  We believe the likelihood of these commitments either needing to be totally funded or funded at the same time is low.  However, should significant funding requirements occur, the Company has available borrowing capacity from various sources as discussed below.

In addition to maintaining a stable core deposit base, we maintain adequate liquidity primarily through the use of investment securities, short term investments such as federal funds sold and unused borrowing capacity. The Bank has invested in Federal Home Loan Bank stock for the purpose of establishing credit lines with the Federal Home Loan Bank. The credit availability to the Bank is based on a percentage of the Bank’s total assets as reported in their most recent quarterly financial information submitted to the Federal Home Loan Bank and subject to the pledging of sufficient collateral. At December 31, 2009, there were $125.0 million in advances outstanding in addition to $25.3 million in letters of credit including $25.1 million used in lieu of pledging securities to the State of Florida to collateralize governmental deposits. As of December 31, 2009, collateral availability under our agreements with the Federal Home Loan Bank provided for total borrowings of up to approximately $206.8 million of which $56.5 million was available. On January 7, 2010, the FHLB notified the Bank that the credit availability has been rescinded and the rollover of existing advances outstanding is limited to twelve months or less.

The Bank had an unsecured overnight federal funds purchased accommodations up to a maximum of $25.0 million from its correspondent bank as of December 31, 2009. On February 17, 2010, the Bank was notified that the maximum amount of the accommodation was changed to $7.5 million and a secured repurchase agreement with a maximum credit availability of $24.4 million. As of December 31, 2009, collateral availability under our agreement with the Federal Reserve Bank of Atlanta (“FRB”) provided for up to $98.6 million of borrowing availability from the FRB discount window. We believe that we have adequate funding sources through unused borrowing capacity from our correspondent banks and FRB, unpledged investment securities, loan principal repayment and potential asset maturities and sales to meet our foreseeable liquidity requiremen ts.

During the second, third, and fourth quarters of 2008 and the first, second, and third quarters of 2009, the Company’s Board of Directors declared 1% (one percent) stock dividends to holders of record as of July 7, 2008, September 30, 2008, December 31, 2008, March 31, 2009, June 30, 2009 and September 30, 2009 respectively. The stock dividends were distributed on July 17, 2008, October 10, 2008, January 10, 2009, April 10, 2009, July 10, 2009 and October 10, 2009. The decision to replace our quarterly cash dividend with a stock dividend was made after consideration of the current and projected economic and operating environment and to conserve cash and capital resources at the holding company to support the potential capital needs of the Bank. The Bank and the Company currently maintain regulatory capital which meets the definitio n of adequately capitalized. As previously described, TIB Bank has entered into an informal agreement with Bank regulatory agencies that it would move in good faith to increase its Tier 1 leverage capital ratio to not less than 8% and its total risk-based capital ratio to not less than 12% by December 31, 2009 and maintain these higher ratios for as long as this agreement is in effect. At December 31, 2009, TIB had a Tier 1 leverage capital ratio of 4.8% and a total risk-based capital ratio of 8.1%.

Due to the timing of our plans to raise capital, we requested an extension of time to April 30, 2010 to comply with the informal agreement. As the financial markets traditionally are not receptive to offerings during the holiday and year-end period, we withdrew our registration statement on December 23, 2009 and intend to pursue our capital efforts once year-end results are available. The Office of Financial Regulation has agreed to the extension provided the FDIC also agrees. We are currently awaiting the FDIC's response.

           As of December 31, 2009, our holding company had cash of approximately $874,000. This cash is available for providing capital support to the subsidiary bank and for other general corporate purposes. During 2009, the holding company invested $20.5 million of capital in the Bank to support its growth in deposits and assets. The Company received a request from the Federal Reserve Bank of Atlanta for the Company’s Board of Directors to adopt a resolution that it will not declare or pay any dividends on its outstanding common or preferred stock, nor will make any payments or distributions on the outstanding trust preferred securities or corresponding subordinated debentures without the prior written approval of the Reserve Bank. The Board adopted this resolution on October 5, 2009. The Company has notified the trustees of its $20 million trust preferred securities due July 7, 2036 and its $5 million trust preferred securities due July 31, 2031 of its election to defer interest payments on the trust preferred securities beginning with the payments due in October 2009. In January 2010, the Company notified the trustees of its $8 million trust preferred securities due September 7, 2030 of its election to defer interest payments on the trust preferred securities beginning with the payment due in March 2010. The Company has also notified the Treasury of its election to defer the dividend payment on the Series A preferred stock issued under TARP beginning in November 2009. Deferral of the trust preferred securities is allowed for up to 60 months without being considered an event of default. Additionally, the Company may not declare or pay dividends on its capital stock, including dividends on preferred stock or, with certain exceptions, repurchase capital stock without first having paid all trust preferred interest and all cumulative preferred dividends that are due. If dividends on the Series A preferred stock are not paid for six quarters, whether or not consecutive, the Treasury has the right to appoint two members to the Board of Directors of the Company. At this time it is unlikely that the Company will resume payment of cash dividends on its common stock for the foreseeable future.

Under state banking law, regulatory approval will be required if the total of all dividends declared in any calendar year by a bank exceeds the bank’s net profits to date for that year combined with its retained net profits for the preceding two years. Based on the level of losses for the prior two years, declaration of dividends by TIB Bank, during 2009, would have required regulatory approval. Therefore, the Company does not expect to receive dividends from the Bank in the foreseeable future.

Closely related to liquidity management is the management of interest-earning assets and interest-bearing liabilities.  The Company manages its rate sensitivity position to avoid wide swings in net interest margins and to minimize risk due to changes in interest rates.
Our interest rate sensitivity position at December 31, 2009 is presented in the table below.


 
(Dollars in thousands) 3 Months or Less  4 to 6 Months  7 to 12 Months  1 to 5 Years  Over 5 Years  Total 
Interest-earning assets:                  
Loans $386,105  $60,523  $106,591  $491,389  $151,556  $1,196,164 
Investment securities-taxable  35,129   -   -   14,490   192,651   242,270 
Investment securities-tax exempt  -   -   -   4,169   3,892   8,061 
Marketable equity securities  8   -   -   -   -   8 
FHLB stock  10,447   -   -   -   -   10,447 
InInterest-bearing deposits in other banks  147,760   -   -   -   -   147,760 
Total interest-bearing assets  579,449   60,523   106,591   510,048   348,099   1,604,710 
                         
Interest-bearing liabilities:                        
NOW accounts  195,960   -   -   -   -   195,960 
Money market  214,531   -   -   -   -   214,531 
Savings deposits  122,292   -   -   -   -   122,292 
Time deposits  169,295   100,110   197,490   197,842   43   664,780 
Subordinated debentures  25,000   -   -   -   8,000   33,000 
Other borrowings  120,475   -   -   115,000   -   235,475 
Total interest-bearing liabilities  847,553   100,110   197,490   312,842   8,043   1,466,038 
                         
Interest sensitivity gap $(268,104) $(39,587) $(90,899) $197,206  $340,056  $138,672 
                         
Cumulative interest sensitivity gap $(268,104) $(307,691) $(398,590) $(201,384) $138,672  $138,672 
                         
Cumulative sensitivity ratio  (16.7%)  (19.2%)  (24.8%)  (12.5%)  8.6%  8.6%
                         

We are cumulatively liability sensitive through the five-year time period, and asset sensitive in the over five year timeframe above.  Certain liabilities such as non-indexed NOW and passbook savings accounts, while technically subject to immediate re-pricing in response to changing market rates, historically do not re-price as quickly or to the extent as other interest-sensitive accounts.  Approximately 13% of our deposit funding is comprised of non-interest-bearing liabilities and total interest-earning assets are greater than the total interest-bearing liabilities.  Therefore it is anticipated that, over time, the effects on net interest income from changes in asset yield will be greater than the change in expense from liability cost.  We expect market short-term interest rates to remain low for an extended period of time.  We expect deposit costs to continue to decline but they may decrease more slowly or to a lesser extent than loan yields, or they could increase due to strong demand in the financial markets and banking system for liquidity which is reflected in elevated pricing competition for deposits. The predominant drivers to increase net interest income are the composition of earning assets, the interest rates paid on our deposits and the net change in non-performing assets.

Interest-earning assets and time deposits are presented based on their contractual terms.  It is anticipated that run off in any deposit category will be approximately offset by new deposit generation.

As a primary measure of our interest rate risk, we employ a financial model derived from our assets and liabilities which simulates the effect of various changes in interest rates on our projected net interest income. This financial model is our principal tool for measuring and managing interest rate risk. Many assumptions regarding the timing and sensitivity of our assets and liabilities to a change in interest rates are made. We continually review and update these assumptions. This model is updated monthly for changes in our assets and liabilities and we model different interest rate scenarios based upon current and projected economic and interest rate conditions. We analyze the results of these simulations and develop tactics and strategies to attempt to mitigate, where possible, the projected unfavorable impact of various interest ra te scenarios on our projected net interest income. We also develop tactics and strategies to increase our net interest margin and net interest income that are consistent with our operating policies.

Investment Portfolio

Contractual maturities of investment securities at December 31, 2009 are shown below.  Expected maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations without call or prepayment penalties. Other securities include mortgage-backed securities and marketable equity securities which are not due at a single maturity date.

(Dollars in thousands) Within 1 Year  
After 1 Year
Within 5 Years
  
After 5 Years
Within 10 Years
  After 10 Years  Other Securities 
  Amount  Yield  Amount  Yield  Amount  Yield  Amount  Yield  Amount 
SsSecurities Available for Sale:                           
U.U.S. Gov’t agencies and corporations  $-   -   $4,088   3.60%  $20,050   1.54%  $5,034   3.93%  $- 
StStates and political subdivisions – tax exempt (a)  -   -   4,169   5.86%  3,892   5.63%  -   -   - 
StStates and political subdivisions – taxable  -   -   -   -   -   -   2,212   6.10%  - 
MMarketable equity securities (a)  -   -   -   -   -   -   -   -   8 
MMortgage-backed securities - residential  -   -   -   -   -   -   -   -   208,115 
C Corporate bonds  -   -   -   -   -   -   2,012   1.10%  - 
C Collateralized debt obligations  -   -   -   -   -   -   759   0.46%  - 
T Total  $-   -   $8,257   4.72%  $23,942   2.18%  $10,017   2.59%  $208,123 
                                     


Yield by classification of investment securities at December 31, 2009 was as follows:

(Dollars in thousands) Yield  Totals 
Securities Available for Sale:      
U.S. Government agencies and corporations  2.24% $29,172 
States and political subdivisions – tax exempt (a)  5.75%  8,061 
States and political subdivisions – taxable  6.10%  2,212 
Marketable equity securities (a)  0%  8 
Mortgage-backed securities - residential  3.83%  208,115 
Corporate bonds  1.10%  2,012 
Collateralized debt obligations (b)  0.46%  759 
Total  (b)  3.63% $250,339 
         
__________
(a)  
Weighted average yields on tax exempt obligations and marketable equity securities have been computed by grossing up actual tax exempt income.
(b)  Excluding the impact of the non-accrual collateralized debt obligation security, the total investment portfolio yield was 3.69%.



The following table presents the amortized cost, unrealized gains, unrealized losses, and fair value for the major categories of our investment portfolio for each reported period:

Available for Sale—December 31, 2009

(Dollars in thousands) Amortized Cost  Unrealized Gains  Unrealized Losses  
Fair
Value
 
U.S. Government agencies and corporations $29,232  $24  $84  $29,172 
States and political subdivisions-tax exempt  7,754   307   0   8,061 
States and political subdivisions-taxable  2,313   -   101   2,212 
Marketable equity securities  12   -   4   8 
Mortgage-backed securities - residential  207,344   2,083   1,312   208,115 
Corporate bonds  2,878   -   866   2,012 
Collateralized debt obligations  4,996   -   4,237   759 
  $254,529  $2,414  $6,604  $250,339 
                 

Available for Sale—December 31, 2008

(Dollars in thousands) Amortized Cost  Unrealized Gains  Unrealized Losses  
Fair
Value
 
U.S. Government agencies and corporations $50,892  $776  $-  $51,668 
States and political subdivisions-tax exempt  7,751   59   21   7,789 
States and political subdivisions-taxable  2,407   -   70   2,337 
Marketable equity securities  12   -   -   12 
Mortgage-backed securities - residential  157,066   1,332   421   157,977 
Corporate bonds  2,870   -   1,158   1,712 
Collateralized debt obligations  5,763   -   1,488   4,275 
  $226,761  $2,167  $3,158  $225,770 
                 

Available for Sale—December 31, 2007

(Dollars in thousands) Amortized Cost  Unrealized Gains  Unrealized Losses  
Fair
Value
 
U.S. Government agencies and corporations $72,482  $1,245  $66  $73,661 
States and political subdivisions-tax exempt  9,629   6   51   9,584 
States and political subdivisions-taxable  2,495   1   21   2,475 
Marketable equity securities  1,224   -   -   1,224 
Mortgage-backed securities - residential  60,161   295   296   60,160 
Corporate bonds  2,865   -   100   2,765 
Collateralized debt obligations  11,110   -   622   10,488 
  $159,966  $1,547  $1,156  $160,357 
                 


Other than temporary impairment of available for sale securities

As of December 31, 2009, we owned three collateralized debt obligation investment securities collateralized by debt obligations of homebuilders, REITs, real estate companies and commercial mortgage backed securities with an aggregate original cost of $10.0 million. Through December 31, 2009, we have recorded cumulative other than temporary impairment losses of $10.0 million on these securities. In determining the estimated fair value of these securities, we utilized a discounted cash flow modeling valuation approach which is discussed in greater detail in Note 18 - Fair Value. These securities are floating rate securities which were rated “A” or better by an independent and nationally recognized rating agency at the time of our purchase. In late December 2007, these securities were downgraded below investment grade by a natio nally recognized rating agency. Due to the ratings downgrade, and the amount of unrealized loss, management concluded that the loss of value was other than temporary under generally accepted accounting principles and the Company wrote these investment securities down to their estimated fair value. This resulted in the recognition of other than temporary impairment loss of $3.9 million in 2007. During 2008, the estimated fair value of these securities declined further due to the occurrence of additional defaults by certain underlying issuers and changes in the cash flow and discount rate assumptions used to estimate the value of these securities. During 2008, we concluded that the further declines in values were other than temporary under generally accepted accounting principles. Accordingly, we wrote-down these investment securities by an additional $5.3 million. These additional write downs included the complete write off of two of the three securities, with an original cost of $2.0 million each. The third security, with an original cost of $6.0 million was valued at an estimated fair value of $763,000 as of December 31, 2008. During 2009, additional defaults by underlying issuers and corresponding changes in estimated future cash flow assumptions resulted in the write-down of this third security to $0.

    As of December 31, 2009, the Company owned a collateralized debt security with an original cost of $5.0 million where the underlying collateral is comprised primarily of trust preferred securities of banks and insurance companies. This security was rated “AA” by a nationally recognized rating agency at the time of our purchase. The inputs used in determining the estimated fair value of this security are Level 3 inputs. In determining the estimated fair value, management utilized a discounted cash flow modeling valuation approach through September 30, 2009. Discount rates utilized in the modeling of these securities were estimated based upon a variety of factors including the market yields of publicly traded trust preferred securities of larger financial institutions and other non-investment grade corpor ate debt. Cash flows utilized in the modeling of these securities were based upon actual default history of the underlying issuers and varying assumptions of estimated future defaults of issuers. During 2009, the estimated fair value of this security declined further due to the occurrence of downgrades by rating agencies, additional defaults or deferrals by certain underlying issuers and changes in the estimated timing of the future cash flow and discount rate assumptions used to estimate the value of this security. As of December 31, 2009, we engaged an independent third party valuation firm to estimate the fair value and credit loss potential of this security. Management reviewed the assumptions and methodology employed in this analysis and while the assumptions differed from those used in prior quarters to estimate the fair value of the security, the general premise of the methodology of discounting estimated future cash flows based upon the expected performance of the underlying issuers collateralizing t he security was consistent with management’s previous approach. Based upon this analysis, as of December 31, 2009, management concluded that the further decline in value does not meet the definition of other than temporary under generally accepted accounting principles because no credit loss has been incurred.

Additionally, during 2007, the market value of an investment in equity securities, which the Company originally acquired in 2003 for $3.0 million to obtain community reinvestment credit, of a publicly owned company declined significantly. During 2007, management determined that the decline was other than temporary; accordingly, we wrote this investment down by $1.8 million. Due to significant further declines in market value during 2008, we wrote this investment down further by $1.1 million in 2008 and decided to sell a portion of this investment in December 2008 to ensure we would fully realize the associated capital loss carryback potential for Federal income tax purposes. In doing so, we recognized an additional realized loss of approximately $124,000 upon the partial disposition of this investment in 2008.

The write downs described above resulted in total recognized other than temporary impairment losses of $763,000, $6.4 million and $5.7 million during 2009, 2008 and 2007, respectively.

We regularly review each investment security for impairment based on criteria that include the extent to which cost exceeds the estimated fair value, the duration of that market decline, the financial health of and specific prospects for the issuer(s) and our ability and intention with regard to holding the security to maturity. Future declines in the fair value of these or other securities may result in additional impairment charges which may be material to the financial condition and results of operations of the Company. For additional detail regarding our impairment assessment process, see Notes 1 and 4 of the Notes to Consolidated financial statements below.

Deposits

The following table presents the average amount outstanding and the average rate paid on deposits by us for the years ended December 31, 2009, 2008, and 2007.

  2009  2008  2007 
(Dollars in thousands) Average Amount  Average Rate  Average Amount  Average Rate  Average Amount  Average Rate 
Non-interest bearing deposits $173,083     $146,158     $163,478    
                      
Interest-bearing deposits                     
NOW Accounts  182,398   0.68%  172,520   1.70%  151,745   3.27%
Money market  196,469   1.43%  151,273   2.41%  186,996   4.15%
Savings deposit  116,956   1.83%  52,896   1.26%  55,360   1.75%
Time deposits  696,606   3.08%  591,723   4.28%  486,658   4.97%
                         
Total $1,365,512   2.02% $1,114,570   2.92% $1,044,237   3.63%
                         

The following table presents the maturity of our time deposits at December 31, 2009:


(Dollars in thousands) Deposits $100 and Greater  Deposits Less than $100  Total 
Months to maturity:         
3 or less $54,573  $114,722  $169,295 
4 to 6  39,312   60,798   100,110 
7 through 12  101,949   95,541   197,490 
Over 12  92,187   105,698   197,885 
Total $288,021  $376,759  $664,780 
             



Off-Balance Sheet Arrangements and Contractual Obligations

Our off-balance sheet arrangements and contractual obligations at December 31, 2009 are summarized in the table that follows.  The amounts shown for commitments to extend credit and letters of credit are contingent obligations, some of which are expected to expire without being drawn upon.  As a result, the amounts shown for these items do not necessarily represent future cash requirements.  We believe that our current sources of liquidity are more than sufficient to fulfill the obligations we have as of December 31, 2009 pursuant to off-balance sheet arrangements and contractual obligations.

  Amount of Commitment Expiration Per Period 
(Dollars in thousands) Total Amounts Committed  One Year or Less  Over One Year Through Three Years  Over Three Years Through Five Years  Over Five Years 
Off-balance sheet arrangements               
 Commitments to extend credit $71,623  $41,970  $10,568  $2,001  $17,084 
 Standby letters of credit  1,896   1,626   270   -   - 
Total $73,519  $43,596  $10,838  $2,001  $17,084 
                     
Contractual obligations                    
 Time deposits $664,780  $466,880  $191,811  $6,046  $43 
 Operating lease obligations  4,481   884   1,276   517   1,804 
 Purchase obligations  16,799   2,953   6,466   7,380   - 
        F   FHLB Advances  125,000   10,000   65,000   50,000   - 
 Long-term debt  63,000   30,000   -   -   33,000 
 Other lOther Long-term liabilities reflected on the balance sheet under GAAP  1,718   32   93   93   1,500 
Total $875,778  $510,749   264,646  $64,036  $36,347 
                     


The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and standby letters of credit.  These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments.  The Bank uses the same credit policies in making commitments to extend credit and generally use the same credit policies for letters of credit as for on-balance sheet instruments.

Commitments to extend credit are legally binding agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Since some of these commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.  Unused commercial lines of credit, which comprise a substantial portion of these commitments, generally expire within a year from their date of origination.  Other loan commitments generally expire in 30 days.  The amount of collateral obtained, if any, by the Bank upon extension of credit is based on management’s credit evaluation of the borrower.  Collateral held varies but may include security interests in business assets, mortgages on commercial and reside ntial real estate, deposit accounts with the Banks or other financial institutions, and securities.

Standby letters of credit are conditional commitments issued by the Bank to assure the performance or financial obligations of a customer to a third party.  The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers.  The Bank generally holds collateral and/or obtains personal guarantees supporting these commitments.

The Bank is obligated under operating leases for office and banking premises which expire in periods varying from one to nineteen years.  Future minimum lease payments, before considering renewal options that generally are present, total $4.5 million at December 31, 2009.

Purchase obligations consist of computer and item processing services, and debit and ATM card processing and support services contracted by the Company under long term contractual relationships and based upon estimated utilization.

Long term debt, at December 31, 2009, consists of subordinated debentures totaling $33.0 million and securities sold under repurchase agreement totaling $30.0 million. These borrowings are further described in Note 10 of the Consolidated Financial Statements.

     The Bank has invested in FHLB stock for the purpose of establishing credit lines with the FHLB. The credit availability to the Bank is based on the amount of collateral pledged.  FHLB advances total $125.0 million at December 31, 2009.  These borrowings are further described in Note 9 of the Consolidated Financial Statements.

Other long-term liabilities represent obligations under the non-qualified retirement plan for the Company’s directors and the non-qualified deferred compensation arrangement with certain of the Company’s executive officers.  Under the director retirement plan, the Company pays each participant, or their beneficiary, the amount of board compensation fees that the director has elected to defer and interest in 120 equal monthly installments, beginning the month following the director’s normal retirement date.  The amount presented above reflects the future obligation to be paid, assuming no future fee deferrals.  Under the executive deferred compensation plan, the Company pays each participant, or their beneficiary, up to 43% of the executive’s highest compensation level in the three yea rs immediately preceding the date of termination of employment for periods of 10 to 15 years.  The amount presented reflects the amount vested in this plan as of December 31, 2009.
In December 2008, the Company entered into amended and restated deferred fee agreements with certain members of the Company’s Board of Directors (the “Directors”) and approved amendments to certain employment agreements and approved revised executive salary continuation and deferred compensation agreements (collectively, the “Agreements”). The Agreements were primarily amended in order to bring each agreement into compliance with the provisions of section 409A of the Internal Revenue Code. Section 409A of the Internal Revenue Code provided a one-time election for participants in deferred compensation agreements to receive a lump sum payment in 2009 prior to March 14, 2009. The Directors’ agreements and the agreement of one employee contained such an election provision and, in connection therewith, the Directors and employee elected to receive lump sum distributions in 2009 of the amount vested, accrued and earned through December 31, 2008. A total of $2.1 million was paid during the first quarter of 2009 to these individuals. These elections were made in connection with each individual’s personal tax planning strategy and resulted in an elimination of the future expenses that would have been incurred by the Company in connection with the Agreements, had the elections not been made.


Capital Adequacy

There are various primary measures of capital adequacy for banks and bank holding companies such as risk based capital guidelines and the leverage capital ratio.  See Notes 2 and 14 to the Consolidated Financial Statements.

In March 2008, we sold 1.2 million shares of our common stock and warrants to purchase an additional 1.2 million shares resulting in gross proceeds of $10.1 million. On December 5, 2008, the Company issued $37 million of preferred stock and a related warrant to the U.S. Treasury under the U.S. Treasury’s Capital Purchase Program. As a result of these actions, the Company increased its levels of capital under capital adequacy guidelines.

On July 2, 2009, TIB Bank entered into a Memorandum of Understanding, which is an informal agreement, with Bank regulatory agencies that it would move in good faith to increase its Tier 1 leverage capital ratio to not less than 8% and its total risk-based capital ratio to not less than 12% by December 31, 2009 and maintain these higher ratios for as long as this agreement is in effect.

As of December 31, 2009, the Bank met the level of capital required in order to be categorized by the FDIC as adequately capitalized under the regulatory framework for prompt corrective action.  The risk-based capital ratio of Tier 1 capital to risk-weighted assets was 6.8%, the risk-based ratio of total capital to risk-weighted assets was 8.1%, and the leverage ratio was 4.8%, for TIB Bank.

As of December 31, 2009, the Company’s risk-based capital ratio of Tier 1 capital to risk-weighted assets was 5.7%, its risk-based ratio of total capital to risk-weighted assets was 8.1%, and its leverage ratio was 4.1%.

Due to the contracting economic conditions, the higher level of nonperforming assets, general regulatory initiatives to increase capital levels, the potential for further operating losses and the agreement to move in good faith to increase its capital, the Company is evaluating its capital position and is proceeding with plans to increase its capital. This may result in the issuance of additional shares of common stock or securities convertible into common stock.  While management believes we have sufficient capital to continue as a going concern, if we are unable to raise additional capital and/or we incur significant additional losses and are unable to comply with the terms of the informal agreement, uncertainty arises about our ability to continue as a going concern.


Inflation

Inflation has an important impact on the growth of total assets in the banking industry and causes a need to increase equity capital higher than normal levels in order to maintain an appropriate equity to assets ratio.  We have been able to maintain an adequate level of equity, as previously mentioned and cope with the effects of inflation by managing our interest rate sensitivity position through our asset/liability management program, and by periodically adjusting our pricing of services and banking products to take into consideration current costs.


Critical Accounting Policies

In reviewing and understanding financial information for the Company, you are encouraged to read and understand the significant accounting policies which are used in preparing the consolidated financial statements of the Company. These policies are described in Note 1 to the Consolidated Financial Statements.  Of these policies, management believes that the accounting for the allowance for loan losses, impairment of investment securities and the valuation allowance on deferred income tax assets are the most critical.

Losses on loans result from a broad range of causes from borrower specific problems, to industry issues, to the impact of the economic environment.  The identification of these factors that lead to default or non-performance under a borrower loan agreement and the estimation of loss in these situations are very subjective. In addition, a dramatic change in the performance of one or a small number of borrowers can have a significant impact on the estimate of losses. As described above under the “Allowance and Provision for Loan Losses” heading, management has implemented a process that has been applied consistently to systematically consider the many variables that impact the estimation of the allowance for loan losses.
Impairment of investment securities results in a write-down that must be included in net income when a market decline below cost is other-than-temporary. We regularly review each investment security for impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer(s) and our ability and intention with regard to holding the security to maturity.

A valuation allowance related to deferred tax assets is required when it is considered more likely than not (greater than 50% probability) that all or part of the benefit related to such assets will not be realized. Income tax expense (or benefit) is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method.  Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. As described above under the “Provision for Income Taxes” heading and in more deta il in Note 11 to the Consolidated Financial Statements, the Company recorded a full valuation allowance against its net deferred tax assets as of December 31, 2009.





Appendix D
Information included under “Management’s Discussion And Analysis Of Financial Condition And Results Of Operations” in TIB Financial Corp.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010.
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

Certain of the matters discussed under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-Q may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act and as such may involve known and unknown risk, uncertainties and other factors which may cause the actual results, performance or achievements of TIB Financial Corp. (the "Company") to be materially different from future results described in such forward-looking statements. Actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation:  failure to continue as a going concern; failure to maintain adequate levels of capital and liquidity to support our op erations; the effects of future economic conditions; governmental monetary and fiscal policies, as well as legislative and regulatory changes; the risks of changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral, and interest rate risks; the effects of competition from other commercial banks, thrifts, consumer finance companies, and other financial institutions operating in the Company's market area and elsewhere.  All forward-looking statements attributable to the Company are expressly qualified in their entirety by these cautionary statements.  The Company disclaims any intent or obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise.

The following discussion addresses the factors that have affected the financial condition and results of operations of the Company as reflected in the unaudited consolidated statement of condition as of June 30, 2010, and statements of operations for the three and six months ended June 30, 2010.  Operating results for the three and six months ended June 30, 2010 are not necessarily indicative of trends or results to be expected for the year ended December 31, 2010. TIB Financial's results of operations include the operations of TIB Bank (the “Bank”) and Naples Capital Advisors, Inc. as well as the operations of nine former branches of Riverside Bank of the Gulf Coast (“Riverside”) subsequent to their assumption on February 13, 2009.

Definitive Investment Agreement
We are required by regulation to maintain adequate levels of capital to support our operations. On July 2, 2009, the Bank entered into a Memorandum of Understanding, which is an informal agreement, with bank regulatory agencies that it would move in good faith to increase its Tier 1 leverage capital ratio to not less than 8% and its total risk-based capital ratio to not less than 12% by December 31, 2009 and maintain these higher ratios for as long as this agreement is in effect.  At December 31, 2009, these elevated capital ratios were not met. On July 2, 2010, the Bank entered a Consent Order, a formal agreement with the bank regulatory agencies under which, among other things, the Bank has agreed to maintain a Tier 1 Capital ratio of at least 8% of total assets and a Total Risk Based Capital ratio of at least 12% within 90 d ays. The Consent Order also governs certain aspects of the Bank’s operations including a requirement that it reduce the balance of assets classified substandard and doubtful by at least 70% over a two-year period, and not undertake asset growth of 5% or more per year without prior approval from the regulatory agencies.  The Consent Order supersedes the Memorandum of Understanding.

On June 29, 2010, the Company and the Bank entered into a definitive agreement with North American Financial Holdings, Inc. (“NAFH”) for the investment of up to $350 million in TIB through the purchase of common stock, preferred stock and a warrant.  Pursuant to the definitive agreement, the Company agreed to sell to NAFH, at the closing of the investment, 700 million shares of its common stock at a purchase price of $0.15 per share and 70,000 shares of newly created mandatorily convertible participating voting preferred stock at a purchase price of $1,000 per share for a cumulative total of $175 million.  The preferred stock will have a liquidation preference of $1,000 per share and each share of preferred stock will be convertible into a number of shares of the Company’s common stock equal to the l iquidation preference divided by $0.15 (subject to customary anti-dilution adjustments).  After giving effect to the NAFH investment, it is expected that NAFH would own approximately 99% of the Company’s common stock (on an as-converted basis).  The Company also intends to conduct a rights offering to legacy shareholders of rights to purchase up to 149 million shares of common stock at a price of $0.15 per share, which would raise up to $22.4 million, which would equate to 12% of the Company’s pro-forma fully diluted equity.  The record date for the rights offering was July 12, 2010.  In addition, during the 18-month period following the closing, NAFH will have the right to invest up to an additional $175 million in preferred stock and/or common stock on the above terms.  Upon closing of the investment, each of the Company and the Bank will add experienced bankers R. Eugene (Gene) Taylor, Christopher (Chris) G. Marshall, R. Bruce Singletary and Ke nneth (Ken) A. Posner to its board of directors, along with other directors to be designated by NAFH.  The investment is subject to satisfaction or waiver of certain closing conditions, including reaching an agreement with the Treasury to repurchase the preferred stock and warrant issued under the Troubled Asset Relief Program Capital Purchase Program on terms acceptable to NAFH, the receipt by NAFH and the Company of the requisite governmental and regulatory approvals as well as the approval of the NASDAQ Stock Market to issue the common stock, preferred stock and warrant in reliance on the shareholder approval exemptions set forth in NASDAQ Rule 5635(f). While the NAFH investment is expected to close in the third quarter of 2010, there is no assurance it will close during the quarter, or ever.  At this time, all the applications required to be filed with regulatory agencies have been filed and we have reached an agreement on the significant terms for the repurchase of the Preferred Stoc k and warrant issued to the Treasury under the TARP Capital Purchase Program. Upon consummation of the investment, it is estimated that both the Company and the Bank will be well capitalized and the Bank will be in compliance with the required capital ratios of the Consent Order.

If the investment by NAFH is not consummated, the Board of Directors and management team intend to seek other strategic alternatives including but not limited to the sale of certain assets, all or a portion of the Company, or seeking a complementary partner in a merger of equals or where the Company is acquired. There is no assurance the Company will be successful in entering into any agreement or closing such an alternative transaction.


Quarterly Summary

For the second quarter of 2010, the Company reported a net loss before dividends and accretion on preferred stock of $14.1 million compared to a net loss of $4.9 million for the second quarter of 2009. The net loss allocated to common shareholders was $14.8 million, or $0.99 per share, for the second quarter of 2010, compared to a net loss of $5.5 million, or $0.37 per share, for the comparable 2009 quarter.

The higher net loss for the second quarter of 2010 compared to the net loss during the second quarter of 2009 was due to higher non-interest expenses, primarily relating to increased valuation adjustments, losses on sale and operating expenses associated with foreclosed real estate, expenses incurred in connection with our capital raising activities and the termination of a consulting agreement and a higher provision for loan losses. During the second quarter of 2010, no income tax benefit was recorded as a valuation allowance was recorded offsetting the increase in deferred tax assets attributed to the net operating loss for the quarter. Partially offsetting this impact was higher non-interest income.

Significant developments are outlined below.

·  We continue to focus on relationship-based lending and generated approximately $3.6 million of new commercial loans and originated $32 million of residential mortgages as well as approximately $7.5 million in consumer and indirect auto loans to prime borrowers during the quarter.

·  Naples Capital Advisors and TIB Bank’s trust department continued to establish new investment management and trust relationships, increasing the market value of assets under management by $49 million, or 41%, from June 30, 2009. Assets under management increased by $5 million, or 3%, during the quarter to $169 million as of June 30, 2010.

·  Our credit risk exposure in the construction and development loan portfolio declined significantly as this portfolio segment declined 56% and 38% from $139.4 million and $97.4 million as of June 30, 2009 and December 31, 2009, respectively.  At June 30, 2010, this loan segment now represents $60.7 million and approximately 6% of our outstanding loans, down from approximately 11% of loans a year ago.

·  Our special asset workout group was able to work with borrowers to achieve the pay off or pay down of approximately $6.4 million in nonaccrual loans, foreclose or negotiate deeds in lieu of foreclosure for approximately $4.3 million of nonaccrual loans and sell approximately $1.9 million of other real estate owned during the quarter.

·  The net interest margin of 2.74% during the quarter decreased 20 basis points and 4 basis points in comparison to 2.94% in the first quarter of 2010 and 2.78% in the second quarter of 2009, due primarily to $892,000 and $1.1 million decreases in net interest income, respectively. These decreases are largely attributable to the increase in nonperforming loans and other real estate owned and a change in asset mix resulting in a lower level of higher yielding loans.  We estimate that the nonperforming assets negatively impacted the margin by approximately 36 basis points during the second quarter of 2010.  Partially offsetting these factors were continued reductions of the cost of interest bearing liabilities.  We continue to maintain strong core funding sources and replace maturing higher priced time depos its with lower cost funding.

Our provision for loan losses of $7.7 million primarily reflects net charge-offs of $7.8 million.  As of June 30, 2010, non-performing loans were $76.6 million or 6.96% of loans, an increase from the $55.7 million and 4.94% of loans as of March 31, 2010.

The allowance for loan losses remained relatively unchanged at $27.7 million, or 2.52%, of total loans and represented 36% of non-performing loans, a decrease from 50% of non-performing loans at March 31, 2010.  Net charge-offs during the quarter increased to 2.81% of average loans on an annualized basis compared to 2.13% for the prior quarter. As of June 30, 2010, the balance of nonaccrual loans reflects cumulative charge downs of $12.3 million based primarily on the net realizable values of collateral for collateral dependent loans.

We reported total assets of $1.66 billion as of June 30, 2010, a decrease of 3% from December 31, 2009. Total loans declined to $1.10 billion, compared to $1.20 billion at December 31, 2009, as a $36.7 million, or 38%, decline in construction and land loans, a $24.2 million, or 48%, decline in indirect auto loans and a $30.7 million, or 5%, decline in commercial real estate loans led the $95.8 million decline of our loan portfolio. Total deposits of $1.34 billion as of June 30, 2010 were approximately 2% lower than the $1.37 billion at December 31, 2009.


Three Months Ended June 30, 2010 and 2009:

Results of Operations

For the second quarter of 2010, our operations resulted in a net loss before dividends on preferred stock of $14.1 million compared to a net loss of $4.9 million in the previous year’s second quarter.  The loss allocated to common shareholders was $0.99 per share for the 2010 quarter as compared to a net loss of $0.37 per share for the comparable 2009 quarter.  The increased loss is primarily due to $4.1 million in increased valuation adjustments, losses on sale and operating expenses associated with foreclosed real estate (OREO); no tax benefit recorded in the current period as a result of the Company’s deferred tax assets being fully reserved; a $1.9 million higher provision for loan losses; and $1.6 million in expenses incurred in connection with our capital raising activities and the termination of a r elated consulting agreement.




Net Interest Income

Net interest income represents the amount by which interest income on interest-earning assets exceeds interest expense incurred on interest-bearing liabilities.  Net interest income is the largest component of our income, and is affected by the interest rate environment and the volume and the composition of interest-earning assets and interest-bearing liabilities. Our interest-earning assets include loans, federal funds sold and securities purchased under agreements to resell, interest-bearing deposits in other banks and investment securities.  Our interest-bearing liabilities include deposits, federal funds purchased, subordinated debentures, advances from the FHLB and other short term borrowings.

Net interest income was $10.6 million for the three months ended June 30, 2010, a decrease from the $11.7 million reported for the same period last year due principally to a $133.8 million, or 8%, decrease in average earning assets.  The decrease in average earning assets was due primarily to loan principal payments, payoffs, charge-offs, the higher level of nonperforming loans and conversion of nonperforming loans to other real estate owned exceeding new loan originations. These factors resulted in a $112.6 million decrease in average loans outstanding during the second quarter of 2010 as compared to the second quarter of 2009.

Additionally, the net interest margin declined by 4 basis points from 2.78% to 2.74%. The decrease in net interest margin is due to higher levels of nonperforming loans, the continued maintenance of higher levels of liquid investment securities and cash equivalents and changes in asset mix resulting in lower volumes of higher yielding loans and investment securities.  The net interest margin continues to be adversely impacted by the level of nonaccrual loans and non-performing assets, which reduced the margin by an estimated 36 basis points during the second quarter of 2010 compared to an 18 basis point estimated impact in the second quarter of 2009.  Partially offsetting these factors were continued reductions of the cost of interest bearing deposits and the successful repricing or replacement of maturing higher pric ed time deposits with lower cost funding.

The $3.9 million decrease in interest and dividend income for the second quarter of 2010 compared to the second quarter of 2009 was mainly attributable to decreased average volumes and rates on loan balances and investment securities due primarily to the higher level of non-performing loans and significant declines in market interest rates.  Due to the lower volumes of higher yielding loans and the higher level of non-accrual loans, the yield on our loans declined 39 basis points. The yield of our interest earning assets declined 57 basis points in the second quarter of 2010 compared to the second quarter of 2009 due to the reduction in the yield on our loans and investment securities.

Partially offsetting the decline in interest and dividend income, were decreases in deposit interest rates paid as well as other market interest rates. The average interest cost of interest bearing deposits declined 80 basis points and the overall cost of interest bearing liabilities declined by 68 basis points compared to the second quarter of 2009.

Going forward, we expect market short-term interest rates to remain low for an extended period of time.  Generally, we expect loan and investment yields and deposit costs to stabilize. However, deposit rates could increase due to demand in the financial markets, banking system and other local markets for liquidity which may be reflected in elevated pricing competition for deposits. The predominant drivers affecting net interest income are the volume and composition of earning assets, the interest rates paid on our deposits and the net change in non-performing assets.



The following table presents average balances of the Company, the taxable-equivalent interest earned, and the rate paid thereon during the three months ended June 30, 2010 and June 30, 2009.

  2010  2009 
 
(Dollars in thousands)
 
Average
Balances
  
Income/
Expense
  
Yields/
Rates
  
Average
Balances
  
Income/
Expense
  
Yields/
Rates
 
Interest-earning assets:                  
 Loans (1)(2) $1,116,406  $14,656   5.27% $1,229,026  $17,355   5.66%
 Investment securities (2)  310,715   2,292   2.96%  382,478   3,495   3.67%
 Money Market Mutual Funds  -   -   -   36,991   27   0.29%
 Interest-bearing deposits in other banks  119,817   75   0.25%  29,773   20   0.27%
 Federal Home Loan Bank stock  10,447   7   0.27%  10,482   -   0.00%
 F  Federal funds sold and securities sold under agreements to resell  -   -   0.00%  2,407   2   0.33%
Total interest-earning assets  1,557,385   17,030   4.39%  1,691,157   20,899   4.96%
                         
Non-interest-earning assets:                        
 C Cash and due from banks  21,036           34,477         
 PrPremises and equipment, net  50,972           38,215         
 aLAllowance for loan losses  (25,826)          (24,459)        
 O Other assets  82,919           69,138         
Total non-interest-earning assets  129,101           117,371         
Total assets $1,686,486          $1,808,528         
                         
Interest-bearing liabilities:                        
Interest-bearing deposits:                        
 N NOW accounts $210,200  $192   0.37% $190,457  $313   0.66%
 MMoney market  178,889   470   1.05%  212,324   837   1.58%
 S  Savings deposits  75,833   137   0.72%  121,709   551   1.82%
 T Time deposits  714,003   3,710   2.08%  707,212   5,450   3.09%
Total interest-bearing deposits  1,178,925   4,509   1.53%  1,231,702   7,151   2.33%
                         
Oth Other interest-bearing liabilities:                        
 S  Short-term borrowings and FHLB advances  193,268   1,206   2.50%  196,501   1,305   2.66%
 L  Long-term borrowings  63,000   671   4.27%  63,000   708   4.51%
Total interest-bearing liabilities  1,435,193   6,386   1.78%  1,491,203   9,164   2.46%
                         
 NNon-interest-bearing liabilities and shareholders’ equity:                        
 D Demand deposits  187,898           183,329         
 O Other liabilities  12,503           16,766         
 S  Shareholders’ equity  50,892           117,230         
T Total non-interest-bearing liabilities and shareholders’ equity  251,293           317,325         
Tot  Total liabilities and shareholders’ equity $1,686,486          $1,808,528         
                         
Interest rate spread  (tax equivalent basis)          2.61%          2.50%
Net interest income  (tax equivalent basis)     $10,644          $11,735     
Net interest margin (3) (tax equivalent basis)          2.74%          2.78%
                         
_______
(1) Average loans include non-performing loans.
(2) Interest income and rates include the effects of a tax equivalent adjustment using applicable statutory tax rates in adjusting tax exempt interest on tax exempt investment securities and loans to a fully taxable basis.
(3) Net interest margin is net interest income divided by average total interest-earning assets.
 





Changes in Net Interest Income

The table below details the components of the changes in net interest income for the three months ended June 30, 2010 and June 30, 2009.  For each major category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes due to average volumes and changes due to rates, with the changes in both volumes and rates allocated to these two categories based on the proportionate absolute changes in each category.

  
2010 Compared to 2009 (1)
Due to Changes in
 
(Dollars in thousands) 
Average
Volume
  
Average
Rate
  
Net Increase
(Decrease)
 
Interest income         
 
Loans (2)
 $(1,527) $(1,172) $(2,699)
 
Investment securities (2)
  (593)  (610)  (1,203)
 Money Market Mutual Funds  (27)  -   (27)
 Interest-bearing deposits in other banks  56   (1)  55 
 Federal Home Loan Bank stock  -   7   7 
 F  Federal funds sold and securities purchased under agreements to resell  (2)  -   (2)
Total interest income  (2,093)  (1,776)  (3,869)
             
Interest expense            
 NOW accounts  30   (151)  (121)
 Money market  (118)  (249)  (367)
 Savings deposits  (160)  (254)  (414)
 Time deposits  52   (1,792)  (1,740)
 Short-term borrowings and FHLB advances  (21)  (78)  (99)
 Long-term borrowings  -   (37)  (37)
Total interest expense  (217)  (2,561)  (2,778)
             
Change in net interest income $(1,876) $785  $(1,091)
             
________
(1)  ((1) The change in interest due to both rate and volume has been allocated to the volume and rate components in proportion to the relationship of the dollar amounts of the absolute change in each.
 
(2) I (2) Interest income includes the effects of a tax equivalent adjustment using applicable statutory tax rates in adjusting tax exempt interest on tax exempt investment securities and loans to a fully taxable basis. 



Provision for Loan Losses

The provision and allowance for loan losses were impacted by many factors including net charge-offs, the decline in loans outstanding, the decline in impaired loans, historical loss rates and the mix of loan types. The provision for loan losses increased to $7.7 million in the second quarter of 2010 compared to $5.8 million in the comparable prior year period. The higher provision for loan losses in 2010 is due principally to an increase in net charge-offs compared to the 2009 period.  Net charge-offs were $7.8 million, or 2.81% of average loans on an annualized basis, during the three months ended June 30, 2010, compared to $5.8 million, or 1.89% of average loans on an annualized basis, for the same period in 2009. As of June 30, 2010, the balance of the allowance for loan losses decreased to $27.7 million as compared to $29.1 million at December 31, 2009 due primarily to a $95.6 million decline in loans outstanding, a $36.7 million decline in impaired loans and a change in the mix of loan types including a 38% decline in construction and vacant land loans and a 48% decline in indirect auto loans. At the same time, due primarily to the impact of recent historical charge-off experience on the factors used in estimating the allowance for loan losses, the June 30, 2010 allowance increased as a percentage of loans to 2.52% compared to 2.43% at December 31, 2009 and the percentage allocation of the reserve not specifically allocated to impaired loans increased to 2.06% of unimpaired loans at June 30, 2010 as compared to 1.91% at December 31, 2009. Offsetting the impact of historical loss rate factors used in estimating the allowance for loan losses were overall declines in loan balances outstanding, declines in loans classified as impaired and changes in the mix of loan types which, in combination, resulted in a lower balance of the a llowance for loan losses at June 30, 2010.

Our provision for loan losses in future periods will be influenced by the loss potential of impaired loans, trends in the delinquency of loans, non-performing loans and net charge offs, which cannot be reasonably predicted.

     We continuously monitor and actively manage the credit quality of the entire loan portfolio and will continue to recognize the provision required to maintain the allowance for loan losses at an appropriate level. Due to the continued economic contraction, both individual and business customers are exhibiting difficulty in timely payment of their loan obligations. We believe that this trend may continue for the foreseeable future. Consequently, we may experience higher levels of delinquent and non-performing loans, which may require higher provisions for loan losses, higher charge-offs and higher collection related expenses in future periods. For additional information on nonperforming assets and the allowance for loan losses, refer to the section entitled Nonperforming Assets and Allowance for Loan Losses below.



  Non-interest Income

              Excluding net gains on investment securities, non-interest income was $2.5 million in the second quarter of 2010 compared to $2.2 million in the second quarter of 2009.  The increase in non-interest income is primarily due to the following: a $163,000 increase in fees from the origination and sale of residential mortgages in the secondary market; an $85,000 increase in fees for investment advisory services; an increase of $176,000 in debit card income; and an insurance gain of $135,000 on a bank owned life insurance policy.  Partially offsetting these increases was a decline in service charges on deposit accounts of $363,000.

The following table represents the principal components of non-interest income for the second quarter of 2010 and 2009:

(Dollars in thousands)     2010      2009 
Service charges on deposit accounts $839  $1,202 
Investment securities gains, net  993   95 
Fees on mortgage loans sold  481   318 
Investment advisory fees  313   228 
Debit card income  389   213 
Earnings on bank owned life insurance policies  265   130 
Other  214   146 
Total non-interest income $3,494  $2,332 
         


Non-interest Expense

During the second quarter of 2010, non-interest expense increased $4.3 million, or 27%, to $20.5 million compared to $16.2 million for the second quarter of 2009. The increase is due primarily to a $4.1 million increase in OREO related expenses and valuation adjustments, $1.6 million in expense related to our capital raising initiatives and the termination of a related consulting agreement during the second quarter of 2010 and $258,000 in increased insurance premiums.  Offsetting these increased costs were reductions in salaries and employee benefits of $655,000, a net decrease in FDIC insurance assessments of $297,000 due to the one time special assessment of $800,000 recorded in second quarter of 2009 and a decrease in net occupancy expense of $165,000.

The decrease in salaries and employee benefits in the second quarter of 2010 relative to the second quarter of 2009 was due largely to the effect of a reduction in employee headcount beginning in 2009.  At June 30, 2009, the Company had 417 employees compared to 379 employees at June 30, 2010.

For the second quarter of 2010, the decrease in occupancy expense as compared to the second quarter of 2009 is a result of our continued focus on consolidating facilities and containing operating costs.

Foreclosed asset related expenses increased $4.1 million in the second quarter of 2010 relative to the second quarter of 2009. Of this increase, $3.6 million relates to OREO valuation adjustments during the second quarter of 2010. Such estimated fair value adjustments reflect the decline in real estate values determined by updated appraisals, comparable sales and local market trends in asking prices and data from recent closed transactions.  Other OREO operating and ownership expenses increased $683,000. Such costs include real estate taxes, insurance and other costs to own and maintain the properties.

Other expenses increased $1.1 million during the second quarter of 2010 compared to the second quarter of 2009.  The increase is primarily due to $1.6 million in expenses relating to our capital raising initiatives and the termination of a related consulting agreement ($1.25 million). Offsetting this increase was a decrease in total FDIC insurance assessments of $297,000 which is comprised of an increase in regular assessments by $502,000 relative to the second quarter of 2009, due primarily to higher deposit insurance premium rates, offset by the $800,000 one time special assessment in second quarter of 2009.



The following table represents the principal components of non-interest expense for the second quarter of 2010 and 2009:

(Dollars in thousands)           2010         2009 
Sl Salary and employee benefits $6,413  $7,068 
N Net occupancy expense  2,273   2,438 
F  Foreclosed asset related expense  5,149   1,086 
L  Legal, and other professional  777   860 
C Computer services  647   663 
C Collection costs  (4)  118 
P  Postage, courier and armored car  270   280 
MMarketing and community relations  276   241 
O Operating supplies  130   194 
DiDirectors’ fees  214   221 
TrTravel expenses  84   93 
F  FDIC and state assessments  1,453   951 
S  Special FDIC assessment  -   800 
    Amortization of intangibles  389   419 
N Net gains on disposition of repossessed assets  7   (36)
C Capital raise expenses  1,597   - 
InInsurance, non-building  340   82 
O Other operating expense  480   680 
T Total non-interest expense $20,495  $16,158 
         


Income Taxes

The provision for income taxes includes federal and state income taxes and in 2010 reflects a full valuation allowance against our deferred tax assets. The effective income tax rates for the three months ended June 30, 2010 and 2009 were 0% and 38%, respectively. Historically, the fluctuations in effective tax rates reflect the effect of the differences in the inclusion or deductibility of certain income and expenses, respectively, for income tax purposes. A valuation allowance related to deferred tax assets is required when it is considered more likely than not (greater than 50% likelihood) that all or part of the benefit related to such assets will not be realized. In assessing the need for a valuation allowance, management considered various factors including the significant cumulative losses we have incurred over the last three years coupled with the expectation that our future realization of deferred taxes will be substantially limited as a result of the planned investment by NAFH. These factors represent the most significant negative evidence that management considered in concluding that a full valuation allowance was necessary at June 30, 2010 and December 31, 2009.

Our future effective income tax rate will fluctuate based on the mix of taxable and tax free investments we make and, to a greater extent, the impact of changes in the required amount of  the valuation allowance recorded against our net deferred tax assets and our overall level of taxable income. See Note 1 of our unaudited consolidated financial statements for additional information about the calculation of income tax expense. Additionally, there were no unrecognized tax benefits at June 30, 2010 or December 31, 2009, and we do not expect the total of unrecognized tax benefits to significantly increase in the next twelve months.


Six Months Ended June 30, 2010 and 2009:

Results of Operations

For the first six months of 2010, our operations resulted in a net loss before dividends on preferred stock of $19.2 million compared to a net loss of $8.3 million in the first half of the previous year.  The loss allocated to common shareholders was $1.38 per share for the first six months of 2010 as compared a net loss of $0.66 per share for the comparable 2009 period.  The increased loss is primarily due to $4.8 million in increased valuation adjustments, losses on sale and operating expenses associated with foreclosed real estate; no tax benefit recorded in the current period as a result of the Company’s deferred tax assets being fully reserved; a $1.6 million higher provision for loan losses; and $1.6 million in expenses incurred in connection with our capital raising activities and the termination of a rel ated consulting agreement.

Annualized loss on average assets for the first six months of 2010 was 2.28% compared to a loss on average assets of 0.94% for the first six months of 2009.  The annualized loss on average shareholders’ equity was 72.54% for the first six months of 2010 compared to a loss of 13.83% for the same period of 2009.

Net Interest Income

Net interest income was $22.1 million for the six months ended June 30, 2010, a decrease from the $22.5 million reported for the same period last year due principally to a 6% decrease in average earning assets.  The decrease in average earning assets was due primarily to loan principal payments, payoffs, charge-offs and the conversion of nonperforming loans to other real estate owned exceeding new loan originations and resulting in a $79.9 million decrease in average loans outstanding during the six months ended June 30, 2010 as compared to the six months ended June 30, 2009.

The net interest margin increased by 13 basis points from 2.71% to 2.84%. The increase in the net interest margin is due to continued reductions of the cost of interest bearing deposits and the successful repricing or replacement of maturing higher priced time deposits with lower cost funding.  Partially offsetting the increase was continued higher levels of nonperforming loans and the change in asset mix resulting in lower volumes of higher yielding loans and investment securities.  The net interest margin continues to be adversely impacted by the level of nonaccrual loans and non-performing assets, which reduced the margin by an estimated 31 basis points during the six months ended June 30, 2010 compared to an estimated 16 basis point impact during the six months ended June 30, 2009.

The $6.4 million decrease in interest and dividend income for the first half of 2010, compared to the first half of 2009, was mainly attributable to lower balances of loans, the higher level of non-performing loans, significant declines in market interest rates and the related impact on loan and investment yields.  Due to the lower volumes of higher yielding loans and the higher level of non-accrual loans, the yield on our loans declined 39 basis points. The yield of our interest earning assets declined 50 basis points in the first half of 2010, compared to the first half of 2009, due to the reduction in the yield on our loans and investment securities.

Partially offsetting the decline in interest and dividend income, were decreases in deposit interest rates paid as well as other market interest rates.  The average interest cost of interest bearing deposits declined 93 basis points and the overall cost of interest bearing liabilities declined by 77 basis points compared to the first half of 2009.

Going forward, we expect market short-term interest rates to remain low for an extended period of time. Generally, we expect loan and investment yields and deposit costs to stabilize. However, deposit rates could increase due to demand in the financial markets, banking system and other local markets for liquidity which may be reflected in elevated pricing competition for deposits. The predominant drivers affecting net interest income are the composition of earning assets, the interest rates paid on our deposits and the net change in non-performing assets.


The following table presents average balances of the Company, the taxable-equivalent interest earned, and the rate paid thereon during the six months ended June 30, 2010 and June 30, 2009.

  2010  2009 
 
(Dollars in thousands)
 
Average
Balances
  
Income/
Expense
  
Yields/
Rates
  
Average
Balances
  
Income/
Expense
  
Yields/
Rates
 
Interest-earning assets:                  
 Loans (1)(2) $1,147,456  $30,674   5.39% $1,227,339  $35,196   5.78%
 Investment securities (2)  297,279   4,537   3.08%  335,415   6,409   3.85%
 Money Market Mutual Funds  -   -   -   60,569   130   0.43%
 Interest-bearing deposits in other banks  120,006   149   0.25%  35,519   40   0.23%
 Federal Home Loan Bank stock  10,447   10   0.19%  11,389   (19)  (0.34)%
     Federal funds sold and securities sold under agreements to resell  7   -   0.00%  4,985   5   0.20%
Total interest-earning assets  1,575,195   35,370   4.53%  1,675,216   41,761   5.03%
                         
Non-interest-earning assets:                        
 C Cash and due from banks  22,821           33,049         
 PrPremises and equipment, net  45,918           38,210         
 A Allowance for loan losses  (26,651)          (23,908)        
 O Other assets  76,087           73,056         
Total non-interest-earning assets  118,175           120,407         
Total assets $1,693,370          $1,795,623         
                         
Interest-bearing liabilities:                        
Interest-bearing deposits:                        
 N NOW accounts $210,356  $384   0.37% $179,061  $642   0.72%
 M Money market  191,023   998   1.05%  184,316   1,499   1.64%
 S  Savings deposits  81,490   291   0.72%  106,930   959   1.81%
 TiTime deposits  701,993   7,738   2.22%  728,735   11,950   3.31%
Total interest-bearing deposits  1,184,862   9,411   1.60%  1,199,042   15,050   2.53%
                         
Oth Other interest-bearing liabilities:                        
 S  Short-term borrowings and FHLB advances  193,679   2,443   2.54%  224,045   2,735   2.46%
 L  Long-term borrowings  63,000   1,325   4.24%  63,000   1,444   4.62%
Total interest-bearing liabilities  1,441,541   13,179   1.84%  1,486,087   19,229   2.61%
                         
N Non-interest-bearing liabilities and shareholders’ equity:                        
 D Demand deposits  186,535           169,824         
     Other liabilities  12,058           18,026         
 S  Shareholders’ equity  53,236           121,686         
T Total non-interest-bearing liabilities and shareholders’ equity  251,829           309,536         
Tot  Total liabilities and shareholders’ equity $1,693,370          $1,795,623         
                         
Interest rate spread  (tax equivalent basis)          2.69%          2.42%
Net interest income  (tax equivalent basis)     $22,191          $22,532     
Net interest margin (3) (tax equivalent basis)          2.84%          2.71%
                         
_______
(1) Average loans include non-performing loans.
(2) Interest income and rates include the effects of a tax equivalent adjustment using applicable statutory tax rates in adjusting tax exempt interest on tax exempt investment   securities and loans to a fully taxable basis.
(3) Net interest margin is net interest income divided by average total interest-earning assets.
 




Changes in Net Interest Income

The table below details the components of the changes in net interest income for the six months ended June 30, 2010 and June 30, 2009.  For each major category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes due to average volumes and changes due to rates, with the changes in both volumes and rates allocated to these two categories based on the proportionate absolute changes in each category.

  
2010 Compared to 2009 (1)
Due to Changes in
 
(Dollars in thousands) 
Average
Volume
  
Average
Rate
  
Net Increase
(Decrease)
 
Interest income         
 
Loans (2)
 $(2,215) $(2,307) $(4,522)
 
Investment securities (2)
  (676)  (1,196)  (1,872)
 Money Market Mutual Funds  (130)  -   (130)
 Interest-bearing deposits in other banks  104   5   109 
 Federal Home Loan Bank stock  -   29   29 
 F  Federal funds sold and securities purchased under agreements to resell  (5)  -   (5)
Total interest income  (2,922)  (3,469)  (6,391)
             
Interest expense            
 NOW accounts  98   (356)  (258)
 Money market  53   (554)  (501)
 Savings deposits  (189)  (479)  (668)
 Time deposits  (424)  (3,788)  (4,212)
 Short-term borrowings and FHLB advances  (381)  89   (292)
 Long-term borrowings  -   (119)  (119)
Total interest expense  (843)  (5,207)  (6,050)
             
Change in net interest income $(2,079) $1,738  $(341)
             
________
(1)  ((1)  The change in interest due to both rate and volume has been allocated to the volume and rate components in proportion to the relationship of the dollar amounts of the absolute change in each.
 
(2) I (2) Interest income includes the effects of a tax equivalent adjustment using applicable statutory tax rates in adjusting tax exempt interest on tax exempt investment securities and loans to a fully taxable basis. 


Provision for Loan Losses

The provision and allowance for loan losses were impacted by many factors including net charge-offs, the decline in loans outstanding, the decline in impaired loans, historical loss rates and the mix of loan types. The provision for loan losses increased to $12.6 million in the first six months of 2010 compared to $11.1 million in the comparable prior year period. The higher provision for loan loss in 2010 is principally due to an increase in net charge-offs compared to the 2009 period.  Net charge-offs were $14.0 million, or 2.46% of average loans on an annualized basis, during the six months ended June 30, 2010, compared to $9.4 million, or 1.55% of average loans on an annualized basis, for the same period in 2009. As of June 30, 2010, the balance of the allowance for loan losses decreased to $27.7 million, as compared to $29 .1 million at December 31, 2009, due primarily to a $95.6 million decline in loans outstanding, a $36.7 million decline in impaired loans and a change in the mix of loan types including a 38% decline in construction and vacant land loans and a 48% decline in indirect auto loans. At the same time, due primarily to the impact of recent historical charge-off experience on the factors used in estimating the allowance for loan losses, the June 30, 2010 allowance increased as a percentage of loans to 2.52%, compared to 2.43% at December 31, 2009, and the percentage allocation of the reserve not specifically allocated to impaired loans increased to 2.06% of unimpaired loans at June 30, 2010 as compared to 1.91% at December 31, 2009. Offsetting the impact of historical loss rate factors used in estimating the allowance for loan losses were overall declines in loan balances outstanding, declines in loans classified as impaired and changes in the mix of loan types which, in combination, resulted in a lower balance of the allowance for loan losses at June 30, 2010.

Our provision for loan losses in future periods will be influenced by the loss potential of impaired loans, trends in the delinquency of loans, non-performing loans and net charge offs, which cannot be reasonably predicted.

     We continuously monitor and actively manage the credit quality of the entire loan portfolio and will continue to recognize the provision required to maintain the allowance for loan losses at an appropriate level. Due to the continued economic contraction, both individual and business customers are exhibiting difficulty in timely payment of their loan obligations. We believe that this trend may continue for the foreseeable future. Consequently, we may experience higher levels of delinquent and non-performing loans, which may require higher provisions for loan losses, higher charge-offs and higher collection related expenses in future periods. For additional information on nonperforming assets and the allowance for loan losses, refer to the section entitled Nonperforming Assets and Allowance for Loan Losses below.

  Non-interest Income

              Excluding net gains on investment securities, non-interest income was $4.3 million in the first six months of 2010 compared to $4.0 million in the prior year period of 2009.  The increase in non-interest income is primarily due to the following: a $331,000 increase in fees from the origination and sale of residential mortgages in the secondary market; a $199,000 increase in fees for investment advisory services; an increase of $335,000 in debit card income; and an insurance gain $135,000 on bank owned life insurance policies.  These increases were offset by a decline in service charges on deposit accounts of $414,000 and a $346,000 loss recorded upon the sale of $20.1 million of indirec t auto loans during the first quarter of 2010. The indirect auto loans were sold at a price exceeding the face value of the underlying notes. However, as unamortized premiums paid to auto dealers upon the origination of these loans exceeded the premium received in the sale, the accounting result of the sale was the aforementioned loss. Premiums paid to auto dealers upon loan origination are recorded as deferred loan costs and amortized over the life of the individual loans. Economically, when the transaction is evaluated considering the reduction of approximately $621,000 of the allowance for loan losses attributable to the sold loans, we estimate the sale had a net positive impact of approximately $275,000.

The following table represents the principal components of non-interest income for the six months of 2010 and 2009:

(Dollars in thousands) 2010  2009 
Service charges on deposit accounts $1,754  $2,168 
Investment securities gains, net  2,635   691 
Fees on mortgage loans sold  764   433 
Investment advisory fees  620   421 
Loss on sale of indirect loans  (346)  - 
Debit card income  733   398 
Earnings on bank owned life insurance policies  365   261 
Other  383   339 
Total non-interest income $6,908  $4,711 
         


Non-interest Expense

During the first six months of 2010, non-interest expense increased $6.0 million, or 20%, to $35.5 million compared to $29.5 million for the first six months of 2009. The increase is primarily due to a $4.8 million increase in OREO related expenses and valuation adjustments, $1.6 million related to our capital raising initiatives and the termination of a related consulting agreement during the second quarter of 2010, increased FDIC insurance costs of $793,000 due to higher deposit insurance premium rates, an increase in other professional fees of $332,000, and a $489,000 increase in insurance premiums related to corporate insurance coverage. Offsetting these increased costs were reductions in salaries and employee benefits and the $800,000 one time FDIC special assessment recorded in the second quarter of 2009.

Salaries and employee benefits decreased $1.2 million in the first six months of 2010 relative to the first six months of 2009. The primary reason for the decrease in salaries and employee benefits was due to a reduction in employee headcount beginning in 2009 and $674,000 of higher severance related costs incurred in the first half of 2009.  At June 30, 2009, the Company had 417 employees compared to 379 employees as June 30, 2010.

Foreclosed asset related expenses increased $4.8 million in the first six months of 2010 relative to the first six months of 2009. Of this increase, $4.0 million relates to OREO valuation adjustments during the first half of 2010. Such estimated fair value adjustments reflect the decline in the real estate values determined by updated appraisals, comparable sales and local market trends in asking prices and data from recent closed transactions. Other OREO operating and ownership expenses increased $939,000. Such costs include real estate taxes, insurance and other costs to own and maintain the properties and the increase reflects the higher level of OREO in 2010 compared to 2009.

Other expenses increased $2.4 million in the first six months of 2010 compared to the first six months of 2009.  The 2010 period includes $1.6 million in expenses relating to our capital raising initiatives and the termination of a related consulting agreement ($1.25 million) during the second quarter of 2010. Other professional fees increased by $332,000 due principally to the costs associated with a 2010 independent third party loan review and $489,000 of increased insurance premiums. FDIC insurance assessments increased by $793,000, relative to the first half of 2009, due primarily to higher deposit insurance premium rates offset by the impact of the $800,000 one time FDIC special assessment in second quarter of 2009.

The following table represents the principal components of non-interest expense for the first six months of 2010 and 2009:

     2010        2009    
(Dollars in thousands) Total  
Riverside
Operations
  Excluding Riverside  Total  
Riverside
Operations
  Excluding Riverside 
SaSalary and employee benefits $13,249  $959  $12,290  $14,448  $946  $13,502 
N Net occupancy expense  4,557   710   3,847   4,590   696   3,894 
F  Foreclosed asset related expense  6,249   -   6,249   1,406   -   1,406 
L  Legal, and other professional  1,640   3   1,637   1,308   264   1,044 
C Computer services  1,369   344   1,025   1,288   213   1,075 
C Collection costs  39   -   39   222   -   222 
P  Postage, courier and armored car  552   51   501   531   103   428 
MMarketing and community relations  658   86   572   519   52   467 
O Operating supplies  275   44   231   336   92   244 
D Directors’ fees  409   -   409   453   -   453 
T  Travel expenses  166   2   164   176   5   171 
F  FDIC and state assessments  2,315   444   1,871   1,522   241   1,281 
F  FDIC special assessment  -   -   -   800   169   631 
A Amortization of intangibles  779   509   270   652   382   270 
N Net gains on disposition of repossessed assets  (46)  -   (46)  (105)  -   (105)
C Capital raise expense  1,597   -   1,597   -   -   - 
In Insurance, non-building  652   1   651   163   1   162 
O Other operating expense  1,069   24   1,045   1,216   75   1,141 
T  Total non-interest expense $35,529  $3,177  $32,352  $29,525  $3,239  $26,286 
                         


Income Taxes

The provision for income taxes includes federal and state income taxes and in 2010 reflects a full valuation allowance against our deferred tax assets. The effective income tax rates for the six months ended June 30, 2010 and 2009 were 0% and 38%, respectively. Historically, the fluctuations in effective tax rates reflect the effect of the differences in the inclusion or deductibility of certain income and expenses, respectively, for income tax purposes. A valuation allowance related to deferred tax assets is required when it is considered more likely than not (greater than 50% likelihood) that all or part of the benefit related to such assets will not be realized. In assessing the need for a valuation allowance, management considered various factors including the significant cumulative losses we have incurred over the last three years c oupled with the expectation that our future realization of deferred taxes will be substantially limited as a result of the planned investment by NAFH. These factors were among the most significant negative evidence that management considered in concluding that a full valuation allowance was necessary at June 30, 2010 and December 31, 2009.

Our future effective income tax rate will fluctuate based on the mix of taxable and tax free investments we make and, to a greater extent, the impact of changes in the required amount of the valuation allowance recorded against our net deferred tax assets and our overall level of taxable income. See Note 1 of our unaudited consolidated financial statements for additional information about the calculation of income tax expense. Additionally, there were no unrecognized tax benefits at June 30, 2010 or December 31, 2009, and we do not expect the total of unrecognized tax benefits to significantly increase in the next twelve months.


Balance Sheet

Total assets at June 30, 2010 were $1.66 billion, a decrease of $46.3 million, or 3%, from total assets of $1.71 billion at December 31, 2009.  Total loans declined to $1.10, billion compared to $1.20 billion at December 31, 2009, as a $36.7 million, or 38%, decline in construction and land loans, a $24.2 million, or 48%, decline in indirect auto loans and a $30.7 million, or 5%, decline in commercial real estate loans led the $95.8 million decline of our loan portfolio. Of this decline in loans outstanding, $26.3 million related to loans foreclosed and transferred to other real estate owned, $14.0 million related to charge-offs and $5.6 million related to sales of nonperforming loans. The decline in indirect auto loans was due primarily to the sale of approximately $20.1 million of such loans during the first quarter of 2010. Also, in the first six months of 2010, investment securities increased $32.3 million, or 13%.

At June 30, 2010, advances from the Federal Home Loan Bank were $125.0 million, which remained even with December 31, 2009.  Total deposits of $1.34 billion as of June 30, 2010 decreased $27.7 million, or 2%, compared to $1.37 billion at December 31, 2009.  Brokered deposits declined $37.2 million from $48.2 million at December 31, 2009 to $10.9 million at June 30, 2010.

Shareholders’ equity totaled $39.0 million at June 30, 2010, decreasing $16.5 million from December 31, 2009. Book value per common share decreased to $0.22 at June 30, 2010 from $1.42 at December 31, 2009.


Investment Securities

During the first six months of 2010 and 2009, we realized net gains of $2.6 million and $1.5 million relating to sales of approximately $188.6 million and $290.9 million (including the liquidation of funds temporarily invested in money market mutual funds) of available for sale securities, respectively.

As previously described in the Annual Report on Form 10-K for 2009, as of June 30, 2010, the Company owns four collateralized debt obligation investment securities (three backed primarily by corporate debt obligations of homebuilders, REITs, real estate companies and commercial mortgage backed securities and the fourth backed by trust preferred securities of banks and insurance companies) with an aggregate original cost of $15.0 million.  In determining the estimated fair value of these securities, management utilizes a discounted cash flow modeling valuation approach which is discussed in greater detail in Note 7 - Fair Value. These securities are floating rate securities which were rated "A" or better by an independent and nationally recognized rating agency at the time of purchase. At various dates during 2008 and 2009, due to ratings downgrades, changes in estimates of future cash flows and the amounts of impairment, management concluded that the losses of value for the collateralized debt obligations backed by debt securities of homebuilders, REITs and real estate companies and commercial mortgage backed securities, aggregating $10.0 million, were other than temporary under generally accepted accounting principles. Accordingly, the Company wrote these investment securities down at various dates to their estimated fair value. During 2009, the Company recognized approximately $763,000 of such write-downs.  Through the end of the second quarter of 2009 the write-down of these three securities to $0 resulted in the recognition of cumulative other than temporary impairment losses of $10.0 million. During 2009, the estimated fair value of the security backed by trust preferred securities of banks and insurance companies declined further due to the occurrence of additional defaults or deferrals by certain underlying issuer s and changes in the estimated timing of the future cash flow and discount rate assumptions used to estimate the value of these securities. As of June 30, 2010, management concluded that the unrealized loss on this security does not meet the definition of other than temporary under generally accepted accounting principles because no credit loss has been incurred.

As these securities are not readily marketable and there have been no observable transactions involving substantially similar securities, estimates of future cash flows, levels and timing of future default and assumptions of applicable discount rates are highly subjective and have a material impact on the estimated fair value of these securities. The estimated fair value may fluctuate significantly from period to period based upon actual occurrence of future events of default, recovery, and changes in expectations of assumed future levels of default and discount rates applied.

We regularly review each investment security for impairment based on criteria that include the extent to which cost exceeds fair value, the duration of that impairment, the financial health of and specific prospects for the issuer(s) and our ability and intention with regard to holding the security to maturity. Future declines in the fair value of these or other securities may result in additional impairment charges which may be material to the financial condition and results of operations of the Company. For additional detail regarding our impairment assessment process, see Note 2 of the Unaudited Notes to Consolidated financial statements above.


Loan Portfolio Composition

Two significant components of our loan portfolio are classified in the notes to the accompanying unaudited financial statements as commercial real estate and construction and vacant land. Our goal of maintaining high standards of credit quality include a strategy of diversification of loan type and purpose within these categories. The following charts illustrate the composition of these portfolios as of June 30, 2010 and December 31, 2009.

  June 30, 2010  December 31, 2009 
(Dollars in thousands) Commercial Real Estate  Percentage Composition  Commercial Real Estate  Percentage Composition 
Mixed Use Commercial/Residential $101,425   16% $102,901   15%
Office Buildings  100,719   16%  103,426   15%
Hotels/Motels  68,339   10%  78,992   12%
1-4 Family and Multi Family  66,344   10%  75,342   11%
Guesthouses  92,591   14%  94,663   14%
Retail Buildings  76,222   12%  78,852   12%
Restaurants  49,758   8%  50,395   7%
Marinas/Docks  20,182   3%  19,521   3%
Warehouse and Industrial  28,208   4%  32,328   5%
Other  45,891   7%  43,989   6%
Total $649,679   100% $680,409   100%
                 


  June 30, 2010  December 31, 2009 
  Construction and Vacant Land  Percentage Composition  Construction and Vacant Land  Percentage Composition 
Construction:            
 Residential – owner occupied $2,991   5% $6,024   6%
 Residential – commercial developer  1,669   3%  6,574   7%
 Commercial structure  4,488   7%  13,127   13%
   9,148   15%  25,725   26%
Land:                
 Raw land  10,556   17%  20,684   21%
 Residential lots  17,004   28%  12,773   13%
 Land development  9,054   15%  16,877   17%
 Commercial lots  14,936   25%  21,365   23%
Total land  51,550   85%  71,699   74%
                 
Total $60,698   100% $97,424   100%
                 



Non-performing Assets and Allowance for Loan Losses

Non-performing assets include non-accrual loans and investment securities, repossessed personal property, and other real estate.  Loans and investments in debt securities are placed on non-accrual status when management has concerns relating to the ability to collect the principal and interest and generally when loans are 90 days past due. A loan is considered impaired when it is probable that not all principal and interest amounts will be collected according to the loan contract.  Non-performing assets are as follows:

(Dollars in thousands) June 30, 2010  December 31, 2009 
Total non-accrual loans $76,632  $72,833 
Accruing loans delinquent 90 days or more  -   - 
Total non-performing loans  76,632   72,833 
         
Non-accrual investment securities  758   759 
Repossessed personal property (primarily indirect auto loans)  204   326 
Other real estate owned  38,699   21,352 
Other assets (*)  2,097   2,090 
Total  non-performing assets $118,390  $97,360 
         
Allowance for loan losses $27,710  $29,083 
         
Loa  Loans in compliance with terms modified in troubled debt restructurings and not included in non-performing loans above $22,318  $35,906 
         
Non-performing assets as a percent of total assets  7.14%  5.71%
Non-performing loans as a percent of gross loans  6.96%  6.08%
Allowance for loan losses as a percent of non-performing loans  36.16%  39.93%
Annualized net charge-offs as a percent of average loans for the quarter ended  2.81%  6.40%
         

(*)
  In 1998, TIB Bank made a $10.0 million loan to construct a lumber mill in northern Florida. Of this amount, $6.4 million had been sold by the Bank to other lenders. The loan was 80% guaranteed as to principal and interest by the U.S. Department of Agriculture (USDA). In addition to business real estate and equipment, the loan was collateralized by the business owner’s interest in a trust. Under provisions of the trust agreement, beneficiaries cannot receive trust assets until November 2010.

      The portion of this loan guaranteed by the USDA and held by us was approximately $1.6 million. During the second quarter of 2008, the USDA paid the Company the
    principal and accrued interest and allowed the Company to apply other proceeds previously received to capitalized liquidation costs and protective advances. The non-       guaranteed principal and interest ($2.0 million at June 30, 2010 and December 31, 2009) and the reimbursable capitalized liquidation costs and protective advance costs
           totaling approximately $133,000 and $126,000 at June 30, 2010 and December 31, 2009, respectively, are included as “other assets” in the financial statements.

      Florida law requires a bank to liquidate or charge off repossessed real property within five years, and repossessed personal property within six months. Since the
              property had not been liquidated during this period, the Bank charged-off the non guaranteed principal and interest totaling $2.0 million at June 30, 2003, for
              regulatory purposes.  Since we believe this amount is ultimately realizable, we did not write off this amount for financial statement purposes under generally accepted
              accounting principles.


Non-accrual loans as of June 30, 2010 and December 31, 2009 are as follows:

(Dollars in thousands) June 30, 2010  December 31, 2009 
Collateral Description Number of Loans  Outstanding Balance  Number of Loans  Outstanding Balance 
Residential  1-4 family  42  $11,115   36  $9,250 
Home equity loans  9   1,376   8   1,488 
Commercial 1-4 family investment  12   7,274   19   8,733 
Commercial and agricultural  9   1,982   7   2,454 
Commercial real estate  35   39,734   29   24,392 
Residential land development  16   14,643   13   25,295 
Government guaranteed loans  1   137   2   143 
Indi Indirect auto, auto and consumer loans  38   371   97   1,078 
      $76,632      $72,833 


Net activity relating to nonaccrual loans during the second quarter of 2010 is as follows:
Nonaccrual Loan Activity (Other Than Indirect Auto and Consumer) 
(Dollars in thousands) 
    
Nonaccrual loans at March 31, 2010 $55,288 
Returned to accrual  - 
Net principal paid down on nonaccrual loans  (6,427)
Charge-offs  (7,392)
Loans  foreclosed – transferred to OREO  (4,293)
Loans placed on nonaccrual  39,085 
Nonaccrual loans at June 30, 2010 $76,261 
     




An expanded analysis of the more significant loans classified as nonaccrual during the second quarter of 2010 and remaining classified as of June 30, 2010, is as follows:

Significant Nonaccrual Loans (Other Than Indirect Auto and Consumer) 
(Dollars in thousands)
 
Collateral Description Original Loan Amount  Original Loan to Value (Based on Original Appraisal)  Current Loan Amount  Specific Allocation of Reserve in Allowance for Loan Losses at June 30, 2010  Amount Charged Against Allowance for Loan Losses During the Quarter Ended June 30, 2010  Impact on the Provision for Loan Losses During the Quarter Ended June 30, 2010 (1) 
Arising in Second Quarter 2010                  
Aut Auto dealerships and commercial land in SW Florida $12,938   59% $12,476  $241  $-  $241 
Ow  Owner-occupied commercial real estate in Key West Florida  11,772   75%  11,583   836   -   836 
Two office buildings in SW Florida  2,450   52%  2,212   349   138   205 
1-4 family residential in Florida Keys  2,047   77%  1,880   193   86   279 
     o Mobile home park in Florida Keys  1,375   69%  1,282   -   -   - 
Nur Nursery land and residence in South Florida  1,425   83%  944   420   -   420 
Mix Mixed use – office/residential in Key West Florida  862   63%  849   35   -   35 
O Office condominiums in SW Florida  848   74%  720   58   106   150 
O Office space in Florida Keys  799   75%  678   58   87   140 
    Numerous smaller balance primarily 1-4 family residential and commercial real estate loans          3,690   943   1,551   2,037 
      Total  $36,314  $3,133  $1,968  $4,343 
                         
Nonaccrual Prior to Second Quarter 2010 Remaining on Nonaccrual at June 30, 2010                        
Commercial lots in SW Florida $3,840   54% $3,300  $415  $449  $152 
C  Commercial lots in SW Florida  1,450   76%  1,383   49   -   - 
Commercial 1-4 family residential  1,288   75%  1,228   -   -   - 
Commercial real estate SW Florida  1,700   65%  965   77   188   - 
Waterfront 1-4 family residential home  1,050   32%  1,023   -   -   - 
Commercial 1-4 family residential  1,640   75%  1,323   133   -   31 
Mixed use - developer  3.602   80%  2,300   248   -   232 
Two restaurants SW Florida  5,099   57-70%  4,000   627   914   229 
Office Building - developer  1,346   53%  1,250   158   -   (19)
Vacant land – residential development  4,750   42%  4,795   -   -   - 
Commercial 1-4 family residential  1,050   33%  1,155   -   -   - 
Two commercial 1-4 family residential  1,281   80%  1,045   84   -   - 
Office building  1,118   66%  1,095   215   -   202 
N Numerous smaller balance primarily 1-4 family residential and commercial real estate loans          15,085   1,172   490   661 
          $39,947  $3,178  $2,041  $1,488 
      Total  $76,261  $6,311  $4,009  $5,831 
                         

    Of the $36.3 million of loans placed on nonaccrual during the second quarter of 2010 included in the table above, $1.6 million related to loans which we reviewed during the second quarter and determined that no specific reserves were necessary at such time. The remaining loans which were also reviewed during the period had allocated specific reserves of $3.1 million, after related charge downs, and resulted in the provision of additional specific reserves of $4.3 million during the period.


Allowance for Loan Losses

  The allowance for loan losses is a valuation allowance for probable incurred credit losses in the loan portfolio and amounted to approximately $27.7 million and $29.1 million at June 30, 2010 and December 31, 2009, respectively.  Our formalized process for assessing the adequacy of the allowance for loan losses and the resultant need, if any, for periodic provisions to the allowance charged to income, includes both individual loan analyses and loan pool analyses.  Individual loan analyses are periodically performed on loan relationships of a significant size, or when otherwise deemed necessary, and primarily encompass commercial real estate and other commercial loans.  The result is that commercial real estate loans and commercial loans are class ified into the following risk categories: Pass, Special Mention, Substandard or Loss.  The allowance consists of specific and general components. When appropriate, a specific reserve will be established for individual loans based upon the risk classification and the estimated potential for loss.  The specific component relates to loans that are individually classified as impaired. Otherwise, we estimate an allowance for each risk category.  The general allocations to each risk category are based on factors including historical loss rate, perceived economic conditions (local, national and global), perceived strength of our management, recent trends in loan loss history, and concentrations of credit.

Non-performing loans and impaired loans are defined differently. Some loans may be included in both categories, whereas other loans may only be included in one category. A loan is considered impaired when it is probable that not all principal and interest amounts will be collected according to the loan contract. Generally, residential mortgage, commercial and commercial real estate loans exceeding certain size thresholds established by management, are individually evaluated for impairment. Nonaccrual loans and restructured loans where loan term concessions benefitting the borrowers have been made are generally designated as impaired. Impaired loans presented in the table below include the $76.3 million of nonperforming loans included in the tables above, other than indirect auto and consumer loans, along with $22.3 million of restructure d loans which are in compliance with modified terms and not reported as non-performing and other impaired loans which are not currently classified as non-accrual, but meet the criteria for classification as an impaired loan (i.e. loans for which the collection of all principal and interest amounts as specified in the original loan contract are not expected, or where management has substantial doubt that the collection will be as specified, but is still expected to occur in its entirety). Collectively, these loans comprise the potential problem loans individually considered along with historical portfolio loss experience and trends and other quantitative and qualitative factors applied to the balance of our portfolios in our evaluation of the adequacy of the allowance for loan losses.

If a loan is considered to be impaired, a portion of the allowance is allocated so that the carrying value of the loan is reported at the present value of estimated future cash flows discounted using the loan’s original rate or at the fair value of collateral, less disposition costs, if repayment is expected solely from the collateral. Impaired loans are as follows:

(Dollars in thousands)
 June 30, 2010  December 31, 2009 
Loans with no allocated allowance for loan losses $23,415  $60,629 
Loans with allocated allowance for loan losses  88,354   87,823 
Total $111,769  $148,452 
         
Amount of the allowance for loan losses allocated $7,358  $9,040 
         
Amount of nonaccrual loans classified as impaired $76,261  $71,755 
         


  June 30, 2010 
(Dollars in thousands) 
 
Total Impaired Loans
  
Impaired Loans
With Allocated Allowance
  Amount of Allowance Allocated  Impaired Loans With No Allocated Allowance 
Commercial $4,433  $2,227  $550  $2,206 
Commercial Real Estate  90,450   73,836   5,093   16,614 
Residential  14,410   10,172   998   4,238 
Consumer  100   100   100   - 
HELOC  2,376   2,019   617   357 
Total $111,769  $88,354  $7,358  $23,415 


  December 31, 2009 
(Dollars in thousands) 
 
Total Impaired Loans
  Impaired Loans With Allocated Allowance  Amount of Allowance Allocated  Impaired Loans With No Allocated Allowance 
Commercial $6,210  $4,847  $1,455  $1,363 
Commercial Real Estate  123,452   70,868   5,455   52,584 
Residential  16,261   10,158   1,704   6,103 
Consumer  699   699   274   - 
HELOC  1,830   1,251   152   579 
Total $148,452  $87,823  $9,040  $60,629 


Indirect auto loans and consumer loans generally are not analyzed individually and or separately identified for impairment disclosures.  These loans are grouped into pools and assigned risk categories based on their current payment status and management’s assessment of risk inherent in the various types of loans. The allocations are based on the same factors mentioned above.

Based on an analysis performed by management at June 30, 2010, the allowance for loan losses is considered to be adequate to cover estimated loan losses in the portfolio as of that date. However, management’s judgment is based upon our recent historical loss experience, the level of non-performing and delinquent loans, information known today and a number of assumptions about future events, which are believed to be reasonable, but which may or may not prove valid.  Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that significant additional increases in the allowance for loan losses will not be required. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agenci es may require us to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

As previously discussed in Note 6 to the unaudited consolidated financial statements, TIB Bank has entered into a Consent Order with bank regulatory agencies. In addition to increasing capital ratios, the Bank has agreed to improve its asset quality by reducing the balance of assets classified substandard and doubtful in the report from the most recent regulatory examination through collection, disposition, charge-off or improvement in the credit quality of the loans.

Charge-offs of $1.9 million related to foreclosed loans were recorded during the second quarter of 2010 of which $1.8 million was reserved for.  Valuation adjustments on OREO of $4.3 million were primarily due to updated appraisals, comparable sales and local market trends in asking prices and data from recent closed transactions.  Net activity relating to other real estate owned loans during the second quarter of 2010 is as follows:

OREO Activity 
(Dollars in thousands) 
    
OREO as of March 31, 2010 $41,078 
Real estate acquired  4,293 
Valuation Adjustments  (4,250)
Properties sold  (1,863)
Other  (559)
OREO as of June 30, 2010 $38,699 
     


      An expanded analysis of the significant components of other real estate owned as of June 30, 2010 is as follows:

OREO Analysis as of June 30, 2010 
(Dollars in thousands) 
Property Description Original Loan Amount  Original LTV  
Carrying Value at
June 30, 2010
 
Acquired in Second Quarter of  2010         
Commercial real estate (3 loans)       $2,840 
Other 1-4 family residential (4 loans)        1,373 
        $4,213 
           
Acquired Prior to the Second Quarter of 2010          
Seven undeveloped commercial lots $13,500   50% $8,245 
Luxury boutique hotel in Southwest Florida  9,775   88%  6,755 
B Bayfront land in the Florida Keys  5,622   54%  5,592 
Vacant land in Southwest Florida  5,826   60%  4,412 
F  Five 1-4 family residential condominiums (new construction)  7,066 *  72%  3,841 
Luxury 1-4 family residential in Southwest Florida  2,493   67%  1,610 
Four commercial 1-4 family residential loans Southwest Florida  1,933   73-80%  626 
Commercial real estate (3 loans)          1,817 
Other land (4 Lots – 3 loans)          931 
Other 1-4 family residential (2 loans)          657 
          $34,486 
Total OREO         $38,699 
* Original loan financed the construction of eight units.



Capital and Liquidity

Capital

If a bank is classified as undercapitalized the bank is subject to certain restrictions.  One of the restrictions is that the bank may not accept, renew or roll over any brokered deposits (including CDARs deposits) without being granted a waiver of the prohibition by the FDIC. As of June 30, 2010, we had $33.1 million of brokered deposits consisting of $22.2 million of reciprocal CDARs deposits and $10.9 million of traditional brokered deposits representing approximately 2.5% of our total deposits. CDARs deposits of $20.2 million and traditional brokered deposits of $571,000 mature within the next twelve months. An inability to roll over or raise funds through CDARs deposits or brokered deposits could have a material adverse impact on our liquidity.  Additional restrictions include limitations on deposit pricing, the preclusion from paying “golden parachute” severance payments and the requirement to notify the bank regulatory agencies of certain significant events.

On July 2, 2009, TIB Bank entered into a Memorandum of Understanding, which is an informal agreement, with bank regulatory agencies that it will move in good faith to increase its Tier 1 leverage capital ratio to not less than 8% and its total risk-based capital ratio to not less than 12% by December 31, 2009 and maintain these higher ratios for as long as this agreement is in effect.  At June 30, 2010 and December 31, 2009, these elevated capital ratios were not met. On July 2, 2010, the Bank entered a Consent Order, a formal agreement with the bank regulatory agencies under which, among other things, the Bank has agreed to maintain a Tier 1 capital ratio of at least 8% of total assets and a total risk based capital ratio of at least 12% within 90 days. The Consent Order also governs certain aspects of the Bank’s operati ons including a requirement that it reduce the balance of assets classified substandard and doubtful by at least 70% over a two-year period, and not undertake asset growth of 5% or more per year without prior approval from the regulatory agencies. The Consent Order supersedes the Memorandum of Understanding.

As of June 30, 2010, the Company’s ratio of total capital to risk-weighted assets was 7.1% and the leverage ratio was 2.7% which fell below the levels required to be considered adequately capitalized.  The decline in the leverage ratio from December 31, 2009 is primarily related to net losses incurred.

On December 5, 2008, under the U.S. Department of Treasury’s (the “Treasury”) Capital Purchase Program (the “CPP”) established under the Troubled Asset Relief Program (the “TARP”) that was created as part of the Emergency Economic Stabilization Act of 2008 (the “EESA”), the Company issued to Treasury 37,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, $0.10 par value, having a liquidation amount of $1,000 per share, and a ten-year warrant to purchase 1,106,389 shares of common stock at an exercise price of $5.02 per share, for aggregate proceeds of $37.0 million. Approximately $32.9 million was allocated to the initial carrying value of the preferred stock and $4.1 million to the warrant based on their relative estimated fair values on the issue date. The fair value of the preferred stock was determined using a discount rate of 13% and an assumed life of 10 years and resulted in an estimated fair value of $23.1 million. The fair value of the warrant was determined using the Black-Scholes Model utilizing a 0% dividend yield, a 2.67% risk-free interest rate, a 43% volatility assumption and 10 year expected life. These assumptions resulted in an estimated fair value of $2.9 million for the warrant. Both the number of shares of common stock underlying the warrant and the exercise price are subject to adjustment in accordance with customary anti-dilution provisions and upon certain issuances of the Company’s common stock or stock rights at less than 90% of market value. The $37.0 million of proceeds received were allocated between the preferred stock and the warrant based on their relative fair values. This resulted in the preferred stock being recognized at a discount from its $37.0 million liquidation preference by an amount equal to the relative fair value of the warrant. The discount is currently being accreted using the constant effective yield method over the first five years. Accretion in the amount of $380,000 and $434,000 was recorded during the first six months of 2010 and 2009, respectively. During the first six months of 2009, $823,000 of dividends were recorded.  The total capital raised through this issue qualifies as Tier 1 regulatory capital and can be used in calculating all regulatory capital ratios.

Cumulative preferred stock dividends are payable quarterly at a 5% annual rate on the per share liquidation amount for the first five years and 9% thereafter. Under the original terms of the CPP, the Company may not redeem the preferred stock for three years unless it finances the redemption with the net cash proceeds from sales of common or preferred stock that qualify as Tier 1 regulatory capital (qualified equity offering), and only once such proceeds total at least $9.3 million. All redemptions, whether before or after the first three years, would be at the liquidation amount per share plus accrued and unpaid dividends and are subject to prior regulatory approval.

The Company received a request from the Federal Reserve Bank of Atlanta for the Company’s Board of Directors to adopt a resolution that it will not make any payments or distributions on the outstanding trust preferred securities without the prior written approval of the Reserve Bank.  The Board adopted this resolution on October 5, 2009. The Company has also notified the Treasury of its election to defer the dividend payment on the Series A preferred stock issued under TARP beginning in November 2009.

The Company may not declare or pay dividends on its common stock or, with certain exceptions, repurchase common stock without first having paid all accrued cumulative preferred dividends that are due. For three years from the issue date, the Company also may not increase its common stock dividend rate above a quarterly rate of $0.0589 per share or repurchase its common shares without Treasury’s consent, unless Treasury has transferred all the preferred shares to third parties or the preferred stock has been redeemed.
To be eligible for the CPP, the Company also agreed to comply with certain executive compensation and corporate governance requirements of the EESA, including a limit on the tax deductibility of executive compensation above $500,000. The specific rules covering these requirements were recently developed by Treasury and other government agencies. Additionally, under the EESA, Congress has the ability to impose “after-the-fact” terms and conditions on participants in the CPP. As a participant in the CPP, the Company may be subject to any such retroactive terms and conditions. The Company cannot predict whether, or in what form, additional terms or conditions may be imposed.
The American Recovery and Reinvestment Act (the “ARRA”) became law on February 17, 2009. Among its many provisions, the ARRA imposes certain new executive compensation and corporate expenditure limits on all current and future TARP recipients, including the Company, that are in addition to those previously announced by the Treasury. These limits are effective until the institution has repaid the Treasury, which is now permitted under the ARRA without penalty and without the need to raise new capital, subject to the Treasury’s consultation with the recipient’s appropriate regulatory agency.

Due to the contracting economic conditions, the higher level of nonperforming assets, the potential for further operating losses and the agreement to increase its capital under the Consent Order, the Company is proceeding with plans to increase its capital. These plans will likely result in the issuance of additional shares of common stock and securities convertible into common stock. While management believes we have sufficient capital to continue as a going concern, if we are unable to raise additional capital and/or we incur significant additional losses and are unable to comply with the terms of the Consent Order, uncertainty arises about our ability to continue as a going concern and we may be subject to further regulatory enforcement actions.

On June 29, 2010, the Company and the Bank entered into a definitive agreement with NAFH for the investment of up to $350 million in TIB through the purchase of common stock, preferred stock and a warrant.  Pursuant to the definitive agreement, the Company agreed to sell to NAFH, at the closing of the investment, 700 million shares of its common stock at a purchase price of $0.15 per share and 70,000 shares of newly created mandatorily convertible participating voting preferred stock at a purchase price of $1,000 per share for a cumulative total of $175 million.  The preferred stock will have a liquidation preference of $1,000 per share and each share of preferred stock will be convertible into a number of shares of the Company’s common stock equal to the liquidation preference divided by $0.15 (subject to custo mary anti-dilution adjustments).  After giving effect to the NAFH investment, it is expected that NAFH would own approximately 99% of the Company’s common stock (on an as-converted basis).  The Company also intends to conduct a rights offering to legacy shareholders of rights to purchase up to 149 million shares of common stock at a price of $0.15 per share, which would raise up to $22.4 million, which would equate to 12% of the Company’s pro-forma fully diluted equity.  The record date for the rights offering was July 12, 2010.  In addition, during the 18-month period following the closing, NAFH will have the right to invest up to an additional $175 million in preferred stock and/or common stock on the above terms.  Upon closing of the investment, each of the Company and the Bank will add experienced bankers R. Eugene (Gene) Taylor, Christopher (Chris) G. Marshall, R. Bruce Singletary and Kenneth (Ken) A. Posner to its board of directors, along w ith other directors to be designated by NAFH.  The investment is subject to satisfaction or waiver of certain closing conditions, including reaching an agreement with the Treasury to repurchase the preferred stock and warrant issued under the Troubled Asset Relief Program Capital Purchase Program on terms acceptable to NAFH, the receipt by NAFH and the Company of the requisite governmental and regulatory approvals as well as the approval of the NASDAQ Stock Market to issue the common stock, preferred stock and warrant in reliance on the shareholder approval exemptions set forth in NASDAQ Rule 5635(f). While the NAFH investment is expected to close in the third quarter of 2010, there is no assurance it will close during the quarter, or ever.  At this time, all the applications required to be filed with regulatory agencies have been filed and we have reached an agreement on the significant terms of the repurchase of the Preferred Stock and warrant issued to the Treasury under the TARP Capit al Purchase Program.

If the investment by NAFH is not consummated, the Board of Directors and management team intend to seek other strategic alternatives including but not limited to the sale of certain assets, all or a portion of the Company, or seeking a complementary partner in a merger of equals or where the Company is acquired. There is no assurance the Company will be successful in entering into any agreement or closing such an alternative transaction.


Liquidity

The goal of liquidity management is to ensure the availability of an adequate level of funds to meet the loan demand and deposit withdrawal needs of the Company’s customers.  We manage the levels, types and maturities of earning assets in relation to the sources available to fund current and future needs to ensure that adequate funding will be available at all times.

In addition to maintaining a stable core deposit base, we seek to maintain adequate liquidity primarily through the use of investment securities, short term investments such as federal funds sold and unused borrowing capacity. The Bank has invested in Federal Home Loan Bank stock for the purpose of establishing credit lines with the Federal Home Loan Bank.  The credit availability to the Bank is based on a percentage of the Bank’s total assets as reported in its most recent quarterly financial information submitted to the Federal Home Loan Bank and subject to the pledging of sufficient collateral.  At June 30, 2010, there were $125.0 million in advances outstanding in addition to $25.2 million in letters of credit including $25.1 million used in lieu of pledging securities to the State of Florida to collateraliz e governmental deposits.  On January 7, 2010, the FHLB notified the Bank that the credit availability has been rescinded and the rollover of existing advances outstanding is limited to twelve months or less.

The Bank had unsecured overnight federal funds purchased accommodations up to a maximum of $7.5 million from its correspondent bank and a secured repurchase agreement with a maximum credit availability of $23.6 million as of June 30, 2010. On August 11, 2010, the Bank was notified that the unsecured accommodation was terminated and the secured repurchase agreement availability was increased to $26.3 million.  As of June 30, 2010, collateral availability under our agreement with the Federal Reserve Bank of Atlanta (“FRB”) provides for up to $86.8 million of borrowing availability from the FRB discount window. We believe that we have adequate funding sources through unused borrowing capacity from our correspondent banks and FRB, available cash, unpledged investment securities, loan principal repayment and potential as set maturities and sales to meet our foreseeable liquidity requirements.

As of June 30, 2010, our holding company had cash of approximately $341,000.  This cash is available for providing capital support to the Bank and for other general corporate purposes. The Company received a request from the FRB for the Company’s Board of Directors to adopt a resolution that it will not declare or pay any dividends on its outstanding common or preferred stock, nor will make any payments or distributions on the outstanding trust preferred securities or corresponding subordinated debentures without the prior written approval of the FRB.  The Board adopted this resolution on October 5, 2009.  The Company notified the trustees of its $20 million trust preferred securities due July 7, 2036 and its $5 million trust preferred securities due July 31, 2031 of its election to defer interest paym ents on the trust preferred securities beginning with the payments due in October 2009. In January 2010, the Company notified the trustees of its $8 million trust preferred securities due September 7, 2030 of its election to defer interest payments on the trust preferred securities beginning with the payment due March 2010.  The Company also notified the Treasury of its election to defer the dividend payment on the Series A preferred stock issued under TARP beginning in November 2009. Deferral of the trust preferred securities is allowed for up to 60 months without being considered an event of default. Additionally, the Company may not declare or pay dividends on its capital stock, including dividends on preferred stock, or, with certain exceptions, repurchase capital stock without first having paid all trust preferred interest and all cumulative preferred dividends that are due. If dividends on the Series A preferred stock are not paid for six quarters, whether or not consecutive, the Treasury has the right to appoint two members to the Board of Directors of the Company. At this time it is unlikely that the Company will resume payment of cash dividends on its common stock for the foreseeable future. As previously announced, we have entered into a definitive agreement with NAFH for the investment of up to $350 million in the Company through the purchase of common stock, preferred stock and warrant. For additional information on the potential NAFH investment, refer to Note 1 of the unaudited consolidated financial statements.

Asset and Liability Management

Closely related to liquidity management is the management of the relative interest rate sensitivity of interest-earning assets and interest-bearing liabilities.  The Company manages its interest rate sensitivity position to manage net interest margins and to minimize risk due to changes in interest rates. As a secondary measure of interest rate risk, we review and evaluate our gap position as presented below as part of our asset and liability management process.

(Dollars in thousands) 
3 Months
or Less
  
4 to 6
Months
  
7 to 12
Months
  
1 to 5
Years
  
Over 5
Years
  Total 
Interest-earning assets:                  
Loans $354,647  $38,213  $128,981  $421,154  $157,605  $1,100,600 
Investment securities-taxable  36,057   -   -   1,355   241,955   279,367 
Investment securities-tax exempt  -   -   276   1,121   1,681   3,078 
Marketable equity securities  176   -   -   -   -   176 
FHLB stock  10,447   -   -   -   -   10,447 
InInterest-bearing deposits in other banks  139,278   -   -   -   -   139,278 
Total interest-earning assets  540,605   38,213   129,257   423,630   401,241   1,532,946 
                         
Interest-bearing liabilities:                        
NOW accounts  194,663   -   -   -   -   194,663 
Money market  171,495   -   -   -   -   171,495 
Savings deposits  73,059   -   -   -   -   73,059 
Time deposits  107,438   118,028   353,222   145,624   43   724,355 
Subordinated debentures  25,000   -   -   -   8,000   33,000 
Other borrowings  103,894   -   10,000   115,000   -   228,894 
Total interest-bearing liabilities  675,549   118,028   363,222   260,624   8,043   1,425,466 
                         
Interest sensitivity gap $(134,944) $(79,815) $(233,965) $163,006  $393,198  $107,480 
                         
Cumulative interest sensitivity gap $(134,944) $(214,759) $(448,724) $(285,718) $107,480  $107,480 
                         
Cumulative sensitivity ratio  (8.8%)  (14.0%)  (29.3%)  (18.6%)  7.0%  7.0%
                         


We are cumulatively liability sensitive through the five-year time period, and asset sensitive in the over five year timeframe above. Certain liabilities such as non-indexed NOW and savings accounts, while technically subject to immediate re-pricing in response to changing market rates, historically do not re-price as quickly or to the extent as other interest-sensitive accounts. Approximately 13% of our deposit funding is comprised of non-interest-bearing liabilities and total interest-earning assets are greater than the total interest-bearing liabilities. Therefore it is anticipated that, over time, the effects on net interest income from changes in asset yield will be greater than the change in expense from liability cost. Generally, we expect loan and investment yields and deposit costs to stabilize. However, deposit rates could incr ease due to demand in financial markets, banking system and other local markets for liquidity which may be reflected in elevated pricing competition for deposits. The predominant drivers to increase net interest income are the volume and composition of earning assets, the interest rates paid on our deposits and the net change in non-performing assets.

Interest-earning assets and time deposits are presented based on their contractual terms. It is anticipated that run off in any deposit category will be approximately offset by new deposit generation.

     As a primary measure of our interest rate risk, we employ a financial model derived from our assets and liabilities which simulates the effect of various changes in interest rates on our projected net interest income. This financial model is our principal tool for measuring and managing interest rate risk. Many assumptions regarding the timing and sensitivity of our assets and liabilities to a change in interest rates are made. We continually review and update these assumptions. This model is updated monthly for changes in our assets and liabilities and we model different interest rate scenarios based upon current and projected economic and interest rate conditions. We analyze the results of these simulations and develop tactics and strategies to attempt to mitigate, where possible, the projected unfavorable impact of various interest rate scenarios on our projected net interest income. We also develop tactics and strategies to increase our net interest margin and net interest income that are consistent with our operating policies.



Commitments

The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and standby letters of credit.  These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments.  The Bank uses the same credit policies in making commitments to extend credit and generally uses the same credit policies for letters of credit as it does for on-balance sheet instruments.

Commitments to extend credit are legally binding agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Since some of these commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.  Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee.  At June 30, 2010, total unfunded loan commitments were approximately $63.5 million.

Standby letters of credit are conditional commitments issued by the Bank to assure the performance or financial obligations of a customer to a third party.  The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers.  The Bank generally holds collateral and/or obtains personal guarantees supporting these commitments.  Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements. At June 30, 2010, commitments under standby letters of credit aggregated approximately $1.1 million.

The Company believes the likelihood of the unfunded loan commitments and unfunded letters of credit either needing to be totally funded or funded at the same time is low.  However, should significant funding requirements occur, we have available borrowing capacity from various sources as discussed in the “Capital and Liquidity” section above.




Appendix E
Information included under “Quantitative And Qualitative Disclosures About Market Risk” in TIB Financial Corp.’s Annual Report on Form 10-K for the year ended December 31, 2009.
ITEM 7A:  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk that a financial institution’s earnings and capital, or its ability to meet its business objectives, will be adversely affected by movements in market rates or prices such as interest rates, foreign exchange rates, equity rates, equity prices, credit spreads and/or commodity prices.  The Company has assessed its market risk as predominately interest rate risk.

The estimated interest rate risk as of December 31, 2009 was analyzed using simulation analysis of the Company’s sensitivity to changes in net interest income under varying assumptions for changes in market interest rates.  The Bank uses standardized assumptions run against Bank data by an outsourced provider of Asset Liability modeling.  The model derives expected interest income and interest expense resulting from an immediate two percentage point increase or decrease parallel shift in the yield curve.  The standard parallel yield curve shift uses the implied forward rates and a parallel shift in interest rates to measure the relative risk of change in the level of interest rates.  

The analysis indicates an immediate 200 basis point parallel interest rate increase would result in a decrease in net interest income of approximately $398,000 or -1% over a twelve month period.  While a 200 basis point parallel interest rate decrease would result in an increase in net interest income of approximately $338,000 or 1% over a twelve month period.

A non-parallel yield curve twist is used to estimate risk related to the level of interest rates and changes in the slope or shape of the yield curve using static rates.  The increase or decrease steepening/twist of the yield curve is “ramped” over a twelve month period. Yield curve twists change both the level and slope of the yield curve, are more realistic than parallel yield curve shifts and are more useful for planning purposes.  As an example, a 300 basis point yield twist increase would result in short term rates increasing 300 basis points and long term rates would increase approximately 100 basis points over a 12 month period. This scenario reflects a rapid shift in monetary policy by the Federal Reserve which could occur if the Federal Reserve increased short term rates by 300 basis points over a 12 month period.

 Such, a 300 basis point yield curve twist increase is projected to result in a decrease in net interest income of approximately $666,000 or -1% over a twelve month period.

The projected impact on our net interest income of a 200 basis point parallel increase and decrease, respectively, of the yield curve and a 300 basis point yield curve twist increase of short-term rates are summarized below.


      December 31, 2009 
     Parallel Shift(Term Expiring 2013)       Twist
Twelve Month Period    -2%             +2%+300%/100%(Term Expiring 2012) 
    
 Peter N. FossBradley A. Boaz 
Percentage change in net interest  incomeHoward B. GutmanWilliam A. Hodges +1%             -1%
Christopher G. MarshallR. Eugene Taylor -1%
R. Bruce Singletary  

There are no family relationships among the Company’s directors, director nominees or executive officers. There are no material proceedings to which any of the Company’s directors, director nominees or executive officers, or any associate of any of the Company’s directors, director nominees or executive officers, is a party adverse to the Company or any of its subsidiaries or has a material interest adverse to the Company or any of its subsidiaries.

We attemptTo the Company’s knowledge, none of its directors, director nominees or executive officers has been convicted in a criminal proceeding during the last ten years (excluding traffic violations or similar misdemeanors) and none of its directors, director nominees or executive officers was a party to manageany judicial or administrative proceeding during the last ten years (except for any matters that were dismissed without sanction or settlement) that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws.

The Board of Directors has no reason to believe that the persons named above as nominees for directors will be unable or will decline to serve if elected. However, in the event of death or disqualification of any nominee or the refusal or inability of any nominee to serve as a director, it is the intention of the proxy holders named in the accompanying proxy card to vote for the election of such other person or persons as the proxy holders determine in their discretion. In no circumstance will the proxy be voted for more than seven nominees. Properly executed and moderatereturned proxies, unless revoked, will be voted as directed by the variabilityshareholder or, in the absence of such direction, will be voted in favor of the election of the recommended nominees.
- 8 -
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE “FOR” THE ELECTION OF THE NOMINEES.

Set forth below are the names and other information pertaining to the board’s nominees whose terms of office will continue after the Annual Meeting:

NamePosition with CompanyAgeYear First Elected Director
    
R. Eugene Taylor (1)
President, Chief Executive Officer
and Chairman of the Board
642011
    
Christopher G. Marshall (1)
Executive Vice President, Chief
Financial Officer and Director
532011
    
R. Bruce Singletary (1)
Executive Vice President, Chief
Risk Officer and Director
612011
    
Bradley A. Boaz (2)Director522008
    
Peter N. Foss (2)Director682011
    
Howard B. GutmanDirector582008
    
William A. Hodges (2)Director632011
     

(1)Member of Executive Committee
(2)Member of Audit Committee

R. Eugene Taylor. Mr. Taylor has served as Chairman of our net interest income dueBoard of Directors and as our Chief Executive Officer since 2010. Mr. Taylor spent 38 years at Bank of America Corp. and its predecessor companies, most recently as the Vice Chairman of the firm and President of Global Corporate & Investment Banking. Mr. Taylor also served on Bank of America’s Risk & Capital and Management Operating Committees. He originally joined Bank of America in 1969 as a credit analyst. He served in branch offices, marketing and management positions across North Carolina and Florida. In 1990, Mr. Taylor was named President of the Florida Bank and, in 1993, President of NationsBank Corp. in Maryland, Virginia and the District of Columbia. In 1998, Mr. Taylor was appointed to changeslead Consumer and Commercial Banking operations in the levellegacy Bank of interest ratesAmerica Western U.S. footprint. He subsequently returned to Charlotte, North Carolina to create a national banking unit and, in 2001, was named President of Bank of America Consumer & Commercial Banking. In 2004, Mr. Taylor assumed responsibility for the organization’s combined commercial banking businesses known as Global Business & Financial Services, before being named Vice Chairman of Bank of America and President of Global Corporate & Investment Banking in 2005. Most recently, Mr. Taylor served as a Senior Advisor at Fortress Investment Group LLC. Mr. Taylor serves as Chairman and Chief Executive Officer of CBF, Capital Bank, N.A., and Capital Bank Corporation and Green Bankshares, Inc., two other bank holding companies in which CBF has a majority interest. Mr. Taylor is a Florida native and received his Bachelor of Science in Finance from Florida State University. Mr. Taylor brings to our Board of Directors valuable and extensive experience from managing and overseeing a broad range of operations during his tenure at Bank of America. His experience in leadership roles and activities in the Southeast qualifies him to serve as the Chairman of our Board of Directors.
Christopher G. Marshall. Mr. Marshall has served as our Chief Financial Officer since 2010. From May to October 2009, Mr. Marshall served as a Senior Advisor to the Chief Executive Officer and Chief Restructuring Officer at GMAC, Inc. From July 2008 through March 2009, he also served as an advisor to The Blackstone Group L.P., providing advice and analysis for potential investments in the banking sector. From 2006 through 2008 Mr. Marshall served as the Chief Financial Officer of Fifth Third Bancorp. Mr. Marshall served as Chief Operations Executive of Bank of America’s Global Consumer and Small Business Bank from 2004 to 2006. Mr. Marshall also served as Bank of America’s Chief Financial Officer of the Consumer Products Group from 2003 to 2004, Chief Operating Officer of Technology and Operations from 2002 to 2003 and Chief Financial Officer of Technology and Operations from 2001 to 2002. Prior to joining Bank of America, Mr. Marshall served as Chief Financial Officer and Chief Operating Officer of Honeywell International Inc. Global Business Services from 1999 to 2001, where he was a key member of the integration team for the merger with AlliedSignal Inc., overseeing the integration of all finance, information technology and corporate and administrative functions. From 1995 to 1999, he served as Chief Financial Officer of AlliedSignal Technical Services Corporation. Prior to that, from 1987 to 1995, Mr. Marshall held several managerial positions at TRW, Inc. Mr. Marshall serves as a director and Chief Financial Officer of CBF, Capital Bank, N.A., and Capital Bank Corporation and Green Bankshares, Inc., two other bank holding companies in which CBF has a majority interest. Mr. Marshall earned a Bachelor of Science degree in Business Administration from the University of Florida and obtained a Master of Business Administration degree from Pepperdine University.

- 9 -
R. Bruce Singletary. Mr. Singletary has served as our Chief Risk Officer since 2010. Mr. Singletary spent 32 years at Bank of America and its predecessor companies with the last 19 years in various credit risk roles. Mr. Singletary originally joined C&S National Bank as a credit analyst in Atlanta, Georgia in 1974. He served in various middle market line and credit functions. In 1991, Mr. Singletary was named Senior Credit Policy Executive of C&S Sovran, which was renamed NationsBank Corp. in January 1992 after its acquisition by North Carolina National Bank, for the geographic areas of Maryland, Virginia and the slopeDistrict of Columbia. Mr. Singletary led the credit function of NationsBank Corp. from 1992 to 1998 alongside Mr. Taylor, who served as President of this region from 1993 to 1998. In 1998, Mr. Singletary relocated to Florida to establish a centralized underwriting function to serve middle market commercial clients in the southeastern region of the yield curve by generating adjustable rateUnited States. In 2000, Mr. Singletary assumed credit responsibility for Bank of America’s middle market leveraged finance portfolio for the eastern half of the United States. In 2004, Mr. Singletary served as Senior Risk Manager for commercial banking for Bank of America’s Florida Bank. Mr. Singletary serves as a director and Chief Risk Officer of CBF, Capital Bank, N.A., and Capital Bank Corporation and Green Bankshares, Inc., two other bank holding companies in which CBF has a majority interest. Mr. Singletary earned a Bachelor of Science degree in Industrial Management from Clemson University and obtained a Master of Business Administration degree from Georgia State University.
Bradley A. Boaz. Mr. Boaz has been an independent director of TIB Financial Corp. and Capital Bank, N.A. since 2008. He has served the Barron Collier Companies (BCC) in various positions since 1990 where he currently serves as Executive Vice President and Chief Financial Officer. His tenure at the BCC has included the responsibilities of Chief Financial Officer along with oversight of the Treasury Services, Taxation, Accounting, Information Technology and Legal Services functions. Mr. Boaz is an active Naples community leader being affiliated with the Greater Naples Chamber of Commerce, Leadership Collier Foundation, Collier County Productivity Committee and Florida Taxwatch. Mr. Boaz attended Leadership Institute 2005 and is a graduate of the Leadership Collier Class of 2002. Additionally, Mr. Boaz served as a board member of the Economic Development Council for Collier County from 2000 to 2005, as former Co-chairman of the Economic Development Council Public Policy Committee and as an Executive Committee Member of the Economic Development Council for Collier County.

Peter N. Foss. Mr. Foss has been a member of our Board of Directors since 2010. Mr. Foss has been President of the General Electric Company’s Olympic Sponsorship and Corporate Accounts since 2003. In addition, Mr. Foss is General Manager for Enterprise Selling, with additional responsibilities for Sales Force Effectiveness and Corporate Sales Programs. He has been with GE for 32 years and, prior to his current position, served for six years as the President of GE Polymerland, a commercial organization representing GE Plastics in the global marketplace. Prior to GE Polymerland, Mr. Foss served in various commercial roles in the company, including introducing LEXAN® film in the 1970s, was the Market Development Manager on the ULTEM® introduction team in 1982. He has also served as the Regional General Manager for four of the GE Plastics regions, including leading the GE Plastics effort in Mexico in the mid-1990s. Mr. Foss serves as a director of CBF, Capital Bank, N.A., and Capital Bank Corporation and Green Bankshares, Inc., two other subsidiary bank holding companies in which CBF has a majority interest. Mr. Foss earned a Bachelor of Science degree in Chemistry from Massachusetts College of Pharmacy, Boston. Mr. Foss’s extensive managerial and sales experience qualifies him to serve on our Board of Directors. His experience assists us in developing plans to expand and energize our sales and marketing activities.

Howard B. Gutman. Mr. Gutman, has been an independent director of TIB Financial Corp. and Capital Bank, N.A. since 2008. He is President of The Lutgert Companies, where he has served in various roles for 34 years. The Lutgert Companies include Premier Properties, Lutgert Insurance, Lutgert Title, and development of both residential and commercial real estate projects. A founding member of The Education Foundation of Collier County, Mr. Gutman serves on the local advisory board of the University of Florida Foundation as well as the advisory board for the Bergstrom Center for Real Estate Studies at the University of Florida. He is a member of the International Council of Shopping Centers, a former Collier County advisory board member of Northern Trust Bank and a current board member of the Collier County Winged Foot Athletic Scholarship Foundation. He is co-founder of the Gulfshore Shootout Basketball Tournament and Scholarship Fund and has been involved with many youth-related programs associated with the YMCA, Optimist Club and Greater Naples Little League. The professional experience of having been involved with obtaining financing with financial institutions for over $1.0 billion of real estate development loans and managing the interest rate sensitivityrelated commercial and residential real estate projects and investments brings the Board of Directors extensive real estate industry experience from a borrower’s perspective. In addition to his professional experience representative of a large segment of our investment securities, wholesale funding,loan portfolio customer base, he brings experience in project feasibility evaluation and Fed Funds positions consistent with the re-pricing characteristics of our deposits and other interest bearing liabilities.  The above projections assume that management does not take any measures to change the interest rate sensitivity of the Bank during the simulation period.being responsible for strategic direction.


 
- 10 -
 
William A. Hodges. Mr. Hodges has been a member of our Board of Directors since 2010. Mr. Hodges has been President and Owner of LKW Properties LLC, a Charlotte-based residential land developer and homebuilder, since 2005. Prior to that, Mr. Hodges worked for over 30 years in various functions at Bank of America and its predecessors. From 2004 to 2005, he served as Chairman of Bank of America’s Capital Commitment Committee. Mr. Hodges served as Managing Director and Head of Debt Capital Markets from 1998 to 2004 and as Managing Director and Head of the Real Estate Finance Group from 1996 to 1998. Prior to Bank of America’s merger with NationsBank Corp., he served as Washington, D.C. Market President and Head of MidAtlantic Commercial Banking for NationsBank Corp. from 1992 to 1996. Mr. Hodges began his career at North Carolina National Bank, where he worked for 20 years in various roles, including Chief Credit Officer of Florida operations and as manager of the Real Estate Banking and Special Assets Groups. Mr. Hodges serves as a director of CBF, Capital Bank, N.A., and Capital Bank Corporation and Green Bankshares, Inc., two other subsidiary bank holding companies in which CBF has a majority interest. Mr. Hodges earned a Bachelor of Arts degree in History from the University of North Carolina at Chapel Hill and a Master of Business Administration degree in finance from Georgia State University. Mr. Hodges’s substantial experience in the banking and real estate sectors qualifies him to serve on our Board of Directors.

Appendix FEXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Information included under “Quantitative And Qualitative Disclosures About
CBF now controls more than 50% of the Company’s voting power and, as a result, the Company qualifies as a “controlled company” as defined in Rule 5615(c)(1) of The NASDAQ Stock Market, Risk” in TIB Financial Corp.’s Quarterly ReportInc. Marketplace Rules (the “Marketplace Rules”). Therefore, as of January 28, 2011, the Company is exempt from the requirements of Rule 5605(b)(1) of the Marketplace Rules with respect to the Company Board being comprised of a majority of “Independent Directors,” as defined by Rule 5605(a)(2) of the Marketplace Rules, and Rules 5605(d) and 5605(e) of the Marketplace Rules covering the independence of directors serving on Form 10-Qthe Compensation Committee and the Governance & Nominating Committee of the Company Board, respectively. The Company does not currently have a Compensation Committee, and the Compensation Committee of CBF’s Board of Directors (the “Compensation Committee”) oversees compensation, policies and benefit plans for the quarter ended June 30, 2010.
Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk that a financial institution’s earnings and capital, or its ability to meet its business objectives, will be adversely affected by movements in market rates or prices such as interest rates, foreign exchange rates, equity rates, equity prices, credit spreads and/or commodity prices.  The Company has assessed its market risk as predominately interest rate risk.Company’s executive officers.

The estimated interest rate riskCompensation Discussion and Analysis, which we refer to herein as of June 30, 2010 was analyzed using simulationthe “CD&A,” describes the Company’s executive compensation philosophy, components and policies, including analysis of the compensation earned by the Company’s sensitivity to changes in net interest income under varying assumptions for changes in market interest rates.  The Bank uses standardized assumptions run against Bank data by an outsourced provider of Asset Liability modeling.  The model derives expected interest income and interest expense resulting from an immediate two percentage point increase or decrease parallel shiftnamed executive officers as detailed in the yield curve.  The standard parallel yield curve shift usesaccompanying tables. Our discussion focuses on compensation and practices relating to our most recently completed fiscal year.

Named Executive Officers

R. Eugene Taylor, President and Chief Executive Officer; Christopher G. Marshall, Executive Vice President and Chief Financial Officer; and R. Bruce Singletary, Executive Vice President and Chief Risk Officer have not entered into employment agreements with the implied forward ratesCompany and a parallel shift in interest ratesare therefore at-will employees. None of Messrs. Taylor, Marshall and Singletary receive compensation or are entitled to measurebenefits directly from the relative risk ofCompany, and the Company does not maintain any plans, programs or arrangements that provide change in control benefits to any of Mr. Taylor, Mr. Marshall or Mr. Singletary. The compensation of these executives is paid directly by CBF. A portion of the levelbase salaries and incentive compensation paid to these individuals by CBF for their service to the Company was allocated for the purpose of interest rates.  the disclosures herein.

The other named executive officers of the Company participated in certain plans and programs of the Company prior to the Investment, but such plans and programs were simplified following the Investment and were generally not in place in 2011.

The analysis indicates an immediate 200 basis point parallel interest rate increase would result in a decrease in net interest income of approximately $221,000, or -0.5%, over a twelve month period.

A non-parallel yield curve twist is used to estimate risk related to the level of interest rates and changes in the slope or shape of the yield curve using static rates.  The increase or decrease steepening/twist of the yield curve is “ramped” over a twelve month period. Yield curve twists change both the level and slope of the yield curve, are more realistic than parallel yield curve shifts and are more usefulfollowing executives were our named executive officers for planning purposes.  As an example, a 500 basis point yield curve twist increase would result in short term rates increasing 600 basis points and long term rates would increase approximately 300 basis points over a 12 month period. This scenario reflects a potential rapid shift in monetary policy by the Federal Reserve which could occur if the Federal Reserve increased short term rates by 600 bas is points over a 12 month period.

 Such a 500 basis point yield curve twist increase is projected to result in an increase in net interest income of approximately $1,844,000, or 4%, over a twelve month period.

The projected impact on our net interest income of a 200 basis point parallel increase of the yield curve and a 500 basis point yield curve twist increase of short-term rates are summarized below.

2011:

 NameJune 30, 2010Position 
Parallel ShiftTwist
Twelve Month Period+2%+600%/300%
    
 R. Eugene TaylorChairman and Chief Executive Officer
    
Percentage change in net interest  incomeChristopher G. MarshallExecutive Vice President and Chief Financial Officer -0.5%+4%


      We attempt to manage and moderate the variability of our net interest income due to changes in the level of interest rates and the slope of the yield curve by generating adjustable rate loans and managing the interest rate sensitivity of our investment securities, wholesale funding, and Fed Funds positions consistent with the re-pricing characteristics of our deposits and other interest bearing liabilities.  The above projections assume that management does not take any measures to change the interest rate sensitivity of the Bank during the simulation period.




TIB FINANCIAL CORP.
599 9TH STREET NORTH, SUITE 101
NAPLES, FL  34102-5624
VOTE BY INTERNET — www.proxyvote.com
Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 P.M.  Eastern Time the day before the cutoff date or meeting date.  Have your proxy card in hand when you access the Web site and follow the instructions to obtain your records and to create an electronic voting instruction form.
ELECTRONIC DELIVERY OF FUTURE SHAREHOLDER COMMUNICATIONS —
If you would like to reduce the costs incurred by TIB Financial Corp. in mailing proxy materials, you can consent to receiving all future proxy statements, proxy cards and annual reports electronically via e-mail or the Internet.  To sign up for electronic delivery, please follow the instructions above to vote using the Internet and, when prompted, indicate that you agree to receive or access shareholder communications electronically in future years.
VOTE BY PHONE — 1-800-690-6903
Use any touch-tone telephone to transmit your voting instructions up until 11:59 P.M.  Eastern Time the day before the cutoff date or meeting date.  Have your proxy card in hand when you call and then follow the instructions.
VOTE BY MAIL —
Mark, sign and date your proxy card and return it in the postage-paid envelope we have provided or return it to TIB Financial Corp. c/o Broadridge, 51 Mercedes Way, Edgewood, NY 11717.
1.           For approval of an amendment to the Company’s Restated Articles of Incorporation to increase the number of authorized shares of the Company’s Common Stock as described in the accompanying proxy statement.

ForAgainstAbstain
¨¨¨
2.           For approval of an amendment to the Company’s Restated Articles of Incorporation  to effect a reverse stock split as described in the accompanying proxy statement.

ForAgainstAbstain
¨¨¨

3.           For approval of an amendment to the Company’s Restated Articles of Incorporation to permit shareholders to act by written consent as described in the accompanying proxy statement.

ForAgainstAbstain
¨¨¨


In their discretion, the proxies are authorized to vote upon such of the matters as may properly come before the Special Meeting.
This proxy revokes all prior proxies with respect to the Special Meeting and may be revoked prior to its exercise.  Unless otherwise specified, this proxy will be voted for all three of the above proposals and in the discretion of the persons named as proxies on all other matters that may properly come before the Special Meeting or any adjournments thereof.
IMPORTANT
PLEASE MARK, SIGN BELOW, DATE AND RETURN THIS PROXY PROMPTLY IN THE ENVELOPE FURNISHED.

Note:  Please sign exactly as name appears on your stock certificate.  When shares are held by joint tenants, both should sign.  When signing as attorney, executor, administrator, trustee or guardian, please give full title as such.  If a corporation, please sign in full corporate name by president or other authorized officer.  If a partnership, please sign in partnership name by authorized person.

    
R. Bruce SingletaryExecutive Vice President and Chief Credit Officer
    
 Michael D. CarriganFormer Chief Executive Officer and President of TIB Bank, and former Executive Vice President of Capital Bank
Alma R. ShuckhartFormer Executive Vice President and Chief Credit Officer of TIB Bank, and former Executive Vice President of Capital Bank

- 11 -
Compensation Philosophy and Objectives

The Company is committed to maintaining an executive compensation program that will contribute to the achievement of the Company’s business objectives. For 2011, the Company had an executive compensation program that:

•fulfilled the Company’s business and operating needs, conformed with its general human resource strategies and enhanced shareholder value; and
•enabled the Company to attract and retain the executive talent essential to the Company’s achievement of its short-term and long-term business objectives while balancing the need to consider weak economic conditions and the Company’s financial performance in compensation decisions.
The Company’s objective is to pay its executives and other employees at rates that enable the Company to maintain a highly competent and productive staff. The Compensation Committee evaluated both performance and compensation to ensure that the Company maintains its ability to attract and retain superior employees in key positions, and that compensation provided to key employees remains competitive relative to the compensation paid to similarly situated executives of our peer companies.

Executive Compensation

In light of the economic challenges facing the Company, the Compensation Committee determined that the compensation of the named executive officers should be provided primarily in the form of base salary and that incentive compensation should be limited.

Base Salary. Base salary is designed to compensate executives based upon their experience, duties and scope of responsibility, and retain employees with a proven track record of performance. Salaries for executive positions are established using the same process as for other positions and job levels within the Company, that is, by systematically evaluating the position and assigning a salary based on comparisons with pay scales for similar positions in reasonably comparable institutions. The Compensation Committee determined not to make any adjustments to 2010 base salaries, which have continued to be the base salaries for the named executive officers in 2011.

Messrs. Taylor, Marshall and Singletary’s base salary was determined in connection with the founding and initial private offering of North American Financial Holdings (the predecessor to CBF) in December 2009, and their base salaries have not changed since that time.

Annual Bonus. As noted above, Messrs. Taylor, Marshall and Singletary receive compensation, including an annual bonus, from CBF. The 2011 annual bonus was determined by the Compensation Committee based on the performance of CBF and of the individual named executive officer during 2011. The Compensation Committee awarded each of Mr. Taylor, Mr. Marshall and Mr. Singletary 100% of their annual target bonus for 2011, which, in each case, was 100% of their individual annual base salary.

The table below summarizes the total compensation paid or earned by each of the named executive officers for the years ended December 31, 2010 and 2011.

Summary Compensation Table

Name and Principal Position (1)YearSalary
Bonus
(3)
Stock
Awards
(4)
Option
Awards
(4)
Non-Equity
Incentive Plan
Compensation
(5)
All Other
Compensation
(6)
Total 
          
     
Signature [PLEASE SIGN WITHIN BOX]
R. Eugene Taylor (2)
Chairman and Chief Executive Officer
2011
2010
 Date$
103,819
162,500
$
103,819
162,500
$
1,113,626
–
$
881,252
–
$
–
–
$
–
–
$
2,202,516
325,000
   Signature (Joint Owners) Date
Christopher G. Marshall (2)
Executive Vice President and Chief Financial Officer
2011
2010
$
69,958
109,500
$
69,958
109,500
$
417,611
–
$
330,469
–
$
–
–
$
–
–
$
887,996
219,000
R. Bruce Singletary (2)
Executive Vice President and Chief Risk Officer
2011
2010
$
47,917
75,000
$
47,917
75,000
$
278,407
–
$
220,313
–
$
–
–
$
–
–
$
594,554
150,000

- 12 -
Name and Principal Position (1)YearSalary
Bonus
(3)
Stock
Awards
(4)
Option
Awards
(4)
Non-Equity
Incentive Plan
Compensation
(5)
All Other
Compensation
(6)
Total
Michael D. Carrigan
Former Executive Vice President
2011
2010
$
203,393
270,000
$
–
–
$
–
–
$
–
–
$
–
72,496
$
73,539
12,012
$
276,933
354,508
Alma R. Shuckhart
Former Executive Vice President
2011
2010
$
179,776
217,000
$
–
–
$
–
–
$
–
–
$
–
70,829
$
60,355
13,586
$
240,132
301,415

(1)During 2010, Mr. Carrigan served as Chief Executive Officer and President of TIB Bank, and Ms. Shuckhart served as Executive Vice President and Chief Credit Officer of TIB Bank. Effective as of the closing of the Investment, Mr. Carrigan and Mrs. Shuckhart each were appointed an Executive Vice President of Capital Bank.
(2)None of the compensation paid to Messrs. Taylor, Marshall and Singletary is paid by the Company. The base salary, annual bonus, stock awards and option awards are paid by CBF. The portion disclosed in the Summary Compensation Table reflect the portion of compensation that is allocable to their services to the Company.
(3)Amounts include discretionary payments made to named executive officers under the Annual Incentive Plan.
(4)Amounts listed in the “Stock Awards” column and the “Option Awards” reflect the full grant date fair value of the award received. For a further discussion of these awards, see Note 17 to the Company’s Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended December 31, 2011.
(5)The amounts for Mr. Carrigan and Mrs. Shuckhart in 2010 represent activity related to the provisions of the salary continuation agreements discussed below.
(6)The Company provides the named executive officers with certain group life, health, medical and other noncash benefits generally available to all salaried employees that are not included in this column pursuant to SEC rules. The amounts shown in this column for 2011 consist of (i) matching contributions by the Company under TIB Bank’s Employee Stock Ownership Plan with 401(k) provisions; (ii) officer supplemental life and disability insurance; and (iii) severance paid upon termination of employment.

All Other Compensation

The following table sets forth each component of the “All Other Compensation” column of the Summary Compensation Table for 2011.

Name 
Matching
Contributions
to Stock
Ownership Plan
 
Officer Life
and Disability
Insurance
 
Severance upon
Termination of
Employment
  Total 
              
R. Eugene Taylor $– $– $– $– 
              
Christopher G. Marshall  –  –  –  – 
              
R. Bruce Singletary  –  –  –  – 
              
Michael D. Carrigan  4,677  1,362  67,500  73,539 
              
Alma R. Shuckhart  3,696  2,409  54,250  60,355 

Annual Incentive Compensation. Annual incentive compensation awards provide named executive officers with the opportunity to earn cash bonuses based on the achievement of specific Company-wide, business unit, division, department or function and, when established, individual performance goals. The Compensation Committee designs the annual incentive component of our compensation program to align named executive officers’ pay with our annual (short-term) performance.

The Board of Directors suspended cash incentive compensation awards for 2010, and therefore no awards were provided in 2010. The Board also suspended cash incentive compensation awards for 2011 due to deteriorating economic conditions and the difficulty such economic conditions would present in determining performance metrics and goals.

Employment Agreements. The Company entered into employment agreements with Mr. Carrigan and Mrs. Shuckhart. In connection with the Investment by CBF, these employment agreements were terminated on September 30, 2010, after which each officer became an at-will employee eligible to receive separation benefits under any severance plan or policy applicable to similarly situated senior executives of the Bank.

- 13 -
Equity Awards under the Equity Incentive Plan. Equity compensation is intended to enhance the long-term proprietary interest in the Company on the part of the employee and others who can contribute to the Company’s overall success, and to increase the value of the Company to its shareholders. Under the 2004 Equity Incentive Plan (the “Equity Incentive Plan”), the Board of Directors has the authority to grant stock options and restricted stock to any employee or director of the Company. Equity award levels are generally determined based on market data and vary among participants based on their positions within the Company. From time to time, the Board of Directors may grant an additional award to one or more employees based on special circumstances.

The Board of Directors does not set any performance levels (threshold, target, maximum or otherwise) for equity awards, and all equity awards under the Equity Incentive Plan are made completely at the discretion of the Board of Directors. No equity awards were granted to named executive officers in 2011.

Options Exercises and Stock Vested. None of the Company’s named executive officers exercised any stock options during the year ended December 31, 2011. Any unvested shares from restricted stock awards were 100% vested with the closing of the Investment on September 30, 2010.

Outstanding Equity Awards at Fiscal Year End. All outstanding stock option awards were subject to service-based vesting and are for stock options exercisable into shares of the Company’s Common Stock. All share prices and option exercise prices discussed throughout this document have been adjusted for the effects of the Company’s 1 for 100 reverse stock split effective after the close of business on December 15, 2010.

Messrs. Taylor, Marshall and Singletary have not been granted stock options or restricted stock awards for the Company’s common stock. Stock options granted to Mr. Carrigan and Mrs. Shuckhart were 100% vested but were not exercised within 90 days after termination of employment and therefore were forfeited.

Stock Ownership and Retention Guidelines. While the Company believes that its employees and executive officers should hold stock in the Company to better align their interests with those of our shareholders, the Company does not currently have any stock ownership or retention guidelines for its executive officers or employees.

Other Compensation Programs and Practices

Retirement Plans and Other Benefit Plans

We offer a variety of health and welfare programs to all eligible employees. The named executive officers generally are eligible for the same benefit programs on the same basis as other employees. The health and welfare programs are intended to protect employees against catastrophic health care expenses and encourage a healthy lifestyle. Our health and welfare programs include medical, pharmacy, dental, vision, life insurance and accidental death and disability. We provide full time employees, regularly scheduled to work 30 or more hours per week, long-term disability and basic life insurance at no cost to the employee.

401(k) Plan. We offer a qualified employee stock ownership plan with 401(k) provisions. All employees, including named executive officers, are generally eligible for this plan.

Salary Continuation Agreements. The Company maintained Salary Continuation Plans for the benefit of a select group of management and highly compensated employees. These agreements were designed to provide supplemental retirement income benefits to participants. Upon termination of employment on or after normal retirement at age 65, the participant was entitled to receive a monthly retirement income benefit of up to 43% of the highest annual base salary in the three years immediately preceding retirement and had vesting terms of 10% per year (excluding Mrs. Shuckhart who was 100% vested during 2010). In connection with the Investment by CBF, these plans were terminated, and on November 5, 2010, the amounts accrued under these plans through September 30, 2010 were paid out to the participants.

Perquisites and Other Personal Benefits

Perquisites and other personal benefits represent a small part of the Company’s overall compensation package, and are offered only after consideration of business need. The Company provides executive officers with perquisites and other personal benefits that the Company believes to be reasonable and consistent with its overall compensation program to better enable the Company to attract and retain superior employees for key positions.

- 14 -
Personal benefits offered to executives serve a different purpose than do the other elements of executive compensation. In general, they are designed to provide a safety net of protection against the financial catastrophes that can result from illness, disability or death. Personal benefits offered to executives are largely those that are offered to the general employee population, with some variation primarily to promote tax efficiency.

Potential Payments upon Termination or Change in Control

As of December 31, 2011, none of the named executive officers had arrangements or agreements for termination or change in control. As previously noted, Mr. Taylor’s employment agreement with CBF provides for severance upon a termination of employment with CBF (with such severance payment to be made by CBF, and certain outstanding CBF equity awards held by Messrs. Taylor, Marshall and Singletary vest on a change in control.

Equity Compensation Plan Information

The following table provides information as of December 31, 2011 for all equity compensation plans of the Company (including individual arrangements) under which the Company is authorized to issue equity securities.

Equity Compensation Plans

Plan Category 
Number of Securities
To Be Issued upon Exercise
of Outstanding Options,
Warrants and Rights (1)
 
Weighted Average
Exercise Price
of Outstanding Options,
Warrants and Rights
 
Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation Plans
(Excluding Securities Reflected
in First Column) (1)
 
        
Equity compensation plans approved by security holders  2(2)$541.61  242(3)
           
Equity compensation plans not approved by security holders (4)
  N/A  N/A  N/A 
           
Total  2 $541.61  242 
            

(1)Refers to shares of Common Stock, (shares in thousands).
(2)Consists of options issued under the 1994 Incentive Stock Option Plan and the 2004 Plan.
(3)Consists of shares available for issuance under the 2004 Plan, (shares in thousands).
(4)Consists of options issued in exchange for options to purchase common stock of The Bank of Venice pursuant to the relevant terms of the merger agreement between TIB Financial Corp. and The Bank of Venice.

DIRECTOR COMPENSATION

Director Fees. Directors who are also employees of the Company receive no compensation in their capacities as directors. However, outside directors receive an annual retainer fee of $30,000 as long as they attend at least 75% of the meetings of the Board. No additional fees are paid for attendance at Board of Directors meetings or Board committee meetings.

Equity Compensation. The Company did not grant any option awards to its nonemployee directors during 2011. As of December 31, 2011, all options to purchase common stock held by the Company’s nonemployee directors were fully vested.

Other. Each of our current and former directors is also covered by director and officer liability insurance, and each of our current directors is entitled to reimbursement for reasonable out-of-pocket expenses in connection with meeting attendance.

The following table provides information related to the compensation of the Company’s nonemployee directors for the year ended December 31, 2011.

- 15 -
Director Compensation Table

Name 
Fees Earned
or Paid in
Cash
 
Stock
Awards
 
Option
Awards
 
Non-Equity
Incentive Plan
Compensation
 
Nonqualified
Deferred
Compensation
Earnings
 
All Other
Compensation
 Total 
                       
Bradley A. Boaz $30,200 $– $– $– $– $– $30,200 
Peter N. Foss  9,300  –  –  –  –  –  9,300 
Howard B. Gutman  27,650  –  –  –  –  –  27,650 
William A. Hodges  7,500  –  –  –  –  –  7,500 
Christopher G. Marshall  –  –  –  –  –  –  – 
R. Bruce Singletary  –  –  –  –  –  –  – 
R. Eugene Taylor  –  –  –  –  –  –  – 

AUDIT COMMITTEE REPORT

In accordance with its written Charter (which is available on the Company’s corporate website located at: www.capitalbank-us.com), the Audit Committee supervises the quality and integrity of the accounting, auditing and financial reporting practices of the Company on behalf of the Board. Management has the primary responsibility for preparing the consolidated financial statements and managing the reporting process, including the system of internal controls. As required by the Audit Committee Charter, each Audit Committee member satisfies the independence and financial literacy requirements for serving on the Audit Committee, and at least one member has accounting or related financial management expertise, all as stated in the rules of NASDAQ. In fulfilling its oversight responsibilities, the Audit Committee discussed and reviewed the audited consolidated financial statements in the Annual Report with management, including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements of the Company.

The Audit Committee discussed and reviewed with the independent registered public accounting firm, who are responsible for expressing an opinion on the conformity of the audited consolidated financial statements with accounting principles generally accepted in the United States of America, their judgments as to the quality, not just the acceptability, of the Company’s accounting principles and such other matters as are required to be discussed with the Audit Committee by Statement on Auditing Standards No. 61, as amended by Statement on Auditing Standards No. 90 (Communication with Audit Committees).

In discharging its responsibility for the audit process, the Audit Committee obtained from the independent accountants a letter describing all relationships between the accounting firm and the Company that might bear on the accounting firm’s independence required by the applicable requirements of the Public Company Accounting Oversight Board regarding the independent accounting firm’s communications with the audit committee concerning independence. The Audit Committee also discussed with the accounting firm any relationships that might impact their objectivity and independence and satisfied itself as to the accounting firm’s independence, and considered the compatibility of non-audit services with the accounting firm’s independence.

Based upon the reports, reviews and discussions described in this report, and subject to the limitations on the role and responsibilities of the Audit Committee referred to above and in the Audit Committee charter, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 to be filed with the SEC. The Audit Committee also selected PricewaterhouseCoopers LLP as the Company’s independent registered certified public accounting firm for the fiscal year ended December 31, 2012 and recommended that the selection be presented to the Company’s shareholders for ratification.

This report is submitted by the members of the Audit Committee:

Peter N. Foss (Chairman)
Bradley A. Boaz
William A. Hodges

Certain Transactions

Certain of the directors and executive officers of the Company, members of their immediate families and entities with which they are involved are customers of and borrowers from the Company. As of December 31, 2011, total loans outstanding to directors and executive officers of the Company, and their associates as a group, equaled approximately $125,000. All outstanding loans and commitments included in such transactions were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time in comparable transactions with persons not related to the Company, and did not involve more than the normal risk of collectability or present other unfavorable features.
- 16 -
The Company has had, and expects to have in the future, banking transactions in the ordinary course of its business with directors, officers and principal shareholders of the Company, and their associates, on the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with persons not related to the Company. The Company generally considers credit relationships with directors and/or their affiliates to be immaterial and as not impairing the director’s independence so long as the terms of the credit relationship are similar to other comparable borrowers. The Company presumes extensions of credit that comply with Federal Reserve Regulation O to be consistent with director independence. In other words, the Company does not consider normal, arm’s-length credit relationships entered into in the ordinary course of business to negate a director’s independence.

Regulation O requires such loans to be made on substantially the same terms, including interest rates and collateral, and following credit underwriting procedures that are no less stringent than those prevailing at the time for comparable transactions by Capital Bank with persons not related to the Company. Such loans also may not involve more than the normal risk of repayment or present other unfavorable features. Additionally, no event of default may have occurred (that is, such loans are not disclosed as nonaccrual, past due, restructured, or potential problems). The Board of Directors must review any credit to a director or his or her related interests that has become criticized in order to determine the impact that such classification has on the director’s independence.

From time to time, certain relationships or transactions may arise that would be deemed acceptable and appropriate upon full disclosure, following review and approval by the Audit Committee (in accordance with NASDAQ Listing Rules) to ensure there is a legitimate business reason for the transaction and that the terms of the transaction are no less favorable to the Company that could be obtained from an unrelated person. Therefore, the Board of Directors has adopted the Policy and Procedures with Respect to Related Person Transactions, which is implemented through the Audit Committee of the Board of Directors and is designed to regularly monitor the appropriateness of any significant transactions with related persons (as such term is defined by SEC rules). The policy applies to any transaction required to be disclosed under Item 404(a) of Regulation S-K in which:
•the Company or the Bank is a participant;
•any related person (as defined in Item 404(a) of Regulation S-K) has a direct or indirect interest; and
•the amount involved exceeds $120,000.

The policy requires notification to the Company’s Audit Committee, prior the consummation of any related person transaction, describing the related person’s interest in the transaction, the material facts of the transaction, the benefits to the Company of the transaction, the availability of other sources of comparable products or services, and an assessment of whether the transaction is on terms that are comparable to the terms available to an unrelated third party or employees generally. The Audit Committee then evaluates the proposed transaction and determines whether it is a related person transaction. The Audit Committee considers all of the relevant facts and circumstances available to it including (if applicable) but not limited to:

•the benefits to the Company;
•the impact on a director’s independence in the event the related person is a director, an immediate family member of a director or an entity in which a director is a partner, shareholder or executive officer;
•the availability of other sources for comparable products or services;
•the terms of the transaction; and
•the terms available to unrelated third parties or to employees generally.

No member of the Audit Committee is permitted to participate in any review, consideration or approval of any related person transaction with respect to which such member or any of his or her immediate family members is the related person. The Audit Committee approves only those related person transactions that are in, or are not inconsistent with, the best interests of the Company and its shareholders, as the Audit Committee determines in good faith. If the transaction has already been consummated, the Audit Committee will undergo the same analysis as it does with a proposed transaction, and if it determines that the consummated transaction is a related person transaction, it will evaluate whether the consummated related person transaction should be ratified, amended, terminated or rescinded and whether any disciplinary action is appropriate.

- 17 -
On September 30, 2010, CBF purchased 7,000,000 shares of the Company’s common stock, 70,000 shares of Series B Preferred Stock and a warrant to purchase up to 11,666,667 shares of common stock for aggregate consideration of $175,000,000. The warrant was not exercised and expired on March 31, 2012. As a result of the Investment and the Company’s rights offering on January 18, 2011, CBF currently owns approximately 94% of the Company’s common stock. As the Company’s controlling shareholder, CBF has the power to control the election of the Company’s directors, determine our corporate and management policies and determine the outcome of any corporate transaction or other matter submitted to the Company’s shareholders for approval. CBF also has sufficient voting power to amend the Company’s organizational documents. In addition, five of our seven directors, our Chief Executive Officer, our Chief Financial Officer, and our Chief Risk Officer are affiliated with CBF.
 

During 2011 and 2010, we paid $525,440 and $549,994, respectively, for insurance products from Lutgert Insurance, a subsidiary of The Lutgert Companies, in which Howard B. Gutman, a director of the Company, is President and a shareholder.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires certain of the Company’s officers and its directors to file reports of ownership and changes in ownership with the SEC. Officers and directors are required by SEC regulations to furnish the Company with copies of all Section 16(a) reports they file. To the Company’s knowledge, based solely on a review of reports that were filed with the SEC, all filing requirements under Section 16(a) were complied with during 2011.


PROPOSAL 2:  RATIFICATION OF APPOINTMENT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Audit Committee of the Board of Directors has appointed PricewaterhouseCoopers LLP (“PWC”) as the Company’s independent registered certified public accounting firm for the fiscal year ending December 31, 2012. Although the selection and appointment of an independent registered public accounting firm is not required to be submitted to a vote of shareholders, the Audit Committee and Board of Directors each deem it advisable to obtain shareholder ratification of this appointment. If the shareholders do not ratify the appointment of PWC as the Company’s independent registered certified public accounting firm, the Audit Committee will evaluate the matter and consider what action, if any, to take as a result. PWC has acted as the independent registered certified public accounting firm since April 2011. A representative of PWC is expected to be present at the Annual Meeting and will be available to respond to appropriate questions and afforded an opportunity to make a statement.

Dismissal of Crowe Horwath, LLP

Effective April 19, 2011, the Company dismissed Crowe Horwath, LLP (“Crowe”) as the Company’s independent registered public accounting firm. The decision to change independent registered public accounting firms was recommended and approved by the Audit and Risk Committee of the Board of Directors.

During the fiscal years ended December 31, 2010 and December 31, 2009 and during the period from January 1, 2011 through April 19, 2011, the Company had (i) no disagreements with Crowe on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, any of which that, if not resolved to Crowe’s satisfaction, would have caused it to make reference to the subject matter of any such disagreement in connection with its reports for such year and interim periods and (ii) no reportable events within the meaning of Item 304(a)(1)(v) of Regulation S-K during the two most recent fiscal years or the subsequent interim period.

Crowe’s report on the Company’s consolidated financial statements for the fiscal years ended December 31, 2010 and December 31, 2009 does not contain any adverse opinion or disclaimer of opinion, nor is it qualified or modified as to uncertainty, audit scope, or accounting principles.

During the fiscal years ended December 31, 2010 and December 31, 2009 and during the period from January 1, 2011 through April 19, 2011, neither the Company nor anyone on its behalf has consulted with PWC regarding (i) the application of accounting principles to a specific transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s financial statements and neither a written report was provided to the Company or oral advice was provided that PWC concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was the subject of a disagreement within the meaning of Item 304(a)(1)(iv) and the related instructions to Item 304 of Regulation S-X, or any reportable event as that term is defined in Item 304(a)(1)(v) of Regulation S-K.

- 18 -
In accordance with Item 304(a)(3) of Regulation S-K, the Company provided Crowe with a copy of the disclosures and requested that Crowe furnish the Company with a letter addressed to the SEC stating whether or not Crowe agrees with the above statements. A copy of such letter, dated April 20, 2011, is filed as Exhibit 16.1 to the Company’s Current Report on Form 8-K filed on April 20, 2011.

No representatives of Crowe are expected to be present at the Annual Meeting.

Audit Firm Fee Summary

For the years ended December 31, 2011 and 2010, the Company retained PricewaterhouseCoopers LLP and Crowe Horwath, LLP, respectively, to provide services in the categories and amounts presented below. The following table sets forth the aggregate fees billed or expected to be billed to the Company by PricewaterhouseCoopers LLP for fiscal year 2011, and fees billed by Crowe Horwath, LLP for fiscal year 2010.

  Fiscal 2011 Fiscal 2010 
      
Audit fees $216,667 $225,000 
Audit-related fees  67,500  37,169 
Tax fees  –  38,025 
All other fees  –  – 
Total fees $284,167 $300,194 

Audit Fees. This category includes the aggregate fees billed for professional services rendered for the audits of the Company’s consolidated financial statements and internal controls over financial reporting for fiscal years 2011 and 2010, for the reviews of the financial statements included in the Company’s Quarterly Reports on Form 10-Q during fiscal years 2011 and 2010, and for services that are normally provided by the independent registered public accounting firm in connection with statutory and regulatory filings or engagements for the relevant fiscal years.

Audit-Related Fees. This category includes the aggregate fees billed in each of the last two fiscal years for assurance and related services by the independent registered public accounting firm that are reasonably related to the performance of the audits or reviews of the financial statements and are not reported above under “Audit Fees,” and generally consist of fees for accounting consultation, review of registration statements and audits of employee benefit plans.

Tax Fees. This category includes the aggregate fees billed in each of the last two fiscal years for professional services rendered by the independent registered public accounting firm for tax compliance, tax planning and tax advice. Tax compliance services consist of assistance with federal and state income tax returns.

All Other Fees. This category includes the aggregate fees billed in each of the last two fiscal years for products and services provided by the independent registered public accounting firm that are not reported above under “Audit Fees,” “Audit-Related Fees,” or “Tax Fees.”

The Audit Committee has considered the compatibility of the nonaudit services performed by and fees paid to PWC in fiscal 2011, and determined that such services and fees were compatible with its independence. During 2011, PWC did not utilize any personnel in connection with the audit other than its full-time, permanent employees.

Policy for Approval of Audit and Nonaudit Services. The Audit Committee charter contains the Company’s policy regarding the approval of audit and nonaudit services provided by the independent registered public accounting firm. According to that policy, the Audit Committee must pre-approve all services, including all audit and nonaudit services to be performed by the independent registered public accounting firm. The Audit Committee approved all audit and nonaudit services described above in accordance with this policy. In determining whether to approve a particular audit or permitted nonaudit service, the Audit Committee will consider, among other things, whether such service is consistent with maintaining the independence of the independent registered public accounting firm. The Audit Committee will also consider whether the independent registered public accounting firm is best positioned to provide the most effective and efficient service to the Company and whether the service might be expected to enhance the Company’s ability to manage or control risk or improve audit quality.

THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE COMPANY’S INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING DECEMBER 31, 2012.

- 19 -
SUBMISSION OF SHAREHOLDER PROPOSALS FOR 2013 ANNUAL MEETING

Any proposals which shareholders intend to present for a vote at the Company’s 2013 Annual Meeting of Shareholders, and which such shareholders desire to have included in the Company’s proxy materials relating to that meeting, must be received by the Company on or before April 4, 2013, which is 120 calendar days prior to the anniversary of the date of this Proxy Statement. Proposals received after that date will not be considered for inclusion in such proxy materials.

In addition, if a shareholder intends to present a matter for a vote at the 2013 Annual Meeting of Shareholders, other than by submitting a proposal for inclusion in the Company’s Proxy Statement for that meeting, the shareholder must give timely notice in accordance with the Company’s Bylaws. To be timely, a shareholder’s notice must be delivered to the Company’s Corporate Secretary at its principal office, 599 9th Street North, Suite 101, Naples, FL 34102-5624, not later than the close of business on April 4, 2013, nor earlier than the close of business on March 5, 2013 (the 120th day and 150th day, respectively, prior to the first anniversary of the date on which the Company first mailed its proxy materials to shareholders for the preceding year’s annual meeting of shareholders); provided, however, that if the date of the annual meeting is more than 30 days before or more than 30 days after the anniversary of the preceding year’s annual meeting of shareholders, notice must be so delivered not later than the close of business on the 120th day prior to such annual meeting. Such notices must be in accordance with the procedures and include the information required by the Company’s Bylaws.

ADDITIONAL INFORMATION

A copy of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, including the financial statements and schedules thereto, as filed with the SEC will be furnished upon written request, without charge to any Company shareholder. Such requests should be addressed to Nancy A. Snow, Capital Bank, 333 Fayetteville Street, Raleigh, NC 27601.

Shareholders Sharing the Same Last Name and Address. Only one Annual Report and Proxy Statement may be delivered to multiple shareholders sharing an address unless we have received contrary instructions from one or more of the shareholders. We will deliver promptly upon written or oral request a separate copy of the Annual Report and Proxy Statement to a shareholder at a shared address to which a single copy of the documents was delivered. Requests for additional copies should be directed to Nancy A. Snow, Capital Bank, 333 Fayetteville Street, Raleigh, NC 27601 (telephone number 919-645-6312). Shareholders sharing an address and currently receiving a single copy may contact Ms. Snow as described above to request that multiple copies be delivered in future years. Shareholders sharing an address and currently receiving multiple copies may request delivery of a single copy in future years by contacting Ms. Snow as described above.

MISCELLANEOUS

As of the date hereof, the Company knows of no other business that will be presented for consideration at the Annual Meeting. However, the enclosed proxy confers discretionary authority to vote with respect to any and all of the following matters that may come before the meeting: (i) matters for which the Company did not receive timely written notice; (ii) approval of the minutes of a prior meeting of shareholders, if such approval does not amount to ratification of the action taken at the meeting; (iii) the election of any person to any office for which a bona fide nominee is named in this Proxy Statement and such nominee is unable to serve or for good cause will not serve; (iv) any proposal omitted from this Proxy Statement and the form of proxy pursuant to Rule 14a-8 or Rule 14a-9 under the Exchange Act; and (v) matters incidental to the conduct of the meeting. If any such matters come before the meeting, the proxy agents named in the accompanying proxy card will vote in accordance with their judgment.

Costs of Soliciting Proxies. We will pay all expenses incurred in connection with this solicitation, including postage, printing, handling and the actual expenses incurred by custodians, nominees and fiduciaries in forwarding proxy materials to beneficial owners. In addition to solicitation by mail, certain of our officers, directors and regular employees, who will receive no additional compensation for their services, may solicit proxies by telephone, personal communication or other means. We have also retained Broadridge Financial Solutions (“Broadridge”) to aid in the search for shareholders and the delivery of proxy materials, maintain the Internet website where we will make our proxy card available for voting in accordance with SEC e-proxy rules, establish and operate an online and telephonic voting platform and process and tabulate all votes. We estimate that the aggregate fees, excluding costs for postage and envelopes, to be paid to Broadridge will be $8,000. In addition, as part of the services provided to us as our transfer agent, Broadridge will assist us in identifying recordholders.

ALL SHAREHOLDERS ARE ENCOURAGED TO SIGN, DATE AND RETURN THEIR PROXY SUBMITTED WITH THIS PROXY STATEMENT AS SOON AS POSSIBLE IN THE ENVELOPE PROVIDED. IF A SHAREHOLDER ATTENDS THE ANNUAL MEETING, HE OR SHE MAY REVOKE HIS OR HER PROXY AND VOTE IN PERSON.

- 20 -
 
 
 


Important Notice Regarding the Availability of Proxy Materials for the Special Meeting:
This Proxy Statement, TIB Financial Corp.’s Proxy Statement for the 2010 Annual Meeting of
Shareholders and Annual Report on Form 10K are available at
[●] (for information only).

PROXY
TIB FINANCIAL CORP.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder hereby appoints [●] and [●], and each or any of them, with full power of substitution, as Proxies to represent and to vote, as designated on the reverse, all the shares of Common Stock of TIB Financial Corp. (the “Company”), held of record by the undersigned on October 1, 2010, at the Special Meeting of Shareholders (the “Special Meeting”) to be held on December [●], 2010, or any adjournments thereof.