##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended
    
    Commission File NumberJUNE 30, 2004
    
    000-21329
 TIB FINANCIAL CORP. 
  FLORIDA
    
    65-0655973(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 599 9th STREET NORTH, SUITE 101, NAPLES, FLORIDA 34102-5624   Registrants telephone number, including area code:      (239) 263-3344 Not Applicable  
 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.  Yes [X] or No
[   ] Indicate by check mark whether the issuer is an accelerated filer (as defined
in Rule 12b-2 of the
Act).  Yes [   ] or No [X] Indicate the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practicable date: Common Stock, $0.10 Par Value
    
    5,658,057Class
    
    Outstanding as of July 31, 2004
 1




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TABLE OF CONTENTS  Part I. FINANCIAL INFORMATIONItem 1. Financial StatementsCONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF INCOMECONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITYCONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTSCONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTSItem 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSItem 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKItem 4. CONTROLS AND PROCEDURESPart II. OTHER INFORMATIONItem 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSItem 5. OTHER INFORMATIONItem 6. EXHIBITS AND REPORTS ON FORM 8-KSIGNATURESEx-31.1 Section 302 CEO CertificationEx-31.2 Section 302 CFO CertificationEx-32.1 Section 906 CEO CertificationEx-32.2 Section 906 CFO Certification    Table of Contents  
 Part I. FINANCIAL INFORMATION 
 Item 1. Financial Statements TIB FINANCIAL CORP. 
 CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands, except per share amounts)
 June 30, 2004
    
    December 31, 2003(Unaudited)ASSETSCash and due from banks
    
    $
    25,607
    
    
    $
    17,197Federal funds sold
    
    
    10,889
    
    
    
    16,484Cash and cash equivalents
    
    
    36,496
    
    
    
    33,681Investment securities available for sale
    
    
    81,652
    
    
    
    52,557Loans, net of deferred loan costs and fees
    
    
    592,459
    
    
    
    540,413Less: allowance for loan losses
    
    
    5,806
    
    
    
    5,216Loans, net
    
    
    586,653
    
    
    
    535,197Premises and equipment, net
    
    
    24,455
    
    
    
    21,073Goodwill
    
    
    155
    
    
    
    155Intangible assets, net
    
    
    1,541
    
    
    
    1,687Accrued interest receivable and other assets
    
    
    29,568
    
    
    
    24,948TOTAL ASSETS
    
    $
    760,520
    
    
    $
    669,298LIABILITIESDeposits:Noninterest-bearing demand
    
    $
    145,393
    
    
    $
    121,728Interest-bearing
    
    
    479,001
    
    
    
    432,085Total Deposits
    
    
    624,394
    
    
    
    553,813Federal Home Loan Bank (FHLB) advances
    
    
    38,500
    
    
    
    45,000Short-term borrowings
    
    
    6,874
    
    
    
    4,041Long-term borrowings
    
    
    18,250
    
    
    
    18,250Accrued interest payable and other liabilities
    
    
    7,336
    
    
    
    6,948TOTAL LIABILITIES
    
    
    695,354
    
    
    
    628,052SHAREHOLDERS EQUITYPreferred stock  no par value: 5,000,000
and 0 shares authorized, 0 and 0 shares
issued
    
    
    
    
    
    
    Common stock  $.10 par value: 20,000,000
and 7,500,000 shares authorized, 5,657,957
and 4,431,328 shares issued
    
    
    566
    
    
    
    443Additional paid in capital
    
    
    38,090
    
    
    
    14,255Retained earnings
    
    
    27,591
    
    
    
    26,203Accumulated other comprehensive income
    
    
    (1,081
    )
    
    
    345TOTAL SHAREHOLDERS EQUITY
    
    
    65,166
    
    
    
    41,246TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY
    
    $
    760,520
    
    
    $
    669,298
 (See notes to consolidated financial statements) 2




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##### Table of Contents



TIB FINANCIAL CORP. 
 CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(dollars in thousands, except earnings per share amounts)
 Three months ended
    
    Six months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003INTEREST AND DIVIDEND INCOMELoans, including fees
    
    $
    8,960
    
    
    $
    7,698
    
    
    $
    17,560
    
    
    $
    15,277Investment securities:U.S. Treasury securities
    
    
    36
    
    
    
    2
    
    
    
    38
    
    
    
    4U.S. Government agencies and corporations
    
    
    546
    
    
    
    442
    
    
    
    902
    
    
    
    969States and political subdivisions, tax-exempt
    
    
    111
    
    
    
    83
    
    
    
    205
    
    
    
    144States and political subdivisions, taxable
    
    
    51
    
    
    
    62
    
    
    
    104
    
    
    
    125Marketable equity securities
    
    
    61
    
    
    
    
    
    
    
    120
    
    
    
    Interest bearing deposits in other bank
    
    
    4
    
    
    
    
    
    
    
    5
    
    
    
    1Federal Home Loan Bank Stock
    
    
    9
    
    
    
    14
    
    
    
    24
    
    
    
    30Federal funds sold
    
    
    41
    
    
    
    151
    
    
    
    79
    
    
    
    193TOTAL INTEREST AND DIVIDEND INCOME
    
    
    9,819
    
    
    
    8,452
    
    
    
    19,037
    
    
    
    16,743INTEREST EXPENSEDeposits
    
    
    1,980
    
    
    
    2,124
    
    
    
    3,872
    
    
    
    4,104Federal Home Loan Bank advances
    
    
    70
    
    
    
    33
    
    
    
    164
    
    
    
    102Short-term borrowings
    
    
    12
    
    
    
    10
    
    
    
    21
    
    
    
    21Long term borrowings
    
    
    396
    
    
    
    397
    
    
    
    791
    
    
    
    795TOTAL INTEREST EXPENSE
    
    
    2,458
    
    
    
    2,564
    
    
    
    4,848
    
    
    
    5,022NET INTEREST INCOME
    
    
    7,361
    
    
    
    5,888
    
    
    
    14,189
    
    
    
    11,721PROVISION FOR LOAN LOSSES
    
    
    649
    
    
    
    258
    
    
    
    1,018
    
    
    
    588NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    
    
    6,712
    
    
    
    5,630
    
    
    
    13,171
    
    
    
    11,133NON-INTEREST INCOMEService charges on deposit accounts
    
    
    637
    
    
    
    586
    
    
    
    1,281
    
    
    
    1,158Investment securities gains, net
    
    
    52
    
    
    
    
    
    
    
    96
    
    
    
    5Merchant bankcard processing income
    
    
    1,534
    
    
    
    1,221
    
    
    
    3,294
    
    
    
    2,599Gain on sale of government guaranteed loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88Fees on mortgage loans sold
    
    
    645
    
    
    
    609
    
    
    
    1,043
    
    
    
    1,211Retail investment services
    
    
    107
    
    
    
    99
    
    
    
    201
    
    
    
    186Gain on sale of investment in ERAS Joint Venture
    
    
    
    
    
    
    202
    
    
    
    
    
    
    
    202Other income
    
    
    356
    
    
    
    371
    
    
    
    689
    
    
    
    717TOTAL NON-INTEREST INCOME
    
    
    3,331
    
    
    
    3,088
    
    
    
    6,604
    
    
    
    6,166NON-INTEREST EXPENSESalaries and employee benefits
    
    
    3,614
    
    
    
    3,074
    
    
    
    7,056
    
    
    
    6,241Net occupancy expense
    
    
    1,191
    
    
    
    1,082
    
    
    
    2,313
    
    
    
    2,109Other expense
    
    
    3,348
    
    
    
    2,713
    
    
    
    6,578
    
    
    
    5,302TOTAL NON-INTEREST EXPENSE
    
    
    8,153
    
    
    
    6,869
    
    
    
    15,947
    
    
    
    13,652INCOME BEFORE INCOME TAX EXPENSE
    
    
    1,890
    
    
    
    1,849
    
    
    
    3,828
    
    
    
    3,647INCOME TAX EXPENSE
    
    
    633
    
    
    
    638
    
    
    
    1,298
    
    
    
    1,275INCOME FROM CONTINUING OPERATIONS
    
    $
    1,257
    
    
    $
    1,211
    
    
    $
    2,530
    
    
    $
    2,372DISCONTINUED OPERATIONSIncome from Keys Insurance Agency, Inc. operations
    
    
    
    
    
    
    121
    
    
    
    
    
    
    
    165Income tax expense
    
    
    
    
    
    
    46
    
    
    
    
    
    
    
    62INCOME FROM DISCONTINUED OPERATIONS
    
    
    
    
    
    
    75
    
    
    
    
    
    
    
    103NET INCOME
    
    $
    1,257
    
    
    $
    1,286
    
    
    $
    2,530
    
    
    $
    2,475BASIC EARNINGS PER SHARE:Continuing operations
    
    $
    0.23
    
    
    $
    0.29
    
    
    $
    0.51
    
    
    $
    0.57Discontinued operations
    
    
    
    
    
    
    0.02
    
    
    
    
    
    
    
    0.03Basic earnings per share
    
    $
    0.23
    
    
    $
    0.31
    
    
    $
    0.51
    
    
    $
    0.60DILUTED EARNINGS PER SHARE:Continuing operations
    
    $
    0.22
    
    
    $
    0.28
    
    
    $
    0.49
    
    
    $
    0.56Discontinued operations
    
    
    
    
    
    
    0.02
    
    
    
    
    
    
    
    0.02Diluted earnings per share
    
    $
    0.22
    
    
    $
    0.30
    
    
    $
    0.49
    
    
    $
    0.58
 (See notes to consolidated financial statements) 3




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##### Table of Contents



TIB FINANCIAL CORP. 
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(Unaudited)
(dollars in thousands, except per share amounts)
 Additional
    
    
    
    
    
    Accumulated Other
    
    TotalCommon
    
    Paid in
    
    Retained
    
    Comprehensive
    
    ShareholdersShares
    
    Stock
    
    Capital
    
    Earnings
    
    Income (Loss)
    
    EquityBalance,April 1, 2004
    
    
    4,489,064
    
    
    $
    449
    
    
    $
    14,797
    
    
    $
    26,971
    
    
    $
    1,058
    
    
    $
    43,275Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,257
    
    
    
    
    
    
    
    1,257Other comprehensive income, net of tax
benefit of $1,290:Net market valuation adjustment on
securities available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,106
    )Less: reclassification adjustment for gains
included in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33
    )Other comprehensive income, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,139
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (882
    )Public offering of 1,150,000 shares
    
    
    1,150,000
    
    
    
    115
    
    
    
    23,115
    
    
    
    
    
    
    
    
    
    
    
    23,230Exercise of stock options
    
    
    18,893
    
    
    
    2
    
    
    
    105
    
    
    
    
    
    
    
    
    
    
    
    107Income tax benefit from stock options exercised
    
    
    
    
    
    
    
    
    
    
    73
    
    
    
    
    
    
    
    
    
    
    
    73Cash dividends declared, $.1125 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (637
    )
    
    
    
    
    
    
    (637
    )Balance,June 30, 2004
    
    
    5,657,957
    
    
    $
    566
    
    
    $
    38,090
    
    
    $
    27,591
    
    
    $
    (1,081
    )
    
    $
    65,166
 Additional
    
    
    
    
    
    Accumulated Other
    
    TotalCommon
    
    Paid in
    
    Retained
    
    Comprehensive
    
    ShareholdersShares
    
    Stock
    
    Capital
    
    Earnings
    
    Income (Loss)
    
    EquityBalance,April 1, 2003
    
    
    4,114,425
    
    
    $
    412
    
    
    $
    9,414
    
    
    $
    23,758
    
    
    $
    1,172
    
    
    $
    34,756Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,286
    
    
    
    
    
    
    
    1,286Other comprehensive income, net of tax
expense of $204:Net market valuation adjustment on
securities available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    339Less: reclassification adjustment for gains
included in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other comprehensive income, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    339Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,625Exercise of stock options
    
    
    12,500
    
    
    
    1
    
    
    
    113
    
    
    
    
    
    
    
    
    
    
    
    114Private Placement of 280,653 common shares
    
    
    280,653
    
    
    
    28
    
    
    
    4,316
    
    
    
    
    
    
    
    
    
    
    
    4,344Cash dividends declared, $.11 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (485
    )
    
    
    
    
    
    
    (485
    )Balance,June 30, 2003
    
    
    4,407,578
    
    
    $
    441
    
    
    $
    13,843
    
    
    $
    24,559
    
    
    $
    1,511
    
    
    $
    40,354
 (continued) 4




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##### Table of Contents



Additional
    
    
    
    
    
    Accumulated Other
    
    TotalCommon
    
    Paid in
    
    Retained
    
    Comprehensive
    
    ShareholdersShares
    
    Stock
    
    Capital
    
    Earnings
    
    Income (Loss)
    
    EquityBalance,January 1, 2004
    
    
    4,431,328
    
    
    $
    443
    
    
    $
    14,255
    
    
    $
    26,203
    
    
    $
    345
    
    
    $
    41,246Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,530
    
    
    
    
    
    
    
    2,530Other comprehensive income, net of tax
benefit of $859:Net market valuation adjustment on securities available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,366
    )Less: reclassification adjustment for gains
included in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60
    )
    
    
    Other comprehensive income, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,426
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,104Public offering of 1,150,000 shares
    
    
    1,150,000
    
    
    
    115
    
    
    
    23,115
    
    
    
    
    
    
    
    
    
    
    
    23,230Exercise of stock options
    
    
    76,629
    
    
    
    8
    
    
    
    526
    
    
    
    
    
    
    
    
    
    
    
    534Income tax benefit from stock options exercised
    
    
    
    
    
    
    
    
    
    
    194
    
    
    
    
    
    
    
    
    
    
    
    194Cash dividends declared, $.225 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,142
    )
    
    
    
    
    
    
    (1,142
    )Balance,June 30, 2004
    
    
    5,657,957
    
    
    $
    566
    
    
    $
    38,090
    
    
    $
    27,591
    
    
    $
    (1,081
    )
    
    $
    65,166
 Additional
    
    
    
    
    
    Accumulated Other
    
    TotalCommon
    
    Paid in
    
    Retained
    
    Comprehensive
    
    ShareholdersShares
    
    Stock
    
    Capital
    
    Earnings
    
    Income (Loss)
    
    EquityBalance,January 1, 2003
    
    
    4,035,625
    
    
    $
    403
    
    
    $
    8,966
    
    
    $
    23,022
    
    
    $
    1,115
    
    
    $
    33,506Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,475
    
    
    
    
    
    
    
    2,475Other comprehensive income, net of tax
expense of $239:Net market valuation adjustment on
securities available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    399Less: reclassification adjustment for gains
included in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    Other comprehensive income, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    396Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,871Exercise of stock options
    
    
    91,300
    
    
    
    10
    
    
    
    561
    
    
    
    
    
    
    
    
    
    
    
    571Private Placement of 280,653 common shares
    
    
    280,653
    
    
    
    28
    
    
    
    4,316
    
    
    
    
    
    
    
    
    
    
    
    4,344Cash dividends declared, $.22 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (938
    )
    
    
    
    
    
    
    (938
    )Balance,June 30, 2003
    
    
    4,407,578
    
    
    $
    441
    
    
    $
    13,843
    
    
    $
    24,559
    
    
    $
    1,511
    
    
    $
    40,354
 (See notes to consolidated financial statements) 5




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##### Table of Contents



TIB FINANCIAL CORP. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(Unaudited)
(dollars in thousands)
 For the six month period endedJune 30,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIESNet Income
    
    $
    2,530
    
    
    $
    2,475Adjustments to reconcile net income to net cash provided by operating activities:Net amortization of investments
    
    
    24
    
    
    
    32Amortization of intangible assets
    
    
    146
    
    
    
    146Depreciation of premises and equipment
    
    
    926
    
    
    
    862Provision for loan losses
    
    
    1,018
    
    
    
    588Provision for losses on unfunded loan commitments
    
    
    (11
    )
    
    
    Deferred income tax benefit
    
    
    (360
    )
    
    
    (213
    )Deferred net loan costs and fees
    
    
    (291
    )
    
    
    (502
    )Investment securities net gains
    
    
    (96
    )
    
    
    (5
    )Net (gain) loss on sale/disposal of premises and equipment
    
    
    6
    
    
    
    (1
    )Gain on sale of investment in ERAS JV
    
    
    
    
    
    
    (202
    )Gain on sales of government guaranteed loans, net
    
    
    
    
    
    
    (88
    )Mortgage loans originated for sale
    
    
    (62,472
    )
    
    
    (59,192
    )Proceeds from sale of mortgage loans
    
    
    60,150
    
    
    
    62,985Fees on mortgage loans sold
    
    
    (1,043
    )
    
    
    (1,211
    )Increase in accrued interest receivable and other assets
    
    
    (361
    )
    
    
    (443
    )Increase (decrease) in accrued interest payable and other liabilities
    
    
    455
    
    
    
    (1,677
    )NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    621
    
    
    
    3,554CASH FLOWS FROM INVESTING ACTIVITIESPurchases of investment securities available for sale
    
    
    (38,368
    )
    
    
    (4,592
    )Repayments of principal and maturities of investment securities available for sale
    
    
    1,960
    
    
    
    12,073Sales of investment securities available for sale
    
    
    5,099
    
    
    
    Net sale of FHLB stock
    
    
    325
    
    
    
    201Proceeds from sales of government guaranteed loans
    
    
    569
    
    
    
    2,241Loans originated or acquired, net of principal repayments
    
    
    (52,751
    )
    
    
    (33,835
    )Proceeds from the sale of investment in ERAS JV
    
    
    
    
    
    
    327Purchases of premises and equipment
    
    
    (4,317
    )
    
    
    (2,438
    )Sales of premises and equipment
    
    
    4
    
    
    
    2NET CASH USED BY INVESTING ACTIVITIES
    
    
    (87,479
    )
    
    
    (26,021
    )CASH FLOWS FROM FINANCING ACTIVITIESNet increase in federal funds purchased and securities sold under agreements to repurchase
    
    
    2,832
    
    
    
    676Net increase in FHLB short-term advances
    
    
    3,500
    
    
    
    Proceeds from FHLB long-term advances
    
    
    
    
    
    
    10,000Repayments of FHLB long-term advances
    
    
    (10,000
    )
    
    
    (20,000
    )Net increase in demand, money market and savings accounts
    
    
    49,120
    
    
    
    19,561Net increase in time deposits
    
    
    21,461
    
    
    
    50,605Proceeds from exercise of stock options
    
    
    534
    
    
    
    571Proceeds from private placement of common stock
    
    
    
    
    
    
    4,344Proceeds from public offering of common stock
    
    
    23,230
    
    
    
    Cash dividends paid
    
    
    (1,004
    )
    
    
    (897
    )NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    89,673
    
    
    
    64,860NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    2,815
    
    
    
    42,393CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    33,681
    
    
    
    24,070CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    36,496
    
    
    $
    66,463SUPPLEMENTAL DISCLOSURES OF CASH FLOWS:Cash paid for:Interest
    
    $
    5,993
    
    
    $
    5,662Income taxes
    
    
    1,135
    
    
    
    1,775
 (See notes to consolidated financial statements) 6




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##### Table of Contents



TIB FINANCIAL CORP. 
 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
 NOTE 1  BASIS OF PRESENTATION & ACCOUNTING POLICIES TIB Financial Corp. is a financial holding company headquartered in Naples,
Florida. TIB Financial Corp. owns and operates TIB Bank of the Keys, which has
a total of fourteen branches in Florida that are located in Monroe, Miami-Dade,
Collier and Lee counties. The accompanying unaudited consolidated financial statements for TIB Financial
Corp. (the Company) have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statement
presentation. For further information and an additional description of the
Companys accounting policies, refer to the Companys annual report for the
year ended December 31, 2003. The consolidated statements include the accounts of TIB Financial Corp. and its
wholly-owned subsidiaries, TIB Bank of the Keys, TIB Software and Services,
Inc. (this corporation was dissolved in March 2004  see Note 2), and Keys
Insurance Agency, Inc. (whose assets were sold in August 2003  see Note 10)
and the Banks two subsidiaries, TIB Government Loan Specialists, Inc. (this
corporation was dissolved in March 2004  see Note 2) and TIB Investment Center
Inc., collectively known as the Company. All significant intercompany accounts
and transactions have been eliminated in consolidation. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Certain
amounts previously reported on have been reclassified to conform to the current
period presentation. As used in this document, the terms we, us, our, TIB Financial, and
Company mean TIB Financial Corp. and its subsidiaries (unless the context
indicates another meaning), and the term Bank means TIB Bank of the Keys and
its subsidiaries (unless the context indicates another meaning). CRITICAL ACCOUNTING POLICIES The accounting and reporting policies of the Company are in accordance with
accounting principles generally accepted within the United States of America
and conform to general practices within the banking industry. Accounting and
reporting policies for the allowance for loan losses are deemed critical since
they involve the use of estimates and require significant management judgments.
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.
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. Additional information with regard to the Companys methodology and reporting
of the allowance for loan losses is included in the 2003 Annual Report and
10-K. NOTE 2  ACQUISITIONS AND DIVESTITURES On May 29, 2003, TIB Software and Services, Inc. sold its remaining interest in
ERAS Joint Venture for $326,667. The Company recognized a pretax gain of
approximately $202,000 on the transaction. In March 2004, the Company filed
Articles of Dissolution dissolving TIB Software and Services, Inc. On August 15, 2003, the Company closed the sale of the assets of Keys Insurance
Agency, Inc., a wholly owned subsidiary of the Company. See Note 10 
Discontinued Operations for details on the transaction. In March 2004, the
Company filed Articles of Dissolution dissolving Keys Insurance Agency, Inc. In March 2004, the Company filed Articles of Dissolution dissolving TIB
Government Loan Specialists, Inc. Activities performed through this
corporation are now performed through TIB Bank. 7




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##### Table of Contents



NOTE 3  INVESTMENT SECURITIES The amortized cost and estimated fair value of investment securities available
for sale at June 30, 2004 and December 31, 2003 are presented below: June 30, 2004Amortized
    
    Unrealized
    
    Unrealized
    
    Estimated(dollars in thousands)
    
    Cost
    
    Gains
    
    Losses
    
    Fair ValueU.S. Treasury securities
    
    $
    5,176
    
    
    $
    5
    
    
    $
    75
    
    
    $
    5,106U.S. Government agencies and corporations
    
    
    57,274
    
    
    
    156
    
    
    
    1,862
    
    
    
    55,568States and political
subdivisions-tax-exempt
    
    
    11,299
    
    
    
    235
    
    
    
    239
    
    
    
    11,295States and political subdivisions-taxable
    
    
    3,213
    
    
    
    17
    
    
    
    189
    
    
    
    3,041Marketable equity securities
    
    
    3,000
    
    
    
    159
    
    
    
    
    
    
    
    3,159Mortgage-backed securities
    
    
    3,422
    
    
    
    61
    
    
    
    
    
    
    
    3,483$
    83,384
    
    
    $
    633
    
    
    $
    2,365
    
    
    $
    81,652
 December 31, 2003Amortized
    
    Unrealized
    
    Unrealized
    
    Estimated(dollars in thousands)
    
    Cost
    
    Gains
    
    Losses
    
    Fair ValueU.S. Treasury securities
    
    $
    209
    
    
    $
    9
    
    
    $
    
    
    
    $
    218U.S. Government agencies and corporations
    
    
    31,357
    
    
    
    425
    
    
    
    663
    
    
    
    31,119States and political
subdivisions-tax-exempt
    
    
    8,838
    
    
    
    378
    
    
    
    59
    
    
    
    9,157States and political subdivisions-taxable
    
    
    3,559
    
    
    
    42
    
    
    
    101
    
    
    
    3,500Marketable equity securities
    
    
    3,000
    
    
    
    395
    
    
    
    
    
    
    
    3,395Mortgage-backed securities
    
    
    5,041
    
    
    
    128
    
    
    
    1
    
    
    
    5,168$
    52,004
    
    
    $
    1,377
    
    
    $
    824
    
    
    $
    52,557
 NOTE 4  LOANS Major classifications of loans are as follows: (dollars in thousands)
    
    June 30, 2004
    
    December 31, 2003Real estate mortgage loans:Commercial
    
    $
    329,542
    
    
    $
    297,221Residential
    
    
    61,461
    
    
    
    60,104Farmland
    
    
    3,347
    
    
    
    2,317Construction and vacant land
    
    
    36,972
    
    
    
    32,089Commercial and agricultural loans
    
    
    57,934
    
    
    
    63,624Indirect auto dealer loans
    
    
    76,821
    
    
    
    59,437Home equity loans
    
    
    13,822
    
    
    
    12,574Other consumer loans
    
    
    10,454
    
    
    
    11,232Total loans
    
    
    590,353
    
    
    
    538,598Net deferred loan costs
    
    
    2,106
    
    
    
    1,815Loans, net of deferred loan costs
    
    $
    592,459
    
    
    $
    540,413
 NOTE 5  ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses for the six months ended June 30,
2004 and June 30, 2003 follows: (dollars in thousands)
    
    2004
    
    2003Balance, January 1
    
    $
    5,216
    
    
    $
    4,272Provision for loan losses charged to expense
    
    
    1,018
    
    
    
    588Loans charged off
    
    
    (436
    )
    
    
    (320
    )Recoveries of loans previously charged off
    
    
    8
    
    
    
    14Balance, June 30
    
    $
    5,806
    
    
    $
    4,554
 8




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##### Table of Contents



NOTE 6  EARNINGS PER SHARE AND COMMON STOCK Earnings per share have been computed based on the following weighted average
number of common shares outstanding for the three months and six months ended
June 30: 2004
    
    2003For the three months ended June 30:Basic
    
    
    5,434,532
    
    
    
    4,152,481Dilutive effect of options outstanding
    
    
    163,310
    
    
    
    159,875Diluted
    
    
    5,597,842
    
    
    
    4,312,356For the six months ended June 30:Basic
    
    
    4,948,550
    
    
    
    4,101,616Dilutive effect of options outstanding
    
    
    180,072
    
    
    
    169,084Diluted
    
    
    5,128,622
    
    
    
    4,270,700
 Stock options for 33,736 and 1,923 shares of common stock were not considered
in computing diluted earnings per common share for the three months ended June
30, 2004 and 2003 because they were anti-dilutive. Stock options for 26,909
and 967 shares of common stock were not considered in computing diluted
earnings per common share for the six months ended June 30, 2004 and 2003
because they were anti-dilutive. The effect of stock options is the sole
common stock equivalent for purposes of calculating diluted earnings per common
share. NOTE 7  STOCK-BASED COMPENSATION Total stock options granted, exercised, and expired/forfeited during the six
months ended June 30, 2004, were 37,500, 76,629, and 7,400, respectively. As
of June 30, 2004, there were 430,976 options for shares outstanding. 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. For the three months ended June 30,(dollars in thousands, except per share amounts)
    
    2004
    
    2003Net income, as reported
    
    $
    1,257
    
    
    $
    1,286Stock-based compensation expense determined under fair
value based method, net of tax
    
    
    47
    
    
    
    60Pro forma net income
    
    $
    1,210
    
    
    $
    1,226Basic earnings per share as reported
    
    $
    0.23
    
    
    $
    0.31Pro forma basic earnings per share
    
    
    0.22
    
    
    
    0.30Diluted earnings per share as reported
    
    
    0.22
    
    
    
    0.30Pro forma diluted earnings per share
    
    
    0.22
    
    
    
    0.28
 For the six months ended June 30,(dollars in thousands, except per share amounts)
    
    2004
    
    2003Net income, as reported
    
    $
    2,530
    
    
    $
    2,475Stock-based compensation expense determined under fair
value based method, net of tax
    
    
    119
    
    
    
    97Pro forma net income
    
    $
    2,411
    
    
    $
    2,378
 9




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##### Table of Contents



For the six months ended June 30,(dollars in thousands, except per share amounts)
    
    2004
    
    2003Basic earnings per share as reported
    
    $
    0.51
    
    
    $
    0.60Pro forma basic earnings per share
    
    
    0.49
    
    
    
    0.58Diluted earnings per share as reported
    
    
    0.49
    
    
    
    0.58Pro forma diluted earnings per share
    
    
    0.47
    
    
    
    0.56
 On February 24, 2004, the Board of Directors approved the 2004 Equity Incentive
Plan for directors and employees, which was also approved by the shareholders
at their annual meeting held on May 25, 2004. The Plan allows the Company to
continue to provide equity compensation to employees and directors in order to
enable the Company to attract and retain qualified persons to serve as
directors and employees, to enhance their equity interest in the Company, and
thereby to solidify their common interest with shareholders in enhancing the
value and growth of the Company. Refer to the Companys 2004 Proxy statement
for additional information regarding the 2004 Equity Incentive Plan. NOTE 8  CAPITAL ADEQUACY Federal banking regulators have established certain capital adequacy standards
required to be maintained by banks and bank holding companies. The minimum
requirements established in the regulations are set forth in the table below,
along with the actual ratios at June 30, 2004 and December 31, 2003: Well
    
    AdequatelyCapitalized
    
    Capitalized
    
    June 30, 2004
    
    December 31, 2003Requirement
    
    Requirement
    
    Actual
    
    ActualTier 1 Capital (to Average Assets)Consolidated
    
    
    35
    %
    
    
    34
    %
    
    
    10.4
    %
    
    
    7.8
    %Bank
    
    
    35
    %
    
    
    34
    %
    
    
    11.1
    %
    
    
    8.5
    %Tier 1 Capital (to Risk Weighted Assets)Consolidated
    
    
    36
    %
    
    
    34
    %
    
    
    11.8
    %
    
    
    8.8
    %Bank
    
    
    36
    %
    
    
    34
    %
    
    
    12.6
    %
    
    
    9.6
    %Total Capital (to Risk Weighted Assets)Consolidated
    
    
    310
    %
    
    
    38
    %
    
    
    13.6
    %
    
    
    10.6
    %Bank
    
    
    310
    %
    
    
    38
    %
    
    
    13.5
    %
    
    
    10.5
    %
 Management believes, as of June 30, 2004, that the Company and the Bank met all
capital requirements to which they are subject. The Company has included the
trust preferred securities that were issued in September 2000 and July 2001 in
Tier 1 capital. We completed an offering of 1,150,000 shares of our common stock during the
second quarter of 2004. NOTE 9  SEGMENT REPORTING TIB Financial Corp. has two reportable segments in their continuing operations:
community banking and merchant bankcard processing. The community banking
segments business is to attract deposits from the public and to use such
deposits to make real estate, business and consumer loans in its primary
service area. The merchant bankcard processing segment processes credit card
transactions for local merchants. Parent and other includes the operations of
the holding company and retail investment service operations of the Bank. The results of Keys Insurance Agency, Inc. are not included in the segment
reporting as they are classified separately as discontinued operations in our
consolidated financial statements (see Note 10). Total assets of Keys
Insurance Agency, Inc. at June 30, 2004 and June 30, 2003 were $0 and $2.3
million respectively. The Companys reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different marketing strategies. Intercompany transactions have been ignored in preparing the segment reporting
amounts below. The results of the Companys segments are as follows (dollars in thousands): 10




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##### Table of Contents



Merchant
    
    ParentSix months ended
    
    Community
    
    Bankcard
    
    AndJune 30, 2004
    
    Banking
    
    Processing
    
    Other
    
    TotalsInterest and dividend income
    
    $
    19,037
    
    
    $
    
    
    
    $
    
    
    
    $
    19,037Interest expense
    
    
    4,057
    
    
    
    
    
    
    
    791
    
    
    
    4,848Net interest and dividend
income
    
    
    14,980
    
    
    
    
    
    
    
    (791
    )
    
    
    14,189Other income
    
    
    3,104
    
    
    
    3,294
    
    
    
    206
    
    
    
    6,604Depreciation and amortization
    
    
    1,049
    
    
    
    21
    
    
    
    2
    
    
    
    1,072Other expense
    
    
    12,595
    
    
    
    2,745
    
    
    
    553
    
    
    
    15,893Pretax segment profit (loss)
    
    $
    4,440
    
    
    $
    528
    
    
    $
    (1,140
    )
    
    $
    3,828Segment Assets
    
    $
    760,068
    
    
    $
    30
    
    
    $
    422
    
    
    $
    760,520
 Merchant
    
    ParentSix months ended
    
    Community
    
    Bankcard
    
    andJune 30, 2003
    
    Banking
    
    Processing
    
    Other
    
    TotalsInterest and dividend income
    
    $
    16,743
    
    
    $
    
    
    
    $
    
    
    
    $
    16,743Interest expense
    
    
    4,227
    
    
    
    
    
    
    
    795
    
    
    
    5,022Net interest and dividend
income
    
    
    12,516
    
    
    
    
    
    
    
    (795
    )
    
    
    11,721Other income
    
    
    3,179
    
    
    
    2,599
    
    
    
    388
    
    
    
    6,166Depreciation and amortization
    
    
    955
    
    
    
    23
    
    
    
    2
    
    
    
    980Other expense
    
    
    10,784
    
    
    
    2,104
    
    
    
    372
    
    
    
    13,260Pretax segment profit (loss)
    
    $
    3,956
    
    
    $
    472
    
    
    $
    (781
    )
    
    $
    3,647Segment Assets
    
    $
    630,440
    
    
    $
    55
    
    
    $
    450
    
    
    $
    630,945
 Merchant
    
    ParentThree months ended
    
    Community
    
    Bankcard
    
    AndJune 30, 2004
    
    Banking
    
    Processing
    
    Other
    
    TotalsInterest and dividend income
    
    $
    9,819
    
    
    $
    
    
    
    $
    
    
    
    $
    9,819Interest expense
    
    
    2,062
    
    
    
    
    
    
    
    396
    
    
    
    2,458Net interest and dividend
income
    
    
    7,757
    
    
    
    
    
    
    
    (396
    )
    
    
    7,361Other income
    
    
    1,690
    
    
    
    1,534
    
    
    
    107
    
    
    
    3,331Depreciation and amortization
    
    
    534
    
    
    
    10
    
    
    
    1
    
    
    
    545Other expense
    
    
    6,586
    
    
    
    1,312
    
    
    
    359
    
    
    
    8,257Pretax segment profit (loss)
    
    $
    2,327
    
    
    $
    212
    
    
    $
    (649
    )
    
    $
    1,890
 Merchant
    
    ParentThree months ended
    
    Community
    
    Bankcard
    
    andJune 30, 2003
    
    Banking
    
    Processing
    
    Other
    
    TotalsInterest and dividend income
    
    $
    8,452
    
    
    $
    
    
    
    $
    
    
    
    $
    8,452Interest expense
    
    
    2,167
    
    
    
    
    
    
    
    397
    
    
    
    2,564Net interest and dividend
income
    
    
    6,285
    
    
    
    
    
    
    
    (397
    )
    
    
    5,888Other income
    
    
    1,566
    
    
    
    1,221
    
    
    
    301
    
    
    
    3,088Depreciation and amortization
    
    
    485
    
    
    
    12
    
    
    
    1
    
    
    
    498Other expense
    
    
    5,425
    
    
    
    976
    
    
    
    228
    
    
    
    6,629Pretax segment profit (loss)
    
    $
    1,941
    
    
    $
    233
    
    
    $
    (325
    )
    
    $
    1,849
 The Company discontinued separate reporting of its government guaranteed loan
sales and servicing segment in 2003. This segment is now included as part of
the Community Banking segment above. 11




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##### Table of Contents



NOTE 10  DISCONTINUED OPERATIONS On August 15, 2003, we closed the sale of Keys Insurance Agency, Inc., a wholly
owned subsidiary of the Company, to a former director of the Company and TIB
Bank, and his partner. The transaction was structured as a sale of the agency
assets. The buyer paid $2.2 million in cash at the closing. Of the cash
payment at closing, proceeds of $2.0 million were pursuant to a loan from TIB
Bank to the buyer. We recognized a loss of $15,000 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: (dollars in thousands)
    
    2004
    
    2003For the three months ended June 30:Other income
    
    $
    
    
    
    $
    542Depreciation and amortization
    
    
    
    
    
    
    14Other expense
    
    
    
    
    
    
    407Pretax income from discontinued operations
    
    $
    
    
    
    $
    121For the six months ended June 30:Other income
    
    $
    
    
    
    $
    978Depreciation and amortization
    
    
    
    
    
    
    27Other expense
    
    
    
    
    
    
    786Pretax income from discontinued operations
    
    $
    
    
    
    $
    165
 
 Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Certain of the matters discussed under the caption Managements Discussion and
Analysis of Financial Condition and Results of Operations and elsewhere in
this Form 10-Q may constitute forward-looking statements within the meaning
of the Private Securities Litigation Reform Act and as such may involve known
and unknown risk, uncertainties and other factors which may cause the actual
results, performance or achievements of TIB Financial Corp. 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. The following discussion addresses the factors that have affected the financial
condition and results of operations of TIB Financial Corp. (the Company) as
reflected in the unaudited consolidated statement of condition as of June 30,
2004, and statement of income for the three months and six months ended June
30, 2004. Operating results for the three months and six months ended June 30,
2004 are not necessarily indicative of trends or results to be expected for the
year ended December 31, 2004. THREE MONTHS ENDED JUNE 30, 2004 AND 2003 RESULTS OF OPERATIONS Our net income of $1,257,000 for the second quarter of 2004 was a $29,000 or
2.3% decrease compared to $1,286,000 for the same period last year. Net income
from continuing operations was $1,257,000 for the second quarter of 2004,
compared to $1,211,000 for the second quarter of 2003, an increase of $46,000
or 3.8%. As discussed in Note 10, the Company closed the sale of the assets of
its wholly owned subsidiary, Keys Insurance Agency, Inc., in the third quarter
of 2003. Basic and diluted earnings per share for continuing operations for the second
quarter of 2004 were $0.23 and $0.22 respectively as compared to $0.29 and
$0.28 per share in the previous years quarter. Basic weighted average common
equivalent shares outstanding for the three months ended June 30, 2004 were
5,434,532 compared to 4,152,481 for the three 12




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##### Table of Contents



months ended June 30, 2003. This 30.9% increase in shares outstanding resulted
from the exercise of stock options and the issuance of 1,150,000 shares in the
second quarter of 2004 in connection with a public stock offering of our
shares. Annualized return on average assets was 0.69% and 0.83% for the second quarter
of 2004 and 2003, while the annualized return on average shareholders equity
was 8.31% and 14.29% for the same period. The decline in the return on average
shareholders equity in the current year is primarily attributable to the stock
offering in the second quarter of 2004. 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, advances from the Federal
Home Loan Bank, and other short term borrowings. Net interest income increased $1,473,000, or 25.0%, to $7,361,000 in the three
months ended June 30, 2004 as compared to the same period last year. The prime
rate as published in the Wall Street Journal began 2003 at 4.25% and in June
2003 it declined to 4.00% and remained at that rate until July of 2004. Many
of the Banks loans are indexed to this floating rate, although they also
include floors. The lower level of prime rate in the second quarter of 2004
compared to the comparative period in 2003 did result in a lower average yield
in the loan portfolio, however, increased loan volumes and decreased deposit
rates more than compensated for this allowing for the reported increase in
interest income. PROVISION FOR LOAN LOSSES The provision for loan losses represents the charge to income necessary to
adjust the allowance for loan losses to an amount that represents managements
assessment of the estimated probable credit losses inherent in our loan
portfolio which have been incurred at each balance sheet date. The provision for loan losses increased $391,000, or 151.6%, to $649,000 in the
second quarter of 2004 compared to $258,000 in the comparable prior year
quarter. The higher provision for loan losses in 2004 was primarily
attributable to the growth in the loan portfolio and change in composition of
the loan portfolio. Total loans outstanding grew $40.7 million, or 7.4%,
during the second quarter of 2004, as compared to only $14.8 million, or 3.2%,
during the second quarter of 2003. The largest dollar increase during the
second quarter of 2004 occurred in commercial real estate loans which increased
$35.8 million, or 12.2%. This compares to a $10.4 million, or 3.8% increase in
commercial real estate loans during the second quarter of 2003. We have also
continued to expand our indirect lending portfolio. At June 30, 2004, indirect
auto dealer loans accounted for $76.8 million, or 13.0%, of our loan portfolio.
This compares to an indirect lending portfolio of $39.2 million at June 30,
2003 which represented 8.3% of our total loan portfolio. Total loans outstanding were $590.4 million at June 30, 2004, compared to
$473.1 million at June 30, 2003. Net charge-offs were $190,000 during the
three months ended June 30, 2004 compared to $73,000 for the same period in
2003. Management will continue to monitor the credit quality of the lending portfolio
and will recognize additional provisions in the future as necessary, in the
opinion of management, to maintain the allowance for loan losses at an
appropriate level. NON-INTEREST INCOME Non-interest income for the second quarter of 2004 was $3,331,000. This
represents a $243,000 or 7.9% increase over the prior year quarter which
totaled $3,088,000. The increase in non-interest income is primarily
attributable to an increase of $313,000 in merchant bankcard processing income,
partially offset by a $202,000 decrease from the gain on sale of investment in
ERAS JV. The $313,000 increase in merchant bankcard processing income is primarily a
result of volume increases. On May 29, 2003, we sold our remaining interest in
ERAS Joint Venture and recognized a pretax gain of $202,000 on this
transaction. NON-INTEREST EXPENSE Non-interest expense for the second quarter of 2004 was $8,153,000. This
represents a $1,284,000 or 18.7% increase over the prior year quarter which
totaled $6,869,000. The increase in non-interest expense is attributable to
salaries and employee benefits increasing $540,000, net occupancy expense
increasing $109,000, and other expense increasing $635,000. The increases are
primarily the result of costs associated with the growth of our business and
continued expansion into the Southwest Florida market. 13




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##### Table of Contents



At June 30, 2004 the Bank had 275 full-time employees and 16 part-time
employees, compared to 262 full-time employees and 14 part time employees at
June 30, 2003. The increase in staff was required to manage the growth of the
organization. In general, as we continue to renovate facilities and add branches, the net
occupancy expense category will grow overall. In December 2003, we leased a
new operations facility in Homestead, Florida. Building rent expense on this
property for the three months ended June 30, 2004 totaled $35,000. In the category of other expense, interchange and other bankcard expense
increased approximately $323,000 over the prior year amount. These expenses
are primarily tied to volume, and are consistent with the increase in merchant
bankcard processing income we experienced. We did, however, experience an
increase in the rates charged by our card associations in April 2004 that also
contributed to this increase. Also, in the second quarter of 2004, we incurred
$191,000 in employee relocation costs. These costs were incurred to relocate
various employees, including the Companys Chief Executive Officer, in
connection with the relocation of our corporate headquarters from the Florida
Keys to the Southwest Florida area. INCOME TAXES The provision for income taxes related to continuing operations totaled
$633,000, for an effective tax rate of 33.5%, for the three months ended June
30, 2004, and $638,000, for an effective tax rate of 34.5%, for the three
months ended June 30, 2003. SIX MONTHS ENDED JUNE 30, 2004 AND 2003 RESULTS OF OPERATIONS Our net income of $2,530,000 for the first six months of 2004 was a $55,000 or
2.2% increase compared to $2,475,000 for the same period last year. Net income
from continuing operations was $2,530,000 for the first six months of 2004,
compared to $2,372,000 for the first six months of 2003, an increase of
$158,000 or 6.7%. As discussed in Note 10, the Company closed the sale of the
assets of its wholly owned subsidiary, Keys Insurance Agency, Inc. in the third
quarter of 2003. Basic and diluted earnings per share for the first six months of 2004 were
$0.51 and $0.49 respectively as compared to $0.60 and $0.58 per share in the
previous years period. Basic weighted average common equivalent shares
outstanding for the six months ended June 30, 2004 were 4,948,550 compared to
4,101,616. This 20.6% increase in shares outstanding resulted from the
issuance of an additional 1,150,000 shares in the second quarter of 2004 in
connection with a public offering of our common stock that raised $23.2 million
in new capital, the issuance of 280,653 shares in June 2003 in connection with
a private placement of our stock that raised $4.3 million in new capital, and
the exercise of stock options. Annualized return on average assets was 0.72% and 0.82% for the first six
months of 2004 and 2003, while the annualized return on average shareholders
equity was 9.84% and 14.10% for the same period. The decline in the return on
average shareholders equity in the current year is primarily attributable to
the stock offering in the second quarter of 2004. 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, advances from the Federal
Home Loan Bank, and other short term borrowings. Net interest income increased $2,468,000, or 21.1%, to $14,189,000 in the six
months ended June 30, 2004 as compared to the same period last year. The prime
rate as published in the Wall Street Journal began 2003 at 4.25% and in June
2003 it declined to 4.00% and remained at that rate until July of 2004. Many
of the Banks loans are indexed to this floating rate, although they also
include floors. The lower level of prime rate in the first six months of 2004
compared to the comparative period in 2003 did result in a lower average yield
in the loan portfolio, however, increased loan volumes and decreased deposit
rates more than compensated for this allowing for the reported increase in
interest income. The effect of the low interest rates is to contract our net interest margin in
two ways. First, a low prime rate directly affects yields on loans tied to
that index and even loans not indexed to prime are priced reflective of overall
low asset yields. Second, deposit liabilities can only be priced down so far
before the interest rate is too low to attract the volume of required funding.
The net effect of this rate environment is a larger reduction in asset yields,
generally, than the corresponding reduction in liability costs. 14




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##### Table of Contents



We were able to mitigate the effects of the interest rate environment for the
following reasons. First, even though we are at low relative levels of
interest rates, net interest margins have stabilized and we were able to
decrease liability costs to a similar extent that asset yields contracted.
Second, we have expanded a practice of requiring an interest rate floor on many
new commercial loans. This proved effective in slowing the average decline in
loan yields. Finally, we continue to change our mix of assets to slightly
increase the percentage of higher yielding loans. In April 2002, the Bank began a program to acquire indirect automobile loans.
We predominantly buy loans from auto dealers in southwest Florida which 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. As of June 30, 2004 we had $76.8 million of indirect auto
dealer loans outstanding, compared to $39.2 million at June 30, 2003. Coupled
with the appropriate safeguards, we believe this product continues to offer us
an opportunity to increase asset yields while not sacrificing our primary
objective of maintaining strong asset quality. The average yield on interest-earning assets for the first six months of 2004
was 6.01% which was a decrease of 24 basis points compared to the 6.25% yield
earned during the first six months of 2003. The average cost of
interest-bearing deposits declined 32 basis points from 2.02% during the first
six months of 2003 to 1.70% for the comparable period in 2004, and the rate of
all interest-bearing liabilities decreased 35 basis points, from 2.27% in 2003
to 1.92% in 2004. The Companys net interest margin increased to 4.50% in the
first six months of 2004 compared to 4.39% in the first six months of 2003.
We anticipate interest rates slowly trending up over the next twelve months.
If this occurs or if rates remain stable, net interest margin should expand
only slightly due principally to strong new loan production. However, due to
the cash generated from our recent stock offering in April 2004, there will be
some near term compression in net interest margin until these funds are
invested. Our margin is derived from the rate difference between our average
yields on our current mix of assets in excess of our average cost of
liabilities. By the end of 2004, we anticipate the funds raised in our recent
stock offering will be invested in a similar mix of assets as currently exists
on our balance sheet. 15




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##### Table of Contents



The following table presents average balances of the Company, the
taxable-equivalent interest earned, and the rate paid thereon during the six
months ended June 30, 2004 and June 30, 2003. 2004
    
    
    
    
    
    
    
    
    
    2003Average
    
    Income/
    
    Yields/
    
    Average
    
    Income/
    
    Yields/(dollars in thousands)
    
    Balances
    
    Expense
    
    Rates
    
    Balances
    
    Expense
    
    RatesInterest-earning assets:Loans (1)(2)
    
    $
    558,197
    
    
    $
    17,562
    
    
    
    6.33
    %
    
    $
    457,724
    
    
    $
    15,279
    
    
    
    6.73
    %Investment securities (2)
    
    
    60,830
    
    
    
    1,355
    
    
    
    4.48
    %
    
    
    50,644
    
    
    
    1,317
    
    
    
    5.24
    %Marketable equity securities  90% tax
exempt (2)
    
    
    3,448
    
    
    
    175
    
    
    
    10.23
    %
    
    
    
    
    
    
    
    
    
    
    Interest-bearing deposits in other banks
    
    
    948
    
    
    
    5
    
    
    
    0.98
    %
    
    
    199
    
    
    
    1
    
    
    
    0.96
    %Federal Home Loan Bank stock
    
    
    1,518
    
    
    
    24
    
    
    
    3.21
    %
    
    
    1,424
    
    
    
    30
    
    
    
    4.26
    %Federal funds sold
    
    
    17,038
    
    
    
    79
    
    
    
    0.94
    %
    
    
    32,413
    
    
    
    193
    
    
    
    1.20
    %Total interest-earning assets
    
    
    641,979
    
    
    
    19,200
    
    
    
    6.01
    %
    
    
    542,404
    
    
    
    16,820
    
    
    
    6.25
    %Non-interest-earning assets:Cash and due from banks
    
    
    19,781
    
    
    
    
    
    
    
    
    
    
    
    15,600Investment in ERAS
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104Premises and equipment, net
    
    
    20,776
    
    
    
    
    
    
    
    
    
    
    
    18,850Allowances for loan losses
    
    
    (5,405
    )
    
    
    
    
    
    
    
    
    
    
    (4,503
    )Other assets
    
    
    28,504
    
    
    
    
    
    
    
    
    
    
    
    29,399Total non-interest-earning assets
    
    
    63,656
    
    
    
    
    
    
    
    
    
    
    
    59,450Total assets
    
    $
    705,635
    
    
    
    
    
    
    
    
    
    
    $
    601,854Interest-bearing liabilities:Interest-bearing deposits:NOW accounts
    
    $
    74,269
    
    
    
    120
    
    
    
    0.32
    %
    
    $
    56,269
    
    
    
    124
    
    
    
    0.45
    %Money market
    
    
    126,115
    
    
    
    494
    
    
    
    0.79
    %
    
    
    130,053
    
    
    
    662
    
    
    
    1.03
    %Savings deposits
    
    
    42,860
    
    
    
    82
    
    
    
    0.39
    %
    
    
    33,472
    
    
    
    98
    
    
    
    0.59
    %Time deposits
    
    
    213,760
    
    
    
    3,176
    
    
    
    2.99
    %
    
    
    190,863
    
    
    
    3,220
    
    
    
    3.40
    %Total interest-bearing deposits
    
    
    457,004
    
    
    
    3,872
    
    
    
    1.70
    %
    
    
    410,657
    
    
    
    4,104
    
    
    
    2.02
    %Other interest-bearing liabilities:Short-term borrowings and FHLB advances
    
    
    32,052
    
    
    
    185
    
    
    
    1.16
    %
    
    
    18,091
    
    
    
    123
    
    
    
    1.37
    %Long-term borrowings
    
    
    18,250
    
    
    
    791
    
    
    
    8.71
    %
    
    
    18,250
    
    
    
    795
    
    
    
    8.79
    %Total interest-bearing liabilities
    
    
    507,306
    
    
    
    4,848
    
    
    
    1.92
    %
    
    
    446,998
    
    
    
    5,022
    
    
    
    2.27
    %Non-interest-bearing liabilities and
shareholders equity:Demand deposits
    
    
    138,656
    
    
    
    
    
    
    
    
    
    
    
    112,560Other liabilities
    
    
    8,265
    
    
    
    
    
    
    
    
    
    
    
    7,201Shareholders equity
    
    
    51,408
    
    
    
    
    
    
    
    
    
    
    
    35,095Total non-interest-bearing liabilities and
shareholders equity
    
    
    198,329
    
    
    
    
    
    
    
    
    
    
    
    154,856Total liabilities and shareholders equity
    
    $
    705,635
    
    
    
    
    
    
    
    
    
    
    $
    601,854Interest rate spread (tax equivalent basis)
    
    
    
    
    
    
    
    
    
    
    4.09
    %
    
    
    
    
    
    
    
    
    
    
    3.98
    %Net interest income (tax equivalent basis)
    
    
    
    
    
    $
    14,352
    
    
    
    
    
    
    
    
    
    
    $
    11,798Net interest margin (3) (tax equivalent basis)
    
    
    
    
    
    
    
    
    
    
    4.50
    %
    
    
    
    
    
    
    
    
    
    
    4.39
    %
  (1)
    
    Average loans include non-performing loans.(2)
    
    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.(3)
    
    Net interest margin is net interest income divided by average total
interest-earning assets. 16




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##### Table of Contents



The table below details the components of the changes in net interest income
for the six months ended June 30, 2004 and June 30, 2003. For each major
category of interest-earning assets and interest-bearing liabilities,
information is provided with respect to changes due to average volumes, 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. 2004 compared to 2003 (1)Due to changes inNetAverage
    
    Average
    
    Increase(dollars in thousands)
    
    Volume
    
    Rate
    
    (Decrease)Interest incomeLoans (2)
    
    $
    3,201
    
    
    $
    (918
    )
    
    $
    2,283Investment securities (2)
    
    
    242
    
    
    
    (204
    )
    
    
    38Marketable equity securities (2)
    
    
    175
    
    
    
    
    
    
    
    175Interest-bearing deposits in other banks
    
    
    4
    
    
    
    
    
    
    
    4Federal Home Loan Bank Stock
    
    
    2
    
    
    
    (8
    )
    
    
    (6
    )Federal funds sold
    
    
    (78
    )
    
    
    (36
    )
    
    
    (114
    )Total interest income
    
    
    3,546
    
    
    
    (1,166
    )
    
    
    2,380Interest expenseNOW accounts
    
    
    34
    
    
    
    (38
    )
    
    
    (4
    )Money market
    
    
    (19
    )
    
    
    (149
    )
    
    
    (168
    )Savings deposits
    
    
    23
    
    
    
    (39
    )
    
    
    (16
    )Time deposits
    
    
    363
    
    
    
    (407
    )
    
    
    (44
    )Short-term borrowings and FHLB advances
    
    
    83
    
    
    
    (21
    )
    
    
    62Long-term borrowings
    
    
    
    
    
    
    (4
    )
    
    
    (4
    )Total interest expense
    
    
    484
    
    
    
    (658
    )
    
    
    (174
    )Change in net interest income
    
    $
    3,062
    
    
    $
    (508
    )
    
    $
    2,554
  (1)
    
    The change in interest due to both rate and volume has been allocated to
the volume and rate components in proportion to the relationship of the
dollar amounts of the absolute change in each.(2)
    
    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. PROVISION FOR LOAN LOSSES The provision for loan losses represents the charge to income necessary to
adjust the allowance for loan losses to an amount that represents managements
assessment of the estimated probable credit losses inherent in our loan
portfolio which have been incurred at each balance sheet date. The provision for loan losses increased $430,000 or 73.1% to $1,018,000 in the
first six months of 2004 compared to $588,000 in the comparable prior year
period. The higher provision for loan losses in 2004 was primarily
attributable to the growth in the loan portfolio and change in composition of
the loan portfolio. Total loans outstanding grew $51.8 million, or 9.6%,
during the first six months of 2004, as compared to only $31.4 million, or
7.1%, during the first six months of 2003. The largest dollar increase during
the first six months of 2004 occurred in commercial real estate loans which
increased $32.3 million, or 10.9%. This compares to a $18.2 million, or 6.9%,
increase in commercial real estate loans during the first six months of 2003.
We have also continued to expand our indirect lending portfolio. At June 30,
2004, indirect auto dealer loans accounted for $76.8 million, or 13.0%, of our
loan portfolio. This compares to an indirect lending portfolio of $39.2
million at June 30, 2003 which represented 8.3% of our total loan portfolio. Total loans outstanding were $590.4 million at June 30, 2004, compared to
$473.1 million at June 30, 2003. Net charge-offs were $428,000 during the six
months ended June 30, 2004 compared to $306,000 for the same period in 2003.
Management will continue to monitor the credit quality of the lending portfolio
and will recognize additional provisions in the future as necessary, in the
opinion of management, to maintain the allowance for loan losses at an
appropriate level. NON-INTEREST INCOME Non-interest income for the first six months of 2004 was $6,604,000. This
represents a $438,000 or 7.1% increase over the prior year period which totaled
$6,166,000. The increase in non-interest income is primarily attributable to
an increase of 17




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##### Table of Contents



$695,000 in merchant bankcard processing income, partially offset by a decrease
of $168,000 in fees on mortgage loans sold, and a $202,000 decrease from the
gain on sale of investment in ERAS JV. The increase in merchant bankcard processing income is primarily a result of
volume increases. Fees on mortgage loans sold result from the immediate sale
of various residential mortgages (primarily fixed rate loans) in the secondary
market. The lower fees earned in the first six months of 2004 compared to the
year ago period are attributable to reduced refinancing activity, lower new
sales activity, and thinner margins. On May 29, 2003, we sold our remaining
interest in ERAS Joint Venture and recognized a pretax gain of $202,000 on this
transaction. NON-INTEREST EXPENSE Non-interest expense for the first six months of 2004 was $15,947,000. This
represents a $2,295,000 or 16.8% increase over the prior year period which
totaled $13,652,000. The increase in non-interest expense is attributable to
salaries and employee benefits increasing $815,000, net occupancy expense
increasing $204,000, and other expense increasing $1,276,000. The increases
are primarily the result of costs associated with the growth of our business
and continued expansion into the Southwest Florida market. At June 30, 2004 the Bank had 275 full-time employees and 16 part-time
employees, compared to 262 full-time employees and 14 part time employees at
June 30, 2003. The increase in staff was required to manage growth of the
organization. In the category of other expense, interchange and other bankcard expensed
increased approximately $613,000 over the prior year amount. These expenses
are primarily tied to volume, and are consistent with the increase in merchant
bankcard processing income we experienced. We did, however, experience an
increase in the rates charged by our card associations in April 2004 that also
contributed to this increase. Also, in the first six months of 2004, we
incurred $196,000 in employee relocation costs. These costs were incurred to
relocate various employees, including the Companys Chief Executive Officer, in
connection with the relocation of our corporate headquarters from the Florida
Keys to the Southwest Florida area. INCOME TAXES The change in income tax expense is primarily attributable to the growth in
income before income taxes. The provision for income taxes related to
continuing operations totaled $1,298,000, for an effective tax rate of 33.9%,
for the six months ended June 30, 2004, and $1,275,000, for an effective tax
rate of 35.0%, for the six months ended June 30, 2003. BALANCE SHEET Total assets at June 30, 2004 were $760,520,000, up 13.6% from total assets of
$669,298,000 at December 31, 2003. Asset growth was primarily funded by an
increase in deposits of $70,581,000, or 12.7%. Loans net of deferred loan
costs increased $52.0 million, or 9.6%, to $592.5 million for the first six
months of 2004 from year end 2003. The largest dollar increase came in the
commercial real estate loan category which increased $32.3 million, or 10.9%.
We have also continued to expand our indirect dealer auto loan program. At
June 30, 2004, indirect auto loans accounted for $76.8 million, or 13.0%, of
our loan portfolio as compared to $59.4 million, or 11.0%, at December 31,
2003. Also, in the same period, investment securities increased $29.1 million
as a result of purchases of securities from funds generated from the stock
offering in the second quarter of 2004. During the first six months of 2004, we reduced our advances from the Federal
Home Loan Bank by $6.5 million. Total advances outstanding were $38.5 million
at June 30, 2004 as compared to $45.0 million at December 31, 2003. Shareholders equity totaled $65.2 million at June 30, 2004, increasing $23.9
million from December 31, 2003. Book value per share increased to $11.52 at
June 30, 2004 from $9.31 at December 31, 2003. The Company declared a
quarterly dividend of $0.1125 per share in both the first and second quarter of
2004 and $0.11 per share in both the first quarter and second quarter of 2003. On April 15, 2004, we closed the sale of 1,000,000 shares of our common stock
at a price of $22.00 per share before commissions and expenses. The shares
were sold on a firm commitment basis through Advest, Inc. Advest, Inc. also
purchased an additional 150,000 shares from the Company on May 6, 2004, at
$22.00 per share before commissions and expenses. The net proceeds of the
offering totaling $23.2 million provides capital to support continued loan and
deposit growth throughout our South Florida markets. NON-PERFORMING ASSETS Non-performing assets include nonaccrual loans, accruing loans contractually
past due 90 days or more, repossessed personal property, and other real estate.
Loans are placed on nonaccrual status when management has concerns relating to
the ability to 18




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##### Table of Contents



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: (dollars in thousands)
    
    June 30, 2004
    
    December 31, 2003Total nonaccrual loans
    
    $
    1,250
    
    
    $
    390Accruing loans delinquent 90 days or more (a)
    
    
    
    
    
    
    Total non-performing loans (b)
    
    $
    1,250
    
    
    $
    390Repossessed personal property (indirect auto dealer loans)
    
    
    535
    
    
    
    598Other real estate owned (c)
    
    
    192
    
    
    
    193Other assets (c)
    
    
    2,531
    
    
    
    2,472Total non-performing assets
    
    $
    4,508
    
    
    $
    3,653Allowance for loan losses
    
    $
    5,806
    
    
    $
    5,216Non-performing assets as a percent of total assets
    
    
    0.59
    %
    
    
    0.55
    %Non-performing loans as a percent of gross loans
    
    
    0.21
    %
    
    
    0.07
    %Allowance for loan losses as a percent of non-performing loans
    
    
    464.5
    %
    
    
    1,336.33
    %
 (a) Non-performing loans exclude the $1.6 million loan discussed below that is
guaranteed for both principal and interest by the U.S. Department of
Agriculture (USDA). (b) Nonaccrual loans increased $860,000 from December 31, 2003 to June 30,
2004. Of the increase, $591,000 is attributable to the addition of one loan to
nonaccrual status during the second quarter of 2004. In July 2004, this loan
was satisfactorily paid off. (c) The Bank made a $10,000,000 loan to construct a lumber mill in northern
Florida. Of this amount, $6,400,000 had been sold by the Bank to other lenders.
The loan was partially guaranteed as to principal and interest by the 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 $1,886,000) based on the fair value of the
underlying-collateral. The portion of this loan guaranteed by the USDA was
approximately $1.6 million at June 30, 2004 and December 31, 2003, and is
accruing interest. Accrued interest on this loan totals approximately $632,000
and $590,000 at June 30, 2004 and December 31, 2003, respectively. The Bank is pursuing a sale of the property and equipment and has incurred
various expenditures. The Bank capitalized the liquidation costs and a 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 $192,000 and
$193,000 at June 30, 2004 and December 31, 2003, respectively. The
non-guaranteed principal and interest ($1,961,000 at June 30, 2004 and December
31, 2003) and the reimbursable capitalized liquidation costs and protective
advance costs totaling approximately $570,000 and $511,000 at June 30, 2004 and
December 31, 2003, 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. 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 such date, the Bank
charged-off the non guaranteed principal and interest totaling $1,961,000 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. 19




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##### Table of Contents



The allowance for loan losses amounted to $5,806,000 and $5,216,000 at June 30,
2004 and December 31, 2003, respectively. The allowance for loan losses is a valuation allowance for probable incurred
credit losses in the loan portfolio. Our 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. Based on an analysis performed by management at June 30, 2004, 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. LIQUIDITY The goal of liquidity management is to ensure the availability of an adequate
level of funds to meet the loan demand and deposit withdrawal needs of the
Companys customers. We manage the levels, types and maturities of earning
assets in relation to the sources available to fund current and future needs to
ensure that adequate funding will be available at all times. In addition to maintaining a stable core deposit base, we maintain adequate
liquidity primarily through the use of investment securities and unused
borrowing capacity. The Bank has invested in Federal Home Loan Bank stock for
the purpose of establishing credit lines with the Federal Home Loan Bank. The
credit availability to the Bank is equal to 20 percent 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 June
30, 2004, there were $38.5 million in advances outstanding in addition to a $15
million letter of credit used in lieu of pledging securities to the State of
Florida. 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 done to bring the collateral
availability up to approximately $138.8 million. The Bank has an unsecured overnight federal funds purchased accommodation up to
a maximum of $12.0 million from its principal correspondent bank. In the second quarter of 2004, we completed the sale of 1,150,000 shares of our
common stock at a price of $22.00 per share before commissions and expenses.
The net proceeds provided additional liquidity along with additional capital to
the Company. The net proceeds of the offering will be used to provide capital
to support continued loan and deposit growth throughout our South Florida
markets. ASSET AND LIABILITY MANAGEMENT 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. 20




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##### Table of Contents



Our interest rate sensitivity position at June 30, 2004 is presented in the
table below: 3 months
    
    4 to 6
    
    7 to 12
    
    1 to 5
    
    Over 5(dollars in thousands)
    
    or less
    
    Months
    
    Months
    
    years
    
    Years
    
    TotalInterest-earning assets:Loans
    
    $
    244,921
    
    
    $
    29,509
    
    
    $
    42,205
    
    
    $
    199,300
    
    
    $
    74,418
    
    
    $
    590,353Investment securities-taxable
    
    
    1,418
    
    
    
    
    
    
    
    
    
    
    
    33,113
    
    
    
    32,667
    
    
    
    67,198Investment securities-tax exempt
    
    
    308
    
    
    
    234
    
    
    
    
    
    
    
    3,069
    
    
    
    7,684
    
    
    
    11,295Marketable equity securities
    
    
    3,159
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,159Federal Home Loan Bank stock
    
    
    1,925
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,925Federal funds sold
    
    
    10,889
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,889Interest bearing deposit in other
bank
    
    
    930
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    930Total interest-bearing assets
    
    
    263,550
    
    
    
    29,743
    
    
    
    42,205
    
    
    
    235,482
    
    
    
    114,769
    
    
    
    685,749Interest-bearing liabilities:NOW accounts
    
    
    75,071
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,071Money Market
    
    
    134,216
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    134,216Savings Deposits
    
    
    43,223
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,223Time deposits
    
    
    54,726
    
    
    
    29,257
    
    
    
    71,609
    
    
    
    70,888
    
    
    
    11
    
    
    
    226,491Notes payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,250
    
    
    
    5,250Subordinated debentures
    
    
    5,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,000
    
    
    
    13,000Other borrowings
    
    
    45,374
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,374Total interest-bearing liabilities
    
    
    357,610
    
    
    
    29,257
    
    
    
    71,609
    
    
    
    70,888
    
    
    
    13,261
    
    
    
    542,625Interest sensitivity gap
    
    $
    (94,060
    )
    
    $
    486
    
    
    $
    (29,404
    )
    
    $
    164,594
    
    
    $
    101,508
    
    
    $
    143,124Cumulative interest sensitivity gap
    
    $
    (94,060
    )
    
    $
    (93,574
    )
    
    $
    (122,978
    )
    
    $
    41,616
    
    
    $
    143,124
    
    
    $
    143,124Cumulative sensitivity ratio
    
    
    (13.7
    )%
    
    
    (13.6
    )%
    
    
    (17.9
    )%
    
    
    6.1
    %
    
    
    20.9
    %
    
    
    20.9
    %
 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 NOW and passbook savings accounts, while technically subject to
immediate repricing in response to changing market rates, historically do not
reprice as quickly nor to the extent as other interest sensitive accounts.
Accordingly, if market interest rates should decrease, it is anticipated that
the 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. Therefore, if rates
increase it is anticipated that the net interest margin would over time
increase and this is particularly true over longer time horizons since the
Company has more total assets subject to rate changes than total liabilities
that are rate sensitive. However, over the next several months, the liquidity
generated from our recent stock offering will cause some compression in net
interest margin until these funds are fully invested, irrespective of changes
in market interest rates. Even in the near term, we believe the $123 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
the Company 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 other 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 June 30, 2004, we
were within this range with a one year cumulative sensitivity ratio of -17.9%. See also Item 3, Quantitative and Qualitative Disclosures About Market Risk. COMMITMENTS 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. 21




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##### Table of Contents



The Banks exposure to credit loss in the event of nonperformance by the other
party to financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual notional amount of these
instruments. The Bank uses the same credit policies in making commitments to
extend credit and generally uses the same credit policies for letters of credit
as it does for on-balance sheet instruments. Commitments to extend credit are legally binding agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Since some of these commitments are expected to expire without being
drawn upon, the total commitment amount does not necessarily represent future
cash requirements. Commitments generally have fixed expiration dates or other
termination clauses and may require the payment of a fee. At June 30, 2004,
total unfunded loan commitments were approximately $74.7 million. Standby letters of credit are conditional commitments issued by the Bank to
assure the performance or financial obligations of a customer to a third party.
The credit risk involved in issuing standby letters of credit is essentially
the same as that involved in extending loans to customers. The Bank generally
holds collateral and/or obtains personal guarantees supporting these
commitments. Since most of the letters of credit are expected to expire
without being drawn upon, they do not necessarily represent future cash
requirements. At June 30, 2004, commitments under standby letters of credit
aggregated approximately $2.2 million. The Company believes the likelihood of the unfunded loan commitments and
unfunded letters of credit either needing to be totally funded or funded at the
same time is low. However, should significant funding requirements occur, we
have available borrowing capacity from various sources as discussed in the
Liquidity section above. 
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Market risk is the risk that a financial institutions earnings and capital,
or its ability to meet its business objectives, will be adversely affected by
movements in market rates or prices such as interest rates, foreign exchange
rates, equity rates, equity prices, credit spreads and/or commodity prices.
The Company has assessed its market risk as predominately interest rate risk. The following interest rate sensitivity analysis information as of June 30,
2004 was developed 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 an immediate and parallel shift in the yield
curve in the amounts shown. These rate changes are matched with known repricing intervals and assumptions
for new growth net of expected prepayments. The assumptions are based
primarily on experience in the Companys market under varying rate
environments. The imbedded options that the Companys loan customers possess
to refinance are considered for purposes of this analysis and cause the larger
decreases in income in a declining rate scenario versus the income increases in
the same size rising rate scenario. This analysis intentionally exaggerates interest sensitivity. For the sake of
simplicity and comparability, an immediate change in rates is assumed.
However, any significant change in actual market rates would probably be phased
in over an extended period of time. This phase in would reduce the net
interest income effects for any absolute change in rates. Also, the Company
has been originating adjustable rate commercial loans with interest rate floors
that are currently at rates higher than the index and margin on the loans would
indicate. An example would be a loan at Prime plus 1% but with a 7.0% floor.
The Company currently has in excess of $224 million of these types of loans
where the loan rates are at the floors. The effects of this are twofold.
First, this has benefited our margins currently since we have assets earning
yields higher than would be the case absent the floor rates. Second, in a
declining rate environment and in a limited rising rate environment those
adjustable rate loans act like fixed rate loans. This limits the Companys
loss of interest income when rates decline but does constrain income gains in a
rising rate market. As rates increase beyond 200 basis points from their
current level the effect on net interest income turns around and begins to
expand positively due to an increasing percentage of loans going past their
floors. Also, the passage of time moderates the negative near term impact of
rising rates as new loans are by definition originated at the current, now
higher, rate levels. In general, having this significant amount of loans at
their floors reduces the Companys overall rate sensitivity. The Company attempts to retain interest rate neutrality by generating mostly
adjustable rate loans and managing the securities, wholesale funding, and Fed
Funds positions to offset the repricing characteristics of the deposit
liabilities. 22




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##### Table of Contents



Projections for the next twelve months are as follows: Interest Rates Decrease
    
    Interest Rates
    
    Interest Rates Increase(dollars in thousands)
    
    200 BP
    
    100 BP
    
    Remain Constant
    
    100 BP
    
    200BPInterest Income
    
    $
    40,244
    
    
    $
    42,519
    
    
    $
    44,883
    
    
    $
    47,067
    
    
    $
    49,686Interest Expense
    
    
    8,021
    
    
    
    9,402
    
    
    
    11,763
    
    
    
    14,783
    
    
    
    17,803Net Interest Income
    
    $
    32,223
    
    
    $
    33,117
    
    
    $
    33,120
    
    
    $
    32,284
    
    
    $
    31,883Change in net income
after tax vs.
constant rates
    
    $
    (560
    )
    
    $
    (2
    )
    
    
    
    
    
    $
    (522
    )
    
    $
    (772
    )
 23




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##### Table of Contents



Item 4. CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures The Company maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the rules and
forms of the Securities and Exchange Commission. Based upon their evaluation
of those controls and procedures performed as of the end of the period covered
by this report, the Chief Executive Officer and Chief Financial Officer of the
Company concluded that the Companys disclosure controls and procedures were
adequate. No significant deficiencies or material weaknesses in the design or
operation of internal controls which could adversely affect the Companys
ability to record, process, summarize, and report financial data have been
identified. No fraud that involves management or other employees who have a significant
role in the Companys internal controls has been discovered. Changes in internal controls The Company made no significant changes in its internal controls or in other
factors that could significantly affect these controls subsequent to the date
of the evaluation of those controls by the Chief Executive Officer and Chief
Financial Officer; including any corrective actions with regard to significant
deficiencies and material weaknesses. Limitations on the Effectiveness of Controls Our management, including our principal executive officer and principal
financial officer, does not expect that our disclosure controls and procedures
and internal controls over financial reporting will prevent all errors and all
improper conduct. A control system, no matter how well conceived and operated
can provide only reasonable, not absolute, assurance that the objectives of the
controls system are met. Further, the design of a control system must reflect
the fact that there are resource constraints, and the benefits of controls must
be considered relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of improper conduct, if any, within the
Company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. 24




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##### Table of Contents



Part II. OTHER INFORMATION 
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Shareholders of TIB Financial Corp. held May 25,
2004, ballot totals for the reelection of Directors standing for
reelection were as follows: DIRECTORS
    
    FOR
    
    AGAINST
    
    ABSTAINArmando J. Henriquez, PhD
    
    
    3,804,524
    
    
    
    20,093
    
    
    
    James R. Lawson III
    
    
    3,798,368
    
    
    
    26,249
    
    
    
    Richard C. Bricker, Jr.
    
    
    3,798,368
    
    
    
    26,249
    
    
    
    Paul O. Jones, Jr. M.D.
    
    
    3,804,524
    
    
    
    20,093
    
    
    
    Thomas J. Longe
    
    
    3,798,368
    
    
    
    26,249
    
    
    
    
 The directors continuing in office following the meeting were: Richard C.
Bricker, Jr., Armando J. Henriquez, PhD, Gretchen K. Holland, Paul O.
Jones, Jr. M.D., James R. Lawson, III, Edward V. Lett, Thomas J. Longe,
John G. Parks, Jr., Marvin F. Schindler, Otis T. Wallace, Millard J.
Younkers, Jr., and Robert A. Zolten, M.D. Ballot totals for the approval of the Restated Articles of Incorporation
were as follows: FOR
    
    AGAINST
    
    ABSTAIN3,728,374
    
    
    95,821
    
    
    
    422
 Ballot totals for the approval of the Company 2004 Equity Incentive Plan
were as follows: FOR
    
    AGAINST
    
    ABSTAIN3,708,600
    
    
    111,220
    
    
    
    4,797
 Total shares voted were 3,824,617 which represent 85.2% of the outstanding
shares. 
 Item 5. OTHER INFORMATION Not applicable 25




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##### Table of Contents



Item 6. EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    Exhibits Exhibit 31.1  Chief Executive Officers certification required under
Section 302 of Sarbanes-Oxley Act of 2002 Exhibit 31.2  Chief Financial Officers certification required under
Section 302 of Sarbanes-Oxley Act of 2002 Exhibit 32.1  Chief Executive Officers certification required under
Section 906 of Sarbanes-Oxley Act of 2002 Exhibit 32.2  Chief Financial Officers certification required under
Section 906 of Sarbanes-Oxley Act of 2002  (b)
    
    Reports on Form 8-K On April 20, 2004, the Company reported on Form 8-K that on April
15, 2004, it closed the sale of 1,000,000 shares of common stock at
a price of $22.00 per share before commissions and expenses in a
firm commitment underwriting. On April 29, 2004, the Company issued a press release announcing
certain financial results and additional information related to its
first quarter 2004 earnings. On May 6, 2004, the Company reported on Form 8-K that on May 6,
2004, it closed the sale of an additional 150,000 shares of common
stock at a price of $22.00 per share before commissions and
expenses, pursuant to its previously filed registration statement. On August 3, 2004, the Company issued a press release announcing
certain financial results and additional information related to its
second quarter 2004 earnings. 26




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. TIB FINANCIAL CORP./s/ Edward V. LettDate: August 12, 2004
    
    Edward V. LettPresident and Chief Executive Officer/s/ David P. JohnsonDavid P. JohnsonExecutive Vice President and Chief Financial Officer
 27