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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-KSB þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year Ended December 31, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number ___________ UNITED COMMUNITY BANKSHARES OF FLORIDA, INC. 
  Florida
(State or other jurisdiction
of incorporation or organization)
    
    04-3691059
(I.R.S. Employer
Identification No.)1411 Edgewater Drive, Suite 100, Orlando, Florida
(Address of principal executive offices)
    
    32804
(Zip Code)
 Issuers telephone number, including area code:(407) 447-0386 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share 
 Check whether the issuer has (1) filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that
the issuer was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. YES þ NO o Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B
contained in this form, and no disclosure will be contained, to the best of issuers knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. þ The issuers revenues for its most recent fiscal year was $17,202,000. The aggregate market value of the Common Stock of the issuer held by non-affiliates of the
issuer (2,197,555 shares) on February 25, 2005, was approximately $30,765,770. As of such date, no
organized trading market existed for the Common Stock of the issuer. The aggregate market value
was computed by reference to the $14.00 per share amount at which shares of common stock were sold
by the issuer in February 2005. For the purposes of this response, directors, executive officers
and holders of 5% or more of the issuers Common Stock are considered the affiliates of the issuer
at that date. As of February 25, 2005, there were issued and outstanding 3,263,406 shares of the issuers
Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on March 31,
2005 to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120
days of the issuers fiscal year end are incorporated into Part III, Items 9 through 12 and 14 of
this Annual Report on Form 10-KSB.




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TABLE OF CONTENTS PagePART I
    
    
    
    
    4Item 1.
    
    Description of Business
    
    
    4General
    
    
    4Special Note Regarding Forward-Looking Statements
    
    
    5Critical Accounting Policies
    
    
    5Lending Activities
    
    
    6Deposit Activities
    
    
    7Investments
    
    
    7Correspondent Banking
    
    
    8Data Processing
    
    
    8Effect of Governmental Policies
    
    
    8Interest and Usury
    
    
    8Supervision and Regulation
    
    
    8Competition
    
    
    16Employees
    
    
    17Item 2.
    
    Description of Properties
    
    
    17Item 3.
    
    Legal Proceedings
    
    
    17Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    17PART II
    
    
    
    
    18Item 5.
    
    Market for Common Equity and Related Stockholder Matters
    
    
    18Dividends
    
    
    18Item 6.
    
    Managements Discussion and Analysis
    
    
    19Item 7.
    
    Financial Statements
    
    
    49
 2




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PageItem 8.
    
    Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
    
    
    49Item 8A.
    
    Controls and Procedures
    
    
    49Item 8B.
    
    Other Information
    
    
    49PART III
    
    
    
    
    50Item 9.
    
    Directors, Executive Officers, Promoters and Control Persons;
Compliance with 16(a) of the Exchange Act
    
    
    50Item 10.
    
    Executive Compensation
    
    
    50Item 11.
    
    Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
    
    
    50Item 12.
    
    Certain Relationships and Related Transactions
    
    
    50Item 13.
    
    Exhibits
    
    
    51Item 14.
    
    Principal Accountant Fees and Services
    
    
    52SIGNATURES
    
    
    53EXHIBIT INDEX
    
    
    55Ex-13.1: Financial StatementsEx-21.1: Subsidiaries of the RegistrantEx-23.1: Consent of Osburn, Henning and CompanyEx-31.1: Section 302 Certification of President and CEOEx-31.2: Section 302 Certification of VP and TreasurerEx-32.1: Section 906 Certification of President and CEOEx-32.2: Section 906 Certification of VP and Treasurer
  3




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PART I 
 Item 1. Description of Business 
 General United Community Bankshares of Florida, Inc. (the Company) was incorporated under the laws
of the State of Florida on April 15, 2002. The Company is a registered bank holding company under
the Bank Holding Company Act of 1956, as amended (the BHC Act) and owns 100% of the common stock
of United Heritage Bank (the Bank). The Bank commenced operations in March 2001. On January 13,
2003, the Company acquired Community United Bank (CUB) in a purchase transaction. CUB commenced
operations in August 1999. During 2004, CUB was merged into the Bank, resulting in a one-bank
holding company structure. The accompanying financial information includes the accounts of the Company and the Bank. All
significant intercompany accounts have been eliminated in consolidation. The assets and
liabilities acquired in the January 13, 2003 purchase of CUB and income and expense of CUB
subsequent to January 13, 2003 are included in the accompanying information. The financial
information previous to the purchase of CUB includes only the accounts of the Company and the Bank.
Accordingly, the overall growth of the Company from December 31, 2002 through December 31, 2004 is
due not only to growth of the Bank, but also to the acquisition of CUB. The Company provides a range of consumer and commercial banking services to individuals,
businesses and industries in the Orange and Seminole Counties area of Florida. The basic services
offered by the Company include: demand interest-bearing and noninterest-bearing accounts,
money-market deposit accounts, NOW accounts, time deposits, safe deposit services, credit cards,
cash management, direct deposits, notary services, money orders, night depository, travelers
checks, cashiers checks, domestic collections, savings bonds, bank drafts, automated teller
services, drive-in tellers, and banking by mail. In addition, the Company primarily makes secured
and unsecured commercial and real estate loans and issues stand-by letters of credit. The Company
provides automated teller machine (ATM) cards, as a part of the STAR ATM Network, thereby
permitting customers to utilize the convenience of larger ATM networks. In addition to the STAR
ATM Network, the Bank also provides the Presto system for ATM use. In addition to the foregoing
services, the Company provides customers with extended banking hours. The Company does not have
trust powers and, accordingly, no trust services are provided. The revenues of the Company are primarily derived from interest on, and fees received in
connection with, real estate and other loans, and from interest and dividends from investment
securities and short-term investments. The principal sources of funds for the Companys lending
activities are its deposits, repayment of loans, and the maturity of investment securities. The
principal expenses of the Company are the interest paid on deposits, and operating and general
administrative expenses. As is the case with banking institutions generally, the Companys operations are materially
and significantly influenced by general economic conditions and by related monetary and fiscal
policies of financial institution regulatory agencies, including the Board of Governors
of the Federal Reserve System (the Federal Reserve).
Deposit flows and costs of funds are influenced 4




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by interest rates on competing investments and general market rates of interest.
Lending activities are affected by the demand for financing of real estate and other types of
loans, which in turn is affected by the interest rates at which such financing may be offered and
other factors affecting local demand and availability of funds. The Company faces strong
competition in the attraction of deposits (its primary source of lendable funds) and in the
origination of loans. SeeCompetition. 
 Special Note Regarding Forward-Looking Statements This Annual Report contains certain forward-looking statements which represent the Companys
expectations or beliefs, including, but not limited to, statements concerning the banking industry
and the Companys operations, performance, financial condition and growth. For this purpose, any
statements contained in this Annual Report that are not statements of historical fact may be deemed
forward-looking statements. Without limiting the generality of the foregoing, words such as may,
will, expect, believe, anticipate, intend, could, should, can, estimate, or
continue or the negative or other variations thereof or comparable terminology are intended to
identify forward-looking statements. These statements by their nature involve substantial risks
and uncertainties, certain of which are beyond the Companys control, and actual results may differ
materially depending on a variety of important factors, including competition, general economic
conditions, changes in interest rates, and changes in the value of real estate and other collateral
securing loans, among other things. 
 Critical Accounting Policies The Companys financial condition and results of operations are sensitive to accounting
measurements and estimates of matters that are inherently uncertain. When applying accounting
policies in areas that are subjective in nature, the Company must use its best judgment to arrive
at the carrying value of certain assets. The most critical accounting policy applied is related to
the valuation of the loan portfolio. A variety of estimates impact carrying value of the loan portfolio including the calculation
of the allowance for loan losses, valuation of underlying collateral, the timing of loan
charge-offs and the amount and amortization of loan fees and deferred origination costs. The allowance for loan losses is the most difficult and subjective judgment. The allowance is
established and maintained at a level that the Company believes is adequate to cover losses
resulting from the inability of borrowers to make required payments on loans. Estimates for loan
losses are arrived at by analyzing risks associated with specific loans and the loan portfolio,
current trends in delinquencies and charge-offs, the views of regulators, changes in the size and
composition of the loan portfolio and peer comparisons. The analysis also requires consideration
of the economic climate and direction, change in the interest rate environment, which may impact a
borrowers ability to pay, legislation impacting the banking industry and economic conditions
specific to its service area. Because the calculation of the allowance for loan losses relies on
estimates and judgments relating to inherently uncertain events, results may differ from the
Companys estimates. 5




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The allowance for loan losses is also discussed as part of Managements Discussion and
Analysis  Financial Condition and in Note 4 to the consolidated financial statements. The
significant accounting policies are discussed in Note 2 to the consolidated financial statements. 
 Lending Activities The Company offers a range of lending services, including real estate, consumer and commercial
loans, to individuals and small businesses and other organizations that are located in or conduct a
substantial portion of their business in the Companys market area. The interest rates charged on
loans vary with the degree of risk, maturity, and amount of the loan, and are further subject to
competitive pressures, money market rates, availability of funds, and government regulations. The
Company has no foreign loans or loans for highly leveraged transactions. The Companys loans are concentrated in four major areas: commercial, financial and
agricultural, real estate mortgage, construction and land development, and installment and consumer
loans. A majority of the Companys loans are made on a secured basis. The Companys commercial loan portfolio includes loans to individuals and small-to-medium
sized businesses located primarily in Orange and Seminole Counties for working capital, equipment
purchases, and various other business purposes. A majority of commercial loans are secured by real
estate, equipment or similar assets, but these loans may also be made on an unsecured basis.
Commercial loans may be made at variable or fixed rates of interest. Commercial lines of credit
are typically granted on a one-year basis, with loan covenants and monetary thresholds. Other
commercial loans with terms or amortization schedules of longer than one year will normally carry
interest rates which vary with the prime lending rate and will become payable in full and are
generally refinanced in three to five years. The Companys consumer loan portfolio consists primarily of loans to individuals for various
consumer purposes, but includes some business purpose loans which are payable on an installment
basis. The majority of these loans are for terms of less than five years and are secured by liens
on various personal assets of the borrowers, but consumer loans may also be made on an unsecured
basis. Consumer loans are made at fixed and variable interest rates, and are often based on up to
a five-year amortization schedule. For additional information regarding the Companys loan portfolio, seeManagements
Discussion and Analysis  Financial Condition. Loan originations are derived from a number of sources. Loan originations can be attributed
to direct solicitation by the Companys loan officers, existing customers and borrowers,
advertising, walk-in customers. Certain credit risks are inherent in making loans. These include prepayment risks, risks
resulting from uncertainties in the future value of collateral, risks resulting from changes in
economic and industry conditions, and risks inherent in dealing with individual borrowers. In
particular, longer maturities increase the risk that economic conditions will change and adversely
affect collectibility. The Company attempts to minimize credit losses through various means. In
particular, on larger credits, the Company generally relies on the cash flow of a debtor as the 6




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source of repayment and secondarily on the value of the underlying collateral. In addition, the
Company attempts to utilize shorter loan terms in order to reduce the risk of a decline in the
value of such collateral. 
 Deposit Activities Deposits are the major source of the Companys funds for lending and other investment
activities. The Company considers the majority of its regular savings, demand, NOW and
money-market deposit accounts to be core deposits. Generally, the Company attempts to maintain the
rates paid on its deposits at a competitive level. The majority of the deposits of the Company are
generated from the Orange and Seminole Counties area of Florida. The Company does not currently
accept brokered deposits. For additional information regarding the Companys deposit accounts, see
Managements Discussion and Analysis  Financial Condition. 
 Investments The Company invests a portion of its assets in U.S. Government agency obligations,
mortgage-backed securities and federal funds sold. The Companys investments are managed in
relation to loan demand and deposit growth, and are generally used to provide for the investment of
excess funds at minimal risks while providing liquidity to fund increases in loan demand or to
offset fluctuations in deposits. With respect to the Companys investment portfolio, the Companys total portfolio may be
invested in U.S. Treasury and general obligations of its agencies because such securities generally
represent a minimal investment risk. In addition to the investment portfolio, the Company may
invest in federal funds sold. Federal funds sold is the excess cash the Company has available over
and above daily cash needs. This money is invested on an overnight basis with approved
correspondent banks. The Company monitors changes in financial markets. In addition to investments for its
portfolio, the Company monitors its daily cash position to ensure that all available funds earn
interest at the earliest possible date. A portion of the investment account is designated as
secondary reserves and invested in liquid securities that can be readily converted to cash with
minimum risk of market loss. These investments usually consist of U.S. Treasury obligations, U.S.
government agencies and federal funds sold. The remainder of the investment account may be placed
in investment securities of different type and longer maturity. Daily surplus funds are sold in
the federal funds market for one business day. The Company attempts to stagger the maturities of
its securities so as to produce a steady cash-flow in the event the Company needs cash, or economic
conditions change to a more favorable rate environment. 7




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Correspondent Banking Correspondent banking involves one bank providing services to another bank which cannot
provide that service for itself from an economic or practical standpoint. The Company is required
to purchase correspondent services offered by larger banks, including check collections, purchase
of federal funds, security safekeeping, investment services, coin and currency supplies, overline
and liquidity loan participations and sales of loans to or participation with correspondent banks. The Company will sell loan participations to correspondent banks with respect to loans which
exceed the Companys lending limit. Management of the Company has established correspondent
relationships with Independent Bankers Bank of Florida and SunTrust. The Company pays for such
services. 
 Data Processing The Company outsources its data processing to a large bank data processor which provides a
full range of data processing services, including an automated general ledger, deposit accounting,
and commercial, mortgage and installment lending data processing. 
 Effect of Governmental Policies The earnings and business of the Company are and will be affected by the policies of various
regulatory authorities of the United States, especially the Federal Reserve. The Federal Reserve,
among other things, regulates the supply of credit and deals with general economic conditions
within the United States. The instruments of monetary policy employed by the Federal Reserve for
these purposes influence in various ways the overall level of investments, loans, other extensions
of credit and deposits, and the interest rates paid on liabilities and received on assets. 
 Interest and Usury The Company is subject to numerous state and federal statutes that affect the interest rates
that may be charged on loans. These laws do not, under present market conditions, deter the
Company from continuing the process of originating loans. 
 Supervision and Regulation Banks and their holding companies, and many of their affiliates, are extensively regulated
under both federal and state law. The following is a brief summary of certain statutes, rules, and
regulations affecting the Company and the Bank. This summary is qualified in its entirety by
reference to the particular statutory and regulatory provisions referred to below and is not
intended to be an exhaustive description of the statutes or regulations applicable to the business
of the Company and the Bank. Supervision, regulation, and examination of banks by regulatory
agencies are intended primarily for the protection of depositors, rather than shareholders. 8




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Bank Holding Company Regulation. The Holding Company is a bank holding company,
registered with the Federal Reserve under the BHC Act. As such, the Company is subject to the
supervision, examination and reporting requirements of the BHC Act and the regulations of the
Federal Reserve. The BHC Act requires that a bank holding company obtain the prior approval of the
Federal Reserve before (i) acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any bank, (ii) taking any action that causes a bank to become a subsidiary of the
bank holding company, or (iii) merging or consolidating with any other bank holding company. The BHC Act further provides that the Federal Reserve may not approve any transaction that
would result in a monopoly or would be in furtherance of any combination or conspiracy to
monopolize or attempt to monopolize the business of banking in any section of the United States, or
the effect of which may be substantially to lessen competition or to tend to create a monopoly in
any section of the country, or that in any other manner would be in restraint of trade, unless the
anticompetitive effects of the proposed transaction are clearly outweighed by the public interest
in meeting the convenience and needs of the community to be served. The Federal Reserve is also
required to consider the financial and managerial resources and future prospects of the bank
holding companies and banks concerned and the convenience, and needs of the community to be served.
Consideration of financial resources generally focuses on capital adequacy and consideration of
convenience and needs issues includes the parties performance under the Community Reinvestment Act
of 1977 (the CRA), both of which are discussed below. Banks are subject to the provisions of the CRA. Under the terms of the CRA, the appropriate
federal bank regulatory agency is required, in connection with its examination of a bank, to assess
such banks record in meeting the credit needs of the community served by that bank, including low-
and moderate-income neighborhoods. The regulatory agencys assessment of the banks record is made
available to the public. Further, such assessment is required of any bank which has applied to:  
    charter a bank,
    obtain deposit insurance coverage for a newly chartered institution,
    establish a new branch office that will accept deposits,
    relocate an office, or
    merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial
institution In the case of a bank holding company applying for approval to acquire a bank or other bank
holding company, the Federal Reserve will assess the record of each subsidiary bank of the
applicant bank holding company, and such records may be the basis for denying the application. The BHC Act generally prohibits a bank holding company from engaging in activities other than
banking, or managing or controlling banks or other permissible subsidiaries, and from acquiring or
retaining direct or indirect control of any company engaged in any activities other than those
activities determined by the Federal Reserve to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. In determining whether a particular activity
is permissible, the Federal Reserve must consider whether the performance of such an activity can
reasonably be expected to produce benefits to the public, such as greater 9




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convenience, increased competition, or gains in efficiency that outweigh possible adverse effects,
such as undue concentration of resources, decreased or unfair competition, conflicts of interest,
or unsound banking practices. For example, factoring accounts receivable, acquiring or servicing
loans, leasing personal property, conducting securities brokerage activities, performing certain
data processing services, acting as agent or broker in selling credit life insurance and certain
other types of insurance in connection with credit transactions, and certain insurance underwriting
activities have all been determined by regulations of the Federal Reserve to be permissible
activities of bank holding companies. Despite prior approval, the Federal Reserve has the power to
order a holding company or its subsidiaries to terminate any activity or terminate its ownership or
control of any subsidiary, when it has reasonable cause to believe that continuation of such
activity or such ownership or control constitutes a serious risk to the financial safety,
soundness, or stability of any bank subsidiary of that bank holding company. Gramm-Leach-Bliley Act.Enacted in 1999, The Gramm-Leach-Bliley Act reforms and
modernizes certain areas of financial services regulation. The law permits the creation of new
financial services holding companies that can offer a full range of financial products under a
regulatory structure based on the principle of functional regulation. The legislation eliminates
the legal barriers to affiliations among banks and securities firms, insurance companies, and other
financial services companies. The law also provides financial organizations with the opportunity
to structure these new financial affiliations through a holding company structure or a financial
subsidiary. The new law reserves the role of the Federal Reserve Board as the supervisor for bank
holding companies. At the same time, the law also provides a system of functional regulation which
is designed to utilize the various existing federal and state regulatory bodies. The law also includes a minimum federal standard of financial privacy. Financial institutions
are required to have written privacy policies that must be disclosed to customers. The disclosure
of a financial institutions privacy policy must take place at the time a customer relationship is
established and not less than annually during the continuation of the relationship. The act also
provides for the functional regulation of bank securities activities. The law repeals the
exemption that banks were afforded from the definition of broker, and replaces it with a set of
limited exemptions that allow the continuation of some historical activities performed by banks.
In addition, the act amends the securities laws to include banks within the general definition of
dealer. Regarding new bank products, the law provides a procedure for handling products sold by
banks that have securities elements. In the area of Community Reinvestment Act activities, the law
generally requires that financial institutions address the credit needs of low-to-moderate income
individuals and neighborhoods in the communities in which they operate. Bank regulators are
required to take the Community Reinvestment Act ratings of a bank or of the bank subsidiaries of a
holding company into account when acting upon certain branch and bank merger and acquisition
applications filed by the institution. Under the law, financial holding companies and banks that
desire to engage in new financial activities are required to have satisfactory or better Community
Reinvestment Act ratings when they commence the new activity. Recent Legislation to Curtail Corporate Accounting Irregularities.On July 30, 2002,
the Sarbanes-Oxley Act of 2002 (the Sarbanes Act) was enacted. The Securities and Exchange 10




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Commission (the SEC) has promulgated certain regulations pursuant to the Sarbanes Act and will
continue to propose additional implementing or clarifying regulations as necessary in furtherance
of the Sarbanes Act. The passage of the Sarbanes Act and the regulations implemented by the SEC
subject publicly-traded companies to additional and more extensive reporting regulations and
disclosure. Compliance with the Sarbanes Act and corresponding regulations may increase the
Companys expenses. Bank Regulation.The Bank is chartered under the laws of the State of Florida, and
its deposits are insured by the Federal Deposition Insurance Corporation (FDIC) to the extent
provided by law. The Bank is subject to comprehensive regulation, examination and supervision by
the FDIC and the Florida Office of Financial Regulation (the Florida Department) and to other
laws and regulations applicable to banks. Such regulations include limitations on loans to a
single borrower and to its directors, officers and employees; restrictions on the opening and
closing of branch offices; the maintenance of required capital and liquidity ratios; the granting
of credit under equal and fair conditions; and the disclosure of the costs and terms of such
credit. The Bank is examined periodically by the FDIC and the Florida Department, to whom it
submits periodic reports regarding its financial condition and other matters. The FDIC and the
Florida Department have a broad range of powers to enforce regulations under their jurisdiction,
and to take discretionary actions determined to be for the protection and safety and soundness of
banks, including the institution of cease and desist orders and the removal of directors and
officers. The FDIC and the Florida Department also have the authority to approve or disapprove
mergers, consolidations, and similar corporate actions. There are various statutory limitations on the ability of the Company to pay dividends. The
FDIC and the Florida Department also have the general authority to limit the dividend payment by
banks if such payment may be deemed to constitute an unsafe and unsound practice. For information
on the restrictions on the right of the Bank to pay dividends to the Company, seePart II  Item 5
Market for the Registrants Common Equity and Related Stockholder Matters. Under federal law, federally insured banks are subject, with certain exceptions, to certain
restrictions on any extension of credit to their parent holding companies or other affiliates, on
investment in the stock or other securities of affiliates, and on the taking of such stock or
securities as collateral from any borrower. In addition, banks are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit or the providing of any
property or service. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) imposed
major regulatory reforms, stronger capital standards for savings and loan associations and stronger
civil and criminal enforcement provisions. FIRREA also provides that a depository institution
insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be
incurred by, the FDIC in connection with:  
    the default of a commonly controlled FDIC insured depository institution; or 11




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
    any assistance provided by the FDIC to a commonly controlled FDIC insured institution in danger of default. The FDIC Improvement Act of 1991 (FDICIA) made a number of reforms addressing the safety and
soundness of deposit insurance funds, supervision, accounting, and prompt regulatory action, and
also implemented other regulatory improvements. Annual full-scope, on-site examinations are
required of all insured depository institutions. The cost for conducting an examination of an
institution may be assessed to that institution, with special consideration given to affiliates and
any penalties imposed for failure to provide information requested. Insured state banks also are
precluded from engaging as principal in any type of activity that is impermissible for a national
bank, including activities relating to insurance and equity investments. The Act also recodified
current law restricting extensions of credit to insiders under the Federal Reserve Act. Also important in terms of its effect on banks has been the deregulation of interest rates
paid by banks on deposits and the types of deposit accounts that may be offered by banks. Most
regulatory limits on permissible deposit interest rates and minimum deposit amounts expired several
years ago. The effect of the deregulation of deposit interest rates generally has been to increase
the costs of funds to banks and to make their costs of funds more sensitive to fluctuations in
money market rates. A result of the pressure on banks interest margins due to deregulation has
been a trend toward expansion of services offered by banks and an increase in the emphasis placed
on fee or noninterest income. Capital Requirements.The Federal Reserve Board and bank regulatory agencies require
bank holding companies and financial institutions to maintain capital at adequate levels based on a
percentage of assets and off balance sheet exposures, adjusted for risk weights ranging from 0% to
100%. Under the risk-based standard, capital is classified into two tiers. Tier 1 capital
consists of common shareholders equity, excluding the unrealized gain (loss) on available-for-sale
securities, minus certain intangible assets. Tier 2 capital consists of the general allowance for
credit losses except for certain limitations. An institutions qualifying capital base for
purposes of its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital. The
regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital. Bank holding
companies and banks are also required to maintain capital at a minimum level based on total assets,
which is known as the leverage ratio. The minimum requirement for the leverage ratio is 3%, but
all but the highest rated institutions are required to maintain ratios 100 to 200 basis points
above the minimum. At December 31, 2004 both the Company and the Bank met all capital requirements
to which they were subject. For additional information regarding the Companys capital ratios and requirements, see
Managements Discussion and Analysis  Capital Resources, Commitments and Capital Requirements. FDICIA contains prompt corrective action provisions pursuant to which banks are to be
classified into one of five categories based upon capital adequacy, ranging from well capitalized
to critically undercapitalized and which require (subject to certain exceptions) the appropriate 12




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federal banking agency to take prompt corrective action with respect to an institution which
becomes significantly undercapitalized or critically undercapitalized. The FDIC has issued regulations to implement the prompt corrective action provisions of
FDICIA. In general, the regulations define the five capital categories as follows:  
    an institution is well capitalized if it has a total risk-based
capital ratio of 10% or greater, has a Tier 1 risk-based capital
ratio of 6% or greater, has a leverage ratio of 5% or greater and
is not subject to any written capital order or directive to meet
and maintain a specific capital level for any capital measures;
    an institution is adequately capitalized if it has a total
risk-based capital ratio of 8% or greater, has a Tier 1
risk-based capital ratio of 4% or greater, and has a leverage
ratio of 4% or greater;
    an institution is undercapitalized if it has a total risk-based
capital ratio of less than 8%, has a Tier 1 risk-based capital
ratio that is less than 4% or has a leverage ratio that is less
than 4%;
    an institution is significantly undercapitalized if it has a
total risk-based capital ratio that is less than 6%, a Tier 1
risk-based capital ratio that is less than 3% or a leverage ratio
that is less than 3%; and
    an institution is critically undercapitalized if its tangible
equity is equal to or less than 2% of its total assets. The FDIC also, after an opportunity for a hearing, has authority to downgrade an
institution from well capitalized to adequately capitalized or to subject an adequately
capitalized or undercapitalized institution to the supervisory actions applicable to the next
lower category, for supervisory concerns. Generally, FDICIA requires that an undercapitalized institution must submit an acceptable
capital restoration plan to the appropriate federal banking agency within 45 days after the
institution becomes undercapitalized and the agency must take action on the plan within 60 days.
The appropriate federal banking agency may not accept a capital restoration plan unless, among
other requirements, each company having control of the institution has guaranteed that the
institution will comply with the plan until the institution has been adequately capitalized on
average during each of the three consecutive calendar quarters and has provided adequate assurances
of performance. The aggregate liability under this provision of all companies having control of an
institution is limited to the lesser of:  
    5% of the institutions total assets at the time the institution becomes
undercapitalized or
    the amount which is necessary, or would have been necessary, to bring the institution into
compliance with all capital standards applicable to the institution as of the time the
institution fails to comply with the plan filed pursuant to FDICIA. 13




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##### Table of Contents



An undercapitalized institution may not acquire an interest in any company or any other
insured depository institution, establish or acquire additional branch offices or engage in any new
business unless the appropriate federal banking agency has accepted its capital restoration plan,
the institution is implementing the plan, and the agency determines that the proposed action is
consistent with and will further the achievement of the plan, or the appropriate Federal banking
agency determines the proposed action will further the purpose of the prompt corrective action
sections of FDICIA. If an institution is critically undercapitalized, it must comply with the restrictions
described above. In addition, the appropriate Federal banking agency is authorized to restrict the
activities of any critically undercapitalized institution and to prohibit such an institution,
without the appropriate Federal banking agencys prior written approval, from:  
    entering into any material transaction other than in the usual course of business;
    engaging in any covered transaction with affiliates (as defined in Section 23A(b) of the Federal Reserve Act);
    paying excessive compensation or bonuses; and
    paying interest on new or renewed liabilities at a rate that would increase the institutions weighted average costs
of funds to a level significantly exceeding the prevailing rates of interest on insured deposits in the institutions
normal market areas. The prompt corrective action provisions of FDICIA also provide that in general no
institution may make a capital distribution if it would cause the institution to become
undercapitalized. Capital distributions include cash (but not stock) dividends, stock purchases,
redemptions, and other distributions of capital to the owners of an institution. Additionally, FDICIA requires, among other things, that:  
    only a well capitalized depository institution may accept
brokered deposits without prior regulatory approval and
    the appropriate federal banking agency annually examine all
insured depository institutions, with some exceptions for small,
well capitalized institutions and state-chartered institutions
examined by state regulators. 14




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##### Table of Contents



FDICIA also contains a number of consumer banking provisions, including disclosure
requirements and substantive contractual limitations with respect to deposit accounts. As of December 31, 2004, the Bank met the capital requirements of a well capitalized
institution. Enforcement Powers.Congress has provided the federal bank regulatory agencies with
an array of powers to enforce laws, rules, regulations and orders. Among other things, the
agencies may require that institutions cease and desist from certain activities, may preclude
persons from participating in the affairs of insured depository institutions, may suspend or remove
deposit insurance, and may impose civil money penalties against institution-affiliated parties for
certain violations. Maximum Legal Interest Rates.Like the laws of many states, Florida law contains
provisions on interest rates that may be charged by banks and other lenders on certain types of
loans. Numerous exceptions exist to the general interest limitations imposed by Florida law. The
relative importance of these interest limitation laws to the financial operations of the Bank will
vary from time to time, depending on a number of factors, including conditions in the money
markets, the costs and availability of funds, and prevailing interest rates. Bank Branching.Banks in Florida are permitted to branch state wide. Such branch
banking, however, is subject to prior approval by the FDIC and the Florida Department. Any such
approval would take into consideration several factors, including the banks level of capital, the
prospects and economics of the proposed branch office, and other conditions deemed relevant by the
FDIC and the Florida Department for purposes of determining whether approval should be granted to
open a branch office. Change of Control.Federal law restricts the amount of voting stock of a bank holding
company and a bank that a person may acquire without the prior approval of banking regulators. The
overall effect of such laws is to make it more difficult to acquire a bank holding company and a
bank by tender offer or similar means than it might be to acquire control of another type of
corporation. Consequently, shareholders of the Company may be less likely to benefit from the
rapid increases in stock prices that may result from tender offers or similar efforts to acquire
control of other companies. Federal law also imposes restrictions on acquisitions of stock in a
bank holding company and a state bank. Under the federal Change in Bank Control Act and the
regulations thereunder, a person or group must give advance notice to the Federal Reserve before
acquiring control of any bank holding company. Upon receipt of such notice, the Federal Reserve
may approve or disapprove the acquisition. The Change in Bank Control Act creates a rebuttable
presumption of control if a member or group acquires a certain percentage or more of a bank holding
companys or state banks voting stock, or if one or more other control factors set forth in the
Act are present. Florida law also contains comparable provisions requiring persons to obtain
Florida Department approval prior to acquiring indirect control of the state bank through the
acquisition of control of its bank holding company. Interstate Banking.The Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1996, provides for nationwide interstate banking and branching. Under the law, interstate 15




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##### Table of Contents



acquisitions of banks or bank holding companies in any state by bank holding companies in any other
state will be permissible one year after enactment. Interstate branching and consolidation of
existing bank subsidiaries in different states is permissible. Florida has a law that allows
out-of-state bank holding companies (located in states that allow Florida bank holding companies to
acquire banks and bank holding companies in that state) to acquire Florida banks and Florida bank
holding companies. The law essentially provides for out-of-state entry by acquisition only (and
not by interstate branching) and requires the acquired Florida bank to have been in existence for
at least three years. Effect of Governmental Policies.The earnings and businesses of the Company and the
Bank are affected by the policies of various regulatory authorities of the United States,
especially the Federal Reserve. The Federal Reserve, among other things, regulates the supply of
credit and deals with general economic conditions within the United States. The instruments of
monetary policy employed by the Federal Reserve for those purposes influence in various ways the
overall level of investments, loans, other extensions of credit, and deposits, and the interest
rates paid on liabilities and received on assets. 
 Competition The Company encounters strong competition both in making loans and in attracting deposits.
The deregulation of the banking industry and the widespread enactment of state laws which permit
multi-bank holding companies as well as an increasing level of interstate banking have created a
highly competitive environment for commercial banking. In one or more aspects of its business, the
Company competes with other commercial banks, savings and loan associations, credit unions, finance
companies, mutual funds, insurance companies, brokerage and investment banking companies, and other
financial intermediaries. Most of these competitors, some of which are affiliated with bank holding
companies, have substantially greater resources and lending limits, and may offer certain services
that the Company does not currently provide. In addition, many of the Companys non-bank
competitors are not subject to the same extensive federal regulations that govern bank holding
companies and federally insured banks. Recent federal and state legislation has heightened the
competitive environment in which financial institutions must conduct their business, and the
potential for competition among financial institutions of all types has increased significantly. To compete, the Company relies upon specialized services, responsive handling of customer
needs, and personal contacts by its officers, directors, and staff. Large multi-branch banking
competitors tend to compete primarily by rate and the number and location of branches while
smaller, independent financial institutions tend to compete primarily by rate and personal service. 
 Employees As of December 31, 2004, the Company had fifty-five full-time employees (including executive
officers) and five part-time employees. The employees are not represented by a collective
bargaining unit. The Company considers relations with employees to be good. 16




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##### Table of Contents



Item 2. Description of Properties The main office of the Company is located at 1411 Edgewater Drive, Suite 100, Orlando, Florida
32804. The main office of the Bank is located at 3378 Edgewater Drive, Orlando, Florida 32804.
Additional offices are located at 100 East Packwood Avenue, Maitland, Florida 32751; 1211 Orange
Avenue, Suite 101, Winter Park, Florida 32789; 21 East Third Street, Apopka, Florida 32703; 3001
West Lake Mary Boulevard, Lake Mary, Florida 32746; 413 West First Street, Sanford, Florida
32771; 640 East State Road 434, Longwood, Florida 32750; 5202 Red Bug Road, Winter Springs,
Florida 32708; and 2201 East Michigan Street, Suite S-B, Orlando, Florida 32806. 
 Item 3. Legal Proceedings The Company is periodically party to or otherwise involved in legal proceedings arising in the
normal course of business, such as claims to enforce liens, claims involving the making and
servicing of real property loans, and other issues incident to their respective businesses.
Management does not believe that there is any pending or threatened proceeding against the Company
which, if determined adversely, would have a material adverse effect on the Companys consolidated
financial position or results of operations. 
 Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of the Companys security holders during the fourth
quarter of the year ended December 31, 2004. 17




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##### Table of Contents



PART II 
 Item 5. Market for Common Equity and Related Stockholder Matters The shares of the Companys common stock are not actively traded, and such trading activity,
as it occurs, takes place in privately negotiated transactions. There is no established public
trading market for the shares of the Companys common stock. Management of the Company is aware of
certain transactions in its shares, although the trading prices of all stock transactions are not
known. The following sets forth the high and low trading prices for certain trades of the
Companys common stock that occurred in transactions known to the Companys management during 2004
and 2003: 2004
    
    
    2003High
    
    
    Low
    
    
    Shares
    
    
    High
    
    
    Low
    
    
    Shares1st Quarter
    
    $
    13
    
    
    $
    12
    
    
    
    10,098
    
    
    $
    12
    
    
    $
    12
    
    
    
    52,0002nd Quarter
    
    $
    13
    
    
    $
    12
    
    
    
    22,557
    
    
    $
    
    
    
    $
    
    
    
    
    3rd Quarter
    
    $
    13
    
    
    $
    10
    
    
    
    9,410
    
    
    $
    13
    
    
    $
    13
    
    
    
    6394th Quarter
    
    $
    13
    
    
    $
    13
    
    
    
    767
    
    
    $
    13
    
    
    $
    13
    
    
    
    512
 The Company had approximately 708 shareholders of record as of December 31, 2004. 
 Dividends The Company has not paid any cash dividends in the past. The Company intends that, for the
foreseeable future, it will retain earnings to finance continued growth rather than pay cash
dividends on the Companys common stock. If at any time the Companys Board determines to pay
dividends on the Companys common stock, the timing and the extent to which dividends are paid by
the Company will be determined by such Board in light of then-existing circumstances, including the
Companys rate of growth, profitability, financial condition, existing and anticipated capital
requirements, the amount of funds legally available for the payment of cash dividends, regulatory
constraints and such other factors as the Board determines relevant. The source of funds for
payment of dividends by the Company will be dividends received from the Bank. Payments by the Bank
to the Company are limited by law and regulations of the bank regulatory authorities. There are
various statutory and contractual limitations on the ability of the Bank to pay dividends to the
Company. The FDIC and the Florida Department also have the general authority to limit the
dividends paid by banks if such payment may be deemed to constitute an unsafe and unsound practice.
Under Florida law, after making provisions for a reasonably anticipated future losses on loans and
other assets, the board of directors of a bank may declare a dividend of so much of the banks
aggregate net profits for the current year combined with its retained earnings (if any) for the
preceding two years as the board deems appropriate and, with the approval of the Florida
Department, may declare a dividend fromretained earnings for prior years. No dividends
may be paid at a time when a banks net earnings from the preceding two years is a loss or which
would cause the capital accounts of the bank to fall below the minimum amount required by law,
regulation, order or any written agreement with the Florida Department or a federal regulatory
agency. 18




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##### Table of Contents



Florida law applicable to companies (including the Company) provides that dividends may be
declared and paid only if, after giving it effect, (i) the company is able to pay its debts as they
become due in the usual course of business, and (ii) the companys total assets would be greater
than the sum of its total liabilities plus the amount that would be needed if the company were to
be dissolved at the time of the dividend to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the dividend. During June 2003, the Company closed the sale of 187,500 shares of its Common Stock at a price
of $12.00 per share (or $2,250,000 in the aggregate) pursuant to the Companys Stock Purchase Plan.
The shares were purchased by directors and employees of the Company. No underwriter was involved
in the transaction. The shares were sold in reliance upon the exemption under Regulation 701
issued under the Securities Act of 1933, which provides an exemption from the registration
requirements of that Act for offers and sales of securities under a compensatory benefit plan for
participation by employees and directors of the issuer and its subsidiaries. 
 Item 6. Managements Discussion and Analysis Managements discussion and analysis of operations and related financial data are presented
herein to assist investors in understanding the financial condition and results of operations of
the Company. The following disclosures are made in accordance with current Securities and Exchange
Commission guidelines that apply to bank holding companies. These guidelines require disclosures
for the last three years of operations for most items, except for certain loan portfolio and loan
loss experience items, that require five years of financial data disclosures. The Bank commenced
operations in 2001, therefore the required loan portfolio and loan loss experience items begin in
2001. This discussion should be read in conjunction with the consolidated financial statements and
related footnotes of the Company presented elsewhere herein. 19




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##### Table of Contents



Selected Financial Data($ in thousands, except per share data) At or For the Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001Interest income
    
    $
    16,655
    
    
    
    13,553
    
    
    
    5,762
    
    
    
    2,556Interest expense
    
    $
    5,913
    
    
    
    5,589
    
    
    
    2,321
    
    
    
    817Net interest income before provision
for loan losses
    
    $
    10,742
    
    
    
    7,964
    
    
    
    3,441
    
    
    
    1,739Provision for loan losses
    
    $
    617
    
    
    
    784
    
    
    
    542
    
    
    
    492Net interest income after provision
    
    $
    10,125
    
    
    
    7,180
    
    
    
    2,899
    
    
    
    1,247Noninterest income
    
    $
    547
    
    
    
    526
    
    
    
    270
    
    
    
    97Noninterest expenses
    
    $
    7,346
    
    
    
    6,257
    
    
    
    3,301
    
    
    
    2,407Income (loss) before income taxes
    
    $
    3,326
    
    
    
    1,449
    
    
    
    (131
    )
    
    
    (1,063
    )Income tax (benefit)
    
    $
    1,285
    
    
    
    568
    
    
    
    2
    
    
    
    (460
    )Net income (loss)
    
    $
    2,041
    
    
    
    881
    
    
    
    (133
    )
    
    
    (603
    )Per share data:Basic earnings per share
    
    $
    .63
    
    
    
    .28
    
    
    
    (0.07
    )
    
    
    (.30
    )Diluted earnings per share
    
    $
    .61
    
    
    
    .27
    
    
    
    (0.07
    )
    
    
    (.30
    )Cash dividends declared
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    Book value at end of period
    
    $
    10.35
    
    
    
    9.73
    
    
    
    9.73
    
    
    
    9.55Common shares outstanding at end of period
    
    
    3,263,406
    
    
    
    3,256,888
    
    
    
    2,000,000
    
    
    
    2,000,000Weighted average common shares
outstanding (basic) during period
    
    
    3,258,687
    
    
    
    3,170,513
    
    
    
    2,000,000
    
    
    
    2,000,000Weighted average common shares
outstanding (diluted) during period
    
    
    3,359,724
    
    
    
    3,231,971
    
    
    
    2,000,000
    
    
    
    2,000,000Total assets at end of period
    
    $
    406,467
    
    
    
    324,324
    
    
    
    138,645
    
    
    
    79,127Cash and cash equivalents
    
    $
    85,971
    
    
    
    60,629
    
    
    
    24,565
    
    
    
    14,388Securities
    
    $
    68,640
    
    
    
    56,386
    
    
    
    29,302
    
    
    
    23,712Loans, net
    
    $
    241,214
    
    
    
    198,480
    
    
    
    80,162
    
    
    
    38,830Deposits
    
    $
    365,642
    
    
    
    286,572
    
    
    
    118,114
    
    
    
    57,962Borrowings
    
    $
    6,009
    
    
    
    5,174
    
    
    
    837
    
    
    
    1,882Stockholders equity
    
    $
    33,790
    
    
    
    31,676
    
    
    
    19,468
    
    
    
    19,092Total gross loans
    
    $
    244,650
    
    
    
    201,354
    
    
    
    81,206
    
    
    
    39,366Allowance for loan losses
    
    $
    3,077
    
    
    
    2,526
    
    
    
    1,014
    
    
    
    492Nonperforming loans
    
    $
    94
    
    
    
    491
    
    
    
    
    
    
    
    Allowance for loan losses as a percentage of
period-end total gross loans
    
    
    1.26
    %
    
    
    1.25
    %
    
    
    1.25
    %
    
    
    1.25
    %Allowance for loan losses as a percentage of
nonperforming gross loans
    
    
    3273.40
    %
    
    
    514.46
    %
    
    
    N/A
    
    
    
    N/ATotal nonperforming loans as a percentage
of total loans
    
    
    0.04
    %
    
    
    0.24
    %
    
    
    N/A
    
    
    
    N/ATotal nonperforming loans as a percentage
of total assets
    
    
    0.02
    %
    
    
    0.15
    %
    
    
    N/A
    
    
    
    N/ATotal nonperforming loans and real estate
owned as a percentage of total loans
    
    
    0.02
    %
    
    
    0.15
    %
    
    
    N/A
    
    
    
    N/A
 20




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##### Table of Contents



General United Community Bankshares of Florida, Inc. (the Company) was incorporated under the laws
of the State of Florida on April 15, 2002. The Company is a registered bank holding company under
the Bank Holding Company Act of 1956, as amended (the BHC Act) and owns 100% of the common stock
of United Heritage Bank (the Bank). The Bank commenced operations in March 2001. On January 13,
2003, the Company acquired Community United Bank (CUB) in a purchase transaction. Community
United Bank commenced operations in August 1999. During 2004, CUB was merged into the Bank, result
in a one-bank holding company structure. The accompanying financial information includes the accounts of the Company and the Bank. All
significant intercompany accounts have been eliminated in consolidation. The assets and
liabilities acquired in the January 13, 2003 purchase of CUB and income and expense of CUB
subsequent to January 13, 2003 are included in the accompanying information. The financial
information previous to the purchase of CUB includes only the accounts of the Company and the Bank.
Accordingly, the overall growth of the Company from December 31, 2002 through December 31, 2004 is
due not only to growth of the Bank, but also to the acquisition of CUB. The Companys principal asset is its ownership of the Bank. Accordingly, the Companys
results of operations are primarily dependent upon the results of operations of the Bank. The
Company conducts commercial banking business consisting of attracting deposits from the general
public and applying those funds to the origination of commercial, consumer and real estate loans
(including commercial loans collateralized by real estate). The Companys profitability depends
primarily on net interest income, which is the difference between interest income generated from
interest-earning assets (i.e., loans and investments) less the interest expense incurred on
interest-bearing liabilities (i.e., customer deposits and borrowed funds). Net interest income is
affected by the relative amounts of interest-earning assets and interest-bearing liabilities, and
the interest rate earned and paid on these balances. Net interest income is dependent upon the
Companys interest-rate spread which is the difference between the average yield earned on its
interest-earning assets and the average rate paid on its interest-bearing liabilities. When
interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest
rate spread will generate net interest income. The interest rate spread is impacted by interest
rates, deposit flows, and loan demand. Additionally, and to a lesser extent, the Companys
profitability is affected by such factors as the level of noninterest income and expenses, the
provision for loan losses, and the effective tax rate. Noninterest income consists primarily of
service charges and fees. Noninterest expense consists of salaries and employee benefits,
occupancy expenses, deposit insurance premiums paid to the FDIC, and other operating expenses. 21




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##### Table of Contents



Capital Resources, Commitments and Capital Requirements The Companys principal sources of funds are those generated by the Bank, including net
increases in deposits and borrowings, principal and interest payments on loans, and proceeds from
maturities of investment securities. The Company uses its capital resources principally to fund existing and continuing loan
commitments and to purchase investment securities. Off-balance sheet commitments to extend credit,
which amounted to $63.8 million at December 31, 2004, $60.1 million at December 31, 2003 and $22.4
million at December 31, 2002, represent legally binding agreements to lend to customers with fixed
expiration dates or other termination clauses. Since many commitments are expected to expire
without being funded, committed amounts do not necessarily represent future cash requirements. The following table summarizes the Companys contractual obligations, including certain
on-balance sheet and off-balance sheet obligations, at December 31, 2004 (in thousands): Payments Due by PeriodGreater
    
    
    GreaterThan
    
    
    ThanLess
    
    
    1 Year
    
    
    3 Years
    
    
    MoreThan 1
    
    
    Up to 3
    
    
    Up to 5
    
    
    Than 5Contractual Obligations
    
    Total
    
    
    Year
    
    
    Years
    
    
    Years
    
    
    YearsTime deposit maturities
    
    $
    146,419
    
    
    $
    66,383
    
    
    $
    76,923
    
    
    $
    3,113
    
    
    $
    Borrowings
    
    
    6,009
    
    
    
    6,009
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    8,475
    
    
    
    604
    
    
    
    1,243
    
    
    
    1,322
    
    
    
    5,439Loan commitments and unused lines of credit
    
    
    39,638
    
    
    
    39,638
    
    
    
    
    
    
    
    
    
    
    
    Standby letters of credit
    
    
    2,530
    
    
    
    2,530
    
    
    
    
    
    
    
    
    
    
    
    Undisbursed construction loans in process
    
    
    21,629
    
    
    
    21,629
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    224,700
    
    
    $
    136,793
    
    
    $
    78,166
    
    
    $
    4,435
    
    
    $
    5,439
 Management believes that the Company has adequate resources to fund all its commitments,
that substantially all of its existing commitments will be funded within 12 months and, if so
desired, that the Company can adjust the rates and terms on certificates of deposit and other
deposit accounts to retain or obtain new deposits in a changing interest rate environment. In accordance with risk capital guidelines issued by the FDIC and Federal Reserve, the Bank,
CUB (prior to 2004) and the Company are required to maintain a minimum standard of total capital to
risk-weighted assets of 8.0%. Additionally, regulatory agencies require banks and holding
companies to maintain a minimum leverage-capital ratio of Tier 1 capital (as defined) to average
assets. The leverage-capital ratio ranges from 3.0% to 5.0% based on the banks and bank holding
companys rating under the regulatory rating system. 22




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##### Table of Contents



The following table summarizes the regulatory capital levels and ratios: MinimumTo Be WellCapitalized UnderMinimum Capital
    
    
    Prompt CorrectiveActual
    
    
    Requirement
    
    
    Action ProvisionsAmount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %As of December 31, 2004:Total capital to Risk-
Weighted assets:Consolidated
    
    $
    34,746
    
    
    
    12.00
    %
    
    $
    23,159
    
    
    
    8.00
    %
    
    $
    28,949
    
    
    
    10.00
    %Bank
    
    $
    34,393
    
    
    
    11.83
    %
    
    $
    23,258
    
    
    
    8.00
    %
    
    $
    29,072
    
    
    
    10.00
    %Tier I Capital to Risk-
Weighted Assets:Consolidated
    
    $
    31,669
    
    
    
    10.94
    %
    
    $
    11,580
    
    
    
    4.00
    %
    
    $
    17,369
    
    
    
    6.00
    %Bank
    
    $
    31,316
    
    
    
    10.77
    %
    
    $
    11,629
    
    
    
    4.00
    %
    
    $
    17,443
    
    
    
    6.00
    %Tier I Capital
to Average Assets:Consolidated
    
    $
    31,669
    
    
    
    8.12
    %
    
    $
    15,592
    
    
    
    4.00
    %
    
    $
    19,490
    
    
    
    5.00
    %Bank
    
    $
    31,316
    
    
    
    8.04
    %
    
    $
    15,586
    
    
    
    4.00
    %
    
    $
    19,482
    
    
    
    5.00
    %As of December 31, 2003:Total capital to Risk-
Weighted assets:Consolidated
    
    $
    32,234
    
    
    
    13.95
    %
    
    $
    18,486
    
    
    
    8.00
    %
    
    $
    23,108
    
    
    
    10.00
    %Bank
    
    $
    20,163
    
    
    
    15.47
    %
    
    $
    10,427
    
    
    
    8.00
    %
    
    $
    13,034
    
    
    
    10.00
    %CUB
    
    $
    12,204
    
    
    
    12.00
    %
    
    $
    8,135
    
    
    
    8.00
    %
    
    $
    10,168
    
    
    
    10.00
    %Tier I Capital to Risk-
Weighted Assets:Consolidated
    
    $
    29,708
    
    
    
    12.86
    %
    
    $
    9,243
    
    
    
    4.00
    %
    
    $
    13,865
    
    
    
    6.00
    %Bank
    
    $
    18,799
    
    
    
    14.42
    %
    
    $
    5,213
    
    
    
    4.00
    %
    
    $
    7,820
    
    
    
    6.00
    %CUB
    
    $
    11,042
    
    
    
    10.86
    %
    
    $
    4,067
    
    
    
    4.00
    %
    
    $
    6,101
    
    
    
    6.00
    %Tier I Capital
to Average Assets:Consolidated
    
    $
    29,708
    
    
    
    9.32
    %
    
    $
    12,744
    
    
    
    4.00
    %
    
    $
    15,930
    
    
    
    5.00
    %Bank
    
    $
    18,799
    
    
    
    10.64
    %
    
    $
    7,068
    
    
    
    4.00
    %
    
    $
    8,835
    
    
    
    5.00
    %CUB
    
    $
    11,042
    
    
    
    7.90
    %
    
    $
    5,590
    
    
    
    4.00
    %
    
    $
    6,987
    
    
    
    5.00
    %
 23




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##### Table of Contents



Results of Operations The following table shows selected ratios for the periods ended or at the dates indicated: Year Ended December 31,2004
    
    
    2003
    
    
    2002Average equity as a percentage of average assets
    
    
    8.81
    %
    
    
    10.34
    %
    
    
    17.34
    %Equity to total assets at end of period
    
    
    8.31
    %
    
    
    9.77
    %
    
    
    14.04
    %Return on average assets
    
    
    .56
    %
    
    
    .29
    %
    
    
    (.12
    )%Return on average equity
    
    
    6.38
    %
    
    
    2.85
    %
    
    
    (.69
    )%Noninterest expense to average assets
    
    
    2.02
    %
    
    
    2.09
    %
    
    
    2.98
    %Nonperforming loans and foreclosed real estate as
a percentage of total assets
    
    
    0.02
    %
    
    
    0.15
    %
    
    
    
    %
 The rates and yields for the dates indicated were as follows: Year Ended December 31,2004
    
    
    2003
    
    
    2002Loans
    
    
    6.46
    %
    
    
    6.77
    %
    
    
    7.13
    %Investment securities
    
    
    3.01
    %
    
    
    2.39
    %
    
    
    4.51
    %Other interest-earning assets
    
    
    1.28
    %
    
    
    1.10
    %
    
    
    1.70
    %All interest-earning assets
    
    
    4.92
    %
    
    
    4.85
    %
    
    
    5.56
    %Savings, NOW and money-market deposits
    
    
    1.61
    %
    
    
    1.68
    %
    
    
    2.41
    %Time deposits
    
    
    2.75
    %
    
    
    3.14
    %
    
    
    3.74
    %All interest-bearing liabilities
    
    
    2.11
    %
    
    
    2.39
    %
    
    
    2.98
    %Interest-rate spread
    
    
    2.81
    %
    
    
    2.46
    %
    
    
    2.58
    %
 Net interest income before provision for loan losses, which constitutes the principal
source of income for the Company, represents the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities. The principal
interest-earning assets are investment securities and loans made to businesses and individuals.
Interest-bearing liabilities primarily consist of time deposits, interest-bearing checking accounts
(NOW accounts), retail savings deposits and money-market accounts. Funds attracted by these
interest-bearing liabilities are invested in interest-earning assets. Accordingly, net interest
income depends upon the volume of average interest-earning assets and average interest-bearing
liabilities and the interest rates earned or paid on them. Net interest income before provision for loan losses was approximately $10,742,000 for 2004
compared to $7,964,000 for 2003 and $3,442,000 for 2002. 24




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##### Table of Contents



The following table sets forth, for the periods indicated, information regarding (i) the total
dollar amount of interest and dividend income of the Company from interest-earning assets and the
resultant average yield; (ii) the total dollar amount of interest expense on interest-bearing
liabilities and the resultant average cost; (iii) net interest/dividend income; (iv) interest-rate
spread; and (v) net interest margin. Average balances were based on average daily balances ($ in
thousands). Year Ended December 31,2004
    
    
    2003
    
    
    2002Interest
    
    
    Average
    
    
    
    
    
    
    Interest
    
    
    Average
    
    
    
    
    
    
    Interest
    
    
    AverageAverage
    
    
    and
    
    
    Yield/
    
    
    Average
    
    
    and
    
    
    Yield/
    
    
    Average
    
    
    and
    
    
    Yield/Balance
    
    
    Dividends
    
    
    Rate
    
    
    Balance
    
    
    Dividends
    
    
    Rate
    
    
    Balance
    
    
    Dividends
    
    
    RateInterest-earning assets:Loans
    
    $
    219,946
    
    
    $
    14,202
    
    
    
    6.46
    %
    
    $
    172,178
    
    
    $
    11,653
    
    
    
    6.77
    %
    
    $
    59,216
    
    
    $
    4,216
    
    
    
    7.13
    %Securities
    
    
    54,277
    
    
    
    1,633
    
    
    
    3.01
    
    
    
    55,684
    
    
    
    1,330
    
    
    
    2.39
    
    
    
    28,088
    
    
    
    1,267
    
    
    
    4.51Other (1)
    
    
    64,017
    
    
    
    820
    
    
    
    1.28
    
    
    
    51,803
    
    
    
    570
    
    
    
    1.10
    
    
    
    16,458
    
    
    
    279
    
    
    
    1.70Total interest-earning
assets
    
    
    338,240
    
    
    
    16,655
    
    
    
    4.92
    
    
    
    279,665
    
    
    
    13,553
    
    
    
    4.85
    
    
    
    103,672
    
    
    
    5,762
    
    
    
    5.56Noninterest-earning assets
    
    
    25,165
    
    
    
    
    
    
    
    
    
    
    
    19,131
    
    
    
    
    
    
    
    
    
    
    
    7,065Total assets
    
    $
    363,405
    
    
    
    
    
    
    
    
    
    
    $
    298,796
    
    
    
    
    
    
    
    
    
    
    $
    110,737Interest-bearing liabilities:Savings, NOW
and money-market deposits
    
    
    151,834
    
    
    
    2,446
    
    
    
    1.61
    
    
    
    117,697
    
    
    
    1,982
    
    
    
    1.68
    
    
    
    41,762
    
    
    
    1,008
    
    
    
    2.41Time deposits
    
    
    125,161
    
    
    
    3,442
    
    
    
    2.75
    
    
    
    114,818
    
    
    
    3,601
    
    
    
    3.14
    
    
    
    34,640
    
    
    
    1,297
    
    
    
    3.74Other borrowings (2)
    
    
    3,031
    
    
    
    25
    
    
    
    0.82
    
    
    
    1,524
    
    
    
    6
    
    
    
    0.52
    
    
    
    1,459
    
    
    
    16
    
    
    
    1.10Total interest-bearing
liabilities
    
    
    280,026
    
    
    
    5,913
    
    
    
    2.11
    
    
    
    234,039
    
    
    
    5,589
    
    
    
    2.39
    
    
    
    77,861
    
    
    
    2,321
    
    
    
    2.98Noninterest-bearing deposits
    
    
    49,385
    
    
    
    
    
    
    
    
    
    
    
    33,285
    
    
    
    
    
    
    
    
    
    
    
    13,389Noninterest-bearing liabilities
    
    
    1,995
    
    
    
    
    
    
    
    
    
    
    
    583
    
    
    
    
    
    
    
    
    
    
    
    287Stockholders equity
    
    
    31,999
    
    
    
    
    
    
    
    
    
    
    
    30,889
    
    
    
    
    
    
    
    
    
    
    
    19,200Total liabilities and
stockholders
equity
    
    $
    363,405
    
    
    
    
    
    
    
    
    
    
    $
    298,796
    
    
    
    
    
    
    
    
    
    
    $
    110,737Net interest income
    
    
    
    
    
    $
    10,742
    
    
    
    
    
    
    
    
    
    
    $
    7,964
    
    
    
    
    
    
    
    
    
    
    $
    3,441Interest-rate spread (3)
    
    
    
    
    
    
    
    
    
    
    2.81
    %
    
    
    
    
    
    
    
    
    
    
    2.46
    %
    
    
    
    
    
    
    
    
    
    
    2.58
    %Net interest margin (4)
    
    
    
    
    
    
    
    
    
    
    3.18
    %
    
    
    
    
    
    
    
    
    
    
    2.85
    %
    
    
    
    
    
    
    
    
    
    
    3.32
    %Ratio of average interest-
earning assets to average
interest-bearing
liabilities
    
    
    1.21
    
    
    
    
    
    
    
    
    
    
    
    1.19
    
    
    
    
    
    
    
    
    
    
    
    1.33
   (1)
    Includes Federal Home Loan Bank stock, Federal Funds sold and interest-earning
demand deposits.  (2)
    Includes securities sold under agreement to repurchase and federal funds purchased
lines of credit.  (3)
    Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average rate of interest-bearing liabilities.  (4)
    Net interest margin is net interest income divided by average interest-earning
assets. 25




---



##### Table of Contents



The following tables set forth certain information regarding changes in interest income
and interest expense for the periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to (1) changes in
rate (change in rate multiplied by prior volume); (2) changes in volume (change in volume
multiplied by prior rate) and (3) changes in rate-volume (change in rate multiplied by change in
volume). Increase (Decrease) Due toRate/Rate
    
    
    Volume
    
    
    Volume
    
    
    Total(In thousands)Year Ended December 31, 2004 vs. 2003:Interest-earning assets:Loans
    
    $
    (535
    )
    
    $
    3,233
    
    
    $
    (149
    )
    
    $
    2,549Securities
    
    
    345
    
    
    
    (34
    )
    
    
    (8
    )
    
    
    303Other
    
    
    94
    
    
    
    134
    
    
    
    22
    
    
    
    250Total
    
    
    (96
    )
    
    
    3,333
    
    
    
    (135
    )
    
    
    3,102Interest-bearing liabilities:Deposits:Savings, NOW and money-market deposits
    
    
    (86
    )
    
    
    575
    
    
    
    (25
    )
    
    
    464Time deposits
    
    
    (443
    )
    
    
    324
    
    
    
    (40
    )
    
    
    (159
    )Borrowings
    
    
    7
    
    
    
    6
    
    
    
    6
    
    
    
    19Total
    
    
    (522
    )
    
    
    905
    
    
    
    (59
    )
    
    
    324Net change in net interest income
    
    $
    426
    
    
    $
    2,428
    
    
    $
    (76
    )
    
    $
    2,778Year Ended December 31, 2003 vs. 2002:Interest-earning assets:Loans
    
    $
    (216
    )
    
    $
    8,061
    
    
    $
    (407
    )
    
    $
    7,438Securities
    
    
    (596
    )
    
    
    1,244
    
    
    
    (585
    )
    
    
    63Other
    
    
    (95
    )
    
    
    596
    
    
    
    (210
    )
    
    
    291Total
    
    
    (907
    )
    
    
    9,901
    
    
    
    (1,202
    )
    
    
    7,792Interest-bearing liabilities:Deposits:Savings, NOW and money-market deposits
    
    
    (302
    )
    
    
    1,830
    
    
    
    (554
    )
    
    
    974Time deposits
    
    
    (215
    )
    
    
    2,999
    
    
    
    (481
    )
    
    
    2,303Borrowings
    
    
    102
    
    
    
    (72
    )
    
    
    (38
    )
    
    
    (8
    )Total
    
    
    (415
    )
    
    
    4,757
    
    
    
    (1,073
    )
    
    
    3,269Net change in net interest income
    
    $
    (492
    )
    
    $
    5,144
    
    
    $
    (129
    )
    
    $
    4,523
 26




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##### Table of Contents



Comparison of Results of Operations for 2004 to 2003 General Net income for the year ended December 31, 2004 was $2,041,000 or $.63 basic and $.61 diluted
earnings per share compared to $881,000 or $.28 basic and $.27 diluted earnings per share for the
comparable period in 2003. The increase in the Companys net income was primarily due to an
increase in net interest income, partially offset by an increase in noninterest expenses. Interest Income and Expense Interest income increased to $16.7 million for the year ended December 31, 2004 from $13.5
million for the year ended December 31, 2003. Interest income on loans increased to $14.2 million
primarily due to an increase in the average loan portfolio balance from $172 million for the year
ended December 31, 2003 to $220 million for 2004 which was partially offset by a decrease in the
average yield from 6.77% to 6.46%. Interest income on securities increased to $1.6 million in 2004
from $1.3 million in 2003 primarily due to a increase in the average yield from 2.39% to 3.01%. Interest income on other interest-earning assets increased to $820,000 in 2004 from $570,000
in 2003 primarily due to a increase in the average balance to $64 million in 2004 from $52 million
in 2003 and an increase in the average yield to 1.28% in 2004 from 1.10% in 2003. Interest expense on interest-bearing liabilities was $5.9 million for the year ended December
31, 2004 compared to $5.6 million for 2003. Interest expense increased due to an increase in
average interest-bearing liabilities from $234 million in 2003 to $280 million in 2004, partially
offset by a decrease in the average rate paid from 2.39% in 2003 to 2.11% in 2004. Provision for Loan Losses The provision for loan losses is charged to earnings to increase the total allowance to a
level deemed appropriate by management and is based upon the volume and type of lending conducted
by the Company, industry standards, the amount of nonperforming loans and general economic
conditions, particularly as they relate to the Companys market areas, and other factors related to
the collectibility of the Companys loan portfolio. The Company recorded a provision for loan
losses for the year ended December 31, 2004 of $617,000 compared to $784,000 in 2003. The allowance
for loan losses was $3.1 million at December 31, 2004. Management believes the allowance was
adequate at December 31, 2004. 27




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##### Table of Contents



Noninterest Income Noninterest income increased to $547,000 for the year ended December 31, 2004 compared to
$526,000 for the year ended December 31, 2003. The increase was primarily due to a $35,000
increase in service charges and fees. Noninterest Expense Noninterest expense was $7.3 million for the year ended December 31, 2004 compared to $6.3
million for the year ended December 31, 2003. This increase includes approximately $503,000 in
salary and employee benefits and $273,000 in occupancy and equipment expense associated with the
growth of the Company from 2003 to 2004. Income Taxes The income tax expense for the year ended December 31, 2004 was $1.3 million (an effective
rate of 38.6%, including state income taxes) compared to approximately $568,000 for 2003 (an
effective rate of 39.2%, including state income taxes) for the 2003 period. Comparison of Results of Operations for 2003 to 2002 General Net income for the year ended December 31, 2003 was $881,000 or $.28 basic and $.27 diluted
earnings per share compared to a net loss of $133,000 or $.07 basic and diluted earnings per share
for the comparable period in 2002. The increase in the Companys net income was primarily due to
an increase in net interest income, partially offset by an increase in noninterest expenses. Interest Income and Expense Interest income increased to $13.6 million for the year ended December 31, 2003 from $5.8
million for the year ended December 31, 2002. Interest income on loans increased to $11.7 million
primarily due to an increase in the average loan portfolio balance from $59 million for the year
ended December 31, 2002 to $172 million for 2003 which was partially offset by a decrease in the
average yield from 7.13% to 6.77%. Interest income on securities increased only slightly in 2003
from 2002 primarily due to a decrease in the average yield from 4.51% to 2.39%, despite the total
outstandings increasing from $29.3 million in 2002 to $56.4 million. An increase in
mortgage-backed principal paydowns also contributed to lower interest income for 2003. Interest income on other interest-earning assets increased to $570,000 in 2003 from $279,000
in 2002 primarily due to a increase in the average balance to $52 million in 2003 from $16 million
in 2002 and a decrease in the average yield to 1.10% in 2003 from 1.70% in 2002. Interest expense on interest bearing liabilities was $5.6 million for the year ended December
31, 2003 compared to $2.3 million for 2002. Interest expense increased due to an increase in
average 28




---



##### Table of Contents



interest bearing liabilities from $78 million in 2002 to $234 million in 2003, partially offset by
a decrease in the average rate paid from 2.98% in 2002 to 2.39% in 2003. Provision for Loan Losses The provision for loan losses is charged to earnings to increase the total allowance to a
level deemed appropriate by management and is based upon the volume and type of lending conducted
by the Company, industry standards, the amount of nonperforming loans and general economic
conditions, particularly as they relate to the Companys market areas, and other factors related to
the collectibility of the Companys loan portfolio. The Company recorded a provision for loan
losses for the year ended December 31, 2003 of $784,000 compared to $543,000 in 2002. The
allowance for loan losses was $2.5 million at December 31, 2003. Management believes the allowance
was adequate at December 31, 2003. Noninterest Income Noninterest income increased to $526,000 for the year ended December 31, 2003 compared to
$271,000 for the year ended December 31, 2002. The increase was primarily due to a $211,000
increase in service charges and fees. Noninterest Expense Noninterest expense was $6.3 million for the year ended December 31, 2003 compared to $3.3
million for the year ended December 31, 2002. This increase includes approximately $2.3 million in
salary, occupancy and equipment expense and other operating expenses associated with the
acquisition of Community United Bank on January 13, 2003. The remaining increase is due to the
normal costs associated with the growth of the bank from 2002 to 2003. Income Taxes The income tax expense for the year ended December 31, 2003 was $568,000 (an effective rate of
39.2%, including state income taxes) compared to approximately $2,000 for 2002 (an effective rate
of 2%) for the 2002 period. The effective tax rate in 2002 has been impacted by state income tax,
a rate differential in the actual tax rate compared to the expected tax rate of deferred taxes
associated with use of the net operating loss in 2002, and the establishment of a small valuation
allowance. 29




---



##### Table of Contents



Asset/Liability Management A principal objective of the Companys asset/liability management strategy is to minimize its
exposure to changes in interest rates by matching the maturity and repricing horizons of
interest-earning assets and interest-bearing liabilities. This strategy is overseen in part
through the direction of the Asset and Liability Committee which establishes policies and monitors
results to control interest rate sensitivity. Management evaluates interest rate risk and then formulates guidelines regarding asset
generation and repricing, funding sources and pricing, and off-balance sheet commitments in order
to maintain interest rate risk within target levels for the appropriate level of risk which are
determined by the Committee. The Committee uses internally generated reports to measure the Banks
interest rate sensitivity. From these reports, the Committee can estimate the net earnings effect
of various interest rate scenarios. As a part of the Companys interest rate risk management policy, the Committee examines the
extent to which its assets and liabilities are interest rate sensitive and monitors the banks
interest rate sensitivity gap. An asset or liability is considered to be interest rate sensitive
if it will reprice or mature within the time period analyzed, usually one year or less. The
interest rate sensitivity gap is the difference between interest-earning assets and
interest-bearing liabilities scheduled to mature or reprice within such time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds interest rate sensitive assets. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest income, while a positive gap
would tend to result in an increase in net interest income. During a period of falling interest
rates, a negative gap would tend to result in an increase in net interest income, while a positive
gap would tend to adversely affect net interest income. If the repricing of each banks assets and
liabilities were equally flexible and moved concurrently, the impact of any increase or decrease in
interest rates on net interest income would be minimal. A simple interest rate gap analysis by itself may not be an accurate indicator of how net
interest income will be affected by changes in interest rates. Accordingly, the Committee also
evaluates how the repayment of particular assets and liabilities is impacted by changes in interest
rates. Income associated with interest-earning assets and costs associated with interest-bearing
liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude
and duration of changes in interest rates may have a significant impact on net interest income.
For example, although certain assets and liabilities may have similar maturities or period of
repricing, they may react in different degrees to changes in market interest rates. Interest rates
on certain types of assets and liabilities fluctuate in advance of changes in general market
interest rates, while interest rates on other types may lag behind changes in general market rates.
In addition, certain assets, such as adjustable rate mortgage loans, have features (generally
referred to as interest rate caps) which limit changes in interest rates on a short-term basis
and over the life of the asset. In the event of a change in interest rates, prepayment (on loans)
and early withdrawal (of deposit accounts) levels also could deviate significantly from those
assumed in calculating the interest rate gap. The ability of many borrowers to service their debts
also may decrease in the event of an interest rate increase. 30




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##### Table of Contents



Managements strategy is to maintain a balanced interest rate risk position to protect its net
interest margin from market fluctuations. Principal among the Companys asset/liability management strategies has been the emphasis on
managing its interest rate sensitive liabilities in a manner designed to attempt to reduce the
Companys exposure during periods of fluctuating interest rates. Management believes that the type
and amount of the Companys interest rate sensitive liabilities may reduce the potential impact
that a rise in interest rates might have on the Companys net interest income. The Company seeks
to maintain a core deposit base by providing quality services to its customers without
significantly increasing its cost of funds or operating expenses. Management anticipates that these
core accounts will continue to comprise a significant portion of the Companys total deposit base.
The Company also maintains a portfolio of liquid assets in order to reduce its overall exposure to
changes in market interest rates. The Company also maintains a floor, or minimum rate, on certain
of its floating or prime based loans. These floors allow the Company to continue to earn a higher
rate when the floating rate falls below the established floor rate. 31




---



##### Table of Contents



The following table sets forth certain information relating to the Companys interest-earning
assets and interest-bearing liabilities at December 31, 2004 that are estimated to mature or are
scheduled to reprice within the period shown ($ in thousands): OverUnder 3
    
    
    3 to 12
    
    
    1-5

    
    
    FiveMonths
    
    
    Months
    
    
    Years
    
    
    Years
    
    
    TotalInterest-earning deposits in other banks
    
    $
    9,857
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    9,857Federal funds sold
    
    
    63,831
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,831Loans (1)
    
    
    126,320
    
    
    
    12,294
    
    
    
    46,275
    
    
    
    59,761
    
    
    
    244,650Securities (2)
    
    
    3,256
    
    
    
    9,768
    
    
    
    52,597
    
    
    
    3,019
    
    
    
    68,640Total rate-sensitive assets (earning assets)
    
    $
    203,264
    
    
    $
    22,062
    
    
    $
    98,872
    
    
    $
    62,780
    
    
    $
    386,978Money market (3)
    
    $
    131,131
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    131,131Savings and NOW deposits (3)
    
    
    
    
    
    
    
    
    
    
    35,620
    
    
    
    
    
    
    
    35,620Time deposits (3)
    
    
    17,031
    
    
    
    49,352
    
    
    
    80,036
    
    
    
    
    
    
    
    146,419Other borrowings
    
    
    6,009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,009Total rate-sensitive liabilities
    
    $
    154,171
    
    
    $
    49,352
    
    
    $
    115,656
    
    
    $
    
    
    
    $
    319,179Gap (repricing differences)
    
    $
    49,093
    
    
    $
    (27,290
    )
    
    $
    (16,784
    )
    
    $
    62,780
    
    
    $
    67,799Cumulative Gap
    
    $
    49,093
    
    
    $
    21,803
    
    
    $
    5,019
    
    
    $
    67,799Cumulative GAP/total assets
    
    
    .12
    
    
    
    .05
    
    
    
    .01
    
    
    
    .17Cumulative GAP/total earning assets
    
    
    .13
    
    
    
    .06
    
    
    
    .01
    
    
    
    .18Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    406,467Total earning assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    386,978
   (1)
    
    In preparing the table above, adjustable-rate loans were included in the period
in which the interest rates are next scheduled to adjust rather than in the period in which
the loans mature. Fixed-rate loans were scheduled according to their contractual maturities.(2)
    
    Securities were scheduled based on their remaining maturity or repricing frequency.
Mortgage-backed securities are scheduled over ratably five years.(3)
    
    Excludes noninterest-bearing deposit accounts. Money market deposits were regarded
as maturing immediately. NOW and savings deposits were regarded as maturing in 1-5 years.
All other time deposits were scheduled through the maturity dates. 32




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##### Table of Contents



Financial Condition Lending Activities A significant source of income for the Company is the interest earned on loans. The Companys
primary market area consists of Orange and Seminole Counties, Florida, which offer recreational
facilities, cultural events, resorts, commercial office parks, residential developments, major
transportation routes, shopping centers, and entertainment areas. Business and entertainment
service industries, retail trade, government, construction, real estate, finance/insurance, health
care and transportation/communication/utility form the basis for the areas business economy.
Although not important as it once was, agricultural remains a part of the areas industry, with
citrus crops, nurseries and vegetables making up the bulk of the agriculture business. There is no assurance that the Companys market area will continue to experience economic
growth. Adverse conditions in any one or more of the industries operating in such markets or
slow-down in general economic conditions could have an adverse effect on the Company. Lending activities are conducted pursuant to a written policy which has been adopted by the
Company. Each loan officer has defined lending authority beyond which loans, depending upon their
type and size, must be reviewed and approved by a loan committee comprised of certain directors of
the Company. 33




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##### Table of Contents



The following table sets forth information concerning the Companys loan portfolio by type of
loan at the dates indicated ($ in thousands): At December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofAmount
    
    
    Total
    
    
    Amount
    
    
    Total
    
    
    Amount
    
    
    Total
    
    
    Amount
    
    
    TotalCommercial, financial and agricultural
    
    $
    44,720
    
    
    
    18
    %
    
    $
    42,779
    
    
    
    21
    %
    
    $
    25,294
    
    
    
    31
    %
    
    $
    13,339
    
    
    
    34
    %Real estate mortgage
    
    
    133,257
    
    
    
    54
    
    
    
    119,887
    
    
    
    60
    
    
    
    38,228
    
    
    
    47
    
    
    
    20,962
    
    
    
    53Construction and land development
    
    
    60,675
    
    
    
    25
    
    
    
    31,934
    
    
    
    16
    
    
    
    15,531
    
    
    
    19
    
    
    
    3,716
    
    
    
    10Installment and consumer lines
    
    
    5,998
    
    
    
    3
    
    
    
    6,754
    
    
    
    3
    
    
    
    2,153
    
    
    
    3
    
    
    
    1,349
    
    
    
    3Total loans
    
    $
    244,650
    
    
    
    100
    %
    
    $
    201,354
    

    
    
    100
    %
    
    $
    81,206
    
    
    
    100
    %
    
    $
    39,366
    
    
    
    100
    %Less: Allowance for loan losses
    
    
    (3,077
    )
    
    
    
    
    
    
    (2,526
    )
    
    
    
    
    
    
    (1,014
    )
    
    
    
    
    
    
    (492
    )Net deferred fees
    
    
    (359
    )
    
    
    
    
    
    
    (348
    )
    
    
    
    
    
    
    (30
    )
    
    
    
    
    
    
    (44
    )Loans, net
    
    $
    241,214
    
    
    
    
    
    
    $
    198,480
    
    
    
    
    
    
    $
    80,162
    
    
    
    
    
    
    $
    38,830
 The following table reflects the contractual principal repayments by period of the
Companys loan portfolio at December 31, 2004 (in thousands): 1 Year
    
    
    1 Through
    
    
    Afteror Less
    
    
    5 Years
    
    
    5 Years
    
    
    TotalCommercial, financial and agricultural
    
    $
    26,207
    
    
    $
    17,636
    
    
    $
    877
    
    
    $
    44,720Real estate mortgage
    
    
    27,500
    
    
    
    44,597
    
    
    
    61,160
    
    
    
    133,257Construction and land development
    
    
    19,735
    
    
    
    25,247
    
    
    
    15,693
    
    
    
    60,675Installment and consumer lines
    
    
    3,250
    
    
    
    2,677
    
    
    
    71
    
    
    
    5,998Total loans
    
    $
    76,692
    
    
    $
    90,157
    
    
    $
    77,801
    
    
    $
    244,650Loans with maturities over one year:Fixed rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101,885Variable rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66,073Total maturities greater than one year
    
    
    
    
    
    
    
    
    

    
    
    
    
    $
    167,958
 Asset Quality Management seeks to maintain a high quality of assets through conservative underwriting and
sound lending practices. The majority of the loans in the Companys loan portfolio are
collateralized by real estate mortgages. The level of delinquent loans and foreclosed assets also
is relevant to the credit quality of a loan portfolio. In an effort to maintain the quality of the loan portfolio, management seeks to minimize
higher risk types of lending. In view of the relative significance of real estate related loans, a
downturn in the value of the real estate could have an adverse impact on the Companys
profitability. However, as part of its loan portfolio management strategy, the Company generally
limits its loans to a maximum 34




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##### Table of Contents



of 80% of the value of the underlying real estate as determined by appraisal. In
addition, knowledgeable members of management make physical inspections of properties being
considered for mortgage loans. Commercial loans also entail risks since repayment is usually dependent upon the successful
operation of the commercial enterprise. They also are subject to adverse conditions in the
economy. Commercial loans are generally riskier than mortgage loans because they are typically
underwritten on the basis of the ability to repay from the cash flow of a business rather than on
the ability of the borrower or guarantor to repay. Further, the collateral underlying a commercial
loan may depreciate over time, cannot be appraised with as much precision as real estate, and may
fluctuate in value based on the success of the business. The repayment of consumer installment loans and other loans to individuals is closely linked
to the economic conditions of the communities in which the Company operates. For the most part,
these local economies enjoy diverse labor forces. The majority of these consumer installment loans
are secured by collateral which limits, to a degree, any loss the Company would suffer upon
default. Management has adopted SFAS No. 114, which considers a loan to be impaired if it is probable
that the Company will be unable to collect all amounts due under the contractual terms of the loan
agreement. If a loan is considered impaired, its value generally should be measured based on the
present value of expected cash flows discounted at the loans effective interest rate. As a
practical expedient, however, the loans value may be based on:  
    the loans market price; or
    the fair value of the loans collateral, less discounted
estimated costs to sell, if the collateral is expected to be the
sole source of repayment. If the value of the loan is less than the recorded investment in the loan, a loss is
recognized by recording a valuation allowance and a corresponding increase to the provision for
loan losses charged to operating expenses. Situations may occur where:  
    The Company receives physical possession of a debtors assets
regardless of whether formal foreclosure proceedings have been
initiated or completed; or
    the debtor has effectively surrendered control of the underlying
collateral in contemplation of foreclosure. These situations are referred to as in-substance foreclosures. SFAS No. 114 recognizes the
practical problems of accounting for the operation of an asset the creditor does not possess, and
states that a loan for which foreclosure is probable should continue to be accounted for as a loan. 35




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##### Table of Contents



The following summarizes impaired loans (in thousands): At December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001Impaired loans with a valuation allowance
    
    $
    83
    
    
    $
    376
    
    
    $
    
    
    
    $
    Impaired loans without a valuation allowance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Less  valuation allowance on impaired loans
    
    
    (5
    )
    
    
    (97
    )
    
    
    
    
    
    
    Total net impaired loans
    
    $
    78
    
    
    $
    279
    
    
    $
    
    
    
    $
    
 The average net investment in impaired loans and interest income recognized and received on
impaired loans (in thousands): Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001Average net investment in impaired loans
    
    $
    349
    
    
    $
    376
    
    
    $
    
    
    
    $
    Interest income recognized on impaired loans
    
    $
    3
    
    
    $
    
    
    
    $
    
    
    
    $
    Interest income received on impaired loans
    
    $
    3
    
    
    $
    
    
    
    $
    
    
    
    $
    
 36




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##### Table of Contents



Loans on non-accrual status and foreclosed assets and certain other related information was as
follows: At December 31,2004
    
    
    
    
    
    
    2003
    
    
    
    
    
    
    2002
    
    
    
    
    
    
    2001% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofTotal
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    TotalAmount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans($ in thousands)Loans on nonaccrual status:Real estate loans
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %Commercial
    
    
    50
    
    
    
    .02
    
    
    
    491
    
    
    
    .24
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer and home equity loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total loans on nonaccrual status
    
    
    50
    
    
    
    .02
    
    
    
    491
    
    
    
    .24
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accruing loans past due 90 days or more
    
    
    44
    
    
    
    .02
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Troubled debt restructuring
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total nonperforming loans
    
    
    94
    
    
    
    .04
    
    
    
    491
    
    
    
    .24
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreclosed assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total nonperforming assets
    
    $
    94
    
    
    
    .04
    
    
    $
    491
    
    
    
    .24
    
    
    $
    
    
    
    
    
    
    
    $
    As a percentage of total assets:Total nonperforming loans
    
    
    
    
    
    
    .02
    %
    
    
    
    
    
    
    .15
    %
    
    
    
    
    
    
    N/A
    
    
    
    
    
    
    
    N/ATotal nonperforming assets
    
    
    
    
    
    
    .02
    %
    
    
    
    
    
    
    .15
    %
    
    
    
    
    
    
    N/A
    
    
    
    
    
    
    
    N/AAllowance for loan losses as a percentage of:Total loans
    
    
    
    
    
    
    1.26
    %
    
    
    
    
    
    
    1.25
    %
    
    
    
    
    
    
    1.25
    %
    
    
    
    
    
    
    1.25
    %Nonperforming loans
    
    
    
    
    
    
    3273
    %
    
    
    
    
    
    
    514
    %
    
    
    
    
    
    
    N/A
    
    
    
    
    
    
    
    N/A
 Generally, interest on loans accrues and is credited to income based upon the principal
balance outstanding. It is managements policy to discontinue the accrual of interest income and
classify a loan as nonaccrual when principal or interest is past due 90 days or more and the loan
is not adequately collateralized, or when in the opinion of management, principal or interest is
not likely to be paid in accordance with the terms of the obligation. Consumer installment loans
are generally charged-off after 90 days of delinquency unless adequately collateralized and in the
process of collection. Loans are not returned to accrual status until principal and interest
payments are brought current and future payments appear reasonably certain. Interest accrued and
unpaid at the time a loan is placed on nonaccrual status is charged against interest income.
Subsequent payments received are applied to the outstanding principal balance. 37




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##### Table of Contents



Interest income that would have been recorded under the original terms of loans on nonaccrual
status at December 31, 2004 and interest income actually recognized during the year ended December
31, 2004 on these loans was as follows: Amount(In thousands)Interest income that would have been recorded
    
    $
    4Less: Interest income recognized
    
    
    (3
    )Interest income foregone
    
    $
    1
 Loan concentrations are defined as amounts loaned to a number of borrowers engaged in
similar activities which would cause them to be similarly impacted by economic or other conditions.
The Company, on a routine basis, monitors these concentrations in order to consider adjustments in
its lending practices to reflect economic conditions, loan to deposit ratios, and industry trends.
The Company does not have any concentrations in a specific industry. The Companys Loan Committee concentrates its efforts and resources, and that of its senior
management and lending officers, on loan review and underwriting procedures. Internal controls
include ongoing reviews of loans made to monitor documentation and the existence and valuations of
collateral. In addition, management of the Company has established a review process with the
objective of identifying, evaluating, and initiating necessary corrective action for marginal
loans. The goal of the loan review process is to address classified and nonperforming loans as
early as possible. Classification of Assets and Potential Problem Loans Foreclosed Assets.Assets acquired by the Company as a result of foreclosure or by deed in
lieu of foreclosure is classified as foreclosed assets. Foreclosed assets are recorded at the
lower of cost or fair value less estimated selling costs, and the estimated loss, if any, is
charged to the allowance for loan losses at the time it is transferred to foreclosed assets.
Further allowances for losses in foreclosed assets are recorded at the time management believes
additional deterioration in value has occurred. Classified Assets.Federal regulations and the Companys policy require the classification of
loans and other assets, such as debt and equity securities, considered to be of lesser quality as
substandard, doubtful or loss assets. An asset is considered substandard if it is
inadequately protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. Substandard assets include those characterized by the distinct
possibility that the institution will sustain some loss if the deficiencies are not corrected.
Assets classified as doubtful have all of the weaknesses inherent in those classified
substandard, with the added characteristic that the weaknesses present make collection or
liquidation in full, on the basis of currently existing facts, conditions, and values, highly
questionable and improbable. Assets classified as loss are those considered uncollectibleand 38




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##### Table of Contents



of such little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. In addition, the Companys policies require that assets
which do not currently expose the insured institution to sufficient risk to warrant classification
as substandard but possess other weaknesses are designated special mention by management. If an asset is classified, the estimated fair value of the asset is determined and if that
value is less than the then carrying value of the asset, the difference is established as a
specific reserve. If an asset is classified as loss, the amount of the asset classified as loss is
reserved. The following table sets forth information concerning the number and dollar amount of loans
and foreclosed assets classified as special mention or substandard at December 31, 2004. No
loans or foreclosed assets were classified doubtful or loss at December 31, 2004. Special Mention
    
    
    SubstandardNumber
    
    
    Amount
    
    
    Number
    
    
    Amount($ in thousands)At December 31, 2004:Loans:Commercial, financial and agricultural
    
    
    1
    
    
    $
    33
    
    
    
    
    
    
    $
    Real estate mortgage
    
    
    3
    
    
    
    1,319
    
    
    
    
    
    
    
    Construction and land development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Installment and consumer lines
    
    
    1
    
    
    
    3
    
    
    
    1
    
    
    
    505
    
    
    $
    1,355
    
    
    
    1
    
    
    $
    50Foreclosed assets
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
 39




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##### Table of Contents



Allowance for Loan Losses In originating loans, the Company recognizes that credit losses will be experienced and
that the risk of loss will vary with, among other things, the type of loan being made, the
creditworthiness of the borrower over the term of the loan and, in the case of a collateralized
loan, the quality of the collateral for the loan as well as general economic conditions. It is
managements policy to attempt to maintain an adequate allowance for loan losses based on, among
other things, the Companys historical loan loss experience, evaluation of economic conditions and
regular reviews of any delinquencies and loan portfolio quality. Specific allowances are provided
for individual loans when ultimate collection is considered questionable by management after
reviewing the current status of loans which are contractually past due and considering the net
realizable value of the collateral for the loan. Management recognizes the greater inherent risks
in connection with commercial and consumer lending. SeeManagements Discussion and Analysis -
Provision for Credit Losses. Management continues to actively monitor the Companys asset quality and to charge-off loans
against the allowance for loan losses when appropriate or to provide specific loss allowances when
necessary. Although management believes it uses the best information available to make
determinations with respect to the allowance for loan losses, future adjustments may be necessary
if economic conditions differ from the economic conditions in the assumptions used in making the
initial determinations. Management believes that the allowance for loan losses was adequate at
December 31, 2004. 40




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##### Table of Contents



The following table sets forth information with respect to activity in the Companys allowance
for loan losses during the periods indicated: Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001Allowance at beginning of period
    
    $
    2,526
    
    
    $
    1,014
    
    
    $
    492
    
    
    $
    Charge-offs:Commercial, financial and agricultural
    
    
    (88
    )
    
    
    (139
    )
    
    
    (21
    )
    
    
    Real estate mortgage
    
    
    
    
    
    
    (16
    )
    
    
    
    
    
    
    Installment and consumer lines
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    Total charge-offs
    
    
    (88
    )
    
    
    (160
    )
    
    
    (21
    )
    
    
    Recoveries:Commercial, financial and agricultural
    
    
    22
    
    
    
    1
    
    
    
    
    
    
    
    Total recoveries
    
    
    22
    
    
    
    1
    
    
    
    
    
    
    
    Provision for loan losses charged to earnings
    
    
    617
    
    
    
    784
    
    
    
    543
    
    
    
    492Acquired in purchase transaction
    
    
    
    
    
    
    887
    
    
    
    
    
    
    
    Allowance at end of period
    
    $
    3,077
    
    
    $
    2,526
    
    
    $
    1,014
    
    
    $
    492Ratio of net charges-offs during the period to
average loans outstanding during the period
    
    
    .03
    %
    
    
    .09
    %
    
    
    .04
    %
    
    
    
    %Allowance for loan losses as a percentage of
nonperforming loans
    
    
    3,273
    %
    
    
    514
    %
    
    
    N/A
    
    
    
    N/AAllowance for loan losses as a percentage of
total gross loans
    
    
    1.26
    %
    
    
    1.25
    %
    
    
    1.25
    %
    
    
    1.25
    %
 41




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##### Table of Contents



The following table presents information regarding the Companys total allowance for loan
losses as well as the allocation of such amounts to the various categories of loans ($ in
thousands): At December 31,2004
    
    
    
    
    
    
    2003
    
    
    
    
    
    
    2002
    
    
    
    
    
    
    2001% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofLoans to
    
    
    
    
    
    
    Loans to
    
    
    
    
    
    
    Loans to
    
    
    
    
    
    
    Loans toTotal
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    TotalAmount
    
    
    Loans
    
    
    Amount
    
    
    Total
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    LoansCommercial, financial and
agricultural
    
    $
    457
    
    
    
    18
    %
    
    $
    428
    
    
    
    21
    %
    
    $
    258
    
    
    
    31
    %
    
    $
    136
    
    
    
    34
    %Real estate mortgage
    
    
    1,212
    
    
    
    54
    
    
    
    1,091
    
    
    
    60
    
    
    
    348
    
    
    
    47
    
    
    
    110
    
    
    
    53Construction and land
development
    
    
    607
    
    
    
    25
    
    
    
    319
    
    
    
    16
    
    
    
    155
    
    
    
    19
    
    
    
    12
    
    
    
    10Installment and consumer lines
    
    
    69
    
    
    
    3
    
    
    
    78
    
    
    
    3
    
    
    
    22
    
    
    
    3
    
    
    
    13
    
    
    
    3Unallocated
    
    
    732
    
    
    
    
    
    
    
    610
    
    
    
    
    
    
    
    231
    
    
    
    
    
    
    
    221
    
    
    
    Total allowance for loan losses
    
    $
    3,077
    
    
    
    100
    %
    
    $
    2,526
    
    
    
    100
    %
    
    $
    1,014
    
    
    
    100
    %
    
    $
    492
    
    
    
    100
    %
 Investment Securities The Companys investment securities portfolio consists of United States Government agency
obligations and mortgage-backed securities. The following table sets forth the carrying values of
the Companys investment portfolio at the dates indicated (in thousands): At December 31,2004
    
    
    2003
    
    
    2002Investment securities:Available-for-sale:Debt securities:U.S. Government agency obligations
    
    $
    3,512
    
    
    $
    493
    
    
    $
    Mortgage-backed securities
    
    
    65,128
    
    
    
    55,762
    
    
    
    29,302Equity securities
    
    
    
    
    
    
    131
    
    
    
    Total
    
    $
    68,640
    
    
    $
    56,386
    
    
    $
    29,302Federal funds sold
    
    $
    63,831
    
    
    $
    39,927
    
    
    $
    15,033Interest-earning demand deposits in other banks
    
    $
    9,857
    
    
    $
    9,694
    
    
    $
    5,092
 42




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##### Table of Contents



The following table sets forth, by maturity distribution, certain information pertaining
to the debt securities portfolio as follows ($ in thousands): After One Year
    
    
    After Five YearsOne Year or Less
    
    
    to Five Years
    
    
    to Ten Years
    
    
    After Ten Years
    
    
    TotalAmortized
    
    
    Average
    
    
    Amortized
    
    
    Average
    
    
    Amortized
    
    
    Average
    
    
    Amortized
    
    
    Average
    
    
    Amortized
    
    
    AverageCost
    
    
    Yield
    
    
    Cost
    
    
    Yield
    
    
    Cost
    
    
    Yield
    
    
    Cost
    
    
    Yield
    
    
    Cost
    
    
    YieldDecember 31, 2004:U.S. Government
agency securities
    
    $
    
    
    
    
    
    %
    
    $
    500
    
    
    
    3.1
    %
    
    $
    3,018
    
    
    
    2.5
    %
    
    $
    
    
    
    
    
    %
    
    $
    3,518
    
    
    
    2.6
    %Mortgage-backed
securities
    
    
    
    
    
    
    
    
    
    
    17,329
    
    
    
    3.6
    
    
    
    21,648
    
    
    
    3.6
    
    
    
    26,573
    
    
    
    3.6
    
    
    
    65,550
    
    
    
    3.6$
    
    
    
    
    
    %
    
    $
    17,829
    
    
    
    3.6
    %
    
    $
    24,666
    
    
    
    3.5
    %
    
    $
    26,573
    
    
    
    3.6
    %
    
    $
    69,068
    
    
    
    3.5
    %December 31, 2003:U.S. Government
agency securities
    
    $
    500
    
    
    
    3.1
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    500
    
    
    
    3.1
    %Mortgage-backed
securities
    
    
    
    
    
    
    
    
    
    
    27,119
    
    
    
    3.3
    
    
    
    19,682
    
    
    
    3.5
    
    
    
    9,416
    
    
    
    3.9
    
    
    
    56,217
    
    
    
    3.9$
    500
    
    
    
    3.1
    %
    
    $
    27,119
    
    
    
    3.3
    %
    
    $
    19,682
    
    
    
    3.5
    %
    
    $
    9,416
    
    
    
    3.9
    %
    
    $
    56,717
    
    
    
    3.9
    %December 31, 2002:U.S. Government
agency securities
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %Mortgage-backed
securities
    
    
    
    
    
    
    
    
    
    
    12,011
    
    
    
    4.2
    
    
    
    10,629
    
    
    
    4.9
    
    
    
    6,041
    
    
    
    5.4
    
    
    
    28,681
    
    
    
    4.7$
    
    
    
    
    
    %
    
    $
    12,011
    
    
    
    4.2
    %
    
    $
    10,629
    
    
    
    4.9
    %
    
    $
    6,041
    
    
    
    5.4
    %
    
    $
    28,681
    
    
    
    4.7
    %
 Statement of Financial Accounting Standards No. 115, which requires companies to classify
investments securities, including mortgage-backed securities as either held-to-maturity,
available-for-sale, or trading securities. Securities classified as held-to-maturity are carried
at amortized cost. Securities classified as available-for-sale are reported at fair value, with
unrealized gains and losses, net of tax effect, reported as a separate component of stockholders
equity. Securities classified as trading securities are recorded at fair value, with unrealized
gains and losses included in earnings. The Company has classified all securities as
available-for-sale. Typically, an increase in interest rates results in a decrease in underlying
market value and a decrease in the level of principal repayments on mortgage-backed securities. As
a result of changes in market interest rates, changes in the market value of available-for-sale
securities resulted in net unrealized losses of $267,000 and $289,000 in stockholders equity at
December 31, 2004 and December 31, 2003, respectively. The Company had a net unrealized gain of
$388,000 at December 31, 2002. These fluctuations in stockholders equity represent the after-tax
impact of changes in interest rates on the value of these investments. Management has determined
that these unrealized losses at December 31, 2004 are not considered other than temporary. 43




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##### Table of Contents



Deposit Activities Deposits are the major source of the Companys funds for lending and other investment
purposes. Deposits are attracted principally from within the Companys primary market area through
the offering of a broad variety of deposit instruments including checking accounts, money-market
accounts, regular savings accounts, term certificate accounts (including jumbo certificates in
denominations of $100,000 or more) and retirement savings plans. Maturity terms, service fees and withdrawal penalties are established by the Company on a
periodic basis. The determination of rates and terms is predicated on funds acquisition and
liquidity requirements, rates paid by competitors, growth goals and federal regulations. FDIC regulations limit the ability of certain insured depository institutions to accept,
renew, or rollover deposits by offering rates of interest which are significantly higher than the
prevailing rates of interest on deposits offered by other insured depository institutions having
the same type of charter in such depository institutions normal market area. Under these
regulations, well capitalized depository institutions may accept, renew, or rollover deposits at
such rates without restriction, adequately capitalized depository institutions may accept, renew
or rollover deposits at such rates with a waiver from the FDIC (subject to certain restrictions on
payments of rates), and undercapitalized depository institutions may not accept, renew or
rollover deposits at such rates. The regulations contemplate that the definitions of well
capitalized, adequately capitalized and undercapitalized will be the same as the definitions
adopted by the agencies to implement the prompt corrective action provisions of applicable law.
SeeBusiness  Supervision and Regulation  Capital Requirements. As of December 31, 2004, the
Bank met the definition of a well capitalized depository institution. 44




---



##### Table of Contents



The following table shows the distribution of, and certain other information relating to, the
Companys deposit accounts by type ($ in thousands): At December 31,2004
    
    
    2003
    
    
    2002% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofAmount
    
    
    Deposits
    
    
    Amount
    
    
    Deposits
    
    
    Amount
    
    
    DepositsNoninterest-bearing demand deposits
    
    $
    52,472
    
    
    
    14
    %
    
    $
    42,348
    
    
    
    15
    %
    
    $
    16,130
    
    
    
    14
    %Savings and NOW deposits
    
    
    35,620
    
    
    
    10
    
    
    
    30,033
    
    
    
    11
    
    
    
    6,238
    
    
    
    5Money-market deposits
    
    
    131,131
    
    
    
    36
    
    
    
    89,970
    
    
    
    31
    
    
    
    45,860
    
    
    
    39Subtotal
    
    
    219,223
    
    
    
    60
    
    
    
    162,351
    
    
    
    57
    
    
    
    68,228
    
    
    
    58Time deposits:1.00% - 1.99%
    
    
    5,289
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.00% - 2.99%
    
    
    70,069
    
    
    
    19
    
    
    
    2,301
    
    
    
    1
    
    
    
    4,155
    
    
    
    33.00% - 3.99%
    
    
    57,002
    
    
    
    16
    
    
    
    87,250
    
    
    
    30
    
    
    
    2,555
    
    
    
    24.00% - 4.99%
    
    
    14,059
    
    
    
    4
    
    
    
    33,233
    
    
    
    11
    
    
    
    35,269
    
    
    
    305.00% - 5.99%
    
    
    
    
    
    
    
    
    
    
    1,437
    
    
    
    1
    
    
    
    7,907
    
    
    
    7Total time deposits (1)
    
    
    146,419
    
    
    
    40
    
    
    
    124,221
    
    
    
    43
    
    
    
    49,886
    
    
    
    42Total deposits
    
    $
    365,642
    
    
    
    100
    %
    
    $
    286,572
    
    
    
    100
    %
    
    $
    118,114
    
    
    
    100
    %
   (1) Including individual retirement accounts (IRAs) of $8,695, $6,998 and $1,302
at December 31, 2004, 2003 and 2002, respectively. 45




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##### Table of Contents



The following tables show the average amount outstanding and the average rate paid on
each of the following deposit account categories during the periods indicated ($ in
thousands) : Year Ended December 31,2004
    
    
    2003
    
    
    2002Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    AverageBalance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    RateMoney-market deposits
    
    $
    110,302
    
    
    
    1.84
    %
    
    $
    96,884
    
    
    
    1.86
    %
    
    $
    37,618
    
    
    
    2.59
    %Savings and NOW deposits
    
    
    41,532
    
    
    
    1.00
    
    
    
    20,813
    
    
    
    1.02
    
    
    
    4,144
    
    
    
    .59Time deposits
    
    
    125,161
    
    
    
    2.75
    
    
    
    114,818
    
    
    
    3.14
    
    
    
    34,640
    
    
    
    3.74Total interest-bearing deposits
    
    $
    276,995
    
    
    
    2.13
    %
    
    $
    232,515
    
    
    
    2.40
    %
    
    $
    76,402
    
    
    
    3.02
    %
 The Company does not have a concentration of deposits from any one source, the loss of
which would have a material adverse effect on the Company. Management believes that substantially
all of the Companys depositors are residents in its primary market area. The Company currently
does not accept brokered deposits. As shown in the tables below, a significant amount of the
Companys time deposits will mature during the year ending December 31, 2005. The high volume of
maturities during this period is primarily due to customer demand for time deposits having original
maturities of 12 months or less. Based upon current and anticipated levels of interest rates and
past practice, the Company management anticipates that substantially all of the Companys time
deposits maturing during this time period will be renewed or replaced by certificates of deposit
issued to other customers at competitive market rates, which may be higher or lower than the rates
currently being paid. Consequently, the Company management does not believe that the maturity of
the Companys time deposits during the year ending December 31, 2005, will have a material adverse
effect on the Companys liquidity. However, if the Company is required to pay substantially higher
rates to obtain the renewal of these or other time deposits or alternative sources of funds, the
higher net interest expense could have a material adverse effect on the Companys net earnings. The following tables present by various interest rate categories the amounts of time deposits
at December 31, 2004 which mature during the period indicated (in thousands): Due
    
    
    Due
    
    
    DueUnder Three
    
    
    3 Months to
    
    
    1 Year toMonths
    
    
    12 Months
    
    
    5 Years
    
    
    Total1.00% - 1.99%
    
    $
    
    
    
    $
    5,289
    
    
    $
    
    
    
    $
    5,2892.00% - 2.99%
    
    
    17,031
    
    
    
    44,063
    
    
    
    8,975
    
    
    
    70,0693.00% - 3.99%
    
    
    
    
    
    
    
    
    
    
    57,002
    
    
    
    57,0024.00% - 4.99%
    
    
    
    
    
    
    
    
    
    
    14,059
    
    
    
    14,059Total time deposits
    
    $
    17,031
    
    
    $
    49,352
    
    
    $
    80,036
    
    
    $
    146,419
 46




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##### Table of Contents



Jumbo time deposits ($100,000 and over) mature as follows (in thousands): At December 31,2004
    
    
    2003
    
    
    2002Due in three months or less
    
    $
    9,310
    
    
    $
    11,023
    
    
    $
    4,674Due from three months to one year
    
    
    27,432
    
    
    
    47,229
    
    
    
    11,653Due from twelve months to five years
    
    
    56,992
    
    
    
    18,347
    
    
    
    22,101$
    93,734
    
    
    $
    76,599
    
    
    $
    38,428
 Borrowings The Company has sold securities to certain of its customers under agreements to repurchase.
These borrowings are collateralized by certain securities owned by the Company. The following
summarizes these borrowings ($ in thousands): At or For the Year EndedDecember 31,2004
    
    
    2003
    
    
    2002Balance at year-end
    
    $
    2,009
    
    
    $
    5,174
    
    
    $
    837Average balance during the year
    
    $
    3,019
    
    
    $
    1,489
    
    
    $
    1,459Interest expense during the year
    
    $
    25
    
    
    $
    7
    
    
    $
    16Average interest rate during the year
    
    
    .83
    %
    
    
    .45
    %
    
    
    1.07
    %
 The Company also has unsecured federal funds purchased lines of credit agreements with
correspondent banks under which the Company could borrow up to $14.0 million. These lines are used
for liquidity needs and generally are repaid within seven to fourteen days. At December 31, 2004,
the Company had $4.0 million outstanding at a rate of 2.63%. The Company did not have any
borrowings outstanding under these agreements at December 31, 2003 or 2002. 47




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##### Table of Contents



Selected Quarterly Results 2004
    
    
    2003Fourth
    
    
    Third
    
    
    Second
    
    
    First
    
    
    Fourth
    
    
    Third
    
    
    Second
    
    
    FirstQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter(In thousands, except per share amounts)Interest income
    
    $
    4,669
    
    
    $
    4,264
    
    
    $
    3,898
    
    
    $
    3,824
    
    
    $
    3,693
    
    
    $
    3,382
    
    
    $
    3,376
    
    
    $
    3,102Interest expense
    
    
    1,675
    
    
    
    1,518
    
    
    
    1,401
    
    
    
    1,319
    
    
    
    1,339
    
    
    
    1,410
    
    
    
    1,499
    
    
    
    1,341Net interest income
    
    
    2,994
    
    
    
    2,746
    
    
    
    2,497
    
    
    
    2,505
    
    
    
    2,354
    
    
    
    1,972
    
    
    
    1,877
    
    
    
    1,761Provision for loan
losses
    
    
    125
    
    
    
    106
    
    
    
    226
    
    
    
    160
    
    
    
    372
    
    
    
    190
    
    
    
    102
    
    
    
    120Noninterest income
    
    
    159
    
    
    
    139
    
    
    
    122
    
    
    
    127
    
    
    
    115
    
    
    
    128
    
    
    
    135
    
    
    
    148Noninterest expense
    
    
    2,065
    
    
    
    1,829
    
    
    
    1,649
    
    
    
    1,803
    
    
    
    1,643
    
    
    
    1,516
    
    
    
    1,521
    
    
    
    1,577Earnings before
income taxes
    
    
    963
    
    
    
    950
    
    
    
    744
    
    
    
    669
    
    
    
    454
    
    
    
    394
    
    
    
    389
    
    
    
    212Net earnings
    
    
    591
    
    
    
    584
    
    
    
    467
    
    
    
    399
    
    
    
    267
    
    
    
    258
    
    
    
    237
    
    
    
    119Basic earnings per
common share
    
    
    .18
    
    
    
    .18
    
    
    
    .15
    
    
    
    .12
    
    
    
    .08
    
    
    
    .08
    
    
    
    .08
    
    
    
    .04Diluted earning per
common share
    
    
    .17
    
    
    
    .18
    
    
    
    .14
    
    
    
    .12
    
    
    
    .08
    
    
    
    .08
    
    
    
    .07
    
    
    
    .04
 48




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##### Table of Contents



Impact of Inflation and Changing Prices The financial statements and related financial data concerning the Company presented in this
document have been prepared in accordance with accounting principles generally accepted in the
United States of America, which require the measurement of financial position and operating results
in terms of historical dollars without considering changes in the relative purchasing power of
money over time due to inflation. The primary impact of inflation on the operations of the Company
is reflected in increased operating costs. Unlike most industrial companies, virtually all of the
assets and liabilities of a financial institution are monetary in nature. As a result, changes in
interest rates have a more significant impact on the performance of a financial institution than do
the effects of changes in the general rate of inflation and changes in prices. Interest rates do
not necessarily move in the same direction or in the same magnitude as the prices of goods and
services. 
  Item 7.
    Financial Statements The financial statements of the Company as of and for the years ended December 31, 2004 and
2003 are set forth in this Form 10-KSB as Exhibit 13.1. 
  Item 8.
    Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure Not applicable. 
 Item 8A. Controls and
Procedures  (a)
    Evaluation of disclosure controls and procedures. The Company
maintains controls and procedures designed to ensure that information required to be
disclosed in the reports that the Company files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange Commission.
Based upon their evaluation of those controls and procedures performed within 90 days
of the filing date of this report, the Chief Executive and Chief Financial officers of
the Company concluded that the Companys disclosure controls and procedures were
adequate.  (b)
    Changes in internal controls. The Company made no significant changes
in its internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation of those controls by the Chief
Executive and Chief Financial officers. 
 Item 8B. Other Information Not Applicable 49




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##### Table of Contents



PART III 
  Item 9.
    Directors, Executive Officers, Promoters and Control Persons; Compliance with Section
16(a) of the Exchange Act The information contained under the sections captioned Directors and Executive Officers
under Election of Directors in the registrants definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on March 31, 2005, to be filed with the SEC pursuant to Regulation 14A
within 120 days of the registrants fiscal year end (the Proxy Statement), as incorporated herein
by reference. 
  Item 10.
    Executive Compensation The information contained in the section captioned Information About the Board of Directors
and Its Committees, and Executive Compensation and Benefits under Election of Directors in the
Proxy Statement, is incorporated herein by reference. 
  Item 11.
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters For information regarding the ownership of Common Stock by the Companys directors and
executive officers and related stockholders matters, seeItem 9 above. 
  Item 12.
    Certain Relationships and Related Transactions The information contained in the section captioned Certain Transactions under Election of
Directors in the Proxy Statement, is incorporated herein by reference. 50




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##### Table of Contents



Item 13.
    
    Exhibits3.1
    
    
    -
    
    Articles of Incorporation of United Community Bankshares of Florida, Inc. **3.2
    
    
    -
    
    Bylaws of United Community Bankshares of Florida, Inc. ****4.1
    
    
    -
    
    Specimen Stock Certificate of United Community Bankshares of Florida, Inc. **10.1
    
    
    -
    
    Employment Agreement, dated as of March 15, 2004, between United Heritage Bank and David G. Powers
***10.2
    
    
    -
    
    United Community Bankshares of Florida, Inc. Directors Stock Option Plan *10.3
    
    
    -
    
    United Community Bankshares of Florida, Inc.s Officers and Employees Stock Option Plan *10.4
    
    
    -
    
    Employment Agreement, dated as of March 15, 2004, between United Heritage Bank and Shirley L.
Tyler ***13.1
    
    
    -
    
    Financial Statements of United Community Bankshares of Florida, Inc. and Subsidiary14.1
    
    
    -
    
    Code of Ethics *21.1
    
    
    -
    
    List of Subsidiaries of United Community Bankshares of Florida, Inc.23.1
    
    
    -
    
    Consent of Osburn, Henning and Company31.1
    
    
    -
    
    Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange
Act31.2
    
    
    -
    
    Certification of Chief Financial Officer required by Rule 13a-14(a)/15d-14(a) under the Exchange
Act32.1
    
    
    -
    
    Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    -
    
    Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
 51




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##### Table of Contents



*
    
    Incorporated by reference to the corresponding exhibit number in the Companys Form 10-KSB
filed for the year ended December 31, 2003.**
    
    Incorporated by reference to the corresponding exhibit number in the Companys Form 10-QSB
filed for the quarter ended March 31, 2003.***
    
    Incorporated by reference to the corresponding exhibit number in the Companys Form 10-QSB
filed for the quarter ended March 31, 2004.****
    
    Incorporated by reference to the corresponding exhibit number in the Companys Form 10-QSB
filed for the quarter ended June 30, 2004. 
  Item 14.
    Principal Accountant Fees and Services The information contained in the section captioned Independent Public Accountants in the
Proxy Statement is incorporated herein by reference. 52




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has caused this report to be duly signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Orlando, State of Florida, on the 1st day of March,
2005. UNITED COMMUNITY
BANKSHARES OF FLORIDA, INC./s/ David G. PowersPresident and Chief Executive Officer/s/ Shirley L. TylerExecutive Vice President and Treasurer
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##### Table of Contents



Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on
March 1, 2005. Signature
    
    
    
    Title/s/
    
    James L. Hewitt
    
    DirectorJames L. Hewitt/s/
    
    David G. Powers
    
    DirectorDavid G. Powers/s/
    
    J. Michael Hattaway
    
    DirectorJ. Michael Hattaway/s/
    
    Vincent S. Hughes
    
    DirectorVincent S. Hughes
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##### Table of Contents



United Community Bankshares of Florida, Inc.
Form 10-KSB
For Fiscal Year Ending December 31, 2004 
 EXHIBIT INDEX ExhibitNo.
    
    Exhibit13.1
    
    Financial Statements of United Community Bankshares of Florida, Inc. and Subsidiary21.1
    
    Subsidiaries of the Registrant23.1
    
    Consent of Osburn, Henning and Company31.1
    
    Certification of President and Chief Executive Officer under §302 of the Sarbanes-Oxley Act
of 200231.2
    
    Certification of Executive Vice President and Treasurer under §302 of the Sarbanes-Oxley Act
of 200232.1
    
    Certification of President and Chief Executive Officer under §906 of the Sarbanes-Oxley Act
of 200232.2
    
    Certification of Executive Vice President and Treasurer under §906 of the Sarbanes-Oxley Act
of 2002
 55