Overview

The Banks operate primarily as real estate secured commercial lenders, focusing on middle-market businesses in our Southern Florida markets. The Banks fund their lending activity primarily by gathering retail and commercial deposits from our service area. TIB Bank was formed in 1974 and has a substantial market presence in the Florida Keys. In recent years, TIB Bank has expanded into the adjacent Florida counties of Miami-Dade, Collier, and Lee. The acquisition of The Bank of Venice in April 2007 expanded our presence into Sarasota County, Florida. Despite slowing economic growth in Florida, we anticipate increased opportunities in these contiguous markets for our well-positioned financial institution.

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

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

On March 7, 2008, the Company consummated a transaction whereby two of Southwest Florida's prominent families, their representatives and their related business interests purchased 1.2 million shares of the Company's common stock and warrants to purchase an additional 1.2 million shares of common stock at an exercise price of $8.15 per share at any time prior to March 7, 2011. Gross proceeds from the investment provided additional capital of $10.1 million.

On December 5, 2008, the Company issued $37 million of preferred stock and a related warrant to the U.S. Treasury under the U.S. Treasury's Capital Purchase Program. This increase in capital allows the Company to remain highly competitive, enhance our well capitalized status for regulatory purposes, and provide the added capital strength to support our continued growth through increased capacity to provide new loans to creditworthy individual and commercial customers.

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

TIB Financial Corp. is a financial services holding company focused on growth and expansion in the Florida marketplace and the parent company of TIB Bank, The Bank of Venice and Naples Capital Advisors, Inc. For the year ended December 31, 2008, our operations resulted in a net loss of $20.9 million, or $1.49 per basic and diluted share. These results compared with a net loss of $2.4 million, or $0.19 per basic and diluted share for the prior year. The most significant factors contributing to the 2008 loss were the $28.2 million provision for loan losses and write-downs of investment securities totaling $6.4 million, partially offset by $1.1 million net gains from the sale of investment securities.

Our operating environment remains challenging and our loan growth is muted due to loan payoffs and a lower level of loan origination. During this period of slower economic activity, our loans increased 8% from last year. Our strategy of building relationships with small and middle-market business customers coupled with our new initiative in private banking and wealth management continues to drive our growth and expansion.

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

Net interest income on a tax-equivalent basis was $44.8 million for 2008, a decrease of 3% from $46.4 million a year ago. Changes in monetary policy by the Federal Reserve affect the prime rate, our loan yields, our deposit and borrowing costs and our net interest margin. The principal reason for the decrease was the significant increase in non-performing loans during the year which reduced our net interest income by $2.7 million.

Non-interest income, which includes service charges on deposit accounts, investment securities gains and losses, real estate fees and other operating income, decreased approximately $578,000 to $784,000 in 2008 from $1.4 million in 2007. The decrease was attributable to a $765,000 increase in securities write-downs year over year and a $671,000 decline in fees on mortgage loans originated and sold due to lower sales of residential loans in the secondary market as a result of a greater proportion of our residential loan production being held in our portfolio. Also, contributing to the decrease was a gain of approximately $254,000 from the disposition of land and a gain of approximately $702,000 from the disposition of an office building included in other income in 2007. Offsetting the decrease was $1.1 million in net gains realized in 2008 from the sale of investment securities. Investment advisory fees from Naples Capital Advisors, Inc. contributed $555,000 to the current year.

Non-interest expense for 2008 was $51.0 million, compared with $41.9 million a year ago. The increase in non-interest expense for 2008 is partially attributable to a 9% increase in salaries and employee benefits expenses including severance costs for certain employees. The Bank of Venice represents approximately $646,000 of the increase and Naples Capital Advisors, Inc. represents approximately $668,000 of the increase. Net occupancy and other expenses increased 37% compared to 2007. The increase in net occupancy includes approximately $423,000 related to the operations of The Bank of Venice. The increase in other expenses was primarily attributable to increases in repossession expenses, write-downs of repossessed vehicles, OREO expenses and write-downs, consulting and collection fees and costs, FDIC insurance, operational losses, and $496,000 related to the operations of The Bank of Venice and $269,000 related to Naples Capital Advisors, Inc.

Total assets increased 11% during 2008 to $1.61 billion as of December 31, 2008, compared with $1.44 billion a year ago. Total loans grew 8% to $1.22 billion as of December 31, 2008, compared with $1.13 billion a year ago. Residential real estate mortgage loans accounted for the largest segment increase during 2008, representing $92.9 million of the total increase. Asset growth was funded by a $56.4 million increase in FHLB advances and other borrowings and an increase in total deposits to $1.14 billion as of December 31, 2008, representing deposit growth of 8% from $1.05 billion in the prior year. In 2008, the acquisition of The Bank of Venice in 2007 contributed $18.2 million, $9.2 million and $12.3 million to the 2008 growth in assets, loans and deposits, respectively. The Private Banking group contributed $36.4 million in net new relationship-based deposits.

In response to slowing economic activity, continued softness in residential real estate in our markets and the increase in non-performing loans, we increased our reserve for loan losses. As of December 31, 2008 the allowance for loan losses totaled $23.8 million, or 1.94% of total loans. The allowance represents 60% of non-performing loans at December 31, 2008. Annual net charge-offs represented 1.64% of average loans as of December 31, 2008, compared with 0.45% as of December 31, 2007.

During 2008, it became more apparent that the national economy had entered into a recession with increasing unemployment and declining levels of economic activity. In our local markets the economic contraction that began in late 2006 and early 2007 accelerated with sharp increases in unemployment in Collier and Lee Counties in Southwest Florida to over 9% by the end of 2008. Declining retail sales and lower personal income also reflect the contracting economic environment in our local markets.

Global and national financial markets experienced significant volatility and liquidity concerns and the banking system was under significant pressure due to concerns about the declining economic fundamentals and the increasing level of non-performing loans and investment securities in banks. Liquidity concerns in the national banking system were heightened during the third quarter and early fourth quarter of the year.

In response to the continuing economic contraction, the Federal Reserve maintained an accommodating monetary policy through open market transactions and reduced the targeted fed funds rate from 4.25% at the beginning of the year to 0.25% by the end of the year with a 200 basis point decline in the rate from September. In response the prime rate declined from 7.25% to 3.25% during the year. The Federal Reserve also implemented several liquidity facilities to provide added liquidity to financial institutions and other financial intermediaries.

The Emergency Economic Stabilization Act ("EESA") authorized the FDIC to increase the amount of insured deposit accounts to $250,000 and provide unlimited deposit insurance on non-interest bearing deposits through 2009. The EESA also authorized the U.S. Treasury to provide up to $700 billion of financial support to the U.S. banking industry. The Capital Purchase Program, as part of the Troubled Asset Relief Program, was one of the initiatives that provided additional capital to banks.

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

The increasing economic stress also adversely impacted the estimated fair value of our CDO investment securities as increased defaults by the underlying corporate issuers resulted in a significant reduction in the future estimated cash flows, which caused a significant decline and impairment in the estimated fair value of certain of these securities.

Analysis of Financial Condition

Our assets totaled $1.61 billion at December 31, 2008 compared to $1.44 billion at the end of 2007, an increase of $165.4 million, or 11%. The growth in assets was primarily a result of increased investing and lending activity as the Banks invested funds provided by deposit growth and borrowings.

Total loans increased $95.8 million or 8%, to $1.22 billion at December 31, 2008. The growth in the loan portfolio was primarily attributed to increases in commercial real estate loans of $46.4 million and residential real estate loans of $92.9 million, partially offset by decreases in indirect auto loans of $35.4 million.

Total deposits increased $85.7 million or 8%, from $1.05 billion at the end of 2007 to $1.14 billion at December 31, 2008. Non-interest-bearing deposits decreased $15.0 million or 10%, while interest-bearing deposits increased $100.7 million or 11%.

Borrowed funds, consisting of Federal Home Loan Bank (FHLB) advances, short-term borrowings, notes payable and subordinated debentures, totaled $337.3 million at year end 2008 compared to $280.9 million at the end of 2007. During 2008, we increased our FHLB advances by $62.9 million.

Shareholders' equity increased $24.9 million or 26%, from $96.2 million on December 31, 2007 to $121.1 million at the end of 2008. The increase is primarily a result of the private placement of $10.1 million of common stock and warrants to two prominent Southwest Florida families and their business interests and the issuance of $37 million in preferred stock and a warrant under the Treasury's Capital Purchase Program on December 5, 2008, partially offset by our net loss for the year.

Book value per common share decreased to $6.10 at December 31, 2008, from $7.31 at December 31, 2007.

Net income

2008 compared with 2007:

The net loss was $20.9 million for 2008, compared to a net loss of $2.4 million for 2007. Basic and diluted loss per common share for 2008 were $1.49, as compared to basic and diluted loss per common share of $0.19 in 2007.

The loss on average assets for 2008 was 1.36% compared to a loss on average assets of 0.18% for 2007. On the same basis, loss on average shareholders' equity was 20.4% for 2008 compared to a loss of 2.5% for 2007.

Contributing significantly to the loss during 2008 were the $28.2 million provision for loan losses and the write-down of $6.4 million of investment securities, offset by a $1.1 million net gain on securities sold. In response to continued slowing economic activity and softening real estate values in our markets, our allowance for loan losses increased to $23.8 million or 1.94% of total loans, resulting from our provision for loan losses of $28.2 million exceeding net charge-offs for the period by 45%. For additional information on these items, see the sections that follow entitled "Allowance and Provision for Loan Losses" and "Investment Portfolio", respectively.

2007 compared with 2006:

The net loss was $2.4 million for 2007, compared to net income of $9.0 million for 2006. Basic and diluted loss per common share for 2007 were $0.19, as compared to basic and diluted earnings per common share of $0.75 and $0.73, respectively, in 2006.

Based on continuing operations, the loss on average assets for 2007 was 0.18% compared to a return on average assets of 0.74% for 2006. On the same basis, loss on average shareholders' equity was 2.5% for 2007 while the return on average shareholders' equity was 11.05% for 2006.

As discussed in Note 2 of the accompanying "Notes to Consolidated Financial Statements", the Company closed the sale of the merchant bankcard processing segment in the fourth quarter of 2005. Accordingly, the results of the merchant bankcard operations were classified as discontinued operations during 2006. The Company's net loss for 2007 was $2.4 million compared to net income of $9.2 million for 2006. Basic and diluted loss per common share for 2007 was $0.19 as compared to basic and diluted earnings per common share of $0.77 and $0.75, respectively, in 2006.

Contributing significantly to the loss during 2007 were the $9.7 million provision for loan losses and the write-down of $5.7 million of investment securities. In response to continued slowing economic activity and softening real estate values in our markets, our provision for loan losses in excess of net charge offs resulted in an increase of the allowance for loan losses to $15.0 million or 1.33% of total loans at December 31, 2007. For additional information on these items, see the sections that follow entitled "Allowance and Provision for Loan Losses" and "Investment Portfolio", respectively.

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, subordinated debentures, FHLB advances, and other short-term borrowings.

2008 compared with 2007:

Net interest income was $44.7 million for the year ended December 31, 2008, compared to $46.0 million for the same period in 2007. The $1.4 million or 3% decrease in net interest income was due principally to the increase in non-accrual loans and investment securities during the year which reduced interest income and net interest income by $3.2 million and reduced the net interest margin by 0.21%.

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

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

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

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

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

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

We have also maintained a higher level of investment securities and cash and equivalents due to the volatile and uncertain financial market conditions. All of these factors adversely impacted the net interest margin which declined 50 basis points to 3.10% from 3.60% in 2007.
On the basis of economic and financial market conditions that we observed during the second quarter of 2008, we began to shorten the maturity structure of our interest bearing liabilities by increasing the amount of FHLB borrowings with maturities of one month and by originating wholesale CD deposits with terms of 3 months to 6 months. This funding tactic was initiated to generate lower cost and shorter-term liabilities to improve our net interest margin and position our balance sheet for stable or declining short-term interest rates. This position was maintained through the fourth quarter and at December 31, 2008, we have $70 million of FHLB borrowings that mature in the first quarter and over $96 million of wholesale CD's that have original maturities of 3 months to 6 months. See Asset and Liability Management for a more in depth discussion of our management of changes in interest rates and interest rate risk.

Going forward, we expect market short-term interest rates to remain low for an extended period of time. We expect deposit costs to continue to decline but they may decrease more slowly or to a lesser extent than loan yields, or they could increase due to strong demand in the financial markets and banking system for liquidity which is reflected in elevated pricing competition for deposits. In the current interest rate environment, we believe that our interest margin will continue to be under pressure. The predominant driver to increase net interest income is and will continue to be the growth of our balance sheet. Although the timing and possible effects of future changes in interest rates could be significant, we expect any such impact to continue to be less in extent than the relative impact of earning asset growth.

Net interest income was $46.0 million for the year ended December 31, 2007, compared to $47.1 million for the same period in 2006. The 2% decrease was mainly attributable to deposit accounts re-pricing higher during 2007 lagging prime based asset re-pricings which occurred more timely during 2006 and remained stable throughout the first three quarters of the year. The impact of this lag effect was exacerbated during the fourth quarter as it combined with intense local market competition for deposits as well as the evaporation of wholesale market liquidity resulting in funding rates remaining at higher levels even as the Federal Reserve began swiftly lowering rates in September. Partially offsetting this decrease were increases in loan and securities volume. Additional factors impacting net interest income included a significant increase in the level of nonaccrual loans, increases in interest rates paid on transaction accounts and more significantly time deposits, our highest cost deposit category as a percentage share of total deposits, along with additional funding from short-term borrowings and FHLB advances.

Many of the Banks' loans are indexed to the prime rate. The comparability of the level of the prime rate in 2007 and 2006 combined with the impact of a higher level of non-accrual loans and the acquisition of The Bank of Venice is reflected in a slightly lower average yield for the loan portfolio. The acquisition of The Bank of Venice on April 30, 2007 reduced the average loan yield slightly as it generally has a lower yielding loan mix than TIB Bank. The average yield on interest-earning assets for the 2007 was 7.39% which was a decrease of 16 basis points compared to the 7.55% yield earned during 2006. The average cost of interest-bearing liabilities increased 38 basis points from 4.07% during 2006 to 4.45% in 2007. The average cost of interest bearing deposits and all interest bearing liabilities reflect in part the increase in local deposit competition as well as a general liquidity premium resulting from worldwide financial market turmoil during the second half of 2007. As a result, our tax equivalent net interest margin contracted 58 basis points to 3.60% from 4.18% in 2006.

The following table sets forth information with respect to the average balances, interest income and average yield by major categories of interest-earning assets; the average balances, interest expense and average rate by major categories of interest-bearing liabilities; the average balances of noninterest-earning assets, noninterest-bearing liabilities and shareholders' equity; and net interest income, interest rate spread, and net interest margin for the years ended December 31, 2008, 2007 and 2006.

                             Average Balance Sheets


                                                2008                                           2007                                            2006
                               Average          Income/        Yields/         Average         Income/        Yields/           Average        Income/       Yields/
(Dollars in thousands)         Balances         Expense         Rates          Balances        Expense         Rates            Balances       Expense        Rates
ASSETS
Interest-earning assets:
Loans (a)(b)                 $  1,186,839      $  77,877           6.56 %    $  1,088,751      $ 84,775           7.79 %      $    989,617     $ 78,382          7.92 %
Investment securities (b)         183,649          8,629           4.70 %         146,376         7,633           5.21 %           123,651        6,149          4.97 %
Interest bearing deposits
in other banks                     12,131            104            .85 %             383            19           4.96 %               448           22          4.94 %
FHLB stock                         10,012            350           3.50 %           8,408           503           5.98 %             4,935          285          5.78 %
Federal funds sold/Repo            55,525          1,374           2.47 %          42,187         2,144           5.08 %            15,465          739          4.78 %
Total interest-earning
assets                          1,448,156         88,334           6.10 %       1,286,105        95,074           7.39 %         1,134,116       85,577          7.55 %

Non-interest earning
assets:
Cash and due from banks            17,507                                          20,394                                           22,402
Premises and equipment,
net                                37,596                                          36,609                                           32,205
Allowances for loan
losses                            (16,111 )                                       (10,174 )                                         (8,325 )
Other assets                       54,395                                          41,167                                           32,037
Total non-interest
earning assets                     93,387                                          87,996                                           78,319
Total Assets                 $  1,541,543                                    $  1,374,101                                     $  1,212,435

LIABILITIES &
SHAREHOLDERS' EQUITY
Interest bearing
liabilities:
Interest bearing
deposits:
NOW accounts                 $    172,520          2,932           1.70 %    $    151,745         4,967           3.27 %      $    131,386        3,500          2.66 %
Money market                      151,273          3,649           2.41 %         186,996         7,753           4.15 %           166,501        5,959          3.58 %
Savings deposits                   52,896            669           1.26 %          55,360           968           1.75 %            48,897          346          0.71 %
Time deposits                     591,723         25,346           4.28 %         486,658        24,172           4.97 %           477,204       21,852          4.58 %
Total interest-bearing
deposits                          968,412         32,596           3.37 %         880,759        37,860           4.30 %           823,988       31,657          3.84 %

. . .