is Redactcd Report of Examination is Releasable to the Public. This Report of Examination concerns a failed state- 4 chartered financial institution. Confidential information has been rcdactcd and this Report is rcleasable as a public record per Section 655 Florida Statutes, and Rule 69U- 100 057, Florida Administrative Code. JE it _ii I OFFICE OF FINANCIAL REGULATION REPORT OF EXAMINATION MARCO COMMUNITY BANK #1124 Marco Island, Collier County, Florida Date of Examination: May 7, Data of Financial Statements: March 31, 2007 Examiner-ln-Charge: Karen G. Kelley-Saline THIS REPORT OF EXAMINATION IS STRICTLY CONFIDENTIAL This Report of Examination is furnished by the Ofhce of Financial Regulation to the officers and directors of the examined financial institution for their information and consideration. lt ts desired that each director in Keeping with their responsibilities to both depositors and shareholders review this Report in detail. In addition, it is desired that each director, in reviewing this Report. continue to bear in mind that this Report does not represent a complete audit of the financial institution's books. Pursuant to Section 655.057, Florida Statutes. this Report is a confidential record ofthe Office ot Financial Regulation. The financial institution, and any person in custody of the Report, may not publish or make public, all or any part of this document. The Board of Directors of the financial institution may allow inspection of and access to this Report or portions thereof by its lawyers. accountants, auditors, fidelity _insurance company, and persons seeking to acquire a controlling interest in or merge with the financial institution. In addition, this Report may be inspected by any federal or state examiner responsible for the regulation or supervision of financial institutions. Access by any other person is strictly prohibited without the prior written consent of the Office of Financial Regulation. The information contained herein is based upon the books and records of the financial institution, upon statements made tothe Examiner by directors, officers, and employees, and upon information derived from other sources which the Examiner considered reliable and correct. DON B. SAXON COMMISSIONER - Table of Contents 11124 Examination Conclusions and Comments 1 Risk Management Assessment 5 Violations o1"Laws and Regulations 7 Holding Company and Affiliate Relationships ll Examination Data and Ratios 13 Comparative Statements ofliinanoial Condition 14 Summary of Items Subject to Adverse Classitioation and Special Mention 15 Items Subject to Adverse Classitieation I6 Items Listetl for Special Mention 25 Assets with Credit Data or Collateral Documentation Exceptions 2-5 Concentrations - 28 Capital Calculations 29 Analysis of Earnings 30 3] Signatures oi"`DireotorS All dollar amounts are reported in thousands, unless otherwise inoioatotl_ - -.- - --. Examination Conclusions and Couiments 11124 Current Exam Prior Exam Prior Exam Ratings by Examination Function 05f0Tr'200'i' r' 0312012006 08f23f'200=1 IS Risk Management Composite 4 2 Risk Management Component: Capital 3 2 Asset Quality 4 1 Management 4 2 Earnings 4 3 Liquidity 2 2 Sensitivity to Market Risk 3 2 SCOPE OF A full scope safety and soundness examination started on May 2007, and was completed on June 1, 2007 Both the asset quality and iinancial data presented in the Report of Examination (Report) are as of March 31, 2002. The examination included a review ofthe Bank Secrecy Laundering program. OVERVIEW 'I`he bank opened for business on August 18, 2003, and is wholly owned by a one-bank holding comp any, Marco Community Bancorp, Inc., Marco Island, Florida. By virtue ol" common ownership, the bank is affiliated with Commercial Lending Capital Corporation (CLCC), a commercial mortgage broker also located on Marco Island, Florida. Examination tindings show serious deterioration in asset quality and the financial condition ofthe bank. The Board of Directors and management have not been effective in guiding and overseeing the banl<"s affairs. Cited violations of governing laws and regulations and a contravention of policy statement reflect unsafe and unsound practices. Asset classifications have increased considerably since the last regulatory examination and are over 129 percent of 'l`otal Capital. Earnings will be impaired due to the asset quality problems, which will also diminish capital protection. Excessive exposure to interest-rate risk causes additional earnings and capital pressures. Liquidity is satisfactory at this time, but could be problematic should depositors elect to move funds because of the bank's weak financial condition. MANAGEMENT The Board of Directors and management have exhibited irnprudcnt judgment in their business decisions and supervision ofthe affairs. Unsafe and unsound practices and procedures have caused serious deterioration in the bank's overall condition. One ofthe most serious unsafe practices is continuing to operate the bank without sufficient staffing depth and expertise. Turnover at the senior management level has been si gnitieant since the banl<'s inception and has not been addressed and resolved by the Board of Directors. The bank has operated without a chiefcxecutivc oihccr andfor senior lender for extended periods. Currently, the bank is again without a senior lender. Examination Conclusions and (comments (Continued) 11124 The lack of staffing depth and expertise is evident in the number of violations of governing laws and regulations cited in the Report. The violation cited for exceeding the statutory limit for loans to one borrower involving the Jacksonville, Florida, loan pools show blatant disregard for compliance with governing laws. Additionally, the cited violation concerning transactions with affiliates show a conflict of interest exists at the Board level regarding the best interests of the bank versus the affiliated mortgage company. Refer to the schedule "Violations ofliaws and Regulations" for more details of all cited violations of laws and regulations. Other unsafe and unsound practices and procedures include the failure to develop and implement a Strategic Plan that identifies the bank's weaknesses, competitive pressures, and external issues; and provides viable strategies for mitigating the weaknesses and capitalizing on the Continuing to operate with excessive exposure to interest rate risk is also an unsafe and unsound practice. Regardless of the attendant credit quality issues (and the violation of statutory limits on loans to one borrower) the decision to invest 98 percent of Total Capital in the pools was reckless and exposes the bank to unnecessary credit risk. To assure the bank's_ongoing viability, the Board of Directors and management must stop engaging in unsafe and unsound practices and procedures and restore the bank to a satisfactory condition. ASSET QUALITY Asset quality is weak. Total adversely classified assets are $25,47l,000, or 129.49 percent of Tier _Capital and the allowance for loan and lease losses adversely classified assets consist of problem loans that could require foreclosure action to satisfy debt repayment. Because ofthe declining real estate market, some loans are not adequately secured, resulting in $4,763,000 classified Loss. The significant Loss exposure will require a minimum provision of $5,001,000 to the allowance for loan and lease losses This provision and charge off of Loss classifications must be recognized on the bank's books as of June 30, 2007* and reflected in the June 2007 Call Report. Part of the asset quality problems are attributable to unsafe and unsound underwriting practices that allowed borrowers to provide minimal cash equity and managemenfs inability to properly determine the borrower's repayment capacity. But, the largest contributor to asset quality problems is managemenfs failure to limit the barrl-Us investment in the pools to prudent levels. Beginning June 9, 2006 and continuing through April 16, 2007, management (with the support and guidance ofthe Board of Directors) invested more than $14,000,000 in mortgage pools issued and guaranteed by Jacksonville, Florida. Management'[s failure to truly understand the nature ofthe underlying collateral and borrowers, and inherent risks associated with them, coupled with unsafe and unsound underwriting and monitoring practices, has resulted in elevated credit exposure. Initial loss exposure related to this credit relationship exceeds $3,500,000, and will likely escalate as more information becomes available regarding the financial condition of The remaining loss exposure identified in the examination's loan review also reflects unsafe and unsound monitoring procedures and an over reliance on collateral (real estate) protection. Refer to the schedule "Items Subject to Adverse Classification" for details on all adverse classifications. EARNINGS Earnings reflect diminishing profits caused by a narrowing net interest margin (NIM) and increasing overhead costs. The falling NIM is a result of the bank being positioned for accelerated rising rates coupled with a volume and mix of liabilities that have moved from below market rates to market rates, initially at a quicker rate than assets reprice. Additionally, the efficiency ratio has increased from under 50 percent the past two calendar years, 2 1. 1 -. . -. --.. -.- - Examination Conclusions and Com ents (Continued) 11124 to over 67 percent for the period ended March 31, 2007. The 'primary reason for this unfavorable trend is the increase in personnel expense. First-quarter 2007 results show that the bank will not achieve its budget projections. There is no probability of reaching budget goals because of asset quality deterioration andthe need to replenish the Examination findings show that, at a minimum, a $5,001,000 provision needs to be made forthe This will offset the $532,000 in pretax profit through March 31, 2007, and it is unlikely that earnings for the remainder of 2007 and calendar year 2008 can offset this. Furthermore, given the slow down in the real estate market, anticipated loan growth is unlikely to occur and the bank may experience shrinkage it its earning asset base. CAPITAL ADEQUACY After adjusting forthe deficiency in the Tier Capital would decline to $12,607,000 or 7.80 percent of average total assets. Although the capital measurements meet the criterion for designation as a "Well- Capitalizied" bank under the guidelines ofthe Prompt Corrective Action provisions of Part 325 ofthe Federal Deposit Insurance Corporation Rules and Regulations, because of the banl<"s elevated risk proiile, the capital position is only marginal. Internal capital accumulation (retained earnings) has not been suflicient to fund asset growth without augmentation from the holding company. In the last three calendar years, the holding company has infused $7,750,000 in capital into the bank. This exceeds the $6,400,000 in capital originally raised to open the bank. The Board of Directors and management should develop a capital formulation plan that will assure maintenance of sufii cient capital to allow thebank to resolve its asset quality and earnings problems. SENSITIVITY T0 RISK Sensitivity to market risk, though primarily limited to interest-rate risk exposure, is elevated. Because a volume ofthe banl<'s loans have adjustable rates, the position is beneficial only in a period of rapid sustained rate increases. The current flattening yield curve results in a negative impact on net interest income, even in a period of flat rates or slow and minimal rate increases. The excessive asset-'sensitive position was identified at the prior regulatory examination as an elevated risk. However, the Board of Directors and management have failed to implement viable corrective action. LIQUIDITY Liquidity and funds management practices are satisfactory. The bank is able to meet its funding needs with cash, correspondent bank balances and Federal funds sold, which total $22,671,000 as of March 31, 2007. Risk limits and tolerance levels established by bank policy are acceptable. Core deposits represent 68.83 percent ofthe asset base; whereas net loans and -leases comprise 79.57 percent of total assets. The net non core funding dependence ratio is moderately high at 35.01 percent., but manageable. Management stated that the $36,405,000 in brokered deposits represent a stable source of deposits and when purchased were at a rate equal to or less than the local market. The brokered deposits were purchased in anticipation of strong loan demand that did not materialize as planned. Sixty-one percent of the brokered deposits mature this year and management indicated they will all be allowed to run off as they mature. The bank has an additional $7,500,000 in available lines of credit to meet funding requirements, if needed. As of March 31, 2007, contingent liabilities totaled $3 8,4l9,000, or 216 percent of Tier 1 Capital. These off-balance sheet items include $29,934,000 in unused loan commitments and $8,435,000 in loan participations sold with recourse to the bank. 3 1 li. Examination Conclusions and Ctnriments (Continued) 11124 - ff".m uL EXIT MEETING An exit meeting was held June 1, 2007,1o review the findings of theexamination. ln attendance for the bank were Directors Cox, Greusel, Iannotta, Marks, McGowan, McLaughlin, and Wood. management present included President Montgomery, Chief Financial Officer Whelan and Vice Prcsidenir'Credit Ofiicer Garthside. Additionally, at the request of Board of Directors, Mr. Michael Morris was in attendance. l\/lr, Morris represented the group of investors that have tiled for a change of control at the holding company level. Directing Examiner represented the Federal Reserve Bank - Atlanta and the Office of Financial Regulation was representc ixamincr-ln-Charge Karen Kelley-Saline, Area Financial Manager David Battle and Financial Control Analyst Brock McSwain. UNIFORM FINANCIAL RATING The financial condition and operational soundness of each bank is evaluated using the Uniform Financial Institutions Rating System developed by the Federal Financial Institutions Examination Council (FFIEC). Each institution is assigned a rating of to A rating of is the highest and represents the least degree of supervisory concern, while a rating of is the lowest and represents the greatest degree of supervisory concern. The bank is assi a composite rating of based on the Endings of this examination. Details ofthe detinition of a "fl" rated bank may be found on the back ofthe front cover of this Report. is! Karen Kelly-Saline 4 I . Risk Management Assessment 11124 1, _1 1 Are risk management processes adequate in relation to economic conditions and asset concentrations? No. Risk management processes are not adequate given the weakened real estate market or the concentration in mortgage pools with . 'l`he high level of adversely classified leans is a result of the failure to _limit investment in loan pools an_d implement adequate risk controls designed to provide timely recognition and resolution of problem loans. Over reliance on a strong real estate market caused management to make imprudent lending decisions and engage in unsafe and unsound practices. Management turnover has negated consistency in beth loan and deposit administration and resulted in a lack of depth in management expertise. Are risk management policies and practices for the credit function adequate? Ne. Risk management practices forthe credit function are unsafe and unsound. The use of extensions, modifications, and renewals has been liberal. The failure te perform thorough credit analyses on borrowers has caused lean delinquencies to increase, and with declining property values, collateral margins have narrowed and in some cases no longer exist. Internal loan reviews have not been performed with sufficient frequency, and an over reliance on mortgage brokers' underwriting has resulted in a number of problem leans. Thefailnre to recognize concentrations of credit related to common guarantors, homogeneous loan products (mortgage peels and home equity lines), andfor geographic collateral locations (greater Tampa area or lvlarco Island, Florida) has escalated credit risk exposure. To maintain an adequate allowance for loan and lease losses (AIJLL) the Board of Directors and management need to establish policies and practices for timely determination ol`loan impairment. The December 2006 Interagency Statement onthe Adequacy ofthe provides guidance on measuring lean impairment and the bank's external auditors should be consulted to assess compliance with the requirements of Financial Accounting Board Standards numbered 114 and as contained in the interagency statement. Are risk management policies and practices for assetlliability management and the investment function adequate? No. The Asset Liability Committee (ALCO) meets quarterly and the minutes reflect substantial details of matters pertaining to assetfliability management; however, current measurements related to interest-rate risk are outside internal guidelines because ofthe banl<`s excessive asset-sensitive position over the next 12 months. The projected percentage change in net interest income given either a llat rate scenario or a change of plus or minus 200 basis points in interest rates does not fall within the bank's tolerance level of between 2 and 10 percent. Under the flat rate scenario net interest income would decline 5.18 percent, and with a 200 basis point decrease, it would decline by 16.05 percent. Even with a 200 basis point increase, net interest income would improve by 6.52 percent. The ALCO is aware ofthe elevated interest- rate risk, but has not implemented a corrective strategy. Are risk management processes adequate in relation to and consistent with, the institution's business plan, competitive conditions, and proposed new activities or products? No. The concentration in purchased mortgage pools underscores the imprudence of decision making by the Board of Directors and senior managenrent. Reliance on loan growth through this type ol" activity is 5 Risk Management Assessment (C-utgnued) I 11124 not consistent with the business plan that reflects loan growth to come from market growth in Collier and Lee counties. Are internal controls, audit procedures, and compliance with laws and regulations adequate (includes compliance with the Bank Secrecy Act and related rcgulations)? No. Although internal controls and the audit function are generally adequate, familiarity and compliance with governing laws and regulations is not adequate. Examiner lindings disclosed violations of Florida Statutes and the Federal Reserve Act, which are detailed on the "Violations ol? Laws and Regul ati ons" schedule warrant Board and managemenfs close attention. The violation ofthe loans to one borrower limitation and the violations related to affiliate transactions evidence disregard for governing laws. Bank Secrecy Act Laundering Program The BSAIAML program is satisfactory. However, arinual training for the Board needs to be completed on a timelier basis. The last training for Board members was in early 2006 and the next training session is not scheduled until fall 2007. Additionally, management information systems included in the Board package needs enhancement. It is recommended that a "summary report" be developed to include, but not be limited to, detailed wire activity, high~risl< customers, and activity. The current practice is to monitor all new accounts at inception. Commercial accounts are monitored for six-months and individual accounts are monitored for three-months. A spreadsheet of each account type (consumer, business, savings, and nonresident alien) is maintained that records any suspicious activity, cash transaction activity, lciting activity, wire activity, and transaction testing performed. It is recommended that at the conclusion of the monitoring period accounts be assigned an actual risk rating of either low, moderate or high. Those accounts rated hi gh-risk should be subject to ongoing monitoring and transaction testing procedures. ls Board supervision adequate, and are controls over insider transactions, conflicts of interest, and parentiaftiliate relationships acceptable? No. Board supervision is not adequate. Unsafe and unsound practices exist that have not been addressed by the Board of Directors. Transactions with the affiliated mortgage company have not been in the best interests and have resulted in violations of law. Refer to the "Violations of Laws and Regulations" and "Holding Company and Affiliate Rel ationships" schedules for details. 6 - -1 . Violations ofliaws and Regulationsv 3 _11124 LENDING Loan_s_t,p One Borrower Section Florida_Statutes, permits the bank to make loans and extensions of credit to any person up to 25 percent of its capital accounts if the loans are amply and entirely secured and up to 15 percent of its capital accounts for loans that are unsecured. Section requires all loans guaranteed by any person as to repayment to bc combined when computing the total liabilities of that person. On 8i'2f06, management exceeded the bank's secured legal lending limit to Jacksonville, Florida when the bank purchased loan Pool ll, increasing the bank's exposure to this company to or 32 percent of its capital accounts. As of 5/ lUf07, the bank had $l4,003M invested in mortgage pools guaranteed by This amount reflects the aggregate balance in mortgage pool participations the bank purchased and bookc as loans beginning on 6f9f0o and ending on 4116/'07. Documentation indicates all of the purchased pool participations are fully guaranteed by the underlying issuer, During the llfti/06 visitation, management was advised' that the pool participations could represent a violation ofthe cited Florida statute and that management should contact the Office of Financial Regulation (CFR) for final determination of statute's application. The banl<'s attorney sent a letter to OFR on 1 arguing that the guaranty by did not constitute a "loan to one borrower" violation. The communication was forwarded to the OFR's legal staff for final opinion. On 4fl6-107 the OFR responded that the concentration was a violation of` Florida Statutes. Notwithstanding, on 5f'2f07 President Montgomery authorizedtlie purchase of in Pool Series from the holding company, Marco Community Bancorp. President Montgomery stated the additional purchase was made because, despite the violation, it resulted in a net benefit to the bank by providing Marco Community Bancorp the funds to $l,000M in capital to the bank. At the time of the above-mentioned visitation, the amount invested in oan pools represented approximately 65 percent ofthe bank's capital. Currently, the balance outstanding represents 79.45 percent of capital as reported in 3J3lf07 Report of Condition and 98.02 percent of total capital as adjusted and reported on the "Capital Calculations" schedule. Managcmenfs decision to increase the bank's investment in this loan product despite concerns expressed at the visitation reflects blatant disregard forthe statutory limitation and supervisory a eney advice. Management should take appropriate action necessary to reduce the bank's exposure to to within acceptable limits. Statutory Bad Debt - Section Florida Statutes, prohibits a bank from carrying as an asset, in any report to OFR or any published report, any note for which there has been no payment of interest for one year or longer unless it is inthe process of collection and is being carried at the fair value of its collateral as determined and approved by the Board. The following two loans were carried on the March 31, 2007 Report of Condition, and in violation of this statutory prohibition. - The amount shown reflects the balance of a first mortgage loan that was 420 days past due as of 3K3 lf07. Foreclosure action was initiated on Sf 5r'06 to collect the loan. I-lowever, the Board failed to approve carrying this asset at the l/'30r'07 appraised value of $600l\/l. The full loan balance of $741 was reported in the 3/3lf07 Report of Condition filed with OPI-1. During the examination, was classified Substandard and $204l\/l was classified Loss, - - L- Lf- Violations of Laws and Regulatimis (Continued) 11124 -. -. _u . The amount shown reflects the balance of a loan secured by a second mortgage that was 413 days past due as of 3r'3lfU7. The borrower tiled For bankruptcy protection on l2f'9f05. The Board failed to approve carrying this asset at the reasonable value of the collateral securing the debt prior to the 313 U07 Report of Condition being filed. The value of the second mortgage was determined to be worthless because the market value ol" the property had declined to an amount ciose to the first mortgage balance. The loan should have been charged-off prior to the actual charge~ot`f on 4f30.f07. TRANSACTIONS WITH AFFILIATED PARTIES Regulation W, Section 23I3(a)(l)(A), liederal Reserve Act, requires that transactions with affiliates be "on terms and under circumstances, including credit standards, that are substantially the same, or at least as favorable to such bank or subsidiary, as those prevailing at the same time for comparable transactions with or involving other nonaffiliated companies. Section defines covered transaction with an aftiliatc to include: "Any transaction in which an affiliate acts as an agent or broker or receives a fee for its services to the bank or to any other person." The following lean transactions were entered into with Commercial Lending Capital Corporation a wholly owned subsidiary of the holding company, under circumstances that exposed the bank to undue credit risk because the bank had to take a subordinate credit position by selling a last-in-iirst>>out (LIFO) participation to other lenders to facilitate the transaction. CLCC received $3 07M in brokerage fees tor originating these loans. Two loans that originally totaled with $2,994lvl participated to' Florida, and $500l\fl retained by the bank. Both banks earn the prime interest rate plus 250 basis points, but Marco Community Bank received no other consideration. CLCC received a brokerage fee of and the received an origination fee of $l4lvl. The loan is adversely classified Substandard on the "Items Subject to Adverse Classification" pages of this Report. - The loan originated in the amount of $2,000l`vl with $1 participated to Naples, Florida, and $l,U00l'v1 retained by the bank. Marco Community Bank earns prime plus 200 basis points, but earns prime plus 175 basis points with Marco Community Bank retaining 25 basis points as a servicing fee. CLCC received a brokeragefee of and received an origination fee of SSM. The loan has been extended twice, but is currently performing. - $50Ul'vl The loan originated in the amount of $5,l2Ulvl with participated to Florida, and EBSOUM retained by the bank. Marco Community Bank earns prime plus i75 basis points but earns prime plus 150 basis points with Marco Community Bank retaining 25 basis points as a servicing ice. Marco Community Bank did not receive any other consideration. The CLCC received a brokerage fee of and received an origination fee ol` $23l\fl. The loan is performing as agreed. llil 8 ul.-.l1 Violations of Laws and Regulations (Continued) 11124 l_ - $500lvi The loan originated in the amount of $8,000ivCI with participated to Florida, and retained by the bank. Marco Community Bank earns prime plus 200 basis points but earns prime plus 175 basis points with Marco Community Bank retaining 25 basis' points as a servicing fee. Marco Communit Bank did not receive any other consideration. The CLCC received a brokerage fee of and received an origination fee of The loan was in foreclosure but was paid in tiill prior to the examination. Regulation W, Section Federal Reserve Act, requires that transactions with afiiliates be "on terms and under circumstances, including credit standards, that are substantially the same, or at least as Iavorable to such bank or subsidiary, as those prevailing at the same time for comparable transactions with or involving other companies.. Section 23Ei(a)(2)(C) defines covered transaction with an afliliate to include: "The payment of money or the furnishing of services to an affiliate under contract, lease, or otherwise." Since the prior regulatory examination, the bank ordered several appraisals on behalf ofthe CLCC without being compensated, which is a service that a nonafiiliated company would not have provided for free. As detailed below, three such appraisal reports were provided For loans previously placed at the bank (first three loans listed), and four appraisal reports were provided for loans where the bank did not have a financial interest (last four loans listed). Borrower Date Ordered 06114106 06128106 11101106 07101106 07128106 07123106 1114106 CONTRAVENTION OF POLICY STATEMENT Loan-to-Value Limitations Regulation H- Appendix C, of the-Federal Reserve Act, establishes guidelines for loans granted with high loa.n-to- value levels. The guidance limits the aggregate of high loan-to~value loans not representing to 4 family mortgages to no greater than 30 percent ofthe bank's capital. it also defines value as the lower of acquisition cost ofthe property or the appraised value when the loan is made to purchase the real estate. The following loan is in contravention of this guidance. - The amount shown reflects the aggregate outstanding balance in mortgage pool partieipations the bank purchased and booked as loans beginning 619106 and ending 4116101 Each pool is comprised of numerous loans secured by mortgages to borrowers1investors to finance the acquisition of properties and related renovation costs. Each loan in the pools is close to (or exceeds) 100 percent of cost, renovation, interest and insurance. The loans in aggregate exceed the limitation imposed by federal regulations. Theretbre, because the loans to in aggregate exceed 30 percent of the banl<'s capital, the entire relationship is 9 1 Violations ofLanrs and Regulation 5 (Continued) I 11124 lt# - ..-.-.- deemed to bein contravention ofthe .lending guidance. As of 5f26!U7, the to outstanding to- -was elose to 93 pereentot`Tote.lCapita1. - I lip- luv# p. 1 Holding Company and Affiliate he ationships 11124 .- .=t1fF1L1a1'1r 0 The Commercial Lending Capital Corp (CLCC) was founded in October 2004 under the name MCB Commercial Lending Corporation, and operated out ofthe bank's main office. In January 2007, CLCC changed its name to distinguish itself from the bank, and in February 2007, moved to a location about two miles from the bank's main office. CLCC is wholly owned by lvlarco Community Bancorp, Inc., the bank's holding company; and thus, is an affiliate ofthe bank. Aside from CLCC and the holding company, there are no other affiliates ofthe bank. There are si;-r directors of CLCC, all of whom are current or former directors of either the bank or the holding company. The president of CLCC, Joseph Hausauer, is not a director of CLCC, the bank or the holding company. CLCC is a broker of large commercial real estate loans. Since its inception, CLCC has brokered 30 loans in the aggregate amount of $l66,567lvl. Of this total, the bank participated in 18 loans with a gross balance of and a net retained balance of $l4,?68M. The bank has not participated in any CLCC brokered loans since 3/2f06. Lack of Separate Corporate Existence . Although recent improvement is noted (eg. th name change and different physical location) the affairs of the bank and CLCC have not been adequately segregated. As noted above, the initial name and location of CLCC created the impression that CLCC was a department or subsidiary of the bank. For loans in which the bank participated, underwriting was performed by CLCC personnel with credit memorandurns entitled Commercial Lending Corp Lead Bank Credit Memo." ln addition, commitment letters were issued by CLCC on behalf ofthe bank. Consistent with this activity, all criginationfbrokerage fees went to CLCC and not the bank. Although the activity ceased with the bank's last loan participation on 310106, bank management continued to order appraisals on behalf of CLCC for loans previously placed at the bank (three reports), and for loans in which the bank did not have a participation interest (four reports). This practice enabled CLCC to offer brokered loans with current appraisals prepared for a federally insured financial institution. This enhanced the rnarketability of loans offered by CLCC, and eliminated the requirement that the acquiring bank obtain a new appraisal. In all but one instance, the bank was reimbursed for the cost of the appraisal. Nevertheless, the bank was not compensated for the liability it incurred by having its name used in connection with large brokered real estate loans. Effective 5flf07, the Board resolved that the bank personnel will no longer order appraisal reports on behalf of CLCC. The practice of ordering appraisals on behalf of an affiliate to the benefit ofthat affiliate represents a violation of governing laws and regulations. Refer to the "Violations of Laws and Regulations" schedule for details. Loan tiles create confusion regarding the ongoing role of CLCC in loans purchased by bank and brokered by CLCC. For example; the following 8r'31f06 c-mail exchange took place between a borrower (a principal of and the bank: Borrower: spoke to oe [I-lausaucr] yesterday and he mentioned that was late. As you can see from the attached e-mail dated Aug 14th, we had already advised Joe to arrange to educt the payment out ofthe interest reserve and any difference from the business checking account. am not sure this was forwarded to you as it seems it was not done." Bank: "This was not done, nor were we aware of the request. oe is not employed by Marco Community Bank and operates an independent company. I-le cannot execute bank business or work on behalf of the bank." ll - 1 .- I Holding Company and Affiliate tu.. ationships (Continued) 11124 . . Suspicious Activity Report and Subordinate Financing A similar situation involving CLCC is noted regarding the loan dated 6f9!05 in the amount of $8,0U0l\f1, of which the bank retained a paiticipati on interest. The loan involved a $1 certificate of deposit also provided by an investor unrelated to the borrower, with the attendant interest expense not shown in the credit memorandum prepared by CLEC. it is unclear, if there is a similar undisclosed interest cost. The loan has been paid, but the _loan remains outstanding. Furthermore, additional subordinate financing is evident in the and loans. These loans have secondary mortgage financing in the respective amounts of SLTSUM and SGUOM, which were recorded shortly after the bank's mortgages. However, unlike the CDs, there is no disclosure of this subordinate financing in credit memoranda prepared by CLCC. Although records do not document that CLCC was aware ofthe subordinate financing, it is clear that CLEC management should have been aware and included any related debt service in the corresponding credit memoranda. Both loans with the undisclosed second mortgages were closed by the borrowers' attorney. Allowing loans to be closed by attorneys or agents of borrowers is a poor internal control practice. Management should ensure that, if not a party affiliated with the bank, all loans are closed by an independent and reputable party. Last-in-First>>Out QLIFOQ Participation Regarding CLCC loans involving the bank, management sold participation interests on four of these loans with "last-in-first>>out" positions, whereby the participanfs are last in the loan and first out ofthe loan, even in the event ofdefault. This structure effectively results in the bank subordinating its collateral position' to that of the participant. Given the nominal financial position retained by the bank in relation to the loan amounts retained and $l6,l 14M sold), the resulting structure creates the appearance that the bank provided "credit enhancement" to facilitate the placement of CLCC brokered loans, on which CLCC realized $3 UTM in brokerage fees. Of the total fees earned, was paid to other loan participants, but Marco Community Bank received no origination fees. The credit enhancement feature provided by the LIFO benefited the afiiliate and represents a violation of governing laws and regulations. Refer to the "Violations of Laws and Regulations" schedule for additional comments. 12 1; il-is. Examination Data and Ratios 11124 - - ASSET QUALITY ADVERSELY CLASSIFIED Loans and Leases 20,614 4,763 25,377 Securities Other Real Estate Owned Other Assets 73 16 94 Other Transfer Risk Subtotal 20,692 4,779 25,47 Contin ent Liabilities I 031311200715 1213112005 0613012004153 Exam Date utal Special Mention 290 tiversely Classified Items Coverage Ratio 129.49 oral Adversely Classified Assets1Tota| Assets 15.38 Past Due and Nonaeerual Loans and Leases1Gross Loans and Leases 8.80 Adversely Classified Loans and Leases1'1`otal Loans 18.96 Loans and Leases 1.53 1.15 031311200715 1213112005 061301200415 ier I Leverage Capital1Average Total Assets 7.30 7.98 ier Risk-Based Capital1Risk-Weighted Assets 9.43 10.0 'stat Rislt-ised Capitalfilisk-Weighted Assets 10.68 1 1.22 Capital Category The capital category relates on ly to the Prompt Corrective Action revisions of Part 325 of the FDIC Rules and Regulations. PCA Categories: - Well-capitalized, A Atlequately capitalized, - Unciereapitalized, - Significantly untlereapitalizetl, - Critieaily unclereapitalized 0313112007 0313112007 1213112006 1213112005 Retained Earnings.-' Average Total Equity 7.61 5.47 13.74 12.43 S561 Growth Rate (3.94 23.25 3.93 33.49 Cash Income 3.91 0313112007 0313112007 1213112006 1213112005 et Assets 0.80 0.74 1.33 1.14 et Interest lneorne (TE)1Average Earning Assets 3.36 4.28 4.53 4.39 otal Noninterest Expense1Ave1'age Assets 2.65 3.15 2.24 2.19 0313112007 0313112007 1213112005 1213112005 et Non-Core Funding Dependence 35.01 23.95 32.14 25.71 13 -. .1+q - . Comparative Statements of Financial Condition 11124 ASSETS Total Loans and Leases 133,839 130,466 Less: Allowance for Loan dt Lease Losses 2,047 2,047 Loans and Leases (net) 131,792 123,419 interest-Bearing Balances 2,225 2,141 Federal Funds Sold and Securities Purchased Under Agreetnents to Reseil 18,445 22,327 Trad ing Account Assets Securities: Held-to-Maturity (at Amortized Cost) 6,246 2,33 (at Fair Value) Total Earning Assets 158,708 155,217 Cash and Noninterest-Bearing, Balances 2,001 2,437 Premises and Fixed Assets 2,904 2,93 Other Real Estate Owned Other Assets 2,024 2,1 84 TOTAL ASSETS LIABILITIES - Deposits 146,613 144,446 Fedeial Funds Purchased and Securities Sold Under Agreements to Repurchase Other Borrowed Money Other Liabilities 1,40 1,037 Subordinated Notes and Debentures Total Liabilities 148,013 145,483 Minority Interest in Consolidated Subsidiaries EQUITY CAPITAL Perpetual Preferred Stock Common Equity Capital 17,624 17,292 Incfudes net unrealized Ptoiriing gains (losses) on securities. Other Equity Capital Total Equity Capital AND EQUITY CAPITAL OFF-BAIANCE SHEET ITEMS Unused Commitments 29,984 28,892 Letters of Credit OtherOt`t`fBalanee Sheet Items Other Derivative Contracts Appreciation (Depreciation) in Hcid-to-Maturity Securities ti (7) Footnotes: 14 Items Subject to Adverse Classiliea ion 11124 Includes assets and off-balance sheet items which are detailed in the following categories: 'mm Substandard Assets - ft Substandard asset is inadequately protected by the current sound worth and paying capacity of obligor or ofthe collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation' of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful Assets - An asset classified Doubtful has all the weaknesses inherent in one classified Suhstantlard with the added characteristic that the wealtnesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loss Assets - An asset classified l.oss is considered uneollectible and of such little value that continuance as a hanltable asset is ROI warranted. This elassilieation does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to deter writing off this @ally worthless asset even though partial recovery tnay_be effected in the future. ION .QND Substandard Doubtful Loss LOANS 14 003 10,503 3,501 The a re =ate amount classified represents the outstandingbalance in loan pools purchased from a mortgage lender based in Jacltsortville, Florida. guarantees the pools. lsccausc guarantees the pools, the amount extended represents loans to one borrower in excess of statutory limitations. Refer to the "Violations of Laws and Regulations" schedule for additional comments. The pools are sold through Jacksonville, Florida, and managed through an agent bank arrangement with Jacksonville, Florida. The ioan pools are secured by first mortgage loans made by to purchase and renovate residential properties. The initial funding is rovided by warehouse lines of orc it at has with and Jacksonville, Florida. The lines of credit are secured by mortgages reportedly not yet placed in a particular pool, but no review has been performed by management to assure that 'fpool loans" are not serving as collateral forthe warehouse lines oi` credit. As of the balance on these credit lines is li8,323M at -, and at The line of credit at has been frozen. The entities who are the borrowers at reportedly are knowledgeable investors who plan to "flip" properties in a short period of time (after proposed renovations are complete). The investors do not have any cash equity in the project because finances all acquisition costs, including a 4.5 percent origination fee, 12-months of hazard insurance, closing costs, and all funds necessary to renovate the home. As such, the program provides for the most part 100 percent financing, making each underlying mortgage a contravention of Federal Reserve Bank Regulation - Appendix. A. Refer to the "Violations of Laws and Regulations" schedule for further details. internal policy is to limit loan amounts to 75 percent ofthe appraised market value as improved at completion ofthe renovations. The renovation funding aspect of the program is managed by . it/lanagcment should confirm that disbursement procedures used by are consistent with safe and sound lending practices. Subsequent to the examinatio n, correspondence from noted that controls over the disbursement function had been mishandled in some cases, specliically for properties in the greater 'l`ampa, Florida, area. Because many of the underlying loans in the pools are properties located in the' greater Tampa market, it is imperative management assess the renovation progress of these homes to identify the magnitude of the problem. As noted above, most of the underlying mortgaged properties are located in or near Tampa, Florida, and, to a lesser degree, Jacksonville, Florida. The mortgages are made for an initial twelve-month period with a three~ month extension option and carry interest rates of between 15 and l6.5 percent. The bank is. earning around nine percent on it's investment in the pools. services the loans and the agent bank services the loan ools. interest payments made by investors are aggregated and forwarded by to- and placed into an escrow deposit account to be used to service the pools. lf there are 16 Items Subject to Adverse (Continued) 11124 . AND Substantlard Doub_tf?__ Loss insufficient funds in the escrow account to meet the pool payments, is obligated to cover the shortfall. The depository account at is not being monitored by management, nor docs management receive periodic delinquency reports to monitor the payment performance of the underlying loans made by At the conclusion ofthe examination, delinquency information was received from and is reflected in the chart below, balances are in thousands. Date of Purchase of Pool Original Balance Balance B@_t__Due 06709706 74.21 $2,000 $803 76.17 0771 1706 36.37 1,901 874 74.02 08702706 70.76 1,452 375 33.46 08729706 63.73 1,763 877 59.77 09721706 53.37 1,603 344 36.82 10710706 100.00 2,662 1,509 it 10726706 70.11 1,408 1,119 48.47 11721706 95.86 2,895 2,175 40.02 0l723707* 36.91 965 761 it 03712707 73.32 2,200 2,163 04716707 76.43 2,3 2,503 77 Total $21,352 $14,003 initially purchased by the holding company and repurchased by the bank on 572707. 77 information for Pool was not received and Pools O, are recent pools that are not seasoned enough to exhibit potential delinquency problems. guarantees interest payments on each pool, agrees to pay off any loan in a pool where the underlying property is acquired by through foreclosure, and to repay the entire loan pool upon the maturity of the pool. However, subsequent to the examination, requested forbearance on its obligation to rc urchase problem loans from pools and on interest payments. A linancial statement for as of 5731707 shows limited financial resources with equity of $3 l2l\fl, a pool deposit account of $l6l\f1, and an allowance for loan losses of $1 It is noted that added $l,l00M to the allowance in April and May 2007 because of a deteriorating loan portfolio and has indicated that this may not be adequate to cover the problems that exist. Reportedly, 50 percent of loans made hy- -are past due, which has created a cash flow problem that has to the request for forbearance. information received subsequent to the examination indicates that timely disposal7liquidation of the banl<'s pools could require the bank to take a discount of between 20 to 30 percent or more. 'l`herc1`ore, at this time, it is only prudent for the bank to set aside sufficient resources to cover any potential losses that could arise-from the credit exposure. Given the uncertainty with the problems being experienced by and potcnti al loss exposure should the bank have to look toward the underlying collateral for repayment, $3,50lM is classified Loss (25 percent of the balance) and the-remaining balance of 3 0,502l\fI is classified Substandard. Examiner: Karen 17 Items Subject to Adverse (Continued) 11124 CATEG oar "1 CQQAMENTS Substapclard _"gras 741 Da sPastl)ue 42-0fNonaccrual 537 0204 Represents the remaining balance of a $l,3 33M loan granted on 'if 2104. Proceeds were used to refinance a lot loan and provide funds to construct a "speculative" home on Marco Island. The lot was purchased for $650lvl on 4f5f04. The borrower entered into ajoint venture arrangement with Marco Bay Homes, a local contractor, to build the home. However, the home has not been built, despite the advance of $l47l\/I to fund soft costs. 'l`he loan became delinquent for interest payments as of 3/1 ZIU6, and was placed on nonaccrual on 5!5f06. it matured on 7712106 and now is over onc>>year past due and carried onthe banl<'s records in violation of Section Florida Statutes. Refer to the "Violations of Laws and Regulations" schedule for details. The bank began foreclosure action on SIU6 and received a summary judgment on The execution of service on -was delayed because he relocated to Orlando, Florida, without notifying management. The bank is proceeding with foreclosure action because there are other subordinate liens outstanding on the property. The most recent appraisal dated H3 0!07 sets the market value at $600l\/I. Once title to the property is taken, the bank will have to pay $1 SM to satisfy past due real estate taxes and likely will incur $48l\/l in disposition costs, resulting in a fair value of The fair value is classified Substandard and the remaining is classified Loss. Examiner: Brock Mciiwain 6,469 (2,569) Participation Sold 3,900 3,900 Represents the banl<'s portion of a loan granted on llf8f05. Proceeds were used to purchase l,l35 acres of vacant land outside Sebring, Florida, to be developed into a residential tract development lcnown as . Loan terms call for interest only payments until the loan matures on . roperty was purchased for $S,633lvl. The bank participated of the loan to Florida, but repurchased this participation interest on l2f27.f06 (at the request of . Because of the banl<'s legal lending limit, was participated tothe holding company, Marco Community Bancorp. The ownership interest of the borrowing entity is uncertain because the partnership agreement was not obtained. The main financial guarantors are real estate investors from New Jersey and New York (- but the prej ect is being managed by . ir;-was which owns a shopping center in Kendall, Florida. The development ofthe project has progressed slower than planned, due to conditions imposed by the South Florida Water Management District. The property has been platted into l00 residential lots, but site development has not begun. The guarantors have carried the project out of available funds; however, they have depleted their cash resources to keep the project going. On 5f29f0?, management agreed to renew the loan for another 60 days, to give the borrower time to close on lots under contract to he sold. Reportedly, more than 40 lots are under contract but management has been unable to verify this information. The lli - - Items Subject to Adverse Classification (Continued) 1.1124 CAil:E(i0fLfr' onaarrtir Loss one contract obtained by management during the examination, does not appear to be an arms length contract. On 3/9/07, management was told that lot takedowns would occur next week. To date, lot talccdowns have not occurred and it is questionable whether a potential buyer would be willing to close on alot while the project remains undeveloped.. The loan was underwritten by Commercial Lending Capital Corporation, tr subsidiary ofthe holding company and affiliate ofthe bank. The affiliate failed to document the financial strength provided bythe guarantors, and bank management did not perform an adequate financial analysis to determine the validity of their reported financial statements and likelihood of continued income. Given the uncertainty of the marketabilily of the project and the undocumented financial resources of the guarantors, the balance of $3,900lvl is classified Substandard. Examiner: Brock l\dcSwain 1,229 Days Past Due l49fl`~lonaccrual 78? 442 Represents the balance of a $l,229M loan granted on 2r'3r'05. The loan was to purchase a home for investment purposes on Marco Island held inthe name of . he heme was purchased for ln addition to a lirst mortgage on this home, the bank was to have a second mortgage on primary residence; however, this mortgage was never recorded and sold his home in December 2005 without notifying the bank. has moved to South Carolina and is not responsive to the foreclosure proceedings taken bythe bank. The home was appraised on lf'3Of07 at a value of $86'i'M. Once title to the property is taken, the bank will have to pay $1 to satisfy past due real estate taxes and likely incur another to sell the property, resulting in a fair value of The fair value is classitied Substandard and the deficiency of$442M is classified Loss. Examiner: Brock McSwain 3,235 Days Past Due 77 Participation Sold 470 470 Represents the remaining balance of a participation in two loans closed on 7il4fO5 to acquire 609 acres of unimproved land on US Highway 192 in Osceola County, Florida. The loans are in the amounts of and 53334l\/I and closed on the same day to the same borrower under the same terms, resulting in a total original ex osure of $3,494lvi. A participation interest in the $3,494lvI total exposure was sold to Florida, at closing. This participation was sold on a "last in first out" basis; thus, subordinating the bank's retained participation interest to that of . The relationship was brokered to the bank by a bank affiliate, and is shown as a violation of Federal Reserve Bank Regulation on 9 1- F-. --11 Items Subject to Adverse Classineation (Continued) 11124 AND Substand ard Doubtful Loss the "Violations of Laws and Regulations" schedule in this report of examination. The loans matured on lf 1410? and are in foreclosure. Both loans are secured by the same mortgage on the acquired property, a second mortgage on 1.31 acres on US Highway in Melbourne, Florida, that is improved with two office buildings totaling 12,532 square feet, and a first mortgage on 13 residential lots in Port St. Lucie, Florida. The 609 acre property was acquired for and most recently appraised for (7/1105). The office property was appraised at $610lvi as of l0! 0.f03, and is under contract for sale at The first mortgage on this property had an original balance of $653l\/I as of 1 lf] 0103, The residential lots were individually appraised as of 911 6r'0`5 for a total market value of $l,4l6M. The total available collateral protection based onthe appraised values and the contract value less the first mortgage balance is $11,-4l3lvI. The original principals ofthe borrower are and All are guarantors, along with two corporate interests of and Financial information on the guarantors is reasonably current and shows the ability to service the loans. _passed away without a will, and there is a significant dispute regarding his estate. 'is the managing member for the borrower. The retained participation interest in both loans is classified Substandard because ofthe delinquency and related foreclosure action. Examiner: David Eatlle ser (1) 694 (2) -400 (3) 791 1,791 (1) Represents the balance ofa $69?lvI loan granted on 4fl U06. The proceeds were used to purchase a model home in Ft. Myers, Florida, in a development known as Horse Creek. The model home is leased back to the builder, Loan terms call for interest only payments until the loan matures on l0fl1.l07. The home was purchased for (2) Represents the balance of a Eli694M loan granted on 3f3lf06. The proceeds were used to purchase a model home in Ft. ers, Florida, in a development known as I-Iorse Creek. he model home is leased back to the builder, Loan terms call for interest only payments until the loan matures on 9r'30f07. The home was purchased for lS925lvi. (3) Represents the balance of a loan granted on 4/29r'05. The proceeds urchase a model home in listero, Florida, from The model home was to be leased to until the build- out ofthe development. Loan terms call for interest only payments until the loan matures on 4f29f08. The home was purchased for The borrower is the pro fit sharing plan of retired dentist . On #lil 6f0'l, the bank was notified by -attorney that the profit sharing plan does not have the ability to continue to make payments on the above loans and noted that efforts are being made to sell the properties to satisfy the debt. President 20 I . -- Items Subject to Adverse Classification (Continued) 11124 Mi til-rraoonv AMOUNT, AND Substandard Doubttiil - Loss Montgomery noted that the builders on loan (2) and (3) prepaid under their respective leasebaek arrangements, giving the proiit sharing plan funds that were probably invested in other properties. 'As of 211 SIOY, the profit sharing plan owned four other properties. One oi' these properties was tinaneed by the bank and was repaid when the property was sold in 2007. 'l`wo other properties are financed by the Naples branch. The fourth property is a partial interest in a condominium unit iinanced by the bank and owned by whereby the borrower owns a half interest. The other partners are and The $1 ,23 li/I loan to this partnership is not adversely classified due to the Iinancial strength of the other partners. Although no loss is anticipated, the cash flow deficiencies of the profit sharing plan warrant a Substandard classitication. Examiner: Brock 723 Da Past Due 32 723 Represents the remaining balance ofa loan granted cn The loan proceeds were used to refinance a loan granted on ISKO4 to purchase a residential lot on Marco Island for investment purposes, and to provide tirnds needed to resolve a divorce sttlement. The loan is secured by a tirst mortgage on the residential lot appraised for on I lf22!O6 and a second mortgage on primary residence on Marco Island that was valued at $7'32ivl on l/22106, resulting in a combined value of Ili I ,374lvl. 'l`he tirst mortgage on the home is held by for Loan terms call for interest only payments until the loan matures on ll!2 l. No payments have beenmade during the examination, and the loan has been sent to the bank's attorney for collection. Although no toss is anticipated given the collateral protection provided, the past due status warrants a Substandard classification. Examiner: Brenda Liberti 462 Da sPastDue l22!Ncnaccrual 462 Represents the balance of a loan granted on 5r'2 SKU6. The loan was made to construct a single~t`amily residence on Marco island for investment purposes. The contractor was a local home builder who is experiencing financial problems. The home was not built to the satisfaction ofthe borrower. As a result of the construction deficiencies, asked management to reduce the loan balance. She claims the bank improperly handled her construction loan causing her to incur additional costs to finish the home. Management agreed to waive late fees, but did not agree to the settlement she proposed. The home was appraised for on 6.f22r'U6. Management has begun foreclosure action. The balance of ?'5462ivl is adversely classitied Substandard due to the loan's delinquency. Examiner: Brock iv'lcSwain 2l T- . ltems Subject to Adverse Classification (Continud) 11124 i c,jrr'soonv DESCRIPTION AND Substandard Doubtful _ljoss 209 Da Past Due 55 l4l 68 Represents the remaining balance of a 5B2l2l\fI home equity line of credit granted on ll/5104. Loan terms call for interest oniy payments until the loan matures on ll! 18/ 14. The loan is secured by a second mortgage on a single-family residence on Marco Island. The bank has been unable to contact the borrower concerning the delinquency and the loan has been sent to the bank's attorney for collection. The home was appraised on 0f0'?' for A $4'7lM tirst mortgage is held by Given the property value, the bank intends to pursue the property for repayment ofthe debt; however, it is unlikely that the entire balance will be satisli ed. After disposition costs, it is estimated that the fair value of the property is $61 IZM, leaving $141 after satisfaction of the tirst mortgage. The anticipated recovery of I 41 is ciassitied Substandard and the remaining balance ol' is classitied Loss. Examiner: Brenda Liberti 43 Days Past Due l59fl\lonaecrual 43 (2) Days Past Due l59l'Nonaccrua1 36 (3) Days Past Duc l59fl\lonaccrual 42 (4) Days Past Due l59fl\lonaccrual Days Past Due i59r"Nonaccrual 442 273 Represents the balance of a loan granted on U05 and renewed on 7f24f06. purchase a residential lot in Port Charlotte, Florida. The lot was purchased for $56.5lvI. (2) Represents the balance of a S-42M loan granted on 8/l U05 and renewed on 7.f24f06. purchase a residential lot in Port Charlotte, Florida. The lot was purchased for (3) Represents the balance of a $36l\/I loan granted on 8/'l 1105 and renewed on 7/24/06. purchase a residential lot in Port Charlotte, Florida. The lot was purchased for (4) Represents the balance of a $4lM loan granted on 8/1 U05 and renewed on purchase a residentiallot in Port Charlotte, Florida. The lot was _purchased for (5) Represents the balance of a $272l\fI loan granted on 2r'9/05 and renewed on purchase a residential lot in Cape Coral, Florida. The lot was purchased for 164 Proceeds were used to Proceeds were used to Proceeds were used to Proceeds were used to Proceeds were used to The borrower stopped making payments on all tive loans in October 2006. Some of the lots were purchased from which is believed to be related to the borrower. The Cape Coral lot was "flipped" to the borrower by Land tie Sea Holdings in February 2005 for a $50l\4l profit. Althou the borrower does not appear on any official corporate records of it is noted that has provided subordinate financing for lots purchased from other parties. The balance on loans (1), (2), (4), and (5) have been increased due to the capitalization of delinquent tal estate taxes. During the examination, title to two lots in Port Charlotte, Florida, (loans and 2) were received. Titles to the other properties are expected shortly. 22 Items Subject to Adverse Classification (Continued) 11124 .t fwflacsr AMOUNT, AND Substandard uDoubtful _*loess On the live lots were appraised for an aggregate value of $302l\/I, resulting in a fair value of after normal disposition costs. The fair value is classified Substandard and the remaining deficiency balance of $1 64M is classified Loss. Examiner: Brock McSwain 122 Da Past Due 4l3f'Nonaccrual 122 Represents the remaining balance of a $l25l'vl home equity line of credit granted on 3f12f'0-4. The loan is secured by a second mortgage on a single-family residence on Marco Island. The proceeds were used to payoff credit card debt. On 1219! 05 tiled for Chapter 7 Bankruptcy protection in Illinois. The $1 first mortgage held by was foreclosed on 4i'l U07. On 4f30f0T, management charged-off the loan and it is unlikely that the bank will pursue- for a recovery. Therfore, the balance is classified Loss. Additionally, because the loan was carried past due in excess of one year at a value in excess of its market value, it represents a violation of Florida Statutes. Refer to the "Violations of Laws and Regulations" schedule for additional comments. - Examiner: Brock lt/icSwain 390 Da Past Due l80fNonaecrual 290 |00 Represents the balance of a home equity line of credit granted on 9f13}'05. The line is secured by a second mortgage on a single-family residence on Marco Island. The first lien holder is-. Miami, Florida. The home was purchased in April 2002 tot On 511/07, the bank obtained title to the property and satisfied the mortgage held by The property was appraised on l/8f0'7 at a value of After disposition costs, the fair value ofthe property is estimated to be resulting in a deficiency after satisfaction of the prior lien. For examination purposes, is classified Substandard and $1 00M is Loss. Examiner: Brock McSwain 42-fl 262 162 Represents the remaining balance ofa loan granted on l/14f'U5. Proceeds were used to purchase a vacant residential lot for investment. The purchase price ofthe lot was Loan terms call for interest only payments until the loan matures on lf' 14% 1 5. The last payment made was for the payment due 2!l4r'07. The lot has been listed for sale since 2005, with the asking price being reduced 19 times. It now is listed for $462lv1. On 4/'12f07, management received notification from the borrowers' attorney that an offer of $295l\-fi had been made and that the borrowers were requesting the bank to accept a lower payoff in satisfaction of the debt. On 4/'l4f0'7, management's response demanded the loan be paid current. To date, there have been no further communications between the borrowers, their attorney and management. On 5f9f07, the lot was appraised for a 23 - Items Subject to Adverse (Continued) 11124 i AMOUNT, substandard negbrfui Loss marl-ret value of $285l\fI. It is not known if the offer of $295lv1 is still available, but the borrowers have stopped servicing the debt and repayment now is dependent on the sale of the collateral. Therefore, based on the appraised value, net of disposition costs, the fair value of is classilied Substandard and the remaining deficiency balance of $l 62M is classified Loss. Examiner; Brenda Liberti 405 Da Past Due 97l'Nonaccrual 405 Represents the remaining balance of a $45 construction loan originally granted on Proceeds were used to pay off the $15 lot loan held by the bank and to provide in construction funds for a singlevfamily residence on Marco Island. Because of death on l2f7`fU5 and construction delays, the loan was renewed on 2l'27l'06 for an additional 130 days. Continuing construction delays resulted in a second renewal on for an additional 90 days, The loan matured l2f25!06 and now is carried on nonaeerual. The contractor is Marco Bay Homes, a local builder who is experiencing financial trouble. Currently, the home is unfinished and the bank has been working with the estate to resolve the matter. On 211306, the executor ofthe estate gave special power of attorney so he could act on behalf ofthe estate to finish the home and facilitate the sale ofthe propertywas involved in getting her to invest in this "speculative" home through a joint venture arrangement with the contractor. The home was appraised on 4! for a market value of $660lv1. Although no loss is anticipated, the loan is classified Suhstandard because of the ongoing protraction in completing the house and disposing of the collateral. Examiner: Brock McSwain rofrar, LOANS 20,614 0 assets 94 is is nocatinn nvreaesr rusosrvasris Represents accrued interest receivable on the above adversely classified loans. A detailed list was provided to President lviontgomery. Terai. aovnnsatv crass assets as is 'rotate rrsivts ze,s92"` 4365" 4 11| 24 - nl-1 -- Items Listed for Special Mention 11124 includes assets and oflinbalarice sheet items which are detailed as follows: I Special Mention Assets -- A Special Mention asset has potential weaknesses that deserve rnauagemenfs close attention, lf left uncorrected, those potential weaknesses may result in the deterioration of the repayment prospects for the asset or in the institutioirs credit position at some future dale. Special Mention assets are not adversely classified and do not expose an institution to sufticient risk to warrant adverse classification. amount LOANS 290 290 Represents the outstanding balance ofa homesequity line of credit granted on l2f16i04. Loan terms call for interest only payments until the line matures on The line oi" credit was to be secured by a second mortgage on the borrower's primary' residence located on Marco However, because the mortgage was never recorded, the loan is considered unsecured, The loan was closed by 'a title company in Miami,`Florida that has gone out of business. The title company gave the borrower the original mortgage and management is unable to record a copy of the mortgage that is in tile. The failure to record this mortgage exposes the bank to undue credit risk since th borrower does not warrant an unsecured loan of this amount. On ZFNUT, transferred title to the property to as part of a divorce settlement. The borrower, Z, is willing to execute a newmortgagc to secure the debt. The loan is listed for Special Mention due to managemenfs failtue to record the mortgage on this loan. Examiner: Brock McSwain LOANS LISTED FOR SPECIAL MENTION 290 25 'Wf . Assets with Credit Data or Collateral Documentation Exceptions 11124 This Page assets with technical defects not correcletl during the examination, The appropriate number or description is noted in the "Deficiency Description" column. Appraisal Title Search or Legal Opinion Borrowing Authorization Recordation Insurance 6 - Collateral Assignment 8 - Inadequate In eomefiffash 1-'low Iniiormation 9 - Livestock Inspection 10 - Crop Inspection ll - Tax Return I2 - Collateral Valuation I3 - Inconsistent Sales Price - Filtaucial Statement Date of Most Name or Description Amount Recent Financial Deficiency Desci iption LOANS Statement 3,900 5, 7 - Liability Insurance, Partnership Agreement 1,350 ll 1,229 1 lf29f04 2,875 5 - Liability Insurance 290 4, 5 - Recorded Mortgage, Wind Insurance 1,026 9? 7 975 I2/3lf05 li - FIS 84 TER Gty 750 12/31f04 11 - Rent Roll2,191 i2!31f'05 1,130 2 - Title Endorsetnent 66 121 12f0-4 1,272 i2>>'31f05 Ii - FIS City 1,013 I2i'3lf05 1,959 05!3l!05 I 2,880 Aesets with Credit Data or Collateral Deeumentatlen Fxeept1ens(Cent1nued) 11124 Date ef1'vIeSt Name er Amount Recent na :eral Deiieseney Descrupuen _l,470 259 1,041 1,085 1,195 1,000 405 TOTAL 29,555* 12131104 12131103 11 - WS Tax Return Gty - Leaae, Covenant Monitoring Warranty Deed vs Clesing Statement 7 - Unsigned Wind Insurance, Hazard Insurance Represents 22% eftetal ieans and 41% ef the leans reviewed during the examination. 27 Concentrations 11124 1? . Listed below are concentrations of obligations, direct and indirect, according to the following guidelines: I) Concentrations ol' 25% or more ot' Tier I Capital by individual borrower, small interrelated group of individuals, single repayment source or individual' project; 2) Concentrations of ll}U% or more of Tier Capital by industry, product line, type of collateral, or short term obligations of one financial institution or afliliated group. Any other concentrations may be listed 'in the 25% category if desired. .en appropriate percentage oftotal assets is used when a bar1lc's capital is so low as to make its use meaningless. LLS. Treasury securities, obligations of US. Government agencies and corporations, and any assets collateralized by same are not sohctiuled. EX DESCRIPTION -ETA II, AMOUNT LOANS 14,003 The amount outstanding represents the aggregate balance ofthe banl<*s participation in mortgage loan pools issued and fully guaranteed by . The outstanding balance represents 10% of Tier Capital of $12,-60? M. The amount outstanding is a_ violation of Florida Statutes because it exceeds 25% oi' the benl<'s capital accounts. Refer to the "items Subject to Adverse Classification" and "Violations oi' Laws and Reulations" schedules for additional comments regarding this credit relationship. 23 "y I Capital Calculations I 11124 . -. Tier 1 Capital Perpetual Preferred Stock and Related Surplus Common Stock Surplus lletaincd Earnings Accumulated Gther Comprehensive Income and Other Equity Capital Components - Total Equity Capital Net Unrealized Gains (Losses) on Available-For-Sale Securities (if a gain, deduct from Total Equity Capital in the calculation of Tier Capital, if a loss, add it to Total Equity Capital) Less: Net Unrealized Losses on Available-For-Sale Equity Securities Accumulated Net Gains (Losses) on Cash [ifa gain, deduct from Total Equity Capital in the calculation of Tier Capital, if a loss, add it to Total Equity Capital) Less: Nonqualifying Perpetual Preferred Stock Qualifying Minority Interest in Consolidated Subsidiaries Less: Disallowed Goodwill and Other Disallowed Intangible Assets Less: Disallowed Servicing Assets and Purchased Credit Card Relationships Less: Disallowcd IJel`erned Tax Assets Other Additions to (Deductions from) Tier Capital Subtotal: Tier Capital Elements Less: Assets Other Than Loans Leases Classilicd Loss Less: Additional Amount to he Transferred to Tier 2 for Inadequate Allowance for Loan and Lease Losses Other Adjustments to (from) 'l`ier Capital Tier I Capital Tier I Qapital Qualifying Subordinated Debt and Redeemalnle Preferred Stock Cumulative Perpetual Preterred Stock lncludilnlc in Tier 2 Capital Allowance for Loan dr Lease Losses Less: Loans dr. Leases Classified Loss Add: Amount 'Transferred from Tier Capital Adjusted Allowance for Loan et: Lease Losses Less: ineligible Portion of Allowance (If Applicable) Allowance for Loan and Lease Losses Includible in Tier 2 Capital Unrealized Gains on Available-For-Sale Equity Securities lncludilsle in Tier 2 Capital Other Tier 2 Capital Components Other Adjustments to (hum) Tier 2 Capital Tier 2 Capital (Not to Exceed olTier Capital) Tier 3 Capital Allocated for Market Risk (Tier 3 Plus Tier 2 Not to Exceed 100% ofTier Capital) Less: Deductions for Total Risk-Based Capital (I) Total Ca ital Assets anal Average Total Assets Calculations Risk-Weighted Balance Sheet Items Risk-Weighted Off-balance Sheet items Market Risk Equivalent Assets Less: Risk-Weighted Amounts Deducted liorn Capital Gross Risl-t-Weighted Assets Less: Ineligilnle Portion St (I) Total His It-Weighted Assets Average Total Assets (Prom Call Report Schedule Less: Amounts Deducled hom Tier Capital fl] Ad'usted Avera Total Assets Securities Appreciation (Depreciation) Contin ent LiahilitiesfPotcntial Loss Footnotes: (I) lncludes adjustment for financial subsidiaries as deiined by the Gramrn-Leaclt-Bliley Act of 999, if applicable. 29 . 3,200 10,950 3,474 - 17,624 l7,624 I6 5,U0l 2,047 4,763 5,001 1,'2li5 606 ._-aussi 1,679 125,154 13,336 4,779 606 166,694 5,017 29,9ll4f' l2,6ll7 .. ,679 14,286 ql.-vi-1 l3?l,3ll 133,705 1v 61,677 6 - I I ., Analysis of Earnings 11124 Comparative Statement of Income 0310 H2007 1213 H2006 l21'3li'2005 Interest Income 3,043 8,449 Interest Expense 1 5,028 2,661 Net Interest Income 1,564 7,101 5,788 Noninterest Income T3 309 341 Total Noninterest Expense 1,105 3,612 3,002 Provision for Loan and Lease Losses 348 62 Securities Gains (Losses) Appiicable Income Taxes 20 1,298 945 Extraordinary Credits (Charges), Net Ns? Other 1,25 1,50 - includes changes in the ner arnreo.lizea' holding gains f"fosses,1 on Avoiiable-For- Sole Securities Cash Dividends Chores in Equity Reconcilement of Allowance for Loan and Lease Losses 03/3112007 1213112006 l2f31f2005 Beginning Balance 2,047 1,699 1,081 Recoveries Provision for Loan and Lease Losses 343 620 Other Increases (Decreases) Gross Loan and Lease Losses Ending Balance Other Component Ratios and Trends 03.13 H2007 1213112006 1213 H2005 Net interest Income (TE)fAverage Earning Assets 3.86 4.53 4.39 Total Noninterest ExpenselAverag,e Assets 2.65 2.24 2.19 Net lncomefhrerage Total Equity 2.61 13.74 12.43 Net Lossesiiaverage Total Loans and Leases Eamings Coverage of Net Losses (X) Ni' NIA 1,563.50 Loans and Leases - 1.53 1.57 1,26 Noncurrent Loans and 185.2 61.26 Foo tn otes: 30 - li.. Signatures ol' Directors r) 11124 . 1- We the undersigned directors of Marco Community Bank, Marco Island, Florida, have personally reviewed the contents ofthe Report of Examination dated March 31, 2007. Signatures of Directors Date DIANE M. Berea - 1, a Jost M. Cox JAMIE B. GREUSEL ANTHONY . IANNOTTA -dies-?n| ROBERT R. MARRS MCLRUGHLMI HOWARD s. MONTGOMERY, JR. E.. si>f'fa'11T1if'1 i1F'i11U1$11155 ?11i_ if ii15' a t>;_i5EURifif?? ?ffif_= uatio_nsg *jf 2-il* 9 - `f'3 'Sfi' %it? if Rff_?_li -The i11_aii_ >11fl -ff@H ?<3d ?1iEi0 If 1112fhf -#111 fiFISurfa M411 3% - 1- vi' I I --I-wa _naval'_se_f '-5- arar-L__r IDBHQIIRS O-UTSIDL HOURIQ - -LPI"Il JI5z~r_.1-L . - -5 I -'|-245 -:-I-264 -11124 . - 1 -. - directors, senior officers, and principai Also indicate their titles. Nuniher of shares owned is not rounded. (I -4- - indicates preferred stock owned; - indicates holding cornpany stoclt owned; - indicates stock controlled but not i - Q- Net Worth Year -pear Anim- Number Sam), DW loincd of dawg ofilliares and 1 1 3f30_f0r 2005 ?liieti_'ted2'_ ;f?l@f7l 0 the chairwoman of the liuman Resources and CRA committees. She was the vice chairwoman of directors at Citizens Community Bank of Florida, Marco Island, Florida and also a director of that company. She began her business career as the human resources manager tor Crriflin Company from 1980 through 1993, in southern California. Ms. Beyer remains actively involved non~profit organizations. 1 04100011 200;1_- r_ Founding director of the bank and its parent company. Currently, he is the chairman ofthe Governance Committee. He has been active in the banking and insurance industries for many years. through l992, he was a director and vice president ol`Cox Insurance Agency, Inc., Marco Island, "ln-_l999, he became a director of Peop1c's Community Bank of the West Coast and its parent company, Bancshares, Inc., Sarasota, Florida. Mr. Cox remains an active director of these entities. alsoyras a founding director of Citizens Community Bank of Florida and its parent company, Citizens Community Bancorp, Inc., Marco Island, Florida. The parent company and bank were acquired by Florida in April 2001. in addition to his practical experience, Director Cox has attended Banking School and the Graduate School of Banking at LSU. B. I2/'3lr'06 2003 _llQ_l'hc I 1 is founding director ofthe bank and joined its parent company, Marco Community Bancorp, ine., Marco Island, Florida as a director in 2004. Currently, she is the chairman of the Audit Committee. lireyiously, she was a director ofthe former Citizens Community Bank of Florida, Marco Island, Florida from when the bank was acquired by FNB. Corporation, Naples, Florida. Director Greusel _doctorate degree from Stetson College of Law, Deland, Florida in 1987, and she has been the 1 I Confidential -35 Officers (Continuu I In 11124 Yew Yem An__ Numbm Emmy Names and Comments Joined of of Shares and f~ Atnotint ae 0 Batik Birth ance' Owned Bonus (B) ttatentent _ijirinci_pal__of the Law Oflices of Jamie Greusel, PA., Marco Island, Florida since 1988. She also is the owner of Services, LLC, Marco Island, Florida. iQ . I . iassnsorffra, ANTHONY J. our not zoo-4 assess a founding director of the banl<'s board. Currentl ,_he is the chairman of the Loan Committee. Hel-is_-lthe owner of Island Commimity Mortgage Services and a /s owner of ARA Insurance. Both businesses _in Marco Island, Florida. Director lannotta also is a director of Commercial Lending Capital Marco Island, Florida. This corporation is an affiliate ofthe bank by virtue of common ownership his-the'-parent company, Marco Community Bancorp, Inc., Marco Island, Florida. Mr. Iannotta's biographical shows previous business experience with Citiliiank from 1977 to 1988, but it does not describe the nature or the location of the CitiBanl< facility. - - . . - aoB'sR7r A. zoos ~Itetirsd'.' 1 ofthe Board I is a founding director of both the bank and its parent company, Marco Community Bancorp, Florida. Currentiy, he is the chairman of the board for the banl<'s board of directors and the Marketing Committee.. He also was a director of Citizens Community Bank of Florida and its pa_ffbhi_c_ompany,_Citizens Community Bancorp, Inc., Marco Island, Florida. in 1936, after 30 years of service, retired from Metropolitan Life Insurance Company as the regional manager based in Nashville, and relocated to Marco Island, Florida. Director Marks is active in community affairs for Marco . - I JOHN J. coca - _Easier - of the Board Iv'IcCrovvan joined the board in May 2004 and currently is the vice chairman. also is chairman of and Real Estate Committee. Additionally, Mr. McGowan is a director ofthe banl-Us affiliate, Coih`merc'i'a1 Lending Capital Corporation, Marco Island, Florida and serves as chairman of that corporation's Mr. McGowan is a civil engineer and has been active in the construction iield for over 30 .. Confidential - 36 .- .- I- I t]ffieer?s (Continue ,ll ll 11124 '-.- -1|11 I N51 Year Year Number Salary Dali" Joined ol' dance ofShares and Amount qtalefnf?nt Bank Birth Owned Bonus (B) :is thepresident of .UM 3: Associates, inc., a construction company. sfrisrnan xi. osnixn 2003 Land -and _'Timber Broker ,0 is_ a founding director of the bank and its parent company, Marco Community Bancorp, Inc., Florida. Currently, he is the vice chairman of the holding company bo ard and the chief executive -holding company. He also is the chairman ofthe bank's Executive Committee. Additionally, Mr. a founding director ofthe former Citizens Community Bancorp, Inc. and its subsidiary, Bank of Florida, Marco Island, Florida, until purchased by Corporation, Naples, 2001. Director McLaughlin, a native of Maine, is the ownerfpresident of two rea] estate and businesses located in_Old Town, Maine. . - HOWARD 04f0ir0r 2006 II . President--and_ Chief Executive I - lvlili1l\iIontgo'mery joined the bank in March 2006 in his present capacity as president, chief executive officer and 'banlEUR`?director. From April 2006 through Aprii 2007, he also served as president of the parent company, Marco Bancorp, Inc., Marco Island, Florida. President Montgomery has worked in the iinancial field his He started his senior management career in the thrift industry with Florida Federal Savings and St. Petersburg, Florida. He then went on to be the president, CEO and a director of the "i`ori*rier3First National Bank of Brevard, Merritt Island, Florida. When that bank was sold in 1934, he returned thrift as an executive vice president. Following that he served as an executive vice president and senior loan officer for Commonwealth Savings and Loan, Ft. Lauderdale, Florida from 1985 to is-'l_ "Next he spent a year as thrift examiner for the Texas Savings and Loan Department. Subsequently, in returned to the thrift industry in South Carolina; and then irom 1988 through i915-12, he relocated to he worked with additional thrifts and investment banking companies with an emphasis real estate assets. Later in 1992, he moved to North Carolina to serve as executive management of_g"staQte_chanered commercial bank until l99'i'. During this period, he worked with Tom Whelan, -this bank's C-00.2 flirorn 1997 to 2000 he was the founding president, CEO and director of a community bank in Asheville, He then went on to be the managing director of HASCO Finance, inc., Asheville, North Ciirti'1itta for the-xt two years. After that he spent two years working in the real estate and investment banking lnvkugust 2004, he returned to Florida to care for aging parents and accepted the position of president at Pelican National Bank, Naples, Florida. Subsequent to that bank being sold to the former Old rt. Myers, Fist-isa (now can eri=1ei-ids - southwest) in Februar-y 2006, he was contacted by this 0 cennuemasi 37 . - W..- Directors and Officers (Continut 11124 Nm Were 'fear Year A Number Salary Names and Comments Joined of umm' of Shares and Amount Bank Birth HMB Owned Bonus (B) bank's Clit), Tom Whelan, regarding his current position, which he accepted in March 2006. stcons, E. "nascar 1 01/31107 zoos Retired Mr. Skone is a founding director ofthe bank and its parent company, Marco Community Bancorp, Inc., Marco Island, Florida. lie was a director of the former Citizens Community Bancorp, Inc., Marco Island, Florida from 1998 to I999. Director Skone spent his career, 42 years, as a banker. When he retired in 1997, he was the president and chairman of First National Bank of Deerwood and its parent company, Deerwood Bancorporation, Inc., Deerwood, Minnesota. lie is a graduate ofthe University of Wisconsin School of Banking. Currently, he is the chairman ofthe Assetrliability Committee. os/sores zoos Real Estate Director Wood is the newest member of the Board, joining in October 2006. Mr. Wood's career has been concentrated in the real estate industry in Montgomery County, Maryland. A graduate of Emory df: Henry College, Emory, Virginia with a degree in l-le began his real estate career in 1975 as a general real estate broker with Wood Realty Group, Inc., Brunswick, Maryland. He is a - percent owner of Wood Realty Group. In 2004, he formed Brunswick Associates, LLP, Brunswick, Maryland to acquire and manage a retail shopping center also located in Brunswick, Maryland. 1-Ie is the principal partner and has an -percent ownership in the business. Nor oinncrons nnown, sanona H. zoos Vice President- Officer* Ms. Brown has been with the bank for one year in her current capacity. Prior to then, she was the vice presidentfcompliance officer oi'First State Bank, Union City, Tennessee from 2004 to 2005 and held a similar position with First National Bank of Alachua, Alachua, Florida for tive months in 2004. From 2001 to 2004, she served as an assistant vice presidentfcornpliancc and training officer with Big Lake National Bank, Okeechobee, Florida. She began her banking career in 1936 as a teller with the former Bank of Pahokee, Conhdential 33 - - - _.su - ff" - - -1 -_Pr Dfficers (Continn 11124 Na -H Year Year Number _-Salary -_gfii 1 T~la`mes and Comments Dam Joined of of Shares and 'ig if-' - Amount Hank Birth Owned Bonus (Et) and then worked for Southeast Bank, Great Southern Bank and Fidelity Federal, all greater West Palm Beach, Florida area. Since 2002, she has been specializing in In 2006, she attended and completed six BSAHAML training programs; and in 2007, she :another course. M, 2004 2 I President and Chief Officer Whelan joined the bank in February 2004 at his current position. He has over 35 experience starting in Angola, New York with Evans National Bank, where he worked for 14 to 1986) rising from a management trainee to senior vice president!COO_ In 1986, he relocated to No1*lb`Carolina` where he spent 10 years working for three commercial banks refining his auditing and At his last bank in North Carolina (Triangle Bank, Raleigh, North Carolina) he was hired as bank's president, Howard Montgomery. When he left Triangle Bank he was the ef banking services and had helped facilitate seven merger acquisitions resulting in bank growth from _tc In 1996, he moved to Florida to aid with aging parents and accepted the position of the former Hendry County Bank, Lal3eile, FloridaSHAREHOLDERS Nor DIRECTORS cowtiviuuirv 6-taboo INC. S_ah'_Marco Road Island, FL 311145 "rings IIHNSON 'tvas a founding director ofthe bank and was elected to the holding company board in 2005. She to stand for reelection in 2007. Ms. Hanson also was a director of Citizens Community Bank of Florida from 2000 to 2001, when the been was sold to rate. Cereerenee, Nepiee, r1en<1e_ the president of Bentley Hanson Corporation, a real-estate investment company located in She also has been the co-trustee of a private trust since 1999 and is responsible for managing and investment portfolios of the trust. Jn. Confidential - 39 aLZ`f. *f - *if - 1 5:flf l? `f5~ __li?E EUR1IS 1_ - 53 1 ff *fig5:5-_ ff* - - 7523 fl? -f 2_4 - E55- (5 ?35*Mf1fl? $9 - _jfT - . - . - . . . - - - . - . - - .UIMUIQU .- -- - - - . -'1f@11 Q1-g_.in -.2 _'ff 1 - .-I-125 I .1 .5. SUMMAPFY ANALYSIS OF EXAMINATION 1-TLEPORT 1 (000 omitted in dollar amounts) lnstitution Namef Marco Communi Ean1<"- Re ion: Atlanta ff' 1-'ield Office: South Florida Csliiflflalf-'= 57586 60 Total Adv. Class. Conccn. 14,003 City Marco Island 61 Number Adv. Class. Conecn. State Florida 62 Codedsargest Concen. 070 Zip Code 34145 63 Codet2nd Largest Concent. 010 lnsured Date 08- 1 3-2003 64 Code13rd Largest Concent. 010 Ex am ination Start Date 05-07-2007 65 Insiders Related 0 Examination As of Date 03-31-2007 66 '1`ota1 Loans to Affiliates 0 Date Examination Completed 06-01-2007 67 Adv. Class. Insiders 0 Examination 'l`ypeiScope AIR 68 Adv. Class. Affiliates 0 SHARP Exam Number 0 69 Tot Insider Cap. 0.00 Total Hours: Other 329 70 Tot Past Due at Aceru. 7,992 EIC: Last Name Kelley-Saline 71 Total Loans Nonaeerual 3,791 EIC: First 1 72 R:-:negotiated Debt Past Due 0 Composite Rating 0 73 Renegotiated Debt Nonacc. 0 Component Ratings 3-4-4-4-2-3 74 Sec. 1 Cap 0.05 Rating 0-0-0-0 75 1-'lodged Sec. to Total Sec. 0.00 Total Loans 133,839 '16 Significant Violations? Total Assets 165,637 77 Cail Report Arnended1C, 1, 1 Total Deposits 146,613 78 Fidelity Coverage Adequate '1`ota1Equity Capital 17,624 79 Amount of Blanket Bond 1,000 Disallowed intangibles 0 S0 Amount of Excess 1,000 Adjustment 5,001 S1 Number of Subs Consol. 0 Tier 1 Capital 12,607 82 Any Principal Share? Tier 2 Capital 1,679 83 Owned by Prin. Share. 100.00 Total Capital 14,236 84 il ofBanl-ts in lil-IC 1 Average Total Assets 166,694 35 ti of Banks in Ch in 0 Adjusted Avg. 'Total Assets 161,677 S6 Chg. Control Since Total Risk-weighted Assets 133,705 87 New CEO Since LX Leverage Ratio 7.30 83 Adequate Loan Policies? Tier 1 RB Capital Ratio 9.43 89 Aden. AIL lvlgint Policies? Total RB Capital Ratio 10.68 90 Adeq. Audit Policies? Tang. Eq. Cap.1Avg. Tot. Assets 7.80 91 Subject to Part 335? PCA Capital Category 92 Subject to Gov. Sec. Regs? 2,047 93 ln-House Substandard: Securities 0 94 Dep. or Serviced Ext? Substandard: Loans 20,614 95 Dcp. or 1.ns Serviced ln? Substandard: ORE 0 96 Trust Powers Exercised? Substanclard: Other Assets 78 97 Extemal Audit Date 12-2006 Substandard: Transfer Risk 0 98 External Audit Scope 1 Substandard: Cont. Liao. 0 99 External Audit Type 1 Doubtful: Loans 0 100 External Audit Firm 9 Doubtful: A11 Other 0 101 Change ln Ext. Auditor? Loss: Loans 4,763 102 Meeting llelcl wr' Dir. Loss: Transfer Risk 0 103 Bank Secrecy Review Date 05-07-2007 Loss: All Other 16 104 Contingent Liabilities 29,984 Special Mention Items 290 105 Potential Loss 0 Value1n1p'd Transfer Risk 0 106 Large Dep. to Total Dep. 0.00 Other Transfer Risk Prob's 0 3 107 Subject to Con. Conditions Adv Class Items Coverage Ratio 129.49 108 identified on Lending Alert Tot Adv. Clas AssetsfTA 15.33 109 Changes 1 Change PD 2 Non-Acc.1Oross Loan 8.80 110 Adverse External Factors Adv. Class. 18.96 111 Change ln Risk Profile - Offsite Sub St Dbl' 138.42 112 Niche Bank lt1ns1TotCap-tlneli 138.95 1 13 Signif. New Business Lines Total Adv Class 1.ns S.lvl. l..ns 25,667 114 Effective Loan Grading Tax Loss Available 0 1 15 Dominant Oft1cer.f1?o1iey lvlal-:er Number of Concentrations 116 Internal Control Weakness Concen.1'Tier Capital 1 11.00 117 1'arallel-Owned Banking Org Overall Loan Penetration 54 Confidential - 41