10-K 1 form10-k.htm 10-K 10-K

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 

 
For the fiscal year ended
December 31, 2005
  
Commission file number
000-21329
     
TIB FINANCIAL CORP.
(Exact Name of Registrant as Specified in Its Charter )
     
Florida
(State of Incorporation)
  
65-0655973
(I.R.S. Employer
Identification No.)
599 9th Street North
Suite 101
Naples, Florida
(Address of Principal Executive Offices)
  
34102
(Zip Code)
     
 
(239) 263-3344
(Registrant’s telephone number)
 
 
Securities Registered pursuant to Section 12(b) of the Act: None

Securities Registered pursuant to Section 12(g) of the Act: Common stock, par value $0.10

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes or þ No

Check if the issuer is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨

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

Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-K contained in this form, and will not be contained, to the best of issuer’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer ¨ Accelerated filer þ Non-accelerated filer ¨

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

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2005 was approximately $153,946,000 based on the $26.95 per share closing price on June 30, 2005.

The number of shares outstanding of issuer’s class of common stock at February 28, 2006 was 5,825,548 shares of common stock.

Documents Incorporated By Reference: Portions of the Proxy Statement for the 2006 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days of the Registrant’s 2005 fiscal year end are incorporated by reference into Parts II and III of this report.



 
PART I
Page
1
10
12
13
13
     
 
PART II
  
14
15
17
37
38
74
74
75
     
 
PART III
  
76
76
76
76
76
     
 
PART IV
  
77
     
     



CAUTIONARY NOTICE REGARDING 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 Annual Report on Form 10-K 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: 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.


PART I


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 terms “Bank” and “TIB Bank” mean TIB Bank and its subsidiaries (unless the context indicates another meaning).



General

We are a financial holding company headquartered in Naples, Florida, whose business is conducted primarily through our wholly-owned subsidiary, TIB Bank. TIB Bank, which was formed in 1974, serves the Southern Florida market, principally Monroe, Collier, Lee and South Miami-Dade Counties, Florida. TIB Bank is headquartered in Key Largo, Florida. We operate 16 banking offices and 20 ATMs throughout South Florida. At December 31, 2005, we had approximately $1.08 billion in total assets, $920.4 million in total deposits, $882.4 million in total loans and shareholders' equity of $77.5 million. TIB Bank's deposits are insured by the Federal Deposit Insurance Corporation (FDIC), up to applicable limits.

Through TIB Bank, we offer a wide range of commercial and retail banking and financial services to businesses and individuals. Our account services include checking, interest-bearing checking, money market, savings, certificates of deposit and individual retirement accounts. We offer 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. We also offer a full complement of consumer loan products including residential real estate, installment loans, home equity, home equity lines, and indirect auto dealer loans. Our lending focus is predominantly on small to medium-sized business and consumer borrowers. Most importantly, we provide our customers with access to local TIB Bank officers who are empowered to act with flexibility to meet customers' needs in an effort to foster and develop long-term loan and deposit relationships.

We are subject to examination and regulation by the Board of Governors of the Federal Reserve System, the Florida Office of Financial Regulation, and the FDIC. This regulation is intended for the protection of our depositors, not our shareholders.

In October 2000, we purchased Keys Insurance Agency of Monroe County, Inc. Keys Insurance Agency, Inc. (the new name subsequent to the purchase) had three offices in the Florida Keys and one office in Naples and brokered a full line of commercial and residential hazard insurance coverage as well as life and health insurance and annuities. In August 2003, we sold the assets of Keys Insurance Agency, Inc., and exited this line of business. In 2004, we eliminated TIB Government Loan Specialists, Inc. as a subsidiary, but continue to conduct its government-guaranteed loan program through TIB Bank. In December 2004, we sold internally developed intangible assets, primarily comprised of the book of business of our investment center. In December 2005, we sold our merchant bankcard processing segment.



Business Strategy

Our business strategy is to operate as a profitable, diversified financial services company providing a variety of banking and other financial services, with an emphasis on consumer and residential mortgage lending and commercial business loans to small and medium-sized businesses. As a result of the consolidation of small and medium-sized financial institutions, we believe there is a significant opportunity for a community-focused bank to provide a full range of financial services to small and middle-market commercial and retail customers. We emphasize comprehensive retail and small business products and responsive, decentralized decision-making which reflects our knowledge of our local markets and customers.

To continue asset growth and profitability, our marketing strategy is targeted to:

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

·  
Pursue commercial lending opportunities with small to mid-sized businesses which we believe are underserved by our larger competitors;

·  
Continue originating indirect auto dealer loans to enhance margins, effectively utilizing our funding sources;

·  
Cross-sell our products and services to our existing customers to leverage our relationships and enhance profitability; and

·  
Adhere to safe and sound credit standards to maintain the continued quality of assets as we implement our growth strategy.


Banking services

Commercial Banking. TIB Bank focuses its commercial loan originations on established small and mid-sized businesses , professionals and professional organizations in its market areas. These loans are usually accompanied by cash management services and deposit relationships. TIB Bank provides commercial real estate loans to finance the acquisition and development of owner operated properties; acquisition, development and construction of investment properties; builder construction lines of credit; and the purchase of income-producing properties, including office buildings, industrial buildings, self-storage, hotel/motel, medical centers, marinas, retail and shopping centers. TIB Bank offers a complete range of commercial loan products, including revolving lines of credit for working capital and term loans for the acquisition of equipment, funding property improvements or other business related expenses. Commercial underwriting is driven by cash flow repayment analysis along with the additional support provided by collateral and the principals involved with the loan.

Retail Banking. TIB Bank's retail banking activities emphasize consumer deposit and checking accounts. An extensive range of these services is offered by TIB Bank to meet the varied needs of its customers from young persons to senior citizens. In addition to traditional products and services, TIB Bank offers contemporary products and services, such as debit cards, Internet banking and electronic bill payment services. Consumer loan products offered by TIB Bank include home equity lines of credit, second mortgages, new and used auto loans, including indirect loans through auto dealers, new and used boat loans, overdraft protection, and unsecured personal credit lines.

Mortgage Banking. TIB Bank's mortgage banking business is structured to provide a source of fee income largely from the process of originating product for sale on the secondary market (primarily fixed rate loans), as well as the origination of primarily adjustable rate loans to be held in TIB Bank's loan portfolio. Mortgage banking capabilities include conventional and nonconforming mortgage underwriting; and construction and permanent financing.



Lending activities

Loan Portfolio Composition. At December 31, 2005, TIB Bank's loan portfolio totaled $882.4 million, representing approximately 82.0% of our total assets of $1.08 billion. For a discussion of our loan portfolio, see "Management's Discussion of Financial Condition and Results of Operation - Loan Portfolio."

The composition of TIB Bank's loan portfolio at December 31, 2005 and 2004 is indicated below, along with the growth from the prior year

(Dollars in thousands)
    
Total Loans
December 31, 2005
 
 
% of Total Loans
 
 
Total Loans
December 31, 2004
 
 
% of Total Loans
 
 
% Increase (Decrease) from December 31, 2004 to 2005
  
Real estate mortgage loans:
                                
Commercial
 
$
451,969
    
51.2
  
$
351,346
    
53.7
    
28.6
  
Residential
    
76,003
    
8.6
    
67,204
    
10.3
    
13.1
  
Farmland
    
4,660
    
0.5
    
4,971
    
0.8
    
(6.3
)
Construction
    
125,207
    
14.2
    
49,815
    
7.6
    
151.3
  
Commercial and agricultural loans
    
80,055
    
9.1
    
64,622
    
9.9
    
23.9
  
Indirect auto dealer loans
    
118,018
    
13.4
    
91,890
    
14.1
    
28.4
  
Home equity loans
   
17,232
    
2.0
    
13,856
    
2.1
    
24.4
  
Other consumer loans
    
9,228
    
1.0
    
9,817
    
1.5
    
(6.0
)
Total
  
$
882,372
    
100
  
$
653,521
    
100
    
35.0
  
                                 

Our non-performing loans as a percentage of gross loans remained consistent at 0.11% at December 31, 2005 and 2004.

Commercial Real Estate Mortgage Loans. At December 31, 2005, TIB Bank's commercial real estate loan portfolio totaled $452.0 million. The Bank also has $4.7 million in loans outstanding that are secured by farmland. TIB Bank originates commercial mortgages secured by office and retail buildings, hotels, bed and breakfast inns, and multi-purpose warehouse buildings. Although terms may vary, TIB Bank's commercial mortgages generally are long term in nature, owner-occupied, and variable-rate loans. TIB Bank seeks to reduce the risks associated with commercial mortgage lending by generally lending in its market area and obtaining periodic financial statements and tax returns from borrowers. It is also TIB Bank's general policy to obtain personal guarantees from the principals of the borrowers and assignments of all leases related to the collateral.

Commercial Loans. At December 31, 2005, TIB Bank's commercial loan portfolio totaled $80.1 million. TIB Bank originates secured and unsecured loans for business purposes. Loans are made for acquisition, expansion, and working capital purposes and may be secured by real estate, accounts receivable, inventory, equipment or other assets. The financial condition and cash flow of commercial borrowers are closely monitored by the submission of corporate financial statements, personal financial statements and income tax returns.

Construction Loans. At December 31, 2005, TIB Bank's construction loan portfolio totaled $125.2 million. TIB Bank provides interim real estate acquisition development and construction loans to builders, developers, and persons who will ultimately occupy the building. Real estate development and construction loans to provide interim financing on the property are based on acceptable percentages of the appraised value of the property securing the loan in each case. Real estate development and construction loan funds are disbursed periodically at pre-specified stages of completion. Interest rates on these loans are generally adjustable. TIB Bank carefully monitors these loans with on-site inspections and control of disbursements.

Development and construction loans are secured by the properties under development or construction and personal guarantees are typically obtained. Further, to assure that reliance is not placed solely in the value of the underlying property, TIB Bank considers the market conditions and feasibility of the proposed project, the financial condition and reputation of the borrower and any guarantors, the amount of the borrower’s equity in the project, independent appraisals, costs estimates and pre-construction sale information.

Loans to individuals for the construction of their primary or secondary residences are secured by the property under construction. The loan to value ratio of construction loans is based on the lesser of the cost to construct or the appraised value of the completed home. Construction loans have a maturity of 12 months. These construction loans to individuals may be converted to permanent loans upon completion of construction.



Residential Real Estate Mortgage Loans. At December 31, 2005, TIB Bank's residential loan portfolio totaled $76.0 million. TIB Bank originates adjustable and fixed-rate residential mortgage loans. Such mortgage loans are generally originated under terms, conditions and documentation acceptable to the secondary mortgage market. TIB Bank will place some of these, primarily adjustable rate, loans into its portfolio, although the substantial majority are sold to investors.

Indirect Auto Dealer Loans. At December 31, 2005, TIB Bank's indirect auto dealer loans portfolio totaled $118.0 million. The Bank buys loans that have been originated by automobile dealerships - this is commonly referred to as indirect lending. We predominately buy loans from auto dealers in Southwest Florida and they are for the purchase of new or late model used cars. We serve customers over a broad range of creditworthiness and the required terms and rates are reflective of those risk profiles.

The balance of outstanding indirect loans continued to grow quickly in 2005. However, the pace of growth began to normalize as the portfolio began to mature and payoffs and paydowns have become more significant. Since the expected life of these loans is approximately two years, we believe the level of outstanding indirect loans has leveled off and we therefore expect that indirect loans will remain below 15% of total loans outstanding.

We anticipate being able to deliver strong results while maintaining credit quality in our indirect lending operations due to a combination of factors including:

·  
Business with a limited number of dealers - The dealerships we do business with are characterized by being very sound financially and trade predominately in vehicles which retain market value reasonably well over time. We continually monitor dealers for compliance with our lending guidelines. We endeavor to be one of the main buyers of loans from every dealer we do business with which allows us to have a cooperative relationship with that dealer.

·  
Thorough underwriting of applicants - We evaluate credit scores and other pertinent information such as the stability of the applicant's job, home ownership, and the nature of any credit issues which may give us a better indication of creditworthiness than just the credit score.

·  
Effective collections - We get to customers quickly and more often as payment issues arise. We begin contacting the customer once their payment is 10 days past due. After an account is 15 days past due, it is referred to a collection company for resolution including field contacts as necessary.

·  
Sale of repossessed automobiles at retail prices - We sell most of the repossessed automobiles we acquire on a retail less commission basis instead of wholesale through auctions. We are able to do this because we have an established relationship with a dealer who sells the automobiles for us. This has helped reduce our loss per vehicle.

Other Consumer Loans and Home Equity Loans. At December 31, 2005, TIB Bank's consumer loan portfolio totaled $9.2 million, and its home equity portfolio totaled $17.2 million. TlB Bank offers a variety of consumer loans. These loans are typically secured by residential real estate or personal property, including automobiles and boats. Home equity loans (closed-end and lines of credit) are typically made up to 85% of the appraised value of the property securing the loan, in each case, less the amount of any existing liens on the property. Closed-end loans have terms of up to 15 years. Lines of credit have an original maturity of 10 years. The interest rates on closed-end home equity loans are fixed, while interest rates on home equity lines of credit are variable.


Credit administration

TIB Bank's lending activities are governed by written policies approved by the board of directors to ensure proper management of credit risk. Loans are subject to a defined credit process that includes repayment analysis of the borrower, risk-rating of credits, establishment of lending limits and application of lending procedures, including the holding of adequate collateral and the maintenance of compensating balances, as well as procedures for on-going identification and management of credit deterioration. Regular portfolio reviews are performed to identify potential underperforming credits, estimate loss exposure, and to ascertain compliance with TIB Bank's policies. Management review consists of evaluation of the financial strengths of the borrower and the guarantor, the related collateral and the effects of economic conditions.

TIB Bank generally does not make commercial or consumer loans outside its market area unless the borrower has an established relationship with TIB Bank and conducts its principal business operations within TIB Bank's market area. Consequently, TIB Bank and its borrowers are affected by the economic conditions prevailing in its market area.




Merchant Bankcard Processing

Through December 30, 2005, the Bank processed credit card transactions for merchants primarily in the Florida Keys. As a vacation destination, merchants in the Florida Keys typically generate a high volume of credit card transactions. The Bank competed for merchant bankcard processing business primarily on the basis of customer service. In the typical merchant bankcard transaction, the Bank would pay the merchant the amount of the charge less a negotiated fee. In order to obtain payment of the charge from the issuing bank or its processor, the Bank had to pay interchange fees, which were deducted from the payment and reflected as a part of merchant bankcard processing expenses. As a merchant bankcard processor, the Bank bore the risk of loss if a credit card customer disputed a charge and the Bank could not recover from the merchant. The Bank sold the merchant bankcard processing segment to NOVA Information Systems on December 30, 2005. Subsequent to the sale, all historical operating results are reflected as discontinued operations in the accompanying financial statements.


Investment and insurance activities

Through December 15, 2004, TIB Bank engaged through a wholly-owned subsidiary, TIB Investment Center, Inc., in the retail sale of non-deposit investment products such as variable and fixed rate annuities, mutual funds and other products. On December 15, 2004, the Company closed the sale of certain intangible assets which primarily comprised the book of business which served as the foundation of the investment center operations.


Employees

As of December 31, 2005, the Bank employed 332 full-time employees and 12 part-time employees. Except for certain officers of the Bank who presently serve as officers of the Company, the Company does not have any employees. The Company and its subsidiaries are not a party to any collective bargaining agreement, and management believes the Company and its subsidiaries enjoy satisfactory relations with its employees.


Related Party Transactions

At December 31, 2005, we had $882.4 million in total loans outstanding, of which $862,000 was outstanding to certain of our executive officers, directors, and security holders who own more than 10% of our voting securities, and their related business interests. In the ordinary course of business, TIB Bank makes loans to our directors and their affiliates and to policy-making officers, all of which are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions and do not involve more than the normal risk of collectibility.


SUPERVISION AND REGULATION

General

We are extensively regulated under federal and state law. Generally, these laws and regulations are intended to protect depositors, not shareholders. The following is a summary description of certain provisions of certain laws that affect the regulation of bank holding companies and banks. The discussion is qualified in its entirety by reference to applicable laws and regulations. Changes in such laws and regulations may have a material effect on our business and prospects, as well as those of TIB Bank.


Federal Bank Holding Company Regulation and Structure

We are a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended, and, as such, we are subject to regulation, supervision, and examination by the Federal Reserve. We are required to file annual and quarterly reports with the Federal Reserve and to provide the Federal Reserve with such additional information as it may require. The Federal Reserve may examine us and our subsidiaries.

 

      With certain limited exceptions, we are required to obtain prior approval from the Federal Reserve before acquiring direct or indirect ownership or control of more than 5% of any voting securities or substantially all of the assets of a bank or bank holding company, or before merging or consolidating with another bank holding company. In acting on applications for such approval, the Federal Reserve must consider various statutory factors, including among others, the effect of the proposed transaction on competition in the relevant geographical and product markets, each party’s financial condition and management resources and record of performance under the Community Reinvestment Act. Additionally, with certain exceptions any person proposing to acquire control through direct or indirect ownership of 25% or more of any of our voting securities is required to give 60 days’ written notice of the acquisition to the Federal Reserve, which may prohibit the transaction, and to publish notice to the public.

Generally, a bank holding company may not engage in any activities other than banking, managing or controlling its bank and other authorized subsidiaries, and providing services to these subsidiaries. With prior approval of the Federal Reserve, we may acquire more than 5% of the assets or outstanding shares of a company engaging in nonbank activities determined by the Federal Reserve to be closely related to the business of banking or of managing or controlling banks. In recent years, changes in law have significantly increased the right of an eligible bank holding company, called a “financial holding company,” to engage in a full range of financial activities, including insurance and securities activities, as well as merchant banking and other financial services. We are a financial holding company and thus have expanded financial affiliation opportunities as long as TIB Bank remains a well-capitalized bank under the standards discussed below, and also meets certain other requirements. As of December 31, 2005, TIB Bank met these requirements for our continued qualification as a financial holding company.

Subsidiary banks of a bank holding company are subject to certain quantitative and qualitative restrictions on extensions of credit to the bank holding company or its subsidiaries, investments in their securities, and the use of their securities as collateral for loans to any borrower. These regulations and restrictions may limit our ability to obtain funds from TIB Bank for our cash needs, including funds for the payment of dividends, interest and operating expenses. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. For example, TIB Bank may not generally require a customer to obtain other services from itself or us, and may not require that a customer promise not to obtain other services from a competitor as a condition to and extension of credit to the customer. The Federal Reserve has ended the anti-tying rules for bank holding companies and their non-banking subsidiaries. Such rules were retained for banks.

Under Federal Reserve policy, a bank holding company is expected to act as a source of financial strength to its subsidiary banks and to make capital injections into a troubled subsidiary bank, and the Federal Reserve may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank when required. A required capital injection may be called for at a time when the holding company does not have the resources to provide it. In addition, depository institutions insured by the FDIC can be held liable for any losses incurred by, or reasonably anticipated to be incurred by, the FDIC in connection with the default of, or assistance provided to, a commonly controlled FDIC-insured depository institution.


Federal and State Bank Regulation

TIB Bank is a Florida state-chartered bank, with all the powers of a commercial bank regulated and examined by the Florida Office of Financial Regulation and the FDIC. The FDIC has extensive enforcement authority over the institutions it regulates to prohibit or correct activities that violate law, regulation or written agreement with the FDIC. Enforcement powers also regulate activities that are deemed to constitute unsafe or unsound practices. Enforcement actions may include the appointment of a conservator or receiver, the issuance of a cease and desist order, the termination of deposit insurance, the imposition of civil money penalties on the institution, its directors, officers, employees and institution-affiliated parties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the removal of or restrictions on directors, officers, employees and institution-affiliated parties, and the enforcement of any such mechanisms through restraining orders or other court actions.

In its lending activities, the maximum legal rate of interest, fees and charges that a financial institution may charge on a particular loan depends on a variety of factors such as the type of borrower, the purpose of the loan, the amount of the loan and the date the loan is made. Other laws tie the maximum amount that may be loaned to any one customer and its related interest to capital levels. TIB Bank is also subject to certain restrictions on extensions of credit to executive officers, directors, principal shareholders or any related interest of such persons which generally require that such credit extensions be made on substantially the same terms as are available to third persons dealing with TIB Bank and not involve more than the normal risk of repayment. TIB Bank is also subject to federal laws establishing certain record keeping, customer identification and reporting requirements with respect to certain large cash transactions, sales and travelers’ checks or other monetary instruments, and international transportation of cash or monetary instruments. Further, under the USA Patriot Act of 2001, financial institutions, including TIB Bank, are required to implement additional policies and procedures with respect to, or additional measures designed to address, any or all of the following matters, among others: money laundering, suspicious activities and currency transaction reporting, and currency crimes.


The Community Reinvestment Act requires that, in connection with the examination of financial institutions within their jurisdictions, the FDIC evaluates the record of the financial institution in meeting the credit needs in its communities including low and moderate income neighborhoods, consistent with the safe and sound operation of those banks. These factors are also considered by all regulatory agencies in evaluating mergers, acquisitions and applications to open a branch or facility. As of the date of its most recent examination report, TIB Bank has a Community Reinvestment Act rating of “Satisfactory.”

Under the Federal Deposit Insurance Corporation Improvement Act of 1991, each federal banking agency is required to prescribe, by regulation, noncapital safety and soundness standards for institutions under its authority. The federal banking agencies, including the FDIC, have adopted standards covering internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits. An institution that fails to meet those standards may subject the institution to regulatory sanctions if required by the agency to develop a plan acceptable to the agency, specifying the steps that the institution will take to meet the standards. We believe that we meet substantially all standards that have been adopted. This law also imposes capital standards on insured depository institutions. See “Capital Requirements” below.

The Federal Deposit Insurance Corporation Improvement Act of 1991 also provides for, among other things, (i) publicly available annual financial condition and management reports for financial institutions, including audits by independent accountants, (ii) the establishment of uniform accounting standards by federal banking agencies, (iii) the establishment of a “prompt corrective action” system of regulatory supervision and intervention, based on capitalization levels with more scrutiny and restrictions placed on depository institutions with lower levels of capital, (iv) additional grounds for the appointment of a conservator or receiver, and (v) restrictions or prohibitions on accepting brokered deposits, except for institutions which significantly exceed minimum capital requirements. FDICIA also provides for increased funding of the FDIC insurance funds and the implementation of risked-based premiums.


Deposit Insurance

As an FDIC member institution, deposits of TIB Bank are currently insured to a maximum of $100,000 per category of ownership of depositor through the Bank Insurance Fund, which is administered by the FDIC.


Limits on Dividends and Other Payments

Our current ability to pay dividends is largely dependent upon the receipt of dividends from TIB Bank. Both federal and state laws impose restrictions on the ability of TIB Bank to pay dividends. Federal law prohibits the payment of a dividend by an insured depository institution like TIB Bank if the depository institution is considered “undercapitalized” or if the payment of the dividend would make the institution “undercapitalized.” See “Capital Requirements" below. The Federal Reserve has issued a policy statement that provides that bank holding companies should pay dividends only out of the prior year’s net income, and then only if their prospective rate of earnings retention appears consistent with their capital needs, asset quality, and overall financial condition. For a Florida state-chartered bank, dividends may be paid out of the bank’s aggregate net profits for the current year combined with its retained earnings for the preceding two years as the board deems appropriate. No dividends may be paid at a time when a bank’s net income from the preceding two years is a loss or which would cause the capital accounts of the bank to fall below the minimum amount required by law. In addition to these specific restrictions, bank regulatory agencies also have the ability to prohibit proposed dividends by a financial institution that would otherwise be permitted under applicable regulations if the regulatory body determines that such distribution would constitute an unsafe or unsound practice.


Capital Requirements

The Federal Reserve and FDIC have adopted certain risk-based capital guidelines to assist in the assessment of the capital adequacy of a banking organization’s operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit and recourse arrangement which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities to 100% for assets with relatively high credit risk, such as business loans.


A banking organization’s risk-based capital ratio is obtained by dividing its qualifying capital by its total risk adjusted assets. The regulators measure risk-adjusted assets, which include off balance sheet items, against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. “Tier 1,” or core capital includes common equity, perpetual preferred stock (excluding auction rate issues), trust preferred securities (subject to certain limitations), and minority interest in equity accounts of consolidated subsidiaries (less goodwill and other intangibles), subject to certain exceptions. “Tier 2,” or supplementary capital, includes, among other things limited-life preferred stock, hybrid capital instruments, mandatory convertible securities and trust preferred securities, qualifying and subordinated debt, and the allowance for loan and lease losses, subject to certain limitations and less required deductions. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies.

The federal banking agencies are required to take “prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements. As a result, the federal bank regulatory authorities have adopted regulations setting forth a five tiered system for measuring the capital adequacy of the depository institutions that they supervise. Under these regulations, a depository institution is classified in one of the following capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” An institution may be deemed by the regulators to be in a capitalization category that is lower than is indicated by its actual capital position if, among other things, it receives an unsatisfactory examination rating with respect to asset quality, management, earnings or liquidity. As of December 31, 2005, TIB Bank met the definition of a “well-capitalized” institution.

A depository institution generally is prohibited from making any capital distribution (including payment of a cash dividend) or paying any management fees to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized depository institutions may be subject to a number of other requirements and restrictions including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and stop accepting deposits from correspondent banks. Critically undercapitalized institutions are subject to the appointment of a receiver or conservator, generally within 90 days of the date such institution is determined to be critically undercapitalized.

The federal banking agencies also have significantly expanded powers to take enforcement action against institutions that fail to comply with capital or other standards. Such action may include limitations on the right to pay dividends, the issuance by the applicable regulatory authority of a capital directive to increase capital and, in the case of depository institutions, the termination of deposit insurance by the FDIC. The circumstances under which the FDIC is permitted to provide financial assistance to an insured institution before appointment of a conservator or receiver also is limited under law. In addition, future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of TIB Bank to grow and could restrict the amount of profits, if any, available for the payment of dividends to us.


Interstate Banking Legislation

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Riegle-Neal”), subject to certain restrictions, allows adequately capitalized and managed bank holding companies to acquire existing banks across state lines, regardless of state statutes that would prohibit acquisitions by out-of-state institutions. Further, a bank holding company may consolidate interstate bank subsidiaries into branches and a bank may merge with an unaffiliated bank across state lines to the extent that the applicable states authorize such transactions. Florida has enacted a law which permits interstate branching through merger transactions under the federal interstate laws. Under the Florida law, with the prior approval of the Florida Office of Financial Regulation, a Florida bank may establish, maintain and operate one or more branches in a state other than the State of Florida pursuant to a merger transaction in which the Florida bank is the resulting bank. In addition, Florida law provides that one or more Florida banks may enter into a merger transaction with one or more out-of-state banks, and an out-of-state bank resulting from such transaction may maintain and operate branches of a Florida bank that participated in such merger.


Financial Services Modernization

Enacted in 1999, the Graham-Leach-Bliley Act reforms and modernizes certain areas of financial services regulations and repeals the affiliation provisions of the federal Glass-Steagall Act of 1933, which, taken together, limited the securities, insurance and other non-banking activities of any company that controls a FDIC insured financial institution. The Act provides that a financial holding company may engage in a full range of financial activities, including insurance and securities sales and underwriting activities, real estate development, and, with certain exceptions, merchant banking activities, with new expedited notice procedures. The Act also permits certain qualified national banks to form “financial subsidiaries,” which have broad authority to engage in all financial activities except insurance underwriting, insurance investments, real estate investment or development, and merchant banking, and expands the potential financial activities of subsidiaries of state banks, subject to applicable state law. The range of activities in which bank holding companies and their subsidiaries may engage is not as broad, and the Act may increase the competition that we face. The law also includes substantive requirements for maintenance of customer financial privacy.

 

Sarbanes-Oxley Act

In 2002, the Sarbanes-Oxley Act was enacted which imposes a myriad of corporate governance and accounting measures designed so that shareholders have full and accurate information about the public companies in which they invest. All public companies are affected by the Act. Some of the principal provisions of the Act include:

·  
The creation of an independent accounting oversight board to oversee the audit of public companies and auditors who perform such audits;

·  
Auditor independence provisions which restrict non-audit services that independent accountants may provide to their audit clients;

·  
Additional corporate governance and responsibility measures which (a) require the chief executive officer and chief financial officer to certify financial statements and to forfeit salary and bonuses in certain situations, and (b) protect whistleblowers and informants;

·  
Expansion of the authority and responsibilities of the company’s audit, nominating and compensation committees;

·  
Mandatory disclosure by analysts of potential conflicts of interest; and

·  
Enhanced penalties for fraud and other violations.


Other Legislative Considerations

The United States Congress and the Florida Legislature periodically consider and may adopt legislation that results in additional deregulation, among other matters, of banks and other financial institutions. Such legislation could modify or eliminate current prohibitions with other financial institutions, including mutual funds, securities, brokerage firms, insurance companies, banks from other states, and investment banking firms. The effect of any such legislation on our business or that of TIB Bank cannot be accurately predicted. We cannot predict what legislation might be enacted or what other implementing regulations might be adopted, and if enacted or adopted, the effect on us.


Competition

The banking business is highly competitive. Banks generally compete with other financial institutions through the banking products and services offered, the pricing of services, the level of service provided, the convenience and availability of services, and the degree of expertise and the personal manner in which services are offered. The Bank encounters strong competition from most of the financial institutions in the Bank's primary service area. In the conduct of certain areas of its banking business, the Bank also competes with credit unions, consumer finance companies, insurance companies, money market mutual funds and other financial institutions, some of which are not subject to the same degree of regulation and restrictions imposed upon the Bank. Many of these competitors have substantially greater resources and lending limits than the Bank has and offer certain services, such as trust services, that the Bank does not provide presently. Management believes that personalized service and competitive pricing is a sustainable competitive advantage that will provide it with a method to compete effectively in our primary service area.


Monetary Policy

Our earnings are affected by domestic and foreign economic conditions, particularly by the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve has an important impact on the operating results of banks and other financial institutions through its power to implement national monetary policy. The methods used by the Federal Reserve include setting the reserve requirements of banks, establishing the discount rate on bank borrowings and conducting open market transactions in United States Government securities.



FDIC Insurance Assessments

The FDIC insures the deposits of the Bank up to prescribed limits for each depositor. The amount of FDIC assessments paid by each Bank Insurance Fund (BIF) member institution is based on its relative risks of default as measured by regulatory capital ratios and other factors. Specifically, the assessment rate is based on the institution’s capitalization risk category and supervisory subgroup category. An institution’s capitalization risk category is based on the FDIC’s determination of whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. An institution’s supervisory subgroup category is based on the FDIC’s assessment of the financial condition of the institution and the probability that FDIC intervention or other corrective action will be required. The FDIC may terminate insurance of deposits upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC.


Statistical Information

Certain statistical information is found in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K.


RISK FACTORS

      Our business is subject to a variety of risks, including the risks described below as well as adverse business conditions and changes in regulations and the local, regional and national economic environment. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not known to us or not described below which we have not determined to be material may also impair our business operations. You should carefully consider the risks described below, together with all other information in this report, including information contained in the “Business,” “Management’s Discussion and Analysis of Results of Operations and Financial Condition,” and “Quantitative and Qualitative Disclosures about Market Risk” sections. This report contains forward-looking statements that involve risks and uncertainties, including statements about our future plans, objectives, intentions and expectations. Many factors, including those described below, could cause actual results to differ materially from those discussed in forward-looking statements. If any of the following risks actually occur, our business, financial condition and results of operations could be adversely affected, and we may not be able to achieve our goals. Such events may cause actual results to differ materially from expected and historical results, and the trading price of our common stock could decline.

Risks Related to Our Business

Our business strategy includes the continuation of significant growth plans, and if we fail to grow or fail to manage our growth effectively as we pursue our strategy, it could negatively affect our results of operations

    We intend to continue pursuing a significant growth strategy for our business. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in significant growth stages of development. We cannot assure you that we will be able to expand our market presence in our existing markets or successfully enter new markets or that any such expansion will not adversely affect our results of operations. Failure to manage our growth effectively could have a material adverse effect on our business, future prospects, financial condition or results of operations, and could adversely affect our ability to successfully implement our business strategy. Also, if our growth occurs more slowly than anticipated or declines, our operating results could be materially adversely affected.

    Our ability to successfully grow will depend on a variety of factors including the continued availability of desirable business opportunities, the competitive responses from other financial institutions in our market areas and our ability to manage our growth. While we believe that we have the management resources and internal systems in place to successfully manage our future growth, there can be no assurance that growth opportunities will be available or that growth will be successfully managed.

If the value of real estate in our core Florida market were to decline materially, a significant portion of our loan portfolio could become under-collateralized, which could have a material adverse effect on us

   With most of our loans concentrated in Southern Florida, a decline in local economic conditions could adversely affect the values of our real estate collateral. Consequently, a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are geographically diverse.



   In addition to the financial strength and cash flow characteristics of the borrower in each case, TIB Bank often secures its loans with real estate collateral. At December 31, 2005, approximately 77% of TIB Bank’s loans have real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earnings and capital could be adversely affected.

An inadequate allowance for loan losses would reduce our earnings

   The risk of credit losses on loans varies with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the value and marketability of the collateral for the loan. Management maintains an allowance for loan losses based upon, among other things, historical experience, an evaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality. Based upon such factors, management makes various assumptions and judgments about the ultimate collectibility of the loan portfolio and provides an allowance for loan losses based upon a percentage of the outstanding balances and for specific loans when their ultimate collectibility is considered questionable. If management’s assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb losses, or if the bank regulatory authorities require TIB Bank to increase the allowance for loan losses as a part of their examination process, TIB Bank’s earnings and capital could be significantly and adversely affected.

Our indirect lending program has a limited operating history and, as a result, the financial performance to date of this program may not be a reliable indicator of whether this business will continue to be successful

    A significant portion of our current lending involves the purchase of consumer automobile installment sales contracts from automobile dealers primarily located in Southwest Florida. We began this program in 2002 and as of December 31, 2005, we had approximately $118 million of indirect loans outstanding. We plan to grow this portfolio further. These loans are for the purchase of new or late model used cars. We serve customers over a broad range of creditworthiness and the required terms and rates are reflective of those risk profiles. While these loans have higher yields than many of our other loans, they involve significant risks in addition to normal credit risk. Potential risk elements associated with indirect lending include the limited personal contact with the borrower as a result of indirect lending through dealers, the absence of assured continued employment of the borrower, the varying general creditworthiness of the borrower, changes in the local economy and difficulty in monitoring collateral. While indirect automobile loans are secured, they are secured by depreciating assets and characterized by loan to value ratios that could result in the Bank not recovering the full value of an outstanding loan upon default by the borrower. In addition, given the relatively unseasoned nature of this portfolio, credit problems may not have surfaced or become apparent yet, but may arise in the future.

Our de novo branching strategy could cause our expenses to increase faster than revenues

    Our strategy for building market share in Southwest Florida is based on establishing new branches. We currently plan to open one new branch and relocate an existing branch in the coming year. We also plan to open at least one additional branch in 2007. There are considerable costs involved in opening branches and new branches generally do not generate sufficient revenues to offset their costs until they have been in operation for several years. Accordingly, our new branches can be expected to be a drag on our earnings for some period of time. Our expenses could be further increased if we encounter delays in the opening of any of our new branches. Finally, we have no assurance that our new branches will be successful even after they have been established.

We are dependent upon the services of our management team

    Our future success and profitability is substantially dependent upon the management and banking abilities of our senior executives. We believe that our future results will also depend in part upon our attracting and retaining highly skilled and qualified management and other personnel. Competition for such personnel is intense, and we cannot assure you that the Company will be successful in retaining such personnel. We also cannot guarantee that members of our executive management team will remain with us. Changes in key personnel and their responsibilities may be disruptive to the Company’s business and could have a material adverse effect on our business, financial condition and results of operations.


Risk Related to an Investment in Our Common Stock

Future capital needs could result in dilution of shareholders’ investments

    Our board of directors may determine from time to time that there is a need to obtain additional capital through the issuance of additional shares of our common stock or other securities. These issuances would dilute the ownership interests of current shareholders in the Company and may dilute the per share book value of our common stock. New investors may also have rights, preferences and privileges senior to our current shareholders which may adversely impact our current shareholders.

Although publicly traded, the trading market in our common stock has substantially less liquidity than the average trading market for stock quoted on The NASDAQ National Market, and the price of our common stock due to this limited trading market may be more volatile in the future

    Our common stock is thinly traded. The average daily trading volume of our shares on The NASDAQ National Market during 2005 was approximately 4,641 shares. Thinly traded stock can be more volatile than stock trading in an active public market. We cannot predict the extent to which an active public market for our common stock will develop or be sustained. In recent years, the stock market has experienced a high level of price and volume volatility, and market prices for the stock of many companies have experienced wide price fluctuations that have not necessarily been related to their operating performance. Therefore, our shareholders may not be able to sell their shares at the volumes, prices, or times that they desire.



The Company’s executive offices are now located at 599 9th Street North, Naples, Florida. The Bank’s executive offices are located at 99451 Overseas Highway, Key Largo, Florida. This is a two-story building owned by the Bank that contains approximately 13,275 square feet of finished space. The building is used for office space and the operation of a branch facility. Other Company operated properties are as follows:


Address
Location
Purpose
Owned/
Leased
30400 Overseas Highway
Big Pine Key
Branch
Owned
8100 Health Center Boulevard
Bonita Springs
Branch and office
Leased
12205 Metro Parkway
Fort Myers
Branch
Owned
12195 Metro Parkway
Fort Myers
Indirect lending
Owned
600 North Homestead Boulevard
Homestead
Branch
Owned
777 North Krome Avenue
Homestead
Branch
Owned
630 Washington Avenue
Homestead
Office space
Leased
28 N.E. 18 Street
Homestead
Office space
Owned
80900 Overseas Highway
Islamorada
Branch and office
Owned
103330 Overseas Highway
Key Largo
Branch
Owned
228 Atlantic Boulevard
Key Largo
Loans and HR
Owned
330 Whitehead Street
Key West
Branch
Owned
3618 North Roosevelt Boulevard
Key West
Branch
Owned
2348 Overseas Highway
Marathon
Branch
Owned
5800 Overseas Highway - Suite 41
Marathon
Commercial lending
Leased
11401 Overseas Highway
Marathon Shores
Branch
Owned
3940 Prospect Avenue - Suite 104 & 105
Naples
Branch
Leased
1720 J & C Boulevard - Suite 1
Naples
Branch
Leased
9915 Tamiami Trail North - Suite 1 & 2
Naples
Loan center
Leased
599 9th Street North - Suite 100 & 101
Naples
Corporate HQ & Branch
Owned
599 9th Street North - Suite 201
Naples
Office space
Leased
1119 US Highway 27 South
Sebring
Residential lending
Leased
91980 Overseas Highway
Tavernier
Branch
Owned
       

In 2004, the Bank purchased a parcel of land located at the Pine Air Lakes Subdivision in Naples, Florida, where it plans to construct a new branch.


In 2005, the Bank sold land that it bought in 2004 located at the Miami Land & Development Subdivision in Homestead, Florida and purchased a property at 17000 Cam Circle in Ft. Myers, Florida where it plans to construct a new branch.




While the Company and the Bank are from time to time parties to various legal proceedings arising in the ordinary course of their business, management believes after consultation with legal counsel that there are no proceedings threatened or pending against the Company or the Bank that will, individually or in the aggregate, have a material adverse effect on the consolidated results of operations or financial condition of the Company.



No matter was submitted to a vote of security holders during the Company's fourth quarter of the fiscal year ended December 31, 2005.



PART II



Our common stock trades on the NASDAQ National Market under the symbol “TIBB.” As of December 31, 2005, there were 459 registered shareholders of record and 5,792,598 shares of our common stock outstanding. The following table sets forth, for the periods indicated, the high and low sale prices per share for our common stock on the NASDAQ National Market:

   
2005
  
2004
  
(Quarter Ended)
  
High
  
Low
  
High
  
Low
  
March 31
  
$
29.02
  
$
24.65
  
$
25.00
  
$
20.15
  
June 30
    
29.30
    
26.10
    
22.85
    
20.20
  
September 30
    
32.50
    
25.85
    
22.25
    
19.62
  
December 31
    
33.71
    
29.00
    
25.67
    
21.90
  
                           

For the year ended December 31, 2005, we paid cash dividends to our shareholders in the amount of $.115 per share for the first three quarters and $.1175 per share for the last quarter ($.4625 in the aggregate). For the year ended December 31, 2004, we paid cash dividends to our shareholders in the amount of $.1125 per share for the first three quarters and $.115 per share for the last quarter ($.4525 in the aggregate). Our ability to continue to pay cash dividends to our shareholders is primarily dependent on the earnings of the Bank. Payment of dividends by the Bank to us is limited by dividend restrictions in capital requirements imposed by Bank regulators. Information regarding restrictions on the ability of the Bank to pay dividends to us is contained in Note 14 of the "Notes to Consolidated Financial Statements" contained in Item 8 hereof. In general, future dividend policy is subject to the discretion of the board of directors and will depend upon a number of factors, including the future earnings, capital requirements, regulatory constraints, and our financial condition as well as that of the Bank.

With respect to information regarding our securities authorized for issuance under equity incentive plans, the information contained in the section entitled “Compensation of Executive Officers and Directors - Equity Compensation Plan Information” of our definitive Proxy Statement for the 2006 Annual Meeting of Shareholders is incorporated herein by reference.

We did not repurchase any shares of our common stock in 2005.



The selected consolidated financial data presented below as of and for the years ended December 31, 2005, 2004, 2003, 2002 and 2001 is unaudited and has been derived from our Consolidated Financial Statements and from our records. The information presented below should be read in conjunction with the Consolidated Financial Statements and related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”


Balance Sheet Data
As of December 31,
 
(Dollars in thousands)
  
2005
 
2004
 
2003
 
2002
 
2001
  
Total assets
  
$
1,076,070
  
$
829,325
  
$
669,298
  
$
567,149
  
$
494,111
  
Investment securities
    
97,464
    
77,807
    
52,557
    
54,268
    
52,354
  
Gross loans
    
882,372
    
653,521
    
538,598
    
441,743
    
379,104
  
Allowance for loan losses
    
7,546
    
6,243
    
5,216
    
4,272
    
3,675
  
Deposits
    
920,424
    
687,859
    
553,813
    
482,683
    
415,736
  
Shareholders’ equity
    
77,524
    
68,114
    
41,246
    
33,506
    
28,672
  
                                 


Income Statement Data
Year ended December 31,
(Dollars in thousands)
  
2005
 
2004
 
2003
 
2002
 
2001
  
Interest and dividend income
  
$
59,434  
$
40,916  
$
34,606  
$
31,316  
$
33,717  
Interest expense
    
20,304
    
10,730
    
9,839
    
10,329
    
15,797
  
Net interest income
    
39,130
    
30,186
    
24,767
    
20,987
    
17,920
  
Provision for loan losses
    
2,413
    
2,455
    
1,586
    
791
    
1,005
  
Net interest income after provision for loan losses
    
36,717
    
27,731
    
23,181
    
20,196
    
16,915
  
Non-interest income
   
6,258
    
6,306
    
7,084
    
6,041
    
5,988
  
Non-interest expense
   
(31,856
)
  
(27,057
)
  
(23,541
)
  
(20,011
)
  
(17,468
)
Income tax expense
    
(3,927
)
  
(2,337
)
  
(2,324
)
  
(2,098
)
  
(1,847
)
Income from continuing operations
    
7,192
    
4,643
    
4,400
    
4,128
    
3,588
  
Income from discontinued operations, net of taxes
    
4,632
    
555
    
702
    
607
    
306
  
Net income
 
$
11,824
  
$
5,198
  
$
5,102
  
$
4,735
  
$
3,894
  
                                 


Per Share Data
Year ended December 31,
   
2005
 
2004
 
2003
 
2002
 
2001
 
                       
Book value per share at year end *  
$
 13.38     $ 11.99     $ 9.31    $ 8.30     $ 7.27   
                                 
Basic earnings per share from continuing operations
  
$
1.26
  
$
0.87
  
$
1.03
  
$
1.03
  
$
0.91
  
Basic earnings per share from discontinued operations
    
0.81
    
0.11
    
0.17
    
0.16
    
0.08
  
Basic earnings per share
  
$
2.07
  
$
0.98
  
$
1.20
  
$
1.19
  
$
0.99
  
                                 
Diluted earnings per share from continuing operations
  
$
1.22
  
$
0.85
  
$
0.99
  
$
1.00
  
$
0.88
  
Diluted earnings per share from discontinued operations
    
0.78
    
0.10
    
0.16
    
0.14
    
0.07
  
Diluted earnings per share
 
$
2.00
  
$
0.95
  
$
1.15
  
$
1.14
  
$
0.95
  
                                 
Basic weighted average common equivalent shares outstanding
    
5,711,974
    
5,309,860
    
4,257,224
    
3,992,775
    
3,923,763
  
Diluted weighted average common equivalent shares outstanding
    
5,900,446
    
5,479,696
    
4,435,861
    
4,144,855
    
4,096,767
  
Dividends declared per share
  
$
0.4625
  
$
0.4525
  
$
0.4425
  
$
0.4325
  
$
0.43
  
                                 
 * Calculation includes unvested shares of restricted stock issued during 2005.              

        


Performance Ratios
 
2005
2004
2003
2002
2001
Return on average assets**
0.74%
0.63%
0.71%
0.77%
0.75%
Return on average equity**
10.19%
7.83%
11.69%
13.26%
13.03%
Average equity/average assets
7.26%
8.01%
6.05%
5.82%
5.79%
Net interest margin
4.38%
4.51%
4.43%
4.39%
4.22%
Dividend payout ratio ***
22.34%
46.22%
36.92%
36.47%
43.32%
Allowance for loan losses/total loans
0.86%
0.96%
0.97%
0.97%
0.97%
Non-performing assets/total assets
0.46%
0.60%
0.55%
0.65%
0.90%
Non-performing loans/gross loans
0.11%
0.11%
0.07%
0.12%
0.42%
Allowance for loan losses/non-performing loans
789.33%
886.79%
1,336.33%
783.19%
231.07%
Non-interest expense/tax equivalent net interest income and non-interest income from continuing operations
 
69.69%
 
73.48%
 
73.44%
 
73.62%
 
72.53%
           
 **  The computation of return on average assets and return on average equity is based on net income from continuing operations.
 ***  The computation of the dividend payout ratio is based on net income including discontinued operations.

                        



Overview

TIB Bank operates primarily as an owner-operated real estate secured commercial lender, focusing on middle-market businesses in our Southern Florida markets. TIB Bank was formed in and has a substantial market presence in the Florida Keys. In recent years, the Bank has expanded into the adjacent Florida counties of Miami-Dade, Collier and Lee. The Bank funds its lending activity by gathering retail and commercial deposits from our service area. Significant economic growth in the southern portion of Miami-Dade County and along the southwest coast of Florida (Naples, Bonita Springs, and Ft. Myers area) offers tremendous opportunities for us to continue to grow our core banking franchise in these contiguous markets.

We are 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. Due to the cost premiums associated with community banks and branches in Florida in recent years, we believe that de novo expansion has been and continues to be the most economical method for us to build market share in many of the areas where we seek to have a presence. While de novo expansion has a dilutive effect on short-term earnings, the resulting growth will continue to add significant value to our franchise. By timing our expansion, we plan to balance earnings, growth and expense. Although organic growth has been the method of choice to date, growth through acquisition would be considered if pricing, market and culture fit were advantageous to our growth and expansion plans.


Performance Overview

TIB Financial Corp. is a financial services holding company focused on growth and expansion in the Florida marketplace and the parent company of TIB Bank. For the year ended December 31, 2005, net income from continuing operations was $7.2 million, or $1.26 per basic share and $1.22 per diluted share. These results compared with $4.6 million, or $0.87 per basic share and $0.85 per diluted share, for the prior year, represent increases of approximately 55%, 45% and 44%, respectively.

We see 2005 as a year of delivering on our stated execution commitments. Quarter after quarter, the team’s successful implementation of our strategic market expansion has resulted in consistent, predictable asset and earnings growth. We’ve experienced the momentum of the increasing market share shift in our direction and recognize and are realizing the significant ongoing opportunities presented by some of the nation’s most dynamic population growth patterns. Our markets display diversity, economic strength and are among the nation’s fastest growing. Additionally, merger-related market disruption continues to provide opportunities in gathering commercial, household and municipal relationships. As we continue to grow, we have and will continue to maintain our high credit underwriting standards, the overall credit quality of our loan portfolio, and the market pricing of our deposit base. The core competency of the Bank has been and remains focused on the middle market commercial business segment that has been so successful for us.

An example of this strategic positioning was the careful consideration of our strategic options for merchant payment processing, resulting in the decision to align ourselves with NOVA Information Systems (“NOVA”) as provider of payment processing for our commercial customers. This alliance allows us to maintain our extraordinary customer service standards while introducing state-of-the-art new products. NOVA was selected by TIB based on its recognized excellence in customer service and its commitment to maintaining superior technology. Under our agreement with NOVA, we sold our existing payment processing portfolio for $7.25 million in cash (approximately a $6.7 million gain, net of transaction costs). This gain provided an infusion of new non-dilutive equity capital which will be used to augment the Bank’s core capital position as the accelerating organic asset growth continues into 2006. The historical operations of the merchant bankcard payment processing segment is reported as discontinued operations in the accompanying consolidated financial statements.

Despite the most active hurricane season in history, including two direct impacts from Hurricanes Katrina and Wilma, several close calls and numerous hurricane threats resulting in evacuations and the myriad of related business disruptions in South Florida during 2005, we suffered no significant physical damage from the storms. In fact, our management truly weathered the storms and our team exemplified our commitment to excellence in customer service as our branch infrastructure was first or among the first to reopen and respond to customer needs in each of our affected markets.

Net interest income on a tax-equivalent basis was $39.5 million for 2005, an increase of 29% over $30.5 million a year ago. Non-interest income, which includes service charges on deposit accounts, real estate fees, and other operating income, totaled $6.3 million, consistent with the prior year.

 

      Our interest margin contracted slightly from 4.51% in 2004 to 4.38% in 2005. This slight contraction is due to several opposing factors. First, although interest rates increased continuously throughout the year, a significant portion of our commercial loans remained at their interest rate floors for some part of the year. Second, we increased the relative proportion of CDs to the total liabilities of the Bank as we decided to use CD promotions to fill our funding needs and lock in the funding costs early as interest rates increased rather than leveraging our balance sheet. Finally, our indirect auto lending portfolio has begun to mature. We expect it will continue to grow, but at a slower pace than in recent years and slower than the comparable pace of loan portfolio and balance sheet growth as a whole. As the indirect loans become a smaller component of our portfolio, we expect the impact of its somewhat higher yields, on the overall loan portfolio yield, will be of decreasing significance. Looking at the year ahead, we expect our margins to remain fairly stable as we expect commercial loan growth to continue in Southwest Florida and to a lesser extent, in the Florida Keys. Our challenge will be to continue to manage and balance this growth coupled with continued near term increases in interest rates with the increasing competition for high yield, high quality commercial credits and market pricing for liabilities.

Non-interest income includes a slight decrease in service charges on deposit accounts, to $2.4 million in 2005; primarily attributable to a substantial increase in the usage of electronic and online banking products which result in lower fees per account. We have been encouraging the usage of these products to lower delivery costs throughout our branch distribution system. Fees on mortgage loans sold increased nominally due to increased competition in the local market place combined with lower volume due to a low level of refinancing volume coupled with multiple interruptions of transaction closings caused by the frequency of local severe weather threats along with an overall softening of the residential real estate market.

Non-interest expense for 2005 was $31.9 million, compared with $27.1 million a year ago. The increase in non-interest expense for 2005 is primarily attributable to a 23% increase in salaries and employee benefits expenses associated with the Company’s ongoing expansion activities in the Southwest Florida market. Our continued focus on cost containment resulted in net occupancy and other expenses increasing less than 12% compared to 2004. We expect the growth in non-interest expenses to continue at a relatively constant level in dollar terms and become a proportionately smaller percentage of the total business in the future.

Total assets increased 30% during 2005 to $1.08 billion as of December 31, compared with $829.3 million a year ago. Total loans grew 35% to $882.4 million as of December 31, 2005, compared with $653.5 million a year ago. Commercial real estate mortgage loans accounted for the largest categorical dollar increase during 2005, representing $100.6 million of the total increase. Asset growth was funded by an increase in total deposits to $920.4 million as of December 31, 2005, representing organic deposit growth of 34% from $687.9 million the prior year.

Credit quality remained strong as of December 31, 2005 with the allowance for loan losses totaling $7.5 million, or 0.86% of total loans and 789% of non-performing loans. These figures compare with 0.96% and 887%, respectively, as of December 31, 2004. Annual net charge-offs represented 0.14% of average loans as of December 31, 2005, compared with 0.24% as of December 31, 2004.

The considerable growth in our balance sheet and operations reflects the continued success of our strategic expansion into more dynamic growth markets in South Florida. By the end of 2005, more than 44% of the Company’s customer deposit base was located outside the mature core business market of the Florida Keys, compared with just 33% at the beginning of the year. We have been able to continue to generate significant internal organic growth of new deposits and loans in our markets outside of the Keys, while maintaining high quality assets and our stellar compliance record. During 2005, continued disruption in the market from big bank mergers and acquisitions created unprecedented opportunities for TIB to continue to attract customers who prefer to conduct business with a locally managed company. To capitalize on the current environment, the Company continues to add senior lenders and de novo branches in the growth markets in Southwest Florida.

Economic and Operating Environment Overview

During 2005, business activity in our primary markets reflected the national trends of increased economic expansion with continued increases in overall employment due to productivity gains and the desire to reduce excess capacity. In an effort to return to monetary neutrality, the Federal Reserve elected to raise short-term interest rates 25 basis points eight times during the year. Specifically, the target Federal Funds Rate began 2005 at 2.25% and ended the year at 4.25%. The Prime lending rate continued its recent pattern of staying 300 basis points, 3%, above the Federal Funds Rate.

The effect of the increasing interest rate environment during 2005 was a slight contraction of our net interest margin. The increasing Prime rate directly affects yields on loans tied to that index and even loans not indexed to Prime are priced reflective of overall higher asset yields. However, throughout the year, many loans remained at floors for some part of the year resulting in a delay of the repricing characteristics of the portfolio. In contrast, our impressive organic growth rate and the related funding needs resulted in our decision to be more competitive on deposit pricing. Our funding mix decisions led to several CD promotions during 2005 allowing us to lock in funding costs in the rising rate environment well in advance of our funding needs while maintaining our borrowing availability and liquidity. This strategy resulted in deposit liabilities price increases to attract the required volume of funding. Excess funds were reinvested in lower yielding liquid assets until necessary to fund loan growth and resulted in an overall higher average level of Fed funds sold throughout 2005 as compared to 2004. We believe that the net effect of the current interest rate environment will translate into margin stability as we continue to manage these opposing factors with our increased funding needs and our desire to obtain such funding through our branch distribution system rather than increasing the leverage of our balance sheet in the near term.



During 2005, the Bank continued to expand its indirect automobile lending program, in an effort to generate higher relative yielding assets. As of December 31, 2005, we had approximately $118 million of indirect auto loans outstanding. Coupled with the appropriate safeguards, we believe this product continues to offer the Bank an opportunity to increase asset yields while not sacrificing our primary objective of maintaining strong asset quality. We believe that during 2005, this portfolio began to mature and peaked below 15% of the total loan portfolio composition. In maturing, indirect loans began to decrease as a percentage of the loan portfolio. Looking ahead, management believes the balance of indirect auto loans outstanding will continue to increase, however, we expect the growth rate to decrease steadily as we experience increasing levels of runoff. Additionally, we expect the indirect portfolio to have a reduced effect on portfolio yield as it continues to become an increasingly smaller relative component of the loan portfolio as a whole.

We also recently announced the completion of our distribution strategy for Collier and Lee counties in Southwest Florida with the identification of and acquisition or contract execution of all related properties. During 2005, we began construction of a 16,000-square-foot banking office in Naples, Florida. Construction is expected to begin in 2006 on two other Southwest Florida locations. Additional branch sites will continue to be explored in other high-growth markets throughout Florida.


Analysis of Financial Condition

Our assets totaled $1.08 billion at December 31, 2005 compared to $829.3 million at the end of 2004, an increase of $246.7 million or 30%. The growth in assets was primarily a result of increased lending activity as the Bank invested funds provided by significant deposit growth.

Total loans increased $228.9 million or 35%, to $882.4 million at December 31, 2005. The growth in the loan portfolio was primarily attributed to increases in commercial real estate loans of $100.6 million, indirect auto dealer loans of $26.1 million, construction loans of $75.4 million, commercial and agricultural loans of $15.4 million and residential loans of $8.8 million.

Total deposits increased $232.6 million or 34%, from $687.9 million at the end of 2004 to $920.4 million on December 31, 2005. Non-interest-bearing deposits increased $17.8 million or 12%, while interest-bearing deposits increased $214.8 million or 40%.

Borrowed funds, consisting of Federal Home Loan Bank (FHLB) advances, short-term borrowings, notes payable, and subordinated debentures, totaled $59.3 million at year end 2005 compared to $65.4 million at the end of 2004. During 2005, we reduced our FHLB advances by $10.0 million. On January 3, 2005 we repaid $1.25 million of the notes payable at a 3% premium.

Shareholders’ equity increased $9.4 million or 14%, from $68.1 million on December 31, 2004 to $77.5 million at the end of 2005.

Book value per share increased to $13.38 at December 31, 2005, from $11.99 at December 31, 2004.


Results of Operations

Net income

2005 compared with 2004:

The Company’s 2005 net income of $11.8 million increased 127% compared to $5.2 million in 2004. Basic and diluted earnings per share for 2005 were $2.07 and $2.00, respectively, as compared to $0.98 and $0.95 per share in 2004.

Net income from continuing operations was $7.2 million for 2005, compared to $4.6 million for 2004, an increase of 55%. As discussed in Note 19 of the accompanying "Notes to Consolidated Financial Statements", the Company closed the sale of the merchant bankcard processing segment in the fourth quarter of 2005.


Return on average assets based on net income from continuing operations was 0.74% and 0.63% for 2005 and 2004, while return on average shareholders’ equity based on net income from continuing operations was 10.19% and 7.83% over the same two years, respectively.

2004 compared with 2003:

The Company’s 2004 net income of $5.2 million increased 2% compared to $5.1 million in 2003. Basic and diluted earnings per share for 2004 were $0.98 and $0.95, respectively, as compared to $1.20 and $1.15 per share in 2003.

Net income from continuing operations was $4.6 million for 2004, compared to $4.4 million for 2003, an increase of 6%. As discussed in Note 19 of the accompanying "Notes to Consolidated Financial Statements", the Company closed the sale of the merchant bankcard processing segment in the fourth quarter of 2005 and closed the sale of the assets of its wholly-owned subsidiary, Keys Insurance Agency, Inc., in the third quarter of 2003.

Return on average assets based on net income from continuing operations was 0.63% and 0.71% for 2004 and 2003, while return on average shareholders’ equity based on net income from continuing operations was 7.83% and 11.69% over the same two years, respectively.


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, interest-bearing deposits in other banks, and investment securities. Our interest-bearing liabilities include deposits, federal funds purchased, notes payable related to Company shares repurchased, subordinated debentures, FHLB advances, and other short-term borrowings.

2005 compared with 2004:

Net interest income was $39.1 million for the year ended December 31, 2005, compared to $30.2 million for the same period in 2004. The 30% increase was mainly attributable to increased lending volume. Partially offsetting this increase was an increase in interest expense on time deposits, our highest cost deposit category as a percentage share of total deposits. The increase in the average cost of interest-bearing liabilities from 2.02% in 2004 to 2.82% in 2005 coupled with higher volumes resulted in an increase in interest expense from $10.7 million in 2004 to $20.3 million in 2005. Our tax equivalent net interest margin contracted slightly to 4.38% from 4.51% in 2004. Going forward, we expect further market rate increases to more directly affect loan yields and deposit costs as more adjustable loans move through their floor levels and competitive pressures result in deposit rates increasing more rapidly. We believe the predominant driver in the increase in net interest income is and will continue to be the growth of our balance sheet. Although the timing and possible effects of future changes in interest rates could be significant, we expect any such impact to be considerably less in extent than the relative impact of asset growth.

2004 compared with 2003:

Net interest income was $30.2 million for the year ended December 31, 2004, compared to $24.8 million for the same period in 2003. The 22% increase was mainly attributable to increased lending volume. Partially offsetting this increase was an increase in interest expense on time deposits, our highest cost deposit category as a percentage share of total deposits. The decrease in the average cost of interest-bearing liabilities from 2.13% in 2003 to 2.02% in 2004 partially offset higher volumes resulting in an increase in interest expense from $9.8 million in 2003 to $10.7 million in 2004. The increased loan volumes and lower costs for liabilities more than offset the decrease in asset yields. Our success in managing asset yields through interest rate floors became evident during 2004 as our tax equivalent net interest margin increased to 4.51% from 4.43% in 2003.

The following table sets forth information with respect to the average balances, interest income and average yield by major categories of interest-earning assets; the average balances, interest expense and average rate by major categories of interest-bearing liabilities; the average balances of noninterest-earning assets, noninterest-bearing liabilities and shareholders’ equity; and net interest income, interest rate spread, and net interest margin for the years ended December 31, 2005, 2004 and 2003.



Average Balance Sheets

   
2005
  
2004
  
2003
 
(Dollars in thousands)
    
Average Balances
    
Income/
Expense
  
Yields/
Rates
      
Average Balances
    
Income/
Expense
  
Yields/
Rates
      
Average Balances
    
Income/
Expense
  
Yields/
Rates
  
ASSETS
                                                      
Interest-earning assets:
                                                      
Loans (a)(b)
  
$
772,363
  
$
54,492
  
7.06
%
  
$
590,167
  
$
37,724
  
6.39
%
  
$
484,147
  
$
31,669
  
6.54
%
Investment securities—taxable
    
73,213
    
2,978
  
4.07
%
    
58,308
    
2,344
  
4.02
%
    
47,729
    
2,250
  
4.71
%
Investment securities—tax exempt (b)
    
9,595
    
572
  
5.96
%
    
9,990
    
615
  
6.16
%
    
7,608
    
499
  
6.56
%
Investment securities—tax exempt (b)(d)
    
3,517
    
388
  
11.03
%
    
3,497
    
368
  
10.52
%
    
748
    
89
  
11.88
%
Interest bearing deposits in other banks
    
359
    
10
  
2.90
%
    
852
    
11
  
1.29
%
    
309
    
3
  
0.85
%
FHLB stock
    
2,725
    
113
  
4.15
%
    
1,635
    
57
  
3.49
%
    
1,667
    
59
  
3.53
%
Federal funds sold
    
38,374
    
1,202
  
3.13
%
    
11,438
    
127
  
1.11
%
    
21,106
    
242
  
1.14
%
Total interest-earning assets
    
900,146
    
59,755
  
6.64
%
    
675,887
    
41,246
  
6.10
%
    
563,314
    
34,811
  
6.18
%
                                                       
Non-interest earning assets:
                                                      
Cash and due from banks
    
21,680
                
18,866
                
15,562
            
Investment in ERAS
    
-
                
-
                
52
            
Premises and equipment, net
    
27,007
                
24,295
                
19,576
            
Allowances for loan losses
    
(6,887
)
              
(5,735
)
              
(4,642
)
          
Other assets
    
30,626
                
26,452
                
27,749
            
Total non-interest earning assets
    
72,426
                
63,878
                
58,297
            
Total Assets
  
$
972,572
              
$
739,765
              
$
621,611
            
                                                       
LIABILITIES & SHAREHOLDERS’ EQUITY
                                                      
Interest bearing liabilities:
                                                      
Interest bearing deposits:
                                                      
NOW accounts
  
$
92,754
    
919
  
0.99
%
  
$
76,068
    
330
  
0.43
%
  
$
59,389
    
218
  
0.37
%
Money market
    
165,266
    
3,686
  
2.23
%
    
130,172
    
1,189
  
0.91
%
    
125,410
    
1,103
  
0.88
%
Savings deposits
    
47,774
    
243
  
0.51
%
    
44,380
    
174
  
0.39
%
    
35,475
    
170
  
0.48
%
Time deposits
    
357,824
    
12,595
  
3.52
%
    
227,834
    
6,878
  
3.02
%
    
198,162
    
6,444
  
3.25
%
Total interest-bearing deposits
    
663,618
    
17,443
  
2.63
%
    
478,454
    
8,571
  
1.79
%
    
418,436
    
7,935
  
1.90
%
                                                       
Notes payable
    
4,052
    
367
  
9.06
%
    
5,250
    
482
  
9.18
%
    
5,250
    
481
  
9.16
%
Short-term borrowings and FHLB advances
    
39,465
    
1,282
  
3.25
%
    
35,585
    
558
  
1.57
%
    
25,455
    
314
  
1.23
%
Subordinated debentures
    
13,000
    
1,212
  
9.32
%
    
13,000
    
1,119
  
8.61
%
    
13,000
    
1,109
  
8.53
%
Total interest bearing liabilities
    
720,135
    
20,304
  
2.82
%
    
532,289
    
10,730
  
2.02
%
    
462,141
    
9,839
  
2.13
%
                                                       
Non-interest bearing liabilities and shareholders’ equity:
                                                      
Demand deposits
    
169,426
                
139,939
                
114,344
            
Other liabilities
    
12,443
                
8,266
                
7,493
            
Shareholders’ equity
    
70,568
                
59,271
                
37,633
            
Total non-interest bearing liabilities and shareholders’ equity
    
252,437
                
207,476
                
159,470
            
Total liabilities and shareholders’ equity
  
$
972,572
              
$
739,765
              
$
621,611
            
Interest rate spread
              
3.82
%
              
4.08
%
              
4.05
%
Net interest income
        
$
39,451
              
$
30,516
              
$
24,972
      
Net interest margin (c)
              
4.38
%
              
4.51
%
              
4.43
%
                                                       
   
__________
(a)  
Average loans include non-performing loans. Interest on loans includes loan fees of $468 in 2005, $394 in 2004 and $265 in 2003.
(b)  
Interest income and rates include the effects of a tax equivalent adjustment using a Federal tax rate of 34% 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.
(d)  
Investment securities indicated hereon were 90% tax deductible during 2005 and 2004, respectively.


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.

 
  
2005 compared to 2004
Due to changes in 
2004 compared to 2003
Due to changes in
(Dollars in thousands)
    
Average Volume
 
 
Average Rate
 
 
Net Increase (Decrease)
 
 
Average Volume
 
 
Average Rate
 
 
Net Increase (Decrease)
 
Interest income
                                      
Loans (a)
  
$
12,550
  
$
4,218
  
$
16,768
  
$
6,793
  
$
(737
)
$
6,056
  
Investment securities (a)
    
664
    
(53
)
  
611
    
881
    
(392
)
  
489
  
Interest-bearing deposits in other banks
    
(9
)
  
8
    
(1
)
  
7
    
1
    
8
  
Federal funds sold
    
606
    
469
    
1,075
    
(108
)
  
(7
)
  
(115
)
FHLB stock
    
44
    
12
    
56
    
(1
)
  
(1
)
  
(2
)
Total interest income
    
13,855
    
4,654
    
18,509
    
7,572
    
(1,136
)
  
6,436
  
                                       
Interest expense
                                      
NOW accounts
    
86
    
503
    
589
    
68
    
44
    
112
  
Money market
    
393
    
2,104
    
2,497
    
43
    
43
    
86
  
Savings deposits
    
14
    
55
    
69
    
38
    
(34
)
  
4
  
Time deposits
    
4,429
    
1,288
    
5,717
    
918
    
(484
)
  
434
  
Notes payable
    
(109
)
  
(6
)
  
(115
)
  
-
    
1
    
1
  
Subordinated debentures
    
-
    
93
    
93
    
-
    
10
    
10
  
Short-term borrowings and FHLB advances
    
67
    
657
    
724
    
99
    
145
    
244
  
Total interest expense
    
4,880
    
4,694
    
9,574
    
1,166
    
(275
)
  
891
  
                                       
Change in net interest income
  
$
8,975
  
$
(40
)
$
8,935
  
$
6,406
  
$
(861
)
$
5,545
  
                                       
__________
(a)  
Interest income includes the effects of a tax equivalent adjustment using a federal tax rate of 34% in adjusting tax exempt interest on tax exempt investment securities and loans to a fully taxable basis.


Non-interest income

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

(Dollars in thousands)
    
2005
 
 
2004
 
 
2003
  
Fees on mortgage loans sold
 
$
1,880
  
$
1,852
  
$
2,201
  
Service charges on deposit accounts
    
2,360
    
2,547
    
2,452
  
Investment securities gains, net
    
1
    
106
    
289
  
Debit card income
    
572
    
422
    
388
  
Earnings on bank owned life insurance policies
    
416
    
404
    
433
  
Gain on sale of land
    
267
    
-
    
-
  
Retail investment services
    
-
    
333
    
420
  
Gain on sale of ERAS Joint Venture
    
-
    
-
    
202
  
Other
    
762
    
642
    
699
  
Total non-interest income
  
$
6,258
  
$
6,306
  
$
7,084
  
                     


Over the past three years, non-interest income has declined from $7.1 million to $6.3 million resulting from our increased focus on our core competencies, middle market commercial lending and community banking. The leading cause of the decline is the sale of our retail investment services in 2004 coupled with the sale of our investment in the ERAS joint venture in 2003.


During 2005, we recognized a gain related to the sale of a parcel of land in Homestead, Florida as a result of a decision to concentrate our branch expansion investments in Southwest Florida.

A significant additional component of this trend is the decline in fees on residential loans sold at origination. This decline is partly due to the overall higher interest rate environment which has resulted in a decline in refinancing volume coupled more recently with an increase in the popularity of variable and adjustable rate mortgages. The change in volume mix resulted in the retention in our portfolio of a greater proportion of the residential loans we originate vs. sell; we generally sell fixed rate residential loans to third parties. Additionally, our pass through volume was affected by the unusually active tropical weather season during 2005 which significantly impacted residential housing sales in our core markets. We intend to maintain current staffing levels with respect to the residential mortgage origination process and expect organic growth from our expanding core customer base and the residential real estate market and population growth trends in the Southwest Florida market to complement increases driven by new saleable mortgage products we plan to offer.

During the three year period, service charge income has declined, driven predominantly by a substantial increase in the utilization of electronic and online banking tools and resulting in lower fees per account. We have been encouraging the sale and usage of these products which lower our service delivery costs throughout our branch distribution system.

2005 compared to 2004:

Non-interest income decreased slightly in 2005. In 2005 the fees on mortgage loans sold, which result from the sale of residential loans (primarily fixed rate loans) to the secondary market, increased only slightly due to increased competition in the market place combined with lower volume due to a low level of refinancing and frequent local severe weather threats. The increase in debit card income partially offset the decline in service charge income which was driven primarily by increased utilization of electronic and online banking tools. The sale of internally developed intangible assets comprising the retail investment services book of business in 2004 also contributed to the decline in non-interest income.

2004 compared to 2003:

Non-interest income decreased from $7.1 million in 2003 to $6.3 million in 2004. Fees on mortgage loans sold result from the sale of residential loans (primarily fixed rate loans) to the secondary market. In 2004, our volumes of residential loans decreased as a result of the increasing interest rates and local economic and real estate environment conditions. Retail investment services income decreased during 2004. The December 15, 2004 sale of internally developed intangibles, primarily the investment center’s book of business resulted in a gain of $50,000 which is included in other income. Debit card income rose slightly due primarily to increasing volume despite a reduction in the interchange rate paid to us.

Non-interest expenses

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

(Dollars in thousands)
    
2005
 
 
2004
 
 
2003
  
Salary and employee benefits
  
$
17,724
  
$
14,385
  
$
12,644
  
Net occupancy expense
    
5,502
    
4,911
    
4,268
  
Accounting, legal, and other professional
    
1,444
    
1,223
    
842
  
Computer services
    
1,650
    
1,773
    
1,533
  
Postage, courier and armored car
    
719
    
617
    
697
  
Marketing and community relations
    
731
    
866
    
851
  
Operating supplies
    
589
    
542
    
484
  
Directors’ fees
    
468
    
438
    
233
  
Indirect loan production expense
    
379
    
231
    
-
  
Provision for unfunded commitments
    
316
    
47
    
32
  
Travel expenses
    
299
    
387
    
153
  
FDIC and state assessments
    
253
    
213
    
189
  
Amortization of intangibles
    
291
    
295
    
292
  
Repossessed asset expenses
   
128
    
64
    
390
  
Operational charge-offs
    
69
    
69
    
82
  
Other operating expenses
    
1,294
    
996
    
851
  
Total non-interest expenses
  
$
31,856
  
$
27,057
  
$
23,541
  
                     



Over the past three years, non-interest expenses have increased from $23.5 million to $31.9 million. The increases in this category are due primarily to the increases in employees, facilities and infrastructure necessary to enable and facilitate the expected future growth of the organization. It is anticipated that this may moderate as a constant level of growth should translate to a smaller percentage of our cost increases in future years.


2005 compared to 2004:

Non-interest expenses increased $4.8 million in 2005. Approximately $3.3 million of the increase was related to salary and employee benefits. At December 31, 2005, the Bank had 332 full-time employees and 12 part-time employees, compared to 309 full-time employees and 13 part-time employees at December 31, 2004. The increased staffing was attributable to the ongoing expansion activity in Southwest Florida and additions to manage growth throughout the Company. Net occupancy and other expense increased less than 12%. The majority of the increases in the non-interest expense category are the result of costs associated with the growth of our business.

2004 compared to 2003:

Non-interest expenses increased $3.5 million in 2004. Approximately $1.7 million of the increase was related to salary and employee benefits. At December 31, 2004, the Bank had 309 full-time employees and 13 part-time employees, compared to 261 full-time employees and 15 part-time employees at December 31, 2003. The increased staffing was attributable to the opening of two branches in Southwest Florida in the second half of 2004, additions to the indirect lending department, additions to manage growth throughout the Company, and additions to assist in security and regulatory compliance. The majority of the increases in the non-interest expense category are the result of costs associated with the growth of our business.


Provision for income taxes

The provision for income taxes includes federal and state income taxes. The effective income tax rates for the years ended December 31, 2005, 2004, and 2003 were 36.9%, 34.0%, and 35.0%, respectively. The fluctuations in effective tax rates reflect the effect of the differences in deductibility of certain income and expenses. In general, as a larger proportion of our income is generated from fully taxable investments, we expect our effective income tax rate to gradually increase towards statutory levels. Additionally, due primarily to the gain recognized on the sale of our merchant bankcard processing segment, the Company’s taxable income exceeded the 34% Federal statutory tax bracket. This resulted in a portion of our taxable income being taxed at 35% and 38% Federal tax rates. Prior to 2005, the Company’s income tax expense had been based on a 34% statutory Federal tax rate. 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, 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.


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. These loans are often $1 million or larger and may be eligible for government-guarantee programs or traditional participation agreements. The government-funded programs such as the Small Business Administration are generally geared toward long-term, adjustable rate financing. As our business expands in Southwest Florida, we believe the loan portfolio will benefit from the resulting geographic diversification which is expected to provide more industry-based diversity to our loan portfolio. As of December 31, 2005, we had approximately $240.1 million of loans outstanding (excluding indirect auto loans) in Southwest Florida, where we had also generated approximately $269.3 million in total deposits.

The cost of living in Monroe County is higher in comparison to other counties in Florida due in large part to the scarce and expensive real estate with various construction restrictions and environmental considerations. Accordingly, collateral values on loans secured by property in this market are greater. We have grown our commercial loan portfolio by aggressively serving this market. The quality of our credit administration along with stable real estate values has kept loan losses at low levels.

 

 
Loans are expected to produce higher yields than investment securities and other interest-earning assets (assuming that credit losses are not excessive). The absolute volume of loans and the volume as a percentage of total earning assets are important determinants of the net interest margin. Gross loans outstanding increased to $882.4 million at the end of 2005 as compared to $653.5 million at year end 2004, an increase of 35%. Of this amount, real estate mortgage loans increased 39% from $473.3 million to $657.8 million. Commercial real estate mortgage loans accounted for much of this increase, growing from $351.3 million to $452.0 million at the respective year ends. Another loan type that increased significantly in 2005 was indirect auto dealer loans. This portfolio increased from $91.9 million at December 31, 2004 to $118.0 million at December 31, 2005. Construction loans also increased significantly growing from $49.8 million at December 31, 2004 to $125.2 million at December 31, 2005. We originate commercial loans with rates that fluctuate with the prime lending rate and residential loans with rates that fluctuate with the one year treasury index. At December 31, 2005, 76% 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)
    
2005
 
 
2004
 
 
2003
 
 
2002
 
 
2001
  
Real estate mortgage loans:
                                
Commercial
  
$
451,969
  
$
351,346
  
$
297,221
  
$
265,113
  
$
232,759
  
Residential
    
76,003
    
67,204
    
60,104
    
68,389
    
68,373
  
Farmland
    
4,660
    
4,971
    
2,317
    
443
    
267
  
Construction
    
125,207
    
49,815
    
32,089
    
14,893
    
6,434
  
Commercial and agricultural loans
    
80,055
    
64,622
    
63,624
    
49,212
    
46,927
  
Indirect auto dealer loans
    
118,018
    
91,890
    
59,437
    
16,854
    
-
  
Home equity loans
    
17,232
    
13,856
    
12,574
    
17,475
    
14,707
  
Other consumer loans
    
9,228
    
9,817
    
11,232
    
9,364
    
9,637
  
Subtotal
    
882,372
    
653,521
    
538,598
    
441,743
    
379,104
  
Less: deferred loan costs (fees)
    
1,652
    
2,157
    
1,815
    
784
    
(157
)
Less: allowance for loan losses
    
(7,546
)
  
(6,243
)
  
(5,216
)
  
(4,272
)
  
(3,675
)
Net loans
  
$
876,478
  
$
649,435
  
$
535,197
  
$
438,255
  
$
375,272
  
                                 


The contractual maturity distribution of our loan portfolio at December 31, 2005 is indicated in the table below. The vast 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
  
$
51,939
  
$
90,681
  
$
309,349
  
$
451,969
  
Residential
    
12
    
3,393
    
72,598
    
76,003
  
Farmland
    
-
    
1,563
    
3,097
    
4,660
  
Construction (a)
    
39,500
    
51,004
    
34,703
    
125,207
  
Commercial and agricultural loans
    
38,067
    
31,438
    
10,550
    
80,055
  
Indirect auto dealer loans
    
609
    
94,021
    
23,388
    
118,018
  
Home equity loans
    
3,143
    
2,338
    
11,751
    
17,232
  
Other consumer loans
    
543
    
5,206
    
3,479
    
9,228
  
Total loans
  
$
133,813
  
$
279,644
  
$
468,915
  
$
882,372
  
                           

__________
(a)  
$17,480 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 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
  
$
14,388
  
$
145,895
  
$
52,178
  
$
212,461
  
Floating or adjustable rates
    
119,425
    
133,749
    
416,737
    
669,911
  
Total loans
  
$
133,813
  
$
279,644
  
$
468,915
  
$
882,372
  
                           


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 and Substandard or worse. When appropriate, a specific reserve will be established for individual loans. Otherwise, we allocate an allowance for each risk category. The allocations 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 dealer loans, residential loans and consumer loans generally are not analyzed individually. 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. As above, when appropriate, a specific reserve will be established for individual loans. Otherwise, we allocate an allowance for each loan classification. The allocations are based on the same factors mentioned above.

Since most of the factors that we use in constructing our estimate for the allowance have been relatively stable in recent years, the provisions we have used to fund this allowance have been necessitated primarily by the overall level of loan growth and to replenish the allowance for specific charge-offs. Because we are principally a commercial bank and have a loan to deposit ratio greater than 90%, any estimate that is used as a multiplier on loan balances reflecting our best perception of a particular type of risk has the potential to have significant income effects if these multipliers change. Increases in volume and concentration of commercial real estate and indirect auto dealer loans relative to the overall composition of the loan portfolio translate to a greater than average increase in the provision for loan losses as our risk management policies dictate generally higher allocations of such provisions for these categories of loans.

During 2005, as the indirect auto dealer loan portfolio began to mature, the loss history has approached expected levels and the management processes, controls and monitoring and risk management tools implemented throughout recent years indicate that higher multipliers were necessary for the indirect loan portfolio. Contemporaneously, as the Florida economy has grown at an accelerated pace compared to other markets, real estate prices have escalated and local economies have benefited resulting in diminishing historical and expected loss factors. Analysis of these events results in these same tools indicating that lower multipliers were necessary for commercial loans collateralized by real estate. Looking forward, the concentration of indirect auto dealer loan category began to decrease during 2005 and management expects this trend to continue as the growth rate of the indirect loan portfolio declines along with its proportion of the loan portfolio as a whole. As this occurs, if we make the assumption, however unlikely, that all other factors were to remain constant, we would expect that the allowance for loan losses would continue to decrease as a percentage of gross loans in the near term. There is no assurance that this will occur.

Further, since the net result of our calculation for the allowance results in this amount being 0.86% of outstanding loans, the risks associated with changes in the underlying factors of this calculation have an asymmetrical risk to the extent of possible negative as opposed to positive consequences. In other words, the current allowance reflects factors whose history has indicated and justified a relatively low allowance in percentage terms. These factors have limited capacity for improvement since associated risks cannot go to zero. However, for example, factors such as economic conditions and loan loss history could conceivably deteriorate dramatically. If that were to happen, the effect on the allowance calculation would be significant and, therefore, require a large provision to absorb higher potential losses.


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 $7.5 million and $6.2 million at December 31, 2005 and December 31, 2004, respectively. Based on an analysis performed by management at December 31, 2005, 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 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 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 losses in the loan portfolio. Our provision for loan losses was $2.4 million, $2.5 million and $1.6 million for the years ended December 31, 2005, 2004 and 2003, respectively.

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


(Dollars in thousands)
    
2005
 
 
2004
 
 
2003
 
 
2002
 
 
2001
 
Balance at beginning of year
  
$
6,243
  
$
5,216
  
$
4,272
  
$
3,675
  
$
3,268
  
                                 
Charge-offs:
                                
Real estate mortgage loans:
                                
Commercial
    
-
    
-
    
-
    
211
    
372
  
Residential
    
-
    
-
    
-
          
21
  
Farmland
    
-
    
-
    
-
    
-
    
-
  
Construction
    
-
    
-
    
-
    
-
    
-
  
Commercial and agricultural loans
    
107
    
92
    
183
    
14
    
200
  
Indirect auto dealer loans
    
1,045
    
1,313
    
370
    
16
    
-
  
Home equity loans
    
-
    
-
    
53
    
15
    
-
  
Other consumer loans
    
67
    
82
    
61
    
46
    
30
  
Total charge-offs
    
1,219
    
1,487
    
667
    
302
    
623
  
                                 
Recoveries:
                                
Real estate mortgage loans:
                                
Commercial
    
-
    
-
    
6
    
84
    
-
  
Residential
    
-
    
-
    
-
    
-
    
10
  
Farmland
    
-
    
-
    
-
    
-
    
-
  
Construction
    
-
    
-
    
-
    
-
    
-
  
Commercial and agricultural loans
    
6
    
38
    
1
          
4
  
Indirect auto dealer loans
    
65
    
3
    
8
    
-
    
-
  
Home equity loans
    
8
    
2
    
1
    
-
    
-
  
Other consumer loans
    
30
    
16
    
9
    
24
    
11
  
Total recoveries
    
109
    
59
    
25
    
108
    
25
  
                                 
Net charged off
    
1,110
    
1,428
    
642
    
194
    
598
  
                                 
Provision for loans losses
    
2,413
    
2,455
    
1,586
    
791
    
1,005
  
                                 
Allowance for loan losses at end of year
  
$
7,546
  
$
6,243
  
$
5,216
  
$
4,272
  
$
3,675
  
                                 
Ratio of net charge-offs to average net loans outstanding
    
0.14
%
  
0.24
%
  
0.13
%
  
0.05
%
  
0.17
%
                                 



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 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. 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.


 
2005
2004
2003
2002
2001
(Dollars in thousands)
  
Allowance
 
 
% of Total Loans
 
 
Allowance
 
 
% of Total Loans
 
 
Allowance
 
 
% of Total Loans
 
 
Allowance
 
 
% of Total Loans
 
 
Allowance
 
 
% of Total Loans
  
Real estate mortgage loans:
                                                            
Commercial
$
2,971
    
51.2
  
$
2,513
    
53.7
  
$
2,608
    
55.2
  
$
2,656
    
60.0
  
$
2,120
    
61.4
  
Residential
  
168
    
8.6
    
144
    
10.3
    
151
    
11.2
    
178
    
15.5
    
183
    
18.0
  
Farmland
  
30
    
0.5
    
34
    
0.8
    
20
    
0.4
    
4
    
0.1
    
-
    
0.1
  
Construction
  
743
    
14.2
    
312
    
7.6
    
217
    
6.0
    
87
    
3.4
    
26
    
1.7
  
Commercial and agricultural loans
  
912
    
9.1
    
737
    
9.9
    
901
    
11.8
    
740
    
11.1
    
917
    
12.4
  
Indirect auto dealer loans
  
2,523
    
13.4
    
2,312
    
14.1
    
1,095
    
11.0
    
169
    
3.8
    
-
    
-
  
Home equity loans
  
85
    
2.0
    
67
    
2.1
    
78
    
2.3
    
216
    
4.0
    
259
    
3.9
  
Other consumer loans
  
114
    
1.0
    
124
    
1.5
    
146
    
2.1
    
222
    
2.1
    
170
    
2.5
  
 
$
7,546
    
100
%
$
6,243
    
100
%
$
5,216
    
100
%
$
4,272
    
100
%
$
3,675
    
100
%
                                                             


Non-Performing Assets

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


(Dollars in thousands)
    
2005
 
 
2004
 
 
2003
 
 
2002
 
 
2001
 
Total non-accrual loans
  
$
956
  
$
704
  
$
390
  
$
546
  
$
1,590
  
Accruing loans delinquent 90 days or more (a)
    
-
    
-
    
-
    
-
    
-
  
Total non-performing loans
    
956
    
704
    
390
    
546
    
1,590
  
                                 
Repossessed personal property (indirect auto dealer loans)
    
962
    
688
    
598
    
70
    
-
  
Other real estate owned (b)
    
190
    
882
    
193
    
550
    
550
  
Other assets (b)
    
2,815
    
2,665
    
2,472
    
2,519
    
2,290
  
Total non-performing assets
  
$
4,923
  
$
4,939
  
$
3,653
  
$
3,685
  
$
4,430
  
                                 
Allowance for loan losses
  
$
7,546
  
$
6,243
  
$
5,216
  
$
4,272
  
$
3,675
  
                                 
Non-performing assets as a percent of total assets
    
0.46
%
  
0.60
%
  
0.55
%
  
0.65
%
  
0.90
%
Non-performing loans as a percent of gross loans
    
0.11
%
  
0.11
%
  
0.07
%
  
0.12
%
  
0.42
%
Allowance for loan losses as a percent of non-performing loans
    
789.33
%
  
886.79
%
  
1,336.33
%
  
783.19
%
  
231.07
%
                                 
__________
(a)  
Non-performing loans exclude the $1.6 million loan discussed below that is guaranteed for both principal and interest by the USDA.
(b)  
The 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 partially 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.

During 2001, upon completion of foreclosure on the underlying collateral, the non-guaranteed portion of this loan and interest accrued through the foreclosure date was reclassified into other real estate ($550,000) and other assets (approximately $1.9 million) based on the fair value of the underlying-collateral. The portion of this loan guaranteed by the USDA was approximately $1.6 million at December 31, 2005 and December 31, 2004, and is accruing interest. Accrued interest on this loan totals approximately $794,000 and $677,000 at December 31, 2005 and December 31, 2004, respectively.

 
In pursuing a sale of the property and equipment, the Bank has incurred various expenditures. The Bank capitalized the liquidation costs and portion of the protective advances which it expects will be fully reimbursed by the USDA. Other real estate recorded on the Bank’s books totaled approximately $190,000 at December 31, 2005 and December 31, 2004, respectively. The non-guaranteed principal and interest ($2.0 million at December 31, 2005 and December 31, 2004) and the reimbursable capitalized liquidation costs and protective advance costs totaling approximately $854,000 and $704,000 at December 31, 2005 and December 31, 2004, respectively, are included as “other assets” in the financial statements.

The Bank sold certain pieces of equipment associated with the lumber mill property. Proceeds from the sales were used to reduce the other real estate amount and liquidation cost amounts recorded on the Bank’s books. In 2003, the Bank wrote down the carrying amount of the other real estate by $262,000 based upon anticipated proceeds from the sale of the property and remaining equipment. In January 2006, the Bank sold the remaining other real estate for $1.25 million and recognized a gain of $33,000 on the Bank’s interest therein, net of transaction costs.

Florida law requires a bank to liquidate or charge off repossessed real property within five years, and repossessed personal property within six months. The Bank was awarded title to the real property on June 12, 2001, and an adjudicated interest in the owner’s trust proceeds. The time constraints imposed by Florida law required that the personal property be disposed of or charged off by December 2001. The Bank applied to the State of Florida for an extension to carry the personal property on the Bank’s books and was granted an extension to carry the personal property on its books until June 11, 2003. Since the property had not been liquidated as of June 11th, 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.


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.

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


(Dollars in thousands)
    
2005
 
 
2004
 
 
2003
  
Provided by operating activities
  
$
19,998
  
$
6,801
  
$
9,574
  
Used by investing activities
    
(246,077
)
  
(151,336
)
  
(98,767
)
Provided by financing activities
    
224,651
    
153,792
    
98,804
  
Net (decrease) increase in cash and cash equivalents
  
$
(1,428
)
$
9,257
  
$
9,611
  
                     

As discussed in Note 16 of the Consolidated Financial Statements, the Company had unfunded loan commitments and unfunded letters of credit totaling $231.0 million at December 31, 2005. The Company believes 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.

The Bank has an unsecured overnight federal funds purchased accommodation up to a maximum of $12.0 million from its principal correspondent bank. Further, the Bank has invested in FHLB stock for the purpose of establishing credit lines with the FHLB. The credit availability to the Bank is equal to up to 20% of the Bank’s total assets as reported on the December 31, 2005 financial information submitted to the Bank’s regulators. The credit availability from the FHLB approximated $176.3 million at December 31, 2005 under which $25 million was outstanding. Borrowings against this line of credit are collateralized by the Bank’s qualifying one-to-four family residential mortgage loans and commercial real estate loans.

Scheduled maturities and paydowns of loans and investment securities are a continued source of liquidity. Also, many adjustable rate residential real estate loans originated are salable in the secondary mortgage market at par or better and therefore provide a secondary source for liquidity.


At December 31, 2005, our gross loan to deposit ratio was 95.9% compared to a ratio of 95.0% at December 31, 2004. Management monitors and assesses the adequacy of our liquidity position on a monthly basis to ensure that sufficient sources of liquidity are maintained and available.

Under state banking law, regulatory approval will be required if the total of all dividends declared in any calendar year by the Bank exceeds the Bank’s net profits to date for that year combined with its retained net profits for the preceding two years. Retained earnings of the Bank available for payment of dividends to us without prior regulatory approval at December 31, 2005 is approximately $21.2 million. These dividends represent the Company’s primary source of liquidity on a stand alone basis.

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, 2005 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
  
$
406,710
  
$
31,313
  
$
49,652
  
$
320,189
  
$
74,508
  
$
882,372
  
Investment securities-taxable
    
981
    
5,116
    
99
    
51,375
    
26,870
    
84,441
  
Investment securities-tax exempt
    
-
    
-
    
310
    
2,778
    
6,496
    
9,584
  
Marketable equity securities
    
3,439
    
-
    
-
    
-
    
-
    
3,439
  
FHLB stock
   
2,781
    
-
    
-
    
-
    
-
    
2,781
  
Federal funds sold
    
17,163
    
-
    
-
    
-
    
-
    
17,163
  
Interest-bearing deposit in other banks
    
292
    
-
    
-
    
-
    
-
    
292
  
Total interest-bearing assets
    
431,366
    
36,429
    
50,061
    
374,342
    
107,874
    
1,000,072
  
                                       
Interest-bearing liabilities:
                                      
NOW accounts
   
104,641
    
-
    
-
    
-
    
-
    
104,641
  
Money market
    
167,072
    
-
    
-
    
-
    
-
    
167,072
  
Savings deposits
   
47,091
    
-
    
-
    
-
    
-
    
47,091
  
Time deposits
    
159,760
    
71,412
    
78,732
    
121,894
    
6
    
431,804
  
Notes payable
    
-
    
-
    
-
    
-
    
4,000
    
4,000
  
Subordinated debentures
    
5,000
    
-
    
-
    
-
    
8,000
    
13,000
  
Other borrowings
    
42,284
    
-
    
-
    
-
    
-
    
42,284
  
Total interest-bearing liabilities
    
525,848
    
71,412
    
78,732
    
121,894
    
12,006
    
809,892
  
                                       
Interest sensitivity gap
  
$
(94,482
)
$
(34,983
)
$
(28,671
)
$
252,448
  
$
95,868
  
$
190,180
  
                                       
Cumulative interest sensitivity gap
  
$
(94,482
)
$
(129,465
)
$
(158,136
)
$
94,312
  
$
190,180
  
$
190,180
  
                                       
Cumulative sensitivity ratio
    
(9.4
%)
  
(12.9
%)
  
(15.8
%)
  
9.4
%
  
19.0
%
  
19.0
%
                                       


We are cumulatively liability sensitive through the one-year time period, and asset sensitive in the over one year timeframes above. Certain liabilities such as non-indexed NOW and passbook savings accounts, while technically subject to immediate repricing in response to changing market rates, historically do not reprice as quickly or to the extent as other interest-sensitive accounts. Nevertheless, if market interest rates should decrease, it is anticipated that our net interest margin would decrease. Because of non-interest-bearing liabilities, total interest-earning assets are substantially greater than the total interest-bearing liabilities and 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. In the next three months, we anticipate interest rates increasing slowly and we expect that our net interest margin should remain fairly stable due to the effects of competitive pressure on loan production at higher interest rates. Thereafter, if interest rates continue to increase, it is anticipated that the net interest margin would expand slightly over longer time horizons since the Company has more total assets subject to rate changes than total liabilities that are rate sensitive.


Even in the near term, we believe the $158.1 million one year cumulative negative sensitivity gap may exaggerate the probable effects on earnings in a rising rate environment for two reasons. First, the liabilities subject to repricing are predominately not indexed to any specific market rate and therefore offer us the opportunity to delay or diminish any rate repricings. Further, in this current rate environment, the Bank has been originating loans with interest rate floors. The effect of this has been to decrease the volatility of net interest margin and decrease asset sensitivity due to the fact that these loans behave similar to fixed rate loans in periods over a significant range of interest rate changes.

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. Since we have experienced steady growth in deposits, no net run off in any deposit category is assumed in the interest rate sensitivity table. It is our policy to maintain our cumulative one year gap ratio in the -20% to +10% range. At December 31, 2005, the Company was within this range with a one year cumulative sensitivity ratio of -15.8%.

Investment Portfolio

Contractual maturities of investment securities at December 31, 2005 are shown below. Expected maturities 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, marketable equity securities and collateralized mortgage obligations 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
  
Securities Available for Sale:
                                                              
U.S. Treasury Securities
$
100
    
2.27
%
  
$
4,938
    
3.32
%
  
$
-
    
-
    
$
-
    
-
    
$
-
  
U.S. Gov’t agencies and corporations
  
5,115
    
4.55
%
    
39,485
    
3.45
%
    
17,812
    
4.45
%
    
-
    
-
      
-
  
States and political subdivisions - tax exempt (a)
  
-
    
-
      
3,088
    
6.15
%
    
4,348
    
6.04
%
    
2,148
    
5.53
%
    
-
  
States and political subdivisions - taxable
  
-
    
-
      
333
    
7.29
%
    
-
    
-
      
2,330
    
6.10
%
    
-
  
Marketable equity securities (a)
  
-
    
-
      
-
    
-
      
-
    
-
      
-
    
-
      
3,439
  
Mortgage-backed securities
  
-
    
-
      
-
    
-
      
-
    
-
      
-
    
-
      
10,252
  
Collateralized mortgage obligations
  
-
    
-
      
-
    
-
      
-
    
-
      
-
    
-
      
4,076
  
                                                               
Total
$
5,215
    
4.50
%
  
$
47,844
    
3.63
%
  
$
22,160
    
4.76
%
  
$
4,478
    
5.82
%
  
$
17,767
  
                                                               


Yield by classification of investment securities at December 31, 2005 was as follows:


(Dollars in thousands)
    
Yield
 
 
Totals
  
Securities Available for Sale:
              
U.S. Treasury Securities
    
3.30
%
$
5,038
  
U.S. Government agencies and corporations
    
3.83
%
  
62,412
  
States and political subdivisions - tax exempt (a)
    
5.96
%
  
9,584
  
States and political subdivisions - taxable
    
6.25
%
  
2,663
  
Marketable equity securities (a)
    
11.50
%
  
3,439
  
Mortgage-backed securities
    
5.34
%
  
10,252
  
Collateralized mortgage obligations
    
5.82
%
  
4,076
  
Total
    
4.53
%
$
97,464
  
               
__________
(a)  
Weighted average yields on tax exempt obligations and marketable equity securities have been computed by grossing up actual tax exempt income (90% for marketable equity securities) to a fully taxable equivalent basis using a federal tax rate of 34%.



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


Available for Sale—December 31, 2005

(Dollars in thousands)
    
Amortized Cost
 
 
Unrealized Gains
 
 
Unrealized Losses
 
 
Fair
Value
  
U.S. Treasury Securities
  
$
5,182
  
$
1
  
$
145
  
$
5,038
  
U.S. Government agencies and corporations
    
64,145
    
5
    
1,738
    
62,412
  
States and political subdivisions-tax exempt
    
9,594
    
91
    
101
    
9,584
  
States and political subdivisions-taxable
    
2,655
    
8
    
-
    
2,663
  
Marketable equity securities
    
3,000
    
439
    
-
    
3,439
  
Mortgage-backed securities
    
10,083
    
193
    
24
    
10,252
  
Collateralized mortgage obligations
    
3,996
    
80
    
-
    
4,076
  
   
$
98,655
  
$
817
  
$
2,008
  
$
97,464
  
                           


Available for Sale—December 31, 2004

(Dollars in thousands)
    
Amortized Cost
 
 
Unrealized Gains
 
 
Unrealized Losses
 
 
Fair
Value
  
U.S. Treasury Securities
  
$
5,178
  
$
5
  
$
29
  
$
5,154
  
U.S. Government agencies and corporations
    
54,228
    
104
    
869
    
53,463
  
States and political subdivisions-tax exempt
    
9,596
    
246
    
26
    
9,816
  
States and political subdivisions-taxable
    
2,862
    
17
    
23
    
2,856
  
Marketable equity securities
    
3,000
    
987
    
-
    
3,987
  
Mortgage-backed securities
    
2,473
    
58
    
-
    
2,531
  
   
$
77,337
  
$
1,417
  
$
947
  
$
77,807
  
                           


Available for Sale—December 31, 2003

(Dollars in thousands)
    
Amortized Cost
 
 
Unrealized Gains
 
 
Unrealized Losses
 
 
Fair
Value
  
U.S. Treasury Securities
  
$
209
  
$
9
  
$
-
  
$
218
  
U.S. Government agencies and corporations
    
31,357
    
425
    
663
    
31,119
  
States and political subdivisions-tax exempt
    
8,838
    
378
    
59
    
9,157
  
States and political subdivisions-taxable
    
3,559
    
42
    
101
    
3,500
  
Marketable equity securities
    
3,000
    
395
    
-
    
3,395
  
Mortgage-backed securities
    
5,041
    
128
    
1
    
5,168
  
   
$
52,004
  
$
1,377
  
$
824
  
$
52,557
  
                           




Deposits

The following table presents the average amount outstanding and the average rate paid on deposits by us for the years ended December 31, 2005, 2004, and 2003.

 
2005
2004
2003
(Dollars in thousands)
  
Average Amount
 
 
Average Rate
 
 
Average Amount
 
 
Average Rate
 
 
Average Amount
 
 
Average Rate
 
Non-interest bearing deposits
$
169,426
        
$
139,939
        
$
114,344
        
                                     
Interest-bearing deposits
                                    
NOW Accounts
  
92,754
    
0.99
%
  
76,068
    
0.43
%
  
59,389
    
0.37
%
Money market
  
165,266
    
2.23
%
  
130,172
    
0.91
%
  
125,410
    
0.88
%
Savings deposit
  
47,774
    
0.51
%
  
44,380
    
0.39
%
  
35,475
    
0.48
%
Time deposits
  
357,824
    
3.52
%
  
227,834
    
3.02
%
  
198,162
    
3.25
%
                                     
Total
$
833,044
    
2.09
%
$
618,393
    
1.39
%
$
532,780
    
1.49
%
                                     


The following table presents the maturity of our time deposits at December 31, 2005:


(Dollars in thousands)
    
Deposits $100,000 and Greater
 
 
Deposits Less than $100,000
 
 
Total
  
Months to maturity:
                    
3 or less
  
$
83,015
  
$
75,372
  
$
158,387
  
4 to 6
    
36,608
    
35,005
    
71,613
  
7 through 12
    
36,268
    
42,837
    
79,105
  
Over 12
    
66,167
    
56,532
    
122,699
  
Total
  
$
222,058
  
$
209,746
  
$
431,804
  
                     




Off-Balance Sheet Arrangements and Contractual Obligations

Our off-balance sheet arrangements and contractual obligations at December 31, 2005 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, 2005 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
  
$
230,993
  
$
115,163
  
$
64,300
  
$
15,763
  
$
35,767
  
    Standby letters of credit
    
2,374
    
2,059
    
315
    
-
    
-
  
 Total  
$
 233,367   $ 117,222   $ 64,615   $ 15,763   $ 35,767  
                                 
Contractual Obligations                                
     Time deposits       $ 431,804   $ 309,105   $  107,125   $ 15,569   $ 5   
    Capital lease obligations
    
-
    
-
    
-
    
-
    
-
  
    Operating lease obligations
    
2,594
    
587
    
1,031
    
632
    
344
  
    Purchase obligations
    
11,685
    
2,001
    
4,477
    
5,207
    
-
  
    Long-term debt
    
17,000
    
-
    
-
    
-
    
17,000
  
    Other long-term liabilities reflected on the balance sheet under GAAP
    
4,319
    
15
    
46
    
116
    
4,142
  
Total
  
$
467,402
  
$
311,708
  
$
112,679
  
$
21,524
  
$
21,491
  
                                 


The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include 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. 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 residential real estate, deposit accounts with the Bank 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 twelve years. Future minimum lease payments, before considering renewal options that generally are present, total $2.6 million at December 31, 2005.

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.


Long term debt, at December 31, 2005, consists of subordinated debentures totaling $12 million and notes payable totaling $5 million. These are further described in Note 10 of the Consolidated Financial Statements.

Other long-term liabilities represent obligations under the non-qualified retirement plan for Bank 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, 43% of the executive’s highest compensation level in the three years immediately preceding the date of termination of employment in 180 equal monthly installments, beginning the month following the executive’s normal retirement date. The amount presented reflects the amount vested in this plan as of December 31, 2005.

Capital Adequacy

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

As of December 31, 2005, the Bank exceeded its required levels of capital for a bank categorized by the FDIC as well capitalized under the regulatory framework for prompt corrective action. The Bank’s risk-based capital ratio of Tier 1 capital to risk-weighted assets was 9.9%, its risk-based ratio of total capital to risk-weighted assets was 10.8%, and its leverage ratio was 8.7%.

As of December 31, 2005, the Company exceeded its required levels of capital under capital adequacy guidelines. The Company’s risk-based capital ratio of Tier 1 capital to risk-weighted assets was 9.6%, its risk-based ratio of total capital to risk-weighted assets was 10.9%, and its leverage ratio was 8.4%.

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 gap position through our asset/liability management program, and by periodically adjusting our pricing of services and banking products to take into consideration current costs.

Recent Accounting Policies

During 2004, the FASB revised Statement No. 123, “Accounting for Stock-Based Compensation” ("SFAS 123R") which established accounting requirements for share-based compensation to employees and carries forward prior guidance on accounting for awards to non-employees. The provisions of this statement became effective for fiscal years beginning after June 15, 2005 for all equity awards granted or modified after the effective date and for the subsequent vesting of previously granted awards. SFAS 123R requires an entity to recognize compensation expense based on an estimate of the fair value and number of awards expected to actually vest, exclusive of awards expected to be forfeited. Currently, the Company accounts for stock options granted to employees according to the provisions of APB Opinion No. 25, whereby compensation expense is recorded based upon the intrinsic value method. The stock-based compensation table included in Note 1 of the accompanying financial statements illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation. Subsequent to adoption, any income tax benefit for the exercise of stock options in excess of income tax expense for financial reporting purposes will be classified as a cash inflow from financing activities and a cash outflow from operating activities in the statement of cash flows. The Company adopted SFAS 123R on January 1, 2006, as required.

In December 2004, the FASB issued Statement No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.” This statement amends the principle of APB No. 29 that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged and more broadly provides for exceptions regarding exchanges of nonmonetary assets that do not have commercial substance. This Statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of this standard on January 1, 2006, as required, did not have a material impact on the financial condition, the results of operations, or liquidity of the Company.

    
    In May 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections—a replacement of APB opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). SFAS 154 changes the requirements for the accounting and reporting of a change in an accounting principle. The statement requires retrospective application of changes in an accounting principle to prior periods’ financial statements unless it is impracticable to determine the period-specific effects or cumulative effect of the change. The correction of an error will continue to require financial statement restatement. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 (the Company’s fiscal year beginning January 1, 2006). The adoption of this standard on January 1, 2006, as required, did not have a material impact on the Company’s financial statements.

     In February 2006, the FASB issued Statement No. 155, “Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140,” (“SFAS 155”). SFAS 155 simplifies and conforms the accounting for certain financial instruments permitting fair value remeasurement for any hybrid financial instrument with an embedded derivative that otherwise would require bifurcation, provided that the whole instrument is accounted for on a fair value basis. The amendments to SFAS No. 133 also clarify that interest-only and principal-only strips are not embedded derivatives. The amendments to SFAS No. 140 allow a qualifying special purpose entity to hold a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This statement is effective for all financial instruments and acquired or issued after the beginning of the first fiscal year after September 15, 2006. Management has not yet determined the impact, if any, of the adoption of SFAS 155.
 
    In March 2004, the FASB Emerging Issues Task Force (EITF) released Issue 03-1, “Meaning of Other Than Temporary Impairment and Its Application to Certain Investments,” which addressed other-than-temporary impairment for certain debt and equity investments. The recognition and measurement requirements of Issue 03-1, and other disclosure requirements not already implemented, were effective for periods beginning after June 15, 2004. In September 2004, the FASB staff issued FASB Staff Position (FSP) EITF 03-1-1, which delayed the effective date for certain measurement and recognition guidance contained in Issue 03-1. The FSP requires the application of pre-existing other-than-temporary guidance during the period of delay until a final consensus was reached. Issuance of the final consensus did not have a material impact on the financial condition, the results of operations, or liquidity of the Company.

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 is 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.





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 interest rate sensitivity as of December 31, 2005 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. Specifically, the model derives expected interest income and interest expense resulting from a gradual and parallel shift in the yield curve. Rate changes are matched with known re-pricing intervals. The Bank uses standardized assumptions run against Bank data by an outsourced provider of Asset Liability reporting. As of December 31, 2005, this analysis indicates that the Bank would be expected to benefit in an increasing rate environment slightly more than it would be expected to be harmed by a decreasing rate environment. The results of the analysis indicate that net interest income could be expected to increase by approximately $2.5 million in a gradual 12-month, 200 basis point interest rate increase. The analysis also indicates that a decrease in net interest income of approximately $2.4 million could be expected from a gradual 12-month, 200 basis point interest rate decrease.

We attempt to retain interest rate neutrality by generating mostly adjustable rate loans and managing the securities, wholesale funding, and Fed Funds positions to offset the re-pricing characteristics of the deposit liabilities.

 





The consolidated financial statements, notes thereto and report of independent registered public accounting firm thereon included on the following pages are incorporated herein by reference.


Index to Consolidated Financial Statements

 
Page
Report of Independent Registered Public Accounting Firm
39
Consolidated Balance Sheets for the Years Ended December 31, 2005 and 2004
41
Consolidated Statements of Income for the Years Ended December 31, 2005, 2004 and 2003
42
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2005, 2004 and 2003
44
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003
46
Notes to Consolidated Financial Statements for the Years Ended December 31, 2005, 2004 and 2003
48
   
















REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




Board of Directors and Shareholders
TIB Financial Corp.
Naples, Florida

We have audited the accompanying consolidated balance sheets of TIB Financial Corp. as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2005. We also have audited management's assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that TIB Financial Corp. maintained effective internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). TIB Financial Corp.'s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these consolidated financial statements, an opinion on management's assessment, and an opinion on the effectiveness of 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 consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and 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 reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain 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 management 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, 2005 and 2004, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, management's assessment that TIB Financial Corp. maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Furthermore, in our opinion, TIB Financial Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).




/s/Crowe Chizek and Company LLC

Fort Lauderdale, Florida
February 23, 2006



40
TIB Financial Corp. and Subsidiaries
 
Consolidated Balance Sheets
As of December 31,

(Dollars in thousands, except per share amounts)
    
2005
 
 
2004
  
Assets
              
Cash and due from banks
 
$
24,347
  
$
27,410
  
Federal funds sold
    
17,163
    
15,528
  
Cash and cash equivalents
    
41,510
    
42,938
  
               
Investment securities available for sale
   
97,464
    
77,807
  
               
Loans, net of deferred loan costs and fees
   
884,024
    
655,678
  
Less: Allowance for loan losses
   
7,546
    
6,243
  
Loans, net
    
876,478
    
649,435
  
               
Premises and equipment, net
   
27,800
    
27,559
  
Intangible assets, net
   
1,100
    
1,392
  
Accrued interest receivable and other assets
   
31,718
    
30,194
  
Total Assets
  
$
1,076,070
  
$
829,325
  
               
Liabilities and Shareholders’ Equity
              
Liabilities
              
Deposits:
              
Noninterest-bearing demand
  
$
169,816
  
$
152,035
  
Interest-bearing
   
750,608
    
535,824
  
Total deposits
    
920,424
    
687,859
  
               
Federal Home Loan Bank (FHLB) advances
   
25,000
    
35,000
  
Short-term borrowings
   
17,284
    
12,157
  
Long-term borrowings
   
17,000
    
18,250
  
Accrued interest payable and other liabilities
   
18,838
    
7,945
  
Total liabilities
    
998,546
    
761,211
  
               
Shareholders’ equity
             
Preferred stock - no par value: 5,000,000 shares authorized, 0 shares issued
    
-
    
-
  
Common stock - $.10 par value: 20,000,000 shares authorized, 5,792,598 and 5,679,239 shares issued
    
579
    
568
  
Additional paid in capital
    
40,736
    
38,284
  
Deferred compensation - restricted stock grants
    
(1,184
)
  
-
  
Retained earnings
    
38,136
    
28,968
  
Accumulated other comprehensive income (loss)
    
(743
)
  
294
  
Total shareholders’ equity
    
77,524
    
68,114
  
               
Total Liabilities and Shareholders’ Equity
  
$
1,076,070
  
$
829,325
  
               
See accompanying notes to consolidated financial statements


41
TIB Financial Corp. and Subsidiaries

Consolidated Statements of Income
Years Ended December 31,

(Dollars in thousands, except per share amounts)
    
2005
    
2004
    
2003
  
Interest and dividend income
                    
Loans, including fees
  
$
54,488
  
$
37,720
  
$
31,664
  
Investment securities:
                    
U.S. Treasury securities
    
171
    
124
    
7
  
U.S. Government agencies and corporations
    
2,607
    
2,023
    
2,003
  
States and political subdivisions, tax-exempt
    
377
    
406
    
329
  
States and political subdivisions, taxable
    
169
    
197
    
240
  
Other investments
    
297
    
251
    
59
  
Interest-bearing deposits in other banks
    
10
    
11
    
3
  
Federal Home Loan Bank stock
    
113
    
57
    
59
  
Federal funds sold
    
1,202
    
127
    
242
  
Total interest and dividend income
    
59,434
    
40,916
    
34,606
  
                     
Interest expense
                    
Interest-bearing demand and money market
    
4,605
    
1,519
    
1,321
  
Savings
    
243
    
174
    
170
  
Time deposits of $100,000 or more
    
6,505
    
3,507
    
3,165
  
Other time deposits
    
6,090
    
3,371
    
3,279
  
Long-term debt-subordinated debentures
    
1,212
    
1,119
    
1,109
  
Federal Home Loan Bank advances
    
857
    
475
    
276
  
Short-term borrowings
    
425
    
83
    
38
  
Notes payable
    
367
    
482
    
481
  
Total interest expense
    
20,304
    
10,730
    
9,839
  
                     
Net interest income
    
39,130
    
30,186
    
24,767
  
Provision for loan losses
   
2,413
    
2,455
    
1,586
  
Net interest income after provision for loan losses
    
36,717
    
27,731
    
23,181
  
                     
Non-interest income
                    
Service charges on deposit accounts
    
2,360
    
2,547
    
2,452
  
Investment securities gains, net
   
1
    
106
    
289
  
Gain on sale of investment in ERAS Joint Venture
   
-
    
-
    
202
  
Gain on sale of government-guaranteed loans
    
-
    
-
    
117
  
Fees on mortgage loans sold
   
1,880
    
1,852
    
2,201
  
Retail investment services
    
-
    
333
    
420
  
Other income
    
2,017
    
1,468
    
1,403
  
Total non-interest income
    
6,258
    
6,306
    
7,084
  
                     
Non-interest expense
                    
Salaries and employee benefits
   
17,724
    
14,385
    
12,644
  
Net occupancy and equipment expense
    
5,502
    
4,911
    
4,268
  
Other expense
   
8,630
    
7,761
    
6,629
  
Total non-interest expense
    
31,856
    
27,057
    
23,541
  
                     
Income before income tax expense
    
11,119
    
6,980
    
6,724
  
                     
Income tax expense
   
3,927
    
2,337
    
2,324
  
                     
Income from continuing operations
    
7,192
    
4,643
    
4,400
  
                     
                     


42
TIB Financial Corp. and Subsidiaries

Consolidated Statements of Income
Years Ended December 31,
(Continued)

(Dollars in thousands, except per share amounts)
    
2005
 
 
2004
 
 
2003
  
Discontinued operations
                    
Income from Keys Insurance Agency, Inc. operations
    
-
    
-
    
200
  
Income from merchant bankcard operations
    
7,630
    
890
    
925
  
                     
Income from discontinued operations before income tax expense
    
7,630
    
890
    
1,125
  
                     
Income tax expense
    
2,998
    
335
    
423
  
                     
Income from discontinued operations
    
4,632
    
555
    
702
  
                     
Net income
 
$
11,824
  
$
5,198
  
$
5,102
  
                     
Basic earnings per common share
                   
Continuing operations
  
$
1.26
  
$
0.87
  
$
1.03
  
Discontinued operations
    
0.81
    
0.11
    
0.17
  
Basic earnings per share
  
$
2.07
  
$
0.98
  
$
1.20
  
                     
Diluted earnings per common share
                   
Continuing operations
  
$
1.22
  
$
0.85
  
$
0.99
  
Discontinued operations
    
0.78
    
0.10
    
0.16
  
Diluted earnings per share
  
$
2.00
  
$
0.95
  
$
1.15
  
                     
See accompanying notes to consolidated financial statements




43
TIB Financial Corp. and Subsidiaries


Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands, except per share amounts)

 
 
 
Shares
 
  
Common Stock
    
Additional Paid in Capital
    
Deferred Compensation Restricted Stock Grants
    
Retained Earnings
    
Accumulated Other Comprehensive Income (Loss)
 
  
Total Shareholders’ Equity
  
Balance, January 1, 2003
    
4,035,625
  
$
403
  
$
8,966
  
$
-
  
$
23,022
  
$
1,115
  
$
33,506
  
Comprehensive income:
                                            
Net income
                            
5,102
          
5,102
  
Other comprehensive income, net of tax benefit of $464:
                                            
Net market valuation adjustment on securities available for sale
                                  
(590
)
      
Less: reclassification adjustment for gains included in net income
                                  
(180
)
      
Other comprehensive income, net of tax
                                        
(770
)
Comprehensive income
                                      
$
4,332
  
Exercise of stock options
    
115,050
    
12
    
723
                      
735
  
Income tax benefit from stock options exercised
                
251
                      
251
  
Private placement of common shares
    
280,653
    
28
    
4,315
                      
4,343
  
Cash dividends declared, $.4425 per share
                            
(1,921
)
        
(1,921
)
Balance, December 31, 2003
    
4,431,328
  
$
443
  
$
14,255
  
$
-
  
$
26,203
  
$
345
  
$
41,246
  
Comprehensive income:
                                            
Net income
                            
5,198
          
5,198
  
Other comprehensive income, net of tax benefit of $32:
                                            
Net market valuation adjustment on securities available for sale
                                  
15
        
Less: reclassification adjustment for gains included in net income
                                  
(66
)
      
Other comprehensive income, net of tax
                                        
(51
)
Comprehensive income
                                      
$
5,147
  
Public offering of common shares
    
1,150,000
    
115
    
23,115
                      
23,230
  
Exercise of stock options
    
97,911
    
10
    
668
                      
678
  
Income tax benefit from stock options exercised
                
246
                      
246
  
Cash dividends declared, $.4525 per share
                            
(2,433
)
        
(2,433
)
Balance, December 31, 2004
    
5,679,239
  
$
568
  
$
38,284
  
$
-
  
$
28,968
  
$
294
  
$
68,114
  
                                             

Continued

44
TIB Financial Corp. and Subsidiaries


Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands, except per share amounts)
(Continued)

    Shares     
Common Stock
    
Additional Paid in Capital
    
Deferred
Compensation
Restricted
Stock Grants
    
Retained Earnings
    
Accumulated Other Comprehensive Income (Loss)
 
  
Total Shareholders’ Equity
  
Balance, December 31, 2004
    
5,679,239
  
$
568
  
$
38,284
  
$
-
  
$
28,968
  
$
294
  
$
68,114
  
Comprehensive income:
                                            
Net income
                            
11,824
          
11,824
  
Other comprehensive income, net of tax benefit of $624:
                                            
Net market valuation adjustment on securities available for sale
                                  
(1,037
)
      
Other comprehensive income, net of tax
                                        
(1,037
)
Comprehensive income
                                      
$
10,787
  
Restricted stock grants
    
41,000
    
4
    
1,278
    
(1,282
)
              
-
  
Amortization of deferred compensation - restricted stock grants
                      
98
                
98
  
Exercise of stock options
    
72,359
    
7
    
831
                      
838
  
Income tax benefit from stock options exercised
                
343
                      
343
  
Cash dividends declared, $.4625 per share
                            
(2,656
)
        
(2,656
)
Balance, December 31, 2005
    
5,792,598
  
$
579
  
$
40,736
  
$
(1,184
)
$
38,136
  
$
(743
)
$
77,524
  
                                             
See accompanying notes to consolidated financial statements



45
TIB Financial Corp. and Subsidiaries


Consolidated Statements of Cash Flows
(Dollars in thousands)


   
Years Ended December 31,
  
     
2005
 
 
2004
 
 
2003
  
Cash flows from operating activities:
                    
Net income
  
$
11,824
  
$
5,198
  
$
5,102
  
Adjustments to reconcile net income to net cash provided by operating activities:
                    
Depreciation and amortization
    
2,511
    
2,245
    
2,048
  
Provision for loan losses
    
2,413
    
2,455
    
1,586
  
Deferred income tax benefit
    
(944
)
  
(90
)
  
(852
)
Investment securities net gains
    
(1
)
  
(106
)
  
(289
)
Gain on sale of merchant bankcard processing segment
    
(6,697
)
  
-
    
-
  
Other
    
(398
)
  
(52
)
  
(306
)
Mortgage loans originated for sale
    
(114,257
)
  
(108,543
)
  
(111,011
)
Proceeds from sales of mortgage loans
    
119,321
    
108,543
    
119,345
  
Fees on mortgage loans sold
    
(1,880
)
  
(1,852
)
  
(2,201
)
Increase in accrued interest receivable and other assets
    
(2,672
)
  
(2,036
)
  
(2,662
)
Increase (decrease) in accrued interest payable and other liabilities
    
10,778
    
1,039
    
(1,186
)
Net cash provided by operating activities
    
19,998
    
6,801
    
9,574
  
                     
Cash flows from investing activities:
                    
Purchases of investment securities available for sale
    
(13,995
)
  
(38,368
)
  
(27,846
)
Sales of investment securities available for sale
    
-
    
9,281
    
4,000
  
Repayments of principal and maturities of investment securities available for sale
    
1,103
    
3,797
    
24,553
  
Net (purchase) sale of FHLB stock
    
129
    
(660
)
  
(890
)
Proceeds from sales of loans
    
-
    
569
    
2,241
  
Proceeds from sale of merchant bankcard processing segment
    
7,250
    
-
    
-
  
Loans originated or acquired, net of principal repayments
    
(237,371
)
  
(115,910
)
  
(97,599
)
Purchase of life insurance policies
    
-
    
(700
)
  
(250
)
Purchases of premises and equipment
   
(3,928
)
  
(9,495
)
  
(3,492
)
Proceeds from sale of premises, equipment and intangible assets
    
735
    
150
    
516
  
Net cash used by investing activities
    
(246,077
)
  
(151,336
)
  
(98,767
)
                     
Cash flows from financing activities:
                    
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase
    
5,127
    
8,116
    
(538
)
Net increase (decrease) in FHLB short-term advances
    
(10,000
)
  
(5,000
)
  
15,000
  
Repayment of notes payable
    
(1,250
)
  
-
    
-
  
Proceeds from FHLB long-term advances
    
-
    
25,000
    
30,000
  
Repayments of FHLB long-term advances
    
-
    
(30,000
)
  
(20,000
)
Net increase in demand, money market and savings accounts
   
51,943
    
87,894
    
25,716
  
Net increase in time deposits
    
180,622
    
46,152
    
45,414
  
Proceeds from exercise of stock options
    
838
    
678
    
735
  
Proceeds from public offering of common stock
    
-
    
23,230
    
-
  
Proceeds from private placement of common stock
    
-
    
-
    
4,343
  
Cash dividends paid
    
(2,629
)
  
(2,278
)
  
(1,866
)
Net cash provided by financing activities
    
224,651
    
153,792
    
98,804
  
                     
Net (decrease) increase in cash and cash equivalents
    
(1,428
)
  
9,257
    
9,611
  
Cash and cash equivalents at beginning of year
    
42,938
    
33,681
    
24,070
  
Cash and cash equivalents at end of year
  
$
41,510
  
$
42,938
  
$
33,681
  
                     
Supplemental disclosures of cash paid:
                    
Interest
  
$
17,387
  
$
10,542
  
$
9,211
  
Income taxes
    
3,530
    
1,945
    
3,775
  

46
TIB Financial Corp. and Subsidiaries


                     
Supplemental disclosures of non-cash transactions:
                    
Mortgage backed securities issued and retained subsequent to securitization of residential mortgages
  
$
8,509
  
$
-
  
$
-
  
Financing of sale of premises and equipment to third parties
    
1,100
    
1,010
    
-
  
                     
                     
See accompanying notes to consolidated financial statements



47
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)


Note 1—Summary of Significant Accounting Policies

Principles of Consolidation and Nature of Operations

TIB Financial Corp. is a financial holding company headquartered in Naples, Florida. The consolidated financial statements include the accounts of TIB Financial Corp. (Parent Company) and its wholly-owned subsidiaries, TIB Bank (Bank), Keys Insurance Agency, Inc. (assets sold in August 2003 - see Note 19), and TIB Software and Services, Inc. (assets sold in 2003 - see Note 2), collectively known as the “Company.” All significant inter-company accounts and transactions have been eliminated in consolidation. TIBFL Statutory Trust I and TIBFL Statutory Trust II 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 sixteen branch locations in Monroe, Miami-Dade, Collier and Lee counties, Florida. TIB 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, savings, 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 dealer loans.

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 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. Net cash flows are reported for customer loan and deposit transactions and short term borrowings.

Investment Securities

Investment securities which management has the ability and intent to hold to maturity are reported at amortized cost. Debt 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.

Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other-than temporary losses, management considers: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, and (3) the Company’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.

Occasionally, the Bank securitizes residential real estate secured mortgages through the Federal Home Loan Mortgage Corporation (Freddie Mac). The Bank has, from time to time, retained the resulting securities. Prior to a securitization transaction, these loans are recorded as residential real estate loans and interest income is reported as interest income from loans. Subsequent to the transaction, if the securities are retained by the Bank, they are reported as mortgage-backed securities and interest income is reported as interest income from securities issued by US government agencies and corporations.

48
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)
 
 
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.

Gains on sales of government-guaranteed loans are recognized as income when the sales occur.

Loans Held for Sale

The majority of residential fixed rate mortgage loans are originated by the Bank and 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 one year 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. The Bank has not historically experienced losses resulting from the recourse provisions described above. Accordingly, management believes that no such provision or allowance is necessary as of December 31, 2005.

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 charged off.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on 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 and commercial real estate 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. Large groups of smaller balance homogeneous loans, such as consumer, indirect, and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

Premises and Equipment

Land is carried at cost. Premises and equipment are reported at cost less accumulated depreciation. For financial reporting purposes, depreciation is computed using the straight-line method over the estimated useful lives of the assets. 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.

49
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)


Foreclosed Assets

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

Intangible Assets

Intangible assets include core deposit base premiums arising from branch aquisitions and are initially measured at fair value.  The deposit base premiums are being amortized using the straight-line method over an estimated life of 10 years.

Long-term 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.

Company Owned Life Insurance

The Company has purchased life insurance polices on certain key executives. Company owned life insurance is recorded at its cash surrender value, or the amount that can be realized, and included in other assets on the balance sheet.

Income Taxes

Income tax expense 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.

Earnings Per Common Share

Basic earnings per share is net income 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 and the dilutive effect of restricted shares computed using the treasury stock method.

Earnings per share have been computed based on the following for the years ended December 31:

     
2005
    
2004
    
2003
  
Weighted average number of common shares outstanding:
                    
Basic
    
5,711,974
    
5,309,860
    
4,257,224
  
Dilutive effect of options outstanding
    
188,472
    
169,836
    
178,637
  
Diluted
    
5,900,446
    
5,479,696
    
4,435,861
  
                     

Stock options for 10,000, 29,720 and 5,027 shares of common stock were not considered in computing diluted earnings per common share for 2005, 2004, and 2003 because they were anti-dilutive. For 2005, 41,000 unvested restricted shares of common stock were not considered in computing diluted earnings per share because they were anti-dilutive. The dilutive effect of stock options and the dilutive effect of unvested restricted shares are the only common stock equivalents for purposes of calculating diluted earnings per common share.
 

50
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)


Stock-Based Compensation

Employee compensation expense under stock options is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation.”

   
2005
  
2004
  
2003
  
Net income, as reported
  
$
11,824
  
$
5,198
  
$
5,102
  
Stock-based compensation expense determined under fair value based method, net of tax
    
268
    
215
    
173
  
Pro forma net income
  
$
11,556
  
$
4,983
  
$
4,929
  
                     
Basic earnings per share as reported
  
$
2.07
  
$
0.98
  
$
1.20
  
Pro forma basic earnings per share
    
2.04
    
0.95
    
1.17
  
Diluted earnings per share as reported
    
2.00
    
0.95
    
1.15
  
Pro forma diluted earnings per share
    
1.97
    
0.92
    
1.12
  
                     

The fair value of each option is estimated as of the date of grant using the Black-Scholes Option Pricing Model and the following weighted average assumptions for options granted in the years ended December 31,:

   
2005
    
2004
    
2003
  
Dividend yield
  
1.93
%
  
2.3
%
  
2.7
%
Risk-free interest rate
  
4.0% to 4.4
%
  
4.0 % to 4.1
%
  
4.0% to 4.2
%
Expected option life
  
9 years
    
9 years
    
9 years
  
Volatility
  
.23
    
.33
    
.31
  
Weighted average fair value of options granted during year
$
7.51
  
$
8.16
  
$
5.83
  
                   

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.

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 now 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, subsequent to the sale of the merchant bankcard processing segment (see Note 19), operations are managed and financial performance is evaluated on a Company wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

51
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)



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

During 2004, the FASB revised Statement No. 123, “Accounting for Stock-Based Compensation” ("SFAS 123R") which established accounting requirements for share-based compensation to employees and carries forward prior guidance on accounting for awards to non-employees. The provisions of this statement became effective for fiscal years beginning after June 15, 2005 for all equity awards granted or modified after the effective date and for the subsequent vesting of previously granted awards. SFAS 123R requires an entity to recognize compensation expense based on an estimate of the fair value and number of awards expected to actually vest, exclusive of awards expected to be forfeited. Currently, the Company accounts for stock options granted to employees according to the provisions of APB Opinion No. 25, whereby compensation expense is recorded based upon the intrinsic value method. The stock-based compensation table on the previous page illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation. Subsequent to adoption, any income tax benefit for the exercise of stock options in excess of income tax expense for financial reporting purposes will be classified as a cash inflow from financing activities and a cash outflow from operating activities in the statement of cash flows. The Company adopted SFAS 123R on January 1, 2006, as required.

Options outstanding as of December 31, 2005 that are anticipated to vest subsequent to the adoption of SFAS 123R are expected to result in additional compensation expense as follows:

2006
  
$
256
  
2007
    
215
  
2008
    
201
  
2009
    
189
  
2010
    
96
  
Thereafter
    
117
  
   
$
1,074
  

In December 2004, the FASB issued Statement No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.” This statement amends the principle of APB No. 29 that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged and more broadly provides for exceptions regarding exchanges of nonmonetary assets that do not have commercial substance. This Statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of this standard on January 1, 2006, as required, did not have a material impact on the financial condition, the results of operations, or liquidity of the Company.

In May 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections—a replacement of APB opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). SFAS 154 changes the requirements for the accounting and reporting of a change in an accounting principle. The statement requires retrospective application of changes in an accounting principle to prior periods’ financial statements unless it is impracticable to determine the period-specific effects or cumulative effect of the change. The correction of an error will continue to require financial statement restatement. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 (the Company’s fiscal year beginning January 1, 2006). The adoption of this standard on January 1, 2006, as required, did not have a material impact on the Company’s financial statements.

In February 2006, the FASB issued Statement No. 155, “Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140,” (“SFAS 155”). SFAS 155 simplifies and conforms the accounting for certain financial instruments permitting fair value remeasurement for any hybrid financial instrument with an embedded derivative that otherwise would require bifurcation, provided that the whole instrument is accounted for on a fair value basis. The amendments to SFAS No. 133 also clarify that interest-only and principal-only strips are not embedded derivatives. The amendments to SFAS No. 140 allow a qualifying special purpose entity to hold a derivative financial instrument that pertains to a beneficial interest other

52
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)


than another derivative financial instrument. This statement is effective for all financial instruments and acquired or issued after the beginning of the first fiscal year after September 15, 2006. Management has not yet determined the impact, if any, of the adoption of SFAS 155.

In March 2004, the FASB Emerging Issues Task Force (EITF) released Issue 03-1, “Meaning of Other Than Temporary Impairment and Its Application to Certain Investments,” which addressed other-than-temporary impairment for certain debt and equity investments. The recognition and measurement requirements of Issue 03-1, and other disclosure requirements not already implemented, were effective for periods beginning after June 15, 2004. In September 2004, the FASB staff issued FASB Staff Position (FSP) EITF 03-1-1, which delayed the effective date for certain measurement and recognition guidance contained in Issue 03-1. The FSP requires the application of pre-existing other-than-temporary guidance during the period of delay until a final consensus is reached. Management does not anticipate the issuance of the final consensus will have a material impact on the financial condition, the results of operations, or liquidity of the Company.

Reclassifications

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


Note 2—Acquisitions and Divestitures

In 1998, the Parent Company’s subsidiary, TIB Software and Services, Inc., acquired a 30 percent interest in ERAS Joint Venture (the “Venture”), a general partnership, in exchange for consideration of $791. The Venture’s primary business is item processing and the design, development, installation and maintenance of accounting software for financial institutions. Goodwill associated with the transaction totaled $638 and was being amortized over a period of ten years through December 31, 2001, at which time the amortization was discontinued. Through December 31, 2001, the investment in the Venture was accounted for using the equity method. On December 31, 2001, the Company sold two thirds of its ownership interest in the Venture for $1,333. The Company recognized a gain of $820 on the transaction. This sale reduced the Company’s ownership in the Venture to 10%. Beginning January 1, 2002, the investment in the Venture was accounted for using the cost method. On October 4, 2002, the Company sold 5.1% of the Company’s 10% interest in the Venture for $340. The Company recognized a gain of $211 on the transaction. This sale, accompanied by the additional transfer of assets by other owners into the Venture, reduced the Company’s ownership in the Venture to 4.53%. The Venture also made a dividend distribution to the Company in 2002 in the amount of $33. On May 29, 2003, TIB Software and Services, Inc. sold its remaining interest in the Venture for $327. The Company recognized a pretax gain of $202 on the transaction. In March 2004, the Company filed Articles of Dissolution dissolving TIB Software and Services, Inc.

ERAS Joint Venture is the Bank’s item processor. Payments of approximately $642, $577 and $579 were made by the Bank to the Venture in 2005, 2004, and 2003, respectively. Of the amount paid in 2003, approximately $249 was paid to the Venture through the sale date of May 29, 2003.

On October 31, 2000, the Company purchased Keys Insurance Agency of Monroe County, Inc. which was 100% owned by a company director. Keys Insurance Agency, Inc. (the new name subsequent to the purchase) had three offices in the Florida Keys and brokered a full line of commercial and residential hazard insurance coverages as well as life and health insurance and annuities. The purchase price for the net assets of the agency was $1,870 which consisted primarily of intangible assets. The consideration consisted of $220 of Company common stock (21,463 shares) and $1,650 in cash (paid at closing). Under the purchase agreement, annual cash payments of $110 were to be made following each of the first three anniversaries of the closing date, subject to the agency achieving certain earnings thresholds. Any of this additional consideration that was paid at the end of each contingency period would at that time be recorded as goodwill and increase the total recorded purchase price of the agency. No amount was required to be paid in 2002 or 2003. This acquisition was recorded using the purchase method of accounting.

On September 25, 2001, Keys Insurance Agency, Inc. purchased BonData Group Limited, Inc. a Ft Myers, Florida based insurance agency specializing in surety bond underwriting and placement. Total consideration paid at closing for the agency was $273. This was comprised of approximately $68 in the Company’s common stock (5,640 shares) and approximately $205 in cash. Under the purchase agreement, annual cash payments of $24 were to be made following each of the first two anniversaries of the closing date, subject to the agency achieving certain earnings thresholds. Any of this additional consideration that was paid at the end of each contingency period, would at that time be recorded as goodwill and increase the total recorded purchase price of the agency. No amount was required to be paid in 2002 or 2003. This acquisition was recorded using the purchase method of accounting.

53
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)



On August 15, 2003, the Company closed the sale of Keys Insurance Agency, Inc., a wholly-owned subsidiary of the Company, to Derek Martin-Vegue and his partner. Mr. Martin-Vegue is a former director of the Company and TIB Bank. The transaction was structured as a sale of the agency assets. The buyer paid $2,205 in cash at the closing. Of the cash payment at closing, proceeds of $2,021 were pursuant to a loan from TIB Bank (a subsidiary of the Company) to the buyer. The Company recognized a loss of $15 on the transaction. Therefore, the results of operations of Keys Insurance Agency, Inc. are included in the Consolidated Statements of Income as “discontinued operations” (Note 19). In March 2004, the Company filed Articles of Dissolution dissolving Keys Insurance Agency, Inc.

On December 15, 2004, the Company closed the sale of certain intangible assets which primarily comprised a book of business which served as the foundation of the Company’s investment center operations. The buyer paid $50 in cash at the closing at which time the Company recognized a gain of $50. Additional cash payments totaling $37 were paid to the Company during 2005 related to the achievement of certain customer and asset retention thresholds and production referrals made through December 31, 2005.

On December 30, 2005, the Company closed the sale of its merchant bankcard processing business segment to NOVA Information Systems, Inc. (“NOVA”). NOVA paid $7,250 in cash at the closing resulting in the Company recognizing a gain of $6,697 on the transaction. Accordingly, the results of operations of the Company’s merchant bankcard processing business segment are included in the Consolidated Statements of Income as “discontinued operations” (Note 19). In connection with the sale, the Company entered into a Marketing and Sales Alliance Agreement and a Non-Competition Agreement. The Marketing and Sales Alliance Agreement provides for the exclusive referral by the Bank to NOVA of Bank customers seeking merchant card processing services, and on-going, active promotion of NOVA’s services to Bank customers. The Marketing and Sales Alliance Agreement has an initial term of ten years, and may be extended by the parties. The Non-Competition Agreement prohibits the Company from competing with NOVA to provide merchant card processing services, and prohibits the Bank from soliciting for such services (other than to be provided by NOVA) any merchants that had a merchant services relationship with the Bank at the time of the sale, and any merchants subsequently referred to NOVA. The Non-Competition Agreement is effective for so long as the Marketing and Sales Alliance Agreement is in effect. The non-solicitation covenant extends for two years following termination of the Marketing and Sales Alliance Agreement.


Note 3—Cash and Due From Banks

Cash on hand or on deposit with the Federal Reserve Bank of $4,925 and $3,979 was required to meet regulatory reserve and clearing requirements at December 31, 2005, and December 31, 2004, respectively. These balances do not earn interest.

The Bank maintains an interest bearing account at the Federal Home Loan Bank of Atlanta. The total on deposit was approximately $292 and $203 at December 31, 2005 and December 31, 2004, 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, are as follows for investment securities available for sale:

December 31, 2005
    
Amortized Cost
    
Unrealized Gains
    
Unrealized Losses
    
Estimated Fair Value
  
U.S. Treasury securities
  
$
5,182
  
$
1
  
$
145
  
$
5,038
  
U.S. Government agencies and corporations
    
64,145
    
5
    
1,738
    
62,412
  
States and political subdivisions—tax exempt
    
9,594
    
91
    
101
    
9,584
  
States and political subdivision—taxable
    
2,655
    
8
    
-
    
2,663
  
Marketable equity securities
    
3,000
    
439
    
-
    
3,439
  
Mortgage-backed securities
    
10,083
    
193
    
24
    
10,252
  
Collateralized mortgage obligations
    
3,996
    
80
    
-
    
4,076
  
   
$
98,655
  
$
817
  
$
2,008
  
$
97,464
  
                           


54
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)






December 31, 2004
    
Amortized Cost
    
Unrealized Gains
    
Unrealized Losses
    
Estimated Fair Value
  
U.S. Treasury securities
  
$
5,178
  
$
5
  
$
29
  
$
5,154
  
U.S. Government agencies and corporations
    
54,228
    
104
    
869
    
53,463
  
States and political subdivisions—tax exempt
    
9,596
    
246
    
26
    
9,816
  
States and political subdivision—taxable
    
2,862
    
17
    
23
    
2,856
  
Marketable equity securities
    
3,000
    
987
    
-
    
3,987
  
Mortgage-backed securities
    
2,473
    
58
    
-
    
2,531
  
   
$
77,337
  
$
1,417
  
$
947
  
$
77,807
  
                           


55
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)



Securities with unrealized losses not recognized in income are as follows:

   
Less than 12 Months
  
12 Months or Longer
  
Total
  
December 31, 2005
    
Estimated Fair Value
    
Unrealized Losses
    
Estimated Fair Value
    
Unrealized Losses
    
Estimated Fair Value
    
Unrealized Losses
  
U.S. Treasury securities
  
$
-
  
$
-
  
$
4,935
  
$
145
  
$
4,935
  
$
145
  
U.S. Government agencies and corporations
    
20,074
    
353
    
37,215
    
1,385
    
57,289
    
1,738
  
States and political subdivisions—tax exempt
    
5,470
    
95
    
228
    
6
    
5,698
    
101
  
Mortgage-backed securities
    
1,537
    
24
    
-
    
-
    
1,537
    
24
  
Total temporarily impaired
  
$
27,081
  
$
472
  
$
42,378
  
$
1,536
  
$
69,459
  
$
2,008
  
                                       

 
  
Less than 12 Months 
12 Months or Longer
Total
December 31, 2004
    
Estimated Fair Value
    
Unrealized Losses
    
Estimated Fair Value
    
Unrealized Losses
    
Estimated Fair Value
    
Unrealized Losses
  
U.S. Treasury securities
  
$
5,046
  
$
29
  
$
-
  
$
-
  
$
5,046
  
$
29
  
U.S. Government agencies and corporations
    
24,858
    
201
    
20,379
    
668
    
45,237
    
869
  
States and political subdivisions—tax exempt
    
2,421
    
22
    
230
    
4
    
2,651
    
26
  
States and political subdivision—taxable
    
2,312
    
19
    
131
    
4
    
2,443
    
23
  
Total temporarily impaired
  
$
34,637
  
$
271
  
$
20,740
  
$
676
  
$
55,377
  
$
947
  
                                       

The Company views the unrealized losses in the above table to be temporary in nature for the following reasons. First, the decline in market values are mostly due to an increase in market rates and are not credit related. These securities are mostly AAA rated securities and have experienced no significant deterioration in value due to credit quality concerns. Second, the magnitude of the unrealized losses at about 3% of the fair value of those securities with losses is consistent with normal fluctuations of value due to the volatility of market interest rates. Finally, the nature of what makes up the security portfolio is determined by the overall balance sheet of the 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.

The estimated fair value of investment securities available for sale at December 31, 2005, 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, 2005
        
Due in one year or less
  
$
5,215
  
Due after one year through five years
    
47,843
  
Due after five years through ten years
    
22,161
  
Due after ten years
    
4,478
  
Marketable equity securities
    
3,439
  
Mortgage-backed securities
    
10,252
  
Collateralized mortgage obligations
    
4,076
  
   
$
97,464
  
         


At December 31, 2005, securities with a fair value of approximately $28,913 are subject to call during 2006.

56
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)



Sales of available for sale securities were as follows:

     
2005
    
2004
    
2003
  
Proceeds
  
$
-
  
$
9,281
  
$
4,000
  
Gross gains
    
-
    
146
    
280
  
Gross losses
    
-
    
(43
)
  
-
  
                     

The tax provision related to net realized gains was $0, $39, and $105 during 2005, 2004, and 2003, respectively.

Maturities, principal repayments, and calls of investment securities available for sale during 2005, 2004 and 2003 were $1,103, $3,797 and $24,553, respectively. Net gains (losses) realized from calls and mandatory redemptions of securities during 2005, 2004 and 2003 were $1, $3 and $9, respectively.

Investment securities having carrying values of approximately $23,539 and $11,924 at December 31, 2005 and 2004, respectively, were pledged to secure public funds on deposit, securities sold under agreements to repurchase, and other purposes as required by law.


Note 5—Loans

Major classifications of loans are as follows:

December 31,
    
2005
    
2004
  
Real estate mortgage loans:
              
Commercial
  
$
451,969
  
$
351,346
  
Residential
    
76,003
    
67,204
  
Farmland
    
4,660
    
4,971
  
Construction and vacant land
    
125,207
    
49,815
  
Commercial and agricultural loans
    
80,055
    
64,622
  
Indirect auto dealer loans
    
118,018
    
91,890
  
Home equity loans
    
17,232
    
13,856
  
Other consumer loans
    
9,228
    
9,817
  
Total loans
    
882,372
    
653,521
  
               
Net deferred loan costs
   
1,652
    
2,157
  
Loans, net of deferred loan costs
  
$
884,024
  
$
655,678
  
               

Substantially all loans are made to borrowers in the Bank’s primary market area of Monroe, South Miami-Dade, Collier and Lee counties.

In 1998, the Bank made a $10,000 loan to construct a lumber mill in northern Florida. Of this amount, $6,400 had been sold by the Bank to other lenders. The loan was partially 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.

During 2001, upon completion of foreclosure on the underlying collateral, the non-guaranteed portion of this loan and interest accrued through the foreclosure date was reclassified into other real estate ($550) and other assets (approximately $1,886) based on the fair value of the underlying-collateral. The portion of this loan guaranteed by the USDA was approximately $1,600 at December 31, 2005 and December 31, 2004, and is accruing interest. Accrued interest on this loan totals approximately $794 and $677 at December 31, 2005 and December 31, 2004, respectively.

57
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)



In pursuing a sale of the property and equipment, the Bank has incurred various expenditures. The Bank capitalized the liquidation costs and the portion of the protective advances which it expects will be fully reimbursed by the USDA. Other real estate recorded on the Bank’s books totaled $190 at December 31, 2005 and December 31, 2004. The non-guaranteed principal and interest ($1,961 at December 31, 2005 and December 31, 2004) and the reimbursable capitalized liquidation costs and protective advance costs totaling approximately $854 and $704 at December 31, 2005 and December 31, 2004, respectively are included as “other assets” in the financial statements.

The Bank sold certain pieces of equipment associated with the lumber mill property. Proceeds from the sales were used to reduce the other real estate amount and liquidation cost amounts recorded on the Bank’s books. In 2003, the Bank wrote down the carrying amount of the other real estate by $262 based upon anticipated proceeds from the sale of the property and remaining equipment. In January 2006, the Bank sold the remaining other real estate for $1,250 and recognized of a gain of $33 on the Bank’s interest therein, net of transaction costs.

Florida law requires a bank to liquidate or charge off repossessed real property within five years, and repossessed personal property within six months. The Bank was awarded title to the real property on June 12, 2001, and an adjudicated interest in the owner’s trust proceeds. The time constraints imposed by Florida law required that the personal property be disposed of or charged off by December 2001. The Bank applied to the State of Florida for an extension to carry the personal property on the Bank’s books and was granted an extension to carry the personal property on its books until June 11, 2003. Since the property had not been liquidated as of June 11th, the Bank charged-off the non guaranteed principal and interest totaling $1,961 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,
    
2005
    
2004
    
2003
  
Balance, beginning of year
  
$
6,243
  
$
5,216
  
$
4,272
  
Provision for loan losses charged to expense
    
2,413
    
2,455
    
1,586
  
Loans charged off
    
(1,219
)
  
(1,487
)
  
(667
)
Recoveries of loans previously charged off
    
109
    
59
    
25
  
Balance, end of year
  
$
7,546
  
$
6,243
  
$
5,216
  
                     


Impaired loans are as follows:

Years ended December 31,
    
2005
    
2004
  
Year end loans with no allocated allowance for loan losses
  
$
324
  
$
2,018
  
Year end loans with allocated allowance for loan losses
    
-
    
-
  
Total
  
$
324
  
$
2,018
  
Amount of the allowance for loan losses allocated
  
$
-
  
$
-
  
               


   
2005
  
2004
  
2003
  
Average of impaired loans during the year
  
$
599
  
$
1,005
  
$
1,088
  
Interest income recognized during impairment
    
41
    
64
    
72
  
Cash basis interest income recognized
    
-
    
-
    
-
  
                     



58
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)



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. 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,
    
2005
    
2004
  
Nonaccrual loans
  
$
956
  
$
704
  
Loans past due over 90 days still on accrual (a)
    
-
    
-
  
               

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) Non-performing loans at December 31, 2005 and 2004 excludes the $1,600 loan discussed previously that is guaranteed for both principal and interest by the USDA.


Note 6—Premises and Equipment

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

December 31,
    
2005
    
2004
    
Estimated Useful Life
  
Land
  
$
9,038
  
$
9,668
        
Buildings and leasehold improvements
    
17,372
    
17,227
    
5 to 40 years
  
Furniture, fixtures and equipment
    
13,833
    
13,354
    
1 to 40 years
  
Construction in progress
    
1,868
    
151
        
     
42,111
    
40,400
        
Less accumulated depreciation
    
(14,311
)
  
(12,841
)
      
Premises and equipment, net
  
$
27,800
  
$
27,559
        
                     

Depreciation expense for the years ended December 31, 2005, 2004 and 2003, was approximately $2,219, $1,950 and $1,756, respectively.

The Bank is obligated under operating leases for office and banking premises which expire in periods varying from one to twelve years. Future minimum lease payments, before considering renewal options that generally are present, are as follows at December 31, 2005:

Years Ending December 31,
        
2006
  
$
587
  
2007
    
546
  
2008
    
485
  
2009
    
312
  
2010
    
320
  
Thereafter
    
344
  
   
$
2,594
  
         

Rental expense for the years ended December 31, 2005, 2004 and 2003, was approximately $674, $561, and $443, respectively.



59
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)


Note 7—Intangible Assets

Intangible assets at December 31, consist of the following:

 
2005
2004
December 31,
  
Gross Carrying Amount
    
Accumulated Amortization
    
Net Book Value
      
Gross Carrying Amount
    
Accumulated Amortization
    
Net Book Value
  
Core deposit intangible
$
2,941
  
$
1,852
  
$
1,089
    
$
2,941
  
$
1,569
  
$
1,372
  
Other
  
51
    
40
    
11
      
89
    
69
    
20
  
Total
$
2,992
  
$
1,892
    
1,100
    
$
3,030
  
$
1,638
  
$
1,392
  
                                       

Aggregate intangible asset amortization expense was $291, $295 and $292 for 2005, 2004, and 2003, respectively.

Estimated amortization expense for each of the next five years is as follows:

Years Ending December 31,
        
2006
  
$
288
  
2007
    
286
  
2008
    
249
  
2009
    
141
  
2010
    
134
  
         

Note 8—Time Deposits

Time deposits of $100 or more were $222,058 and $126,207 at December 31, 2005 and 2004, respectively.

At December 31, 2005, the scheduled maturities of time deposits are as follows:

Years Ending December 31,
        
2006
  
$
309,105
  
2007
    
79,968
  
2008
    
27,157
  
2009
    
12,721
  
2010
    
2,848
  
Thereafter
    
5
  
   
$
431,804
  
         

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.

The Bank has an unsecured overnight federal funds purchased accommodation up to a maximum of $12,000 from its principal correspondent bank. The Bank also has securities sold under agreements to repurchase with commercial account holders whereby the 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 the Bank.

    The Bank accepts Treasury, tax and loan deposits from certain commercial depositors and remits these deposits to the appropriate government authorities. The 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. The Bank pledges certain investment securities against this account.

60
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)


The Bank 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 equal to 20% 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. At December 31, 2005, in addition to a $15,000 letter of credit used in lieu of pledging securities to the State of Florida, there was $25,000 in advances outstanding. At December 31, 2004, the amount of outstanding advances was $35,000. The outstanding amount at December 31, 2005 consists of one $25,000 advance maturing in March 2006. On December 31, 2005 the rate on the long term advance was 4.37%, repricing monthly. In July 2004, new agreements were executed with the FHLB and a blanket floating lien pledge of the Bank’s residential 1-4 family mortgage and commercial real estate secured loans was executed to bring collateral availability up to approximately $176,262.

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 four categories of short-term borrowings:

Year Ended December 31,
    
2005
    
2004
  
Federal funds purchased:
              
Balance:
              
Average daily outstanding
  
$
38
  
$
460
  
Year-end outstanding
    
-
    
-
  
Maximum month-end outstanding
    
-
    
4,519
  
Rate:
              
Weighted average for year
    
2.9
%
  
2.2
%
Weighted average interest rate at December 31
    
n/a
    
n/a
  
               
Securities sold under agreements to repurchase:
              
Balance:
              
Average daily outstanding
  
$
13,186
  
$
5,142
  
Year-end outstanding
    
15,300
    
9,947
  
Maximum month-end outstanding
    
19,473
    
9,947
  
Rate:
              
Weighted average for year
    
3.0
%
  
1.3
%
Weighted average interest rate at December 31
    
4.1
%
  
2.1
%
               
Treasury, tax and loan note option:
              
Balance:
              
Average daily outstanding
  
$
776
  
$
647
  
Year-end outstanding
    
1,984
    
2,210
  
Maximum month-end outstanding
    
1,984
    
2,210
  
Rate:
              
Weighted average for year
    
2.8
%
  
1.1
%
Weighted average interest rate at December 31
    
4.0
%
  
1.9
%
               
Advances from the Federal Home Loan Bank-Short Term:
              
Balance:
              
Average daily outstanding
  
$
466
  
$
9,090
  
Year-end outstanding
    
-
    
10,000
  
Maximum month-end outstanding
    
-
    
25,000
  
Rate:
              
Weighted average for year
    
2.6
%
  
1.8
%
Weighted average interest rate at December 31
    
n/a
    
2.4
%

61
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)



           
Advances from the Federal Home Loan Bank-Long Term:
              
Balance:
              
Average daily outstanding
  
$
25,000
  
$
20,246
  
Year-end outstanding
    
25,000
    
25,000
  
Maximum month-end outstanding
    
25,000
    
25,000
  
Rate:
              
Weighted average for year
    
3.4
%
  
1.6
%
Weighted average interest rate at December 31
    
4.4
%
  
2.4
%
               
 
 
Note 10—Other Borrowings

Line of Credit

Until its maturity on April 30, 2005, the Company had a $3,000 revolving line of credit with Independent Bankers’ Bank of Florida. Amounts outstanding under the line bore interest equal to the prime rate published in The Wall Street Journal minus one half percent, which was subject to change daily, and was subject to a 4.25% floor. Interest was payable monthly, and principal was due on demand, or if no demand was made, at maturity. This credit facility was secured by 100 percent of the outstanding shares of the Bank and required, among other things, that the Bank maintain a minimum Tier 1 capital ratio of 6 percent. There were no amounts outstanding under this line at December 31, 2004 and the Company elected not to renew the line upon maturity.

Notes Payable

The Company entered into an agreement with the Company’s largest shareholder effective July 1, 2000, to purchase 525,000 shares of the Company’s common stock in exchange for four subordinated notes payable of the Company totaling $5,250. The interest rate on these notes was 13% per annum, with interest payments required quarterly. The principal balance was payable in full on October 1, 2010, the maturity date of the notes, and the notes could be prepaid by the Company at par any time after July 1, 2003. Effective January 1, 2002, the interest rate was reduced to 9%, the option to prepay was extended to January 1, 2007, and the maturity date was extended to January 1, 2012. On January 3, 2005 the Company repaid $1,250 of these notes at a 3% premium.

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 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 option 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 Trust 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 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, 2005 was 7.82%. 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.

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).


62
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)


Contractual Maturities

At December 31, 2005, the contractual maturities of long-term borrowings were as follows:

 
    
Fixed Rate 
    
Floating Rate
    
Total
  
Due in 2006
  
$
-
  
$
-
  
$
-
  
Due in 2007
    
-
    
-
    
-
  
Due in 2008
    
-
    
-
    
-
  
Due in 2009
    
-
    
-
    
-
  
Due in 2010
    
-
    
-
    
-
  
Thereafter
    
12,000
    
5,000
    
17,000
  
Total long-term debt
  
$
12,000
  
$
5,000
  
$
17,000
  
                     

Note 11—Income Taxes

Income tax expense (benefit) was as follows:

Years ended December 31,
    
2005
    
2004
    
2003
  
Current income tax provision:
                    
Federal
  
$
6,711
  
$
2,331
  
$
3,049
  
State
    
1,158
    
431
    
550
  
     
7,869
    
2,762
    
3,599
  
Deferred tax benefit:
                    
Federal
    
(805
)
  
(76
)
  
(722
)
State
    
(139
)
  
(14
)
  
(130
)
     
(944
)
  
(90
)
  
(852
)
                     
Total
  
$
6,925
  
$
2,672
  
$
2,747
  
                     

A reconciliation of income tax computed at the Federal statutory income tax rate (35% for 2005 and 34% for 2004 and 2003) to total income taxes reported is as follows:

Years ended December 31,
    
2005
    
2004
    
2003
  
Pretax income
  
$
18,749
  
$
7,870
  
$
7,849
  
Income taxes computed at Federal statutory tax rate
  
$
6,562
  
$
2,676
  
$
2,669
  
Effect of:
                    
Tax-exempt income, net
    
(324
)
  
(340
)
  
(275
)
State income taxes, net
    
662
    
275
    
277
  
Other, net
    
25
    
61
    
76
  
Total
  
$
6,925
  
$
2,672
  
$
2,747
  
                     


63
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)



Year end deferred tax assets and liabilities were due to the following:

Years ended December 31,
    
2005
    
2004
  
Allowance for loan losses
  
$
3,045
  
$
2,475
  
Core deposit intangible
    
245
    
212
  
Deferred compensation
    
788
    
555
  
Net unrealized losses on securities available for sale
    
448
    
-
  
Other
    
182
    
116
  
Total gross deferred tax assets
    
4,708
    
3,358
  
               
Accumulated depreciation
    
(765
)
  
(871
)
Deferred loan costs
    
(555
)
  
(401
)
Net unrealized gains on securities available for sale
    
-
    
(177
)
Other
    
(70
)
  
(85
)
Total gross deferred tax liabilities
    
(1,390
)
  
(1,534
)
               
Net deferred tax asset
  
$
3,318
  
$
1,824
  
               

Note 12—Employee Benefit Plans

The Bank 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 Bank and participants: basic voluntary contributions which are discretionary contributions made by all participants; a matching contribution, whereby the Bank will match 50 percent of salary reduction contributions up to 4 percent of compensation, not to exceed a maximum contribution of $1 per employee; and an additional discretionary contribution which may be made by the Bank and allocated to the accounts of participants on the basis of total relative compensation. The Bank contributed $132, $94 and $69 to the plan in 2005, 2004 and 2003, respectively. As of December 31, 2005, the Plan contained approximately 152,000 shares of the Company’s common stock.

In 2001, the Bank entered into salary continuation agreements with three of its executive officers. Two additional executive officers entered into salary continuation agreements in 2003 and another in 2004. The plan is a nonqualified deferred compensation arrangement that is designed to provide supplemental retirement income benefits to participants. The Bank expensed $386, $309 and $254 for the accrual of future salary continuation benefits in 2005, 2004 and 2003, respectively. The Bank has purchased single premium life insurance policies on these individuals. Cash value income (net of related insurance premium expense) totaled $208, $202 and $225 in 2005, 2004 and 2003, respectively. Other assets included $5,937 and $5,729 in surrender value and other liabilities included salary continuation benefits payable of $1,246 and $860 at December 31, 2005 and 2004, respectively.

In 2001, the Bank established a non qualified retirement benefit plan for eligible Bank directors. Under the plan, the Company pays each participant, or their beneficiary, the amount of fees deferred and interest in 120 equal monthly installments, beginning the month following the director’s normal retirement date. The Bank expensed $233, $273 and $165 for the accrual of current and future retirement benefits in 2005, 2004 and 2003, respectively, which included $184, $236 and $146 in 2005, 2004 and 2003 related to the annual director retainer fees and monthly meeting fees that certain directors elected to defer. The Bank has purchased single premium split dollar life insurance policies on these individuals. Cash value income (net of related insurance premium expense) totaled $138, $138 and $152 in 2005, 2004 and 2003. Other assets included $3,992 and $3,854 in surrender value in other assets and other liabilities included retirement benefits payable of $855 and $623 at December 31, 2005 and 2004, respectively.

64
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)


Note 13—Related Party Transactions

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

         
Beginning balance, January 1, 2005
  
$
1,905
  
New loans
    
606
  
Effect of changes in related parties
    
(188
)
Repayments
    
(1,461
)
Ending balance, December 31, 2005
  
$
862
  
         

Unfunded loan commitments to these individuals and their related business interests totaled $31 at December 31, 2005. Deposits from these individuals and their related interests were $4,237 and $3,008 at December 31, 2005 and 2004, 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 result in certain discretionary 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 ratios. These minimum amounts and ratios along with the actual amounts and ratios for the Company and the Bank as of December 31, 2005 and 2004 are presented in the following tables.

December 31, 2005
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 $42,255
³ 4.0%
$88,839
8.4%
Bank
³ $ 52,775
³ 5.0%
42,220
³ 4.0%
92,297
8.7%
             
Tier 1 Capital ( to Risk Weighted Assets)
            
Consolidated
N/A
N/A
³ $37,173
³ 4.0%
$88,839
9.6%
Bank
³ $ 55,744
³ 6.0%
37,162
³ 4.0%
92,297
9.9%
             
Total Capital (to Risk Weighted Assets)
            
Consolidated
N/A
N/A
³ $74,346
³ 8.0%
$100,931
10.9%
Bank
 ³ $ 92,906
³ 10.0%
74,325
³ 8.0%
100,389
10.8%
             


65
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)



December 31, 2004
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 $31,270
³ 4.0%
$78,048
10.0%
Bank
³ $ 39,069
³ 5.0%
31,255
³ 4.0%
81,780
10.5%
             
Tier 1 Capital ( to Risk Weighted Assets)
            
Consolidated
N/A
N/A
³ $28,583
³ 4.0%
$78,048
10.9%
Bank
³ $ 42,857
³ 6.0%
28,571
³ 4.0%
81,780
11.4%
             
Total Capital (to Risk Weighted Assets)
            
Consolidated
N/A
N/A
³ $57,166
³ 8.0%
$89,772
12.6%
Bank
 ³ $71,428
³ 10.0%
57,143
³ 8.0%
88,254
12.4%
             

At year end 2005 and 2004, the most recent regulatory notification categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.

Management believes, as of December 31, 2005, that the Company and the Bank meet all capital requirements to which it is subject. Tier 1 Capital includes the trust preferred securities that were issued in September 2000 and July 2001.

Under state banking law, regulatory approval will be required if the total of all dividends declared in any calendar year by the Bank exceeds the Bank’s net profits to date for that year combined with its retained net profits for the preceding two years. Retained earnings of the Bank available for payment of dividends to the Company without prior regulatory approval at December 31, 2005, is approximately $21,176.

Note 15—Stock Options and Restricted Stock

As of December 31, 2005, 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. Previously, the Company 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 options to any director, and incentive stock options or nonqualified stock options 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 sold through the 2014 expiration of the plan is 400,000 shares, no more than 133,000 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 granted under the Plan expire or terminate for any reason without having been exercised in full, the shares not purchased shall again be available for option for the purposes of the Plan.

The exercise price for common stock must equal at least 100 percent of the fair market value of the stock at the time the 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 immediately in the case of members of the Board of Directors to up to nine years for certain officers and employees.




66
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)


A summary of the stock option activity in the plans is as follows:

 
Shares
Exercise Price Range
Weighted Average Exercise Price
Balance, January 1, 2003
567,205
$ 5.49 - $14.50
$ 10.09
Granted
44,500
16.35 - 19.40
17.93
Exercised
(115,050)
5.49 - 14.12
6.39
Expired or forfeited
(19,150)
5.49 - 16.35
11.46
Balance, December 31, 2003
477,505
5.49 - 19.40
11.66
Granted
37,500
22.74 - 22.79
22.76
Exercised
(97,911)
5.49 - 14.12
6.92
Expired or forfeited
(7,900)
11.25 - 22.74
19.47
Balance, December 31, 2004
409,194
8.33 - 22.79
13.66
Granted
79,500
25.24 - 32.40
25.94
Exercised
(72,359)
8.33 - 22.74
11.58
Expired or forfeited
(27,350)
9.00 - 25.24
19.73
Balance, December 31, 2005
388,985
$8.33 - $32.40
$16.13
       
 

 
   
 
 
Shares
  
Weighted Average Exercise Price
  
Options exercisable at December 31, 2005
    
152,535
  
$
13.52
  
Options exercisable at December 31, 2004
    
181,944
    
12.96
  
Options exercisable at December 31, 2003
    
236,405
    
10.35
  
               
 

 
Options outstanding at December 31, 2005 were as follows:

           
 
  
Outstanding Options 
Options Exercisable
Range of Exercise Price
    
Number
    
Weighted Average Remaining Contractual Life
    
Weighted Average Exercise Price
    
Number
    
Weighted Average Exercise Price
  
$8.33 - $11.00
    
40,900
    
3.54
  
$
10.04
    
22,050
  
$
9.67
  
11.21 - 11.75
    
14,250
    
3.26
    
11.35
    
2,300
    
11.26
  
12.40 - 12.40
    
98,700
    
5.43
    
12.40
    
29,100
    
12.40
  
12.65 - 13.45
    
12,300
    
3.50
    
13.15
    
9,800
    
13.21
  
13.50 - 13.50
    
68,300
    
1.69
    
13.50
    
53,100
    
13.50
  
13.55 - 19.40
    
58,135
    
6.33
    
16.76
    
28,935
    
15.60
  
22.74 - 22.79
    
28,400
    
8.11
    
22.76
    
7,250
    
22.78
  
25.24 - 25.24
    
58,000
    
9.07
    
25.24
    
-
    
-
  
29.20 - 29.20
    
5,000
    
9.81
    
29.20
    
-
    
-
  
32.40 - 32.40
    
5,000
    
9.67
    
32.40
    
-
    
-
  
$8.33 - $32.40
    
388,985
    
5.42
  
$
16.13
    
152,535
  
$
13.52
  
                                 


In 2005, the Company granted a total of 41,000 shares of restricted stock with a value of $1,283 to members of the board of directors and certain executive officers. The restricted stock provides the grantee with voting, dividend and anti-dilution rights equivalent to common shareholders, however 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 three 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 and during 2005, $98 of related amortization is included in non-interest expense. Future amortization of the expense associated with restricted shares outstanding as of December 31, 2005 is as follows:

67
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)



         
2006
  
$
273
  
2007
    
273
  
2008
    
270
  
2009
    
231
  
2010
    
137
  
   
$
1,184
  
         

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:

   
2005
2004
 
    
Fixed Rate 
    
Variable Rate
    
Fixed Rate
    
Variable Rate
  
Commitments to make loans
  
$
6,320
  
$
78,194
  
$
7,866
  
$
26,567
  
Unfunded commitments under lines of credit
    
742
    
145,737
    
700
    
71,800
  
                           

Commitments to make loans are generally made for periods of 30 days. The fixed rate loan commitments have interest rates ranging from 4.25% to 18.00% and maturities ranging from 6 months to 15 years.

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,
    
2005
    
2004
    
2003
  
Operating supplies
  
$
589
  
$
542
  
$
484
  
Computer services
    
1,650
    
1,773
    
1,533
  
Legal and professional fees
    
1,444
    
1,223
    
842
  
Marketing and community relations
    
731
    
866
    
851
  
Postage, courier, and armored car
    
719
    
617
    
697
  
                     


68
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)


Note 18—Fair Values of Financial Instruments

Carrying amount and estimated fair values of financial instruments were as follows at December 31:

   
2005
2004
 
    
Carrying Value
    
Estimated Fair Value
    
Carrying Value
    
Estimated Fair Value
  
Financial assets:
                          
Cash and cash equivalents
  
$
41,510
  
$
41,510
  
$
42,938
    $
42,938
  
Investment securities available for sale
    
97,464
    
97,464
    
77,807
    
77,807
  
Loans, net
    
876,478
    
872,983
    
649,435
    
650,119
  
Federal Home Loan Bank and Independent Bankers’ Bank stock
    
2,906
    
2,906
    
3,035
    
3,035
  
Accrued interest receivable
    
6,404
    
6,404
    
4,086
    
4,086
  
                           
Financial liabilities:
                          
Non-contractual deposits
    
488,620
    
488,620
    
436,677
    
436,677
  
Contractual deposits
    
431,804
    
429,059
    
251,182
    
251,159
  
Federal Home Loan Bank Advances
    
25,000
    
25,000
    
35,000
    
35,000
  
Short-term borrowings
    
17,284
    
17,284
    
12,157
    
12,157
  
Notes payable
    
4,000
    
4,004
    
5,250
    
5,388
  
Subordinated debentures
    
13,000
    
13,630
    
13,000
    
13,489
  
Accrued interest payable
    
6,609
    
6,609
    
3,692
    
3,692
  
                           

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, Federal Home Loan Bank stock and other bankers’ bank stock, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. 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. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of 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.

Note 19—Discontinued Operations

On December 30, 2005, the Company closed the sale of the merchant bankcard processing segment, a business line of the Company, to NOVA Information Systems. The transaction was structured as a sale of the agency assets. The buyer paid $7,250 in cash at the closing. The Company recognized a gain of $6,697 on the transaction.

The operating results of the merchant bankcard processing segment, which have been classified as discontinued operations in the accompanying consolidated financial statements, are summarized as follows:

Years ended December 31,
    
2005
    
2004
    
2003
  
Other income
  
$
12,865
  
$
5,758
  
$
4,953
  
Depreciation and amortization
    
(8
)
  
(40
)
  
(46
)
Other expense
    
(5,227
)
  
(4,828
)
  
(3,982
)
Pretax income from discontinued operations
  
$
7,630
  
$
890
  
$
925
  
                     


69
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)



On August 15, 2003, the Company closed the sale of Keys Insurance Agency, Inc., a wholly-owned subsidiary of the Company, to Derek Martin-Vegue and his partner. Mr. Martin-Vegue is a former director of the Company and TIB Bank. The transaction was structured as a sale of the agency assets. The buyer paid $2,205 in cash at the closing. Of the cash payment at closing, proceeds of $2,021 were pursuant to a loan from TIB Bank (a subsidiary of the Company) to the buyer. The Company recognized a loss of $15 on the transaction.

The results of Keys Insurance Agency, Inc. operations, which have been classified as discontinued operations in the accompanying consolidated financial statements, are summarized as follows:

 
  
 Year ended December 31, 2003 
  
Other income
  
$
1,255
  
Depreciation and amortization
    
(35
)
Other expense
    
(1,020
)
Pretax income from discontinued operations
  
$
200
  
         

Note 20—Condensed Financial Information of TIB Financial Corp.

Condensed Balance Sheets
(Parent Only)

December 31,
    
2005
    
2004
  
Assets:
              
Cash on deposit with subsidiary
  
$
922
  
$
2,341
  
Dividends and other receivables from subsidiaries
    
10
    
10
  
Investment in bank subsidiary
    
93,982
    
84,845
  
Investment in TIBFL Statutory Trust I
    
248
    
248
  
Investment in TIBFL Statutory Trust II
    
155
    
155
  
Income tax receivable
    
300
    
-
  
Other assets
    
442
    
407
  
Total Assets
  
$
96,059
  
$
88,006
  
               
Liabilities and Shareholders’ Equity:
              
Liabilities:
              
Dividends payable
  
$
681
  
$
653
  
Interest payable
    
438
    
449
  
Notes payable
    
17,403
    
18,653
  
Other liabilities
    
13
    
137
  
Total liabilities
    
18,535
    
19,892
  
               
Shareholders’ equity:
              
Common stock
    
579
    
568
  
Surplus
    
40,736
    
38,284
  
Deferred compensation - restricted stock grants
    
(1,184
)
  
-
  
Retained earnings
    
38,136
    
28,968
  
Accumulated other comprehensive income (loss)
    
(743
)
  
294
  
Total shareholders’ equity
    
77,524
    
68,114
  
               
Total Liabilities and Shareholders’ Equity
  
$
96,059
  
$
88,006
  
               


70
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)



Note 20—Condensed Financial Information of TIB Financial Corp. (Continued)

Condensed Statements of Income
(Parent Only)

Year Ended December 31,
    
2005
    
2004
    
2003
  
Operating income:
                    
Dividend from bank subsidiary
  
$
2,946
  
$
3,708
  
$
832
  
Dividend from TIBFL Statutory Trust I
    
26
    
26
    
26
  
Dividend from TIBFL Statutory Trust II
    
11
    
8
    
8
  
Dividend from TIB Software & Services, Inc.
    
-
    
-
    
126
  
Other income
    
-
    
6
    
-
  
Total operating income
    
2,983
    
3,748
    
992
  
                     
Operating expense:
                    
Interest expense
    
1,616
    
1,636
    
1,624
  
Other expense
    
600
    
553
    
345
  
Total operating expense
    
2,216
    
2,189
    
1,969
  
                     
Income (loss) before income tax benefit and equity in undistributed earnings of subsidiary
    
767
    
1,559
    
(977
)
Income tax benefit
   
884
    
808
    
728
  
Income (loss) before equity in undistributed earnings of subsidiary
    
1,651
    
2,367
    
(249
)
Equity in undistributed earnings of bank subsidiary
    
10,173
    
2,831
    
5,226
  
Income from continuing operations
    
11,824
    
5,198
    
4,977
  
                     
Discontinued operations:
                    
Dividend from Keys Insurance Agency, Inc.
    
-
    
-
    
125
  
Income from discontinued operations
    
-
    
-
    
125
  
                     
Net income
  
$
11,824
  
$
5,198
  
$
5,102
  
                     


71
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)


Note 20—Condensed Financial Information of TIB Financial Corp. (Continued)

Condensed Statements of Cash Flows
(Parent Only)

Year Ended December 31,
    
2005
    
2004
    
2003
  
Cash flows from operating activities:
                    
Net income
  
$
11,824
  
$
5,198
  
$
5,102
  
Equity in undistributed earnings of bank subsidiary
    
(10,173
)
  
(2,831
)
  
(5,226
)
Amortization of intangibles and other assets
    
19
    
17
    
17
  
Amortization of deferred compensation - restricted stock grants
    
98
    
-
    
-
  
Increase in other assets
    
(12
)
  
-
    
(4
)
Decrease in due to subsidiaries
    
(6
)
  
-
    
(3
)
Increase (decrease) in interest payable
    
(10
)
  
9
    
(5
)
Increase in other liabilities
    
-
    
6
    
3
  
Deferred income taxes
    
(37
)
  
-
    
-
  
Increase (decrease) in net income tax obligation
    
(81
)
  
709
    
(3
)
Net cash provided (used) by operating activities
    
1,622
    
3,108
    
(119
)
                     
Cash flows from investing activities:
                    
Investment in bank subsidiary
    
-
    
(23,155
)
  
(5,500
)
Return of capital from Keys Insurance Agency, Inc.
    
-
    
-
    
2,301
  
Return of capital from TIB Software & Services, Inc.
    
-
    
-
    
129
  
Net cash provided (used) in investing activities
    
-
    
(23,155
)
  
(3,070
)
                     
Cash flows from financing activities:
                    
Repayment of note payable
    
(1,250
)
  
-
    
-
  
Proceeds from exercise of stock options
   
838
    
678
    
735
  
Proceeds from stock issuance
    
-
    
23,230
    
4,343
  
Cash dividends paid
    
(2,629
)
  
(2,278
)
  
(1,866
)
Net cash provided (used) by financing activities
    
(3,041
)
  
21,630
    
3,212
  
                     
Net increase (decrease) in cash
    
(1,419
)
  
1,583
    
23
  
Cash, beginning of year
    
2,341
    
758
    
735
  
Cash, end of year
  
$
922
  
$
2,341
  
$
758
  
                     


Note 21—Quarterly Financial Data (Unaudited)

The following is a summary of unaudited quarterly results for 2005 and 2004:

 
2005
  
2004
 
  
Fourth 
    
Third
    
Second
    
First
      
Fourth
    
Third
    
Second
    
First
  
Condensed income statements:
                                                  
Interest income
$
17,360
  
$
15,503
  
$
14,225
  
$
12,346
    
$
11,351
  
$
10,528
  
$
9,819
  
$
9,218
  
Net interest income
  
10,786
    
10,094
    
9,636
    
8,614
      
8,216
    
7,781
    
7,361
    
6,828
  
Income from continuing operations
  
1,898
    
1,949
    
1,997
    
1,348
      
1,223
    
1,219
    
1,125
    
1,076
  
Net income
 
6,039
  
 
2,054
  
 
2,184
  
 
1,547
    
 
1,331
  
 
1,337
  
 
1,257
  
 
1,273
  
                                                   
Earnings per share:
                                                  
Income from continuing operations - Basic
$
0.33
  
$
0.34
  
$
0.35
  
$
0.24
    
$
0.21
  
$
0.22
  
$
0.21
  
$
0.24
  
Income from continuing operations - Diluted
 
0.32
  
 
0.33
  
 
0.34
  
 
0.23
    
 
0.21
  
 
0.21
  
 
0.20
  
 
0.23
  
                                                   

Due to the disposal of the merchant bankcard operations in the fourth quarter of 2005, all previous reported quarterly financial data has been adjusted above to reflect the results of merchant bankcard operations as discontinued operations.




73
TIB Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share amounts)





Not applicable.


(a) Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, they have concluded that the Corporation’s disclosure controls and procedures are effective in ensuring that material information related to the Corporation is made known to them by others within the Corporation.

(b) Management’s Annual Report on Internal Control Over Financial Reporting

During the fourth quarter of 2005 and subsequent thereto, the Company has made no significant changes in its internal controls or in other factors which may significantly affect these controls subsequent to the evaluation of these controls by the Chief Executive Officer and Chief Financial Officer.


MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of TIB Financial Corp. is responsible for establishing and maintaining adequate internal control over financial reporting, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). TIB Financial Corp.’s system of internal control over financial reporting was designed under the supervision of the company’s chief executive officer and chief financial officer to provide reasonable assurance regarding the reliability of the preparation of the company’s financial statements for external reporting purposes, in accordance with U.S. generally accepted accounting principles.

TIB Financial Corp.’s management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the assessment, management determined that, as of December 31, 2005, the company’s internal control over financial reporting is effective. Management’s assessment of the effectiveness of the company’s internal control over financial reporting as of December 31, 2005 has been audited by Crowe Chizek and Company LLC, an independent registered public accounting firm, as stated in their report appearing in Item 8, page 39 of this Form 10-K.

Date: February 23, 2006

/s/ Edward V. Lett
Edward V. Lett
President and Chief Executive Officer

/s/ David P. Johnson
David P. Johnson
Executive Vice President and Chief Financial Officer




(c) Audit Report of the Registered Public Accounting Firm
    The audit report related to the audit of internal controls and management’s report on internal controls over financial reporting is included in Item 8, page 39 of this Form 10-K.


Not applicable.



PART III



The information set forth under the captions “Information About the Board of Directors and Their Committees” and “Executive Officers” under the caption "Election of Directors", “Audit Committee Report” and “Filings Under Section 16(A) Beneficial Ownership Reporting Compliance” in the Proxy Statement to be utilized in connection with the Company's 2006 Annual Shareholders Meeting is incorporated herein by reference.

In 2005, we adopted amendments to the code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer, controller, and persons performing similar functions. We have posted the text of our code of ethics on our website at www.tibbank.com in the section titled “Investor Relations.” In addition, we intend to promptly disclose (i) the nature of any amendment to our code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer, controller, or persons performing similar functions and (ii) the nature of any waiver, including an implicit waiver, from a provision of our code of ethics that is granted to one of these specified individuals, the name of such person who is granted the waiver, and the date of the waiver on our website in the future.



The information contained under the captions "Compensation of Executive Officers and Directors" and “Performance Graph” in the Proxy Statement to be utilized in connection with the Company's 2006 Annual Shareholders Meeting is incorporated herein by reference.


ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

The information contained under the caption "Management and Principal Shareholders" in the Proxy Statement to be utilized in connection with the Company's 2006 Annual Shareholders Meeting is incorporated herein by reference.



The information contained under the caption "Certain Relationships and Related Transactions" in the Proxy Statement to be utilized in connection with the Company's 2006 Annual Shareholders Meeting is incorporated herein by reference.



The information contained under the caption "Independent Public Accountants" in the Proxy Statement to be utilized in connection with the Company's 2006 Annual Shareholders Meeting is incorporated herein by reference.




PART IV



1. Financial Statements

The consolidated financial statements, notes thereto and independent auditors' report thereon, filed as part hereof, are listed in Item 8.

2. Financial Statement Schedules

Financial Statement schedules have been omitted as the required information is not applicable or the required information has been incorporated in the consolidated financial statements and related notes incorporated by reference herein.

3. Exhibits

 
Exhibit Numbers
3.1
Restated Articles of Incorporation*****
3.2
Bylaws **
4.1
Specimen Stock Certificate *
10.1
Employment Agreement between Edward V. Lett, TIB Financial Corp. and TIB Bank effective March 1, 2004 ***/******
10.2
401(K) Savings and Employee Stock Ownership Plan */***
10.3
Employee Incentive Stock Option Plan */***
10.4
Employment Agreement between Millard J. Younkers, Jr., TIB Financial Corp. and TIB Bank effective March 1, 2004 ***/******
10.5
Employment Agreement between David P. Johnson, TIB Financial Corp. and TIB Bank effective March 1, 2004 ***/******
10.6
Form of Director Deferred Fee Agreement***/****
10.7
Form of Salary Continuation Agreement***/****
10.8
Form of Executive Officer Split Dollar Agreement***/****
10.9
Form of Director Deferred Fee Agreement - First Amendment***
10.10
Form of Executive Officer Split Dollar Agreement - First Amendment***
10.11
Employment Agreement between Michael D. Carrigan, TIB Financial Corp. and TIB Bank effective March 1, 2004 ***/******
10.12
Form of Salary Continuation Agreement - First Amendment***
10.13
Form of Restricted Stock Agreement
10.14
Form of Restricted Stock Agreement Addendum
10.15
Merchant Asset Purchase Agreement
10.16
Marketing and Sales Alliance Agreement
10.17
Non-Competition Agreement
10.18
Assignment and Assumption Agreement
14.1 Board of Directors Ethics Code
14.2 Senior Financial Officer Ethics Code
21.1
Subsidiaries of the Registrant
23.1
Consent of Independent Registered Public Accounting Firm
31.1
Chief Executive Officer’s certification required under Section 302 of Sarbanes-Oxley Act of 2002
31.2
Chief Financial Officer’s certification required under Section 302 of Sarbanes-Oxley Act of 2002
32.1
Chief Executive Officer’s certification required under Section 906 of Sarbanes-Oxley Act of 2002
32.2
Chief Financial Officer’s certification required under Section 906 of Sarbanes-Oxley Act of 2002
   


   
*
Previously filed by the Company as an Exhibit (with the same respective Exhibit Number as indicated herein) to the Company's Registration Statement (Registration No. 333-03499) and such document is incorporated herein by reference.
   
**
Previously filed by the Company as Exhibit (with the same respective Exhibit Number as indicated herein) to the Company's Registration Statement (Registration No. 333-113484) and such document is incorporated herein by reference.
   
***
Represents a management contract or a compensation plan or arrangement required to be filed as an exhibit.
   
****
Items 10.6 through 10.9 were previously filed by the Company as Exhibits to the Company’s December 31, 2001 10-K and such documents are incorporated herein by reference.
   
*****
Incorporated by reference to Appendix A in the Company’s Definitive Proxy Statement filed on April 8, 2004.
   
******
Items 10.1, 10.4, 10.5 and 10.10 through 10.13 were previously filed by the Company as Exhibits to the Company’s December 31, 2003 10-K and such documents are incorporated herein by reference.



SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on March 13, 2006.


TIB FINANCIAL CORP.

By:
/s/ Edward V. Lett
    
 
Edward V. Lett
President, Chief Executive Officer and Director
    

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 13, 2006.

Signature
  
Title
/s/ Edward V. Lett
  
President (Principle Executive Officer), Chief Executive Officer and Director
Edward V. Lett
    
     
/s/ Richard C. Bricker, Jr.
  
Director
Richard C. Bricker, Jr.
    
     
/s/ Gretchen K. Holland
  
Director
Gretchen K. Holland
    
     
/s/ Paul O. Jones, Jr., M.D.
  
Director
Paul O. Jones, Jr., M.D.
    
     
/s/ Thomas J. Longe
  
Director
Thomas J. Longe
    
     
/s/ John G. Parks, Jr.
  
Director
John G. Parks, Jr.
    
     
/s/ Marvin F. Schindler
  
Director
Marvin F. Schindler
    
     
/s/ Otis T. Wallace
  
Director
Otis T. Wallace
    
     
/s/ David P. Johnson
  
Chief Financial and Accounting Officer
David P. Johnson
    
     




79