##### Table of Contents



UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




---

FORM 10-K

|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|   |  | For the Fiscal Year Ended December 31,
    2005                                             
|  
|  
|  
|  
|OR
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number

UNITED HERITAGE BANKSHARES OF FLORIDA,
INC.

(Name of Small Business Issuer in its
charter)


|                                                                                                  |  |                                         
|------------------------------------------------------------------------------------------------- |  | ----------------------------------------
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Florida                                                                                           |  | 04-3691059                              
|(State or other jurisdiction
    of incorporation or organization)                                |  | (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) 712-6151


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

(Title of Class)


Indicate by check mark if the Registrant is a
well-known seasoned issuer, as defined in Rule 405 of the
Securities
Act:    YES o        NO þ

Indicate by check mark if the Registrant is not
required to file reports pursuant to Section 13 or 15(d) of
the Exchange
Act:    o

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

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of issuers knowledge, in definitive
proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this
Form 10-K:    þ

Indicate by check mark whether the Registrant is
a large accelerated filer, an accelerated filer, or a
non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act):    Large Accelerated
Filer o        Accelerated
Filer o        Non-accelerated
Filer þ

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

The aggregate market value of the Common Stock of
the issuer held by non-affiliates of the issuer
(3,374,306 shares) on June 30, 2005, was approximately
$47,240,284. 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 per share amount
at which shares were sold during a private placement offering in
March 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 28, 2006, there were issued
and outstanding 4,871,908 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 April 5, 2006 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 by reference into Part II
and Part III of this Annual Report on Form 10-K.



---



##### 










TABLE OF CONTENTS

|                                            |  |                                                                                                                 |    |  |    | 
|------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------- | -- |  | -- | 
|                                            |  |                                                                                                                
|                                            |  | Page                                                                                                            |   
|                                           
|                                           
|                                           
|                                           
|                                           
|                                           
|PART I                                      |  |                                                                                                                 | 3  | 
|Item 1.                                     |  | Description of Business                                                                                         |    |  | 3  | 
|                                            |  | General                                                                                                         |    |  | 3  | 
|                                            |  | Special Note Regarding
    Forward-Looking Statements                                                           |    |  | 3  | 
|                                            |  | Critical Accounting
    Policies                                                                                |    |  | 4  | 
|                                            |  | Risk Factors
    (Item 1A)                                                                                      |    |  | 4  | 
|                                            |  | Lending Activities                                                                                              |    |  | 6  | 
|                                            |  | Deposit Activities                                                                                              |    |  | 7  | 
|                                            |  | Investments                                                                                                     |    |  | 7  | 
|                                            |  | Correspondent Banking                                                                                           |    |  | 8  | 
|                                            |  | Data Processing                                                                                                 |    |  | 8  | 
|                                            |  | Effect of Governmental
    Policies                                                                             |    |  | 8  | 
|                                            |  | Interest and Usury                                                                                              |    |  | 8  | 
|                                            |  | Supervision and
    Regulation                                                                                  |    |  | 8  | 
|                                            |  | Competition                                                                                                     |    |  | 12 | 
|                                            |  | Employees                                                                                                       |    |  | 13 | 
|Item 1B.                                    |  | Unresolved Staff Comments                                                                                       |    |  | 13 | 
|Item 2.                                     |  | Description of Properties                                                                                       |    |  | 13 | 
|Item 3.                                     |  | Legal Proceedings                                                                                               |    |  | 13 | 
|Item 4.                                     |  | Submission of Matters to a
    Vote of Security Holders                                                         |    |  | 13 | 
|                                           
|                                           
|                                           
|                                           
|PART II                                     |  |                                                                                                                 | 13 | 
|Item 5.                                     |  | Market for Common Equity,
    Related Stockholder Matters and Purchases of Equity
    Securities                |    |  | 13 | 
|Item 6.                                     |  | Selected Financial Data                                                                                         |    |  | 15 | 
|Item 7.                                     |  | Managements Discussion
    and Analysis                                                                        |    |  | 16 | 
|Item 7A.                                    |  | Quantitative and Qualitative
    Disclosures About Market Risk                                                  |    |  | 38 | 
|Item 8.                                     |  | Financial Statements                                                                                            |    |  | 38 | 
|Item 9.                                     |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure                        |    |  | 38 | 
|Item 9A.                                    |  | Controls and Procedures                                                                                         |    |  | 38 | 
|Item 9B.                                    |  | Other Information                                                                                               |    |  | 39 | 
|                                           
|                                           
|                                           
|                                           
|PART III                                    |  |                                                                                                                 | 39 | 
|Item 10.                                    |  | Directors, Executive
    Officers, Promoters and Control Persons; Compliance with 16(a)
    of the Exchange Act |    |  | 39 | 
|Item 11.                                    |  | Executive Compensation                                                                                          |    |  | 39 | 
|Item 12.                                    |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters          |    |  | 39 | 
|Item 13.                                    |  | Certain Relationships and
    Related Transactions                                                              |    |  | 39 | 
|Item 14.                                    |  | Principal Accountant Fees
    and Services                                                                      |    |  | 39 | 
|                                           
|                                           
|                                           
|                                           
|PART IV                                     |  |                                                                                                                 |    | 
|Item 15.                                    |  | Exhibits                                                                                                        |    |  | 39 | 
|SIGNATURES                                  |  |                                                                                                                 | 41 | 
|EXHIBIT INDEX                               |  |                                                                                                                 | 43 | 
|Ex-13.1 Financial Statements               
|Ex-21.1 Subsidiaries of the Registrant     
|Ex-23.1 Osburn, Henning and Company Consent
|Ex-31.1 Section 302 CEO Certification      
|Ex-31.2 Section 302 CFO Certification      
|Ex-32.1 Section 906 CEO Certification      
|Ex-32.2 Section 906 CFO Certification      



2



---



##### Table of Contents






PART I




Item 1.     Description of
Business




General

United Heritage 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 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

3



---



##### Table of Contents



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.

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.




Risk Factors

Our future depends on the successful growth of
the Bank

Our primary business activity for the foreseeable
future will be to continue to act as the holding company of the
Bank. Therefore, our future profitability will continue to
depend on the success and growth of the Bank. Our growth will
depend in large part on our ability to leverage our existing
infrastructure. The inability of the Bank to expand its business
without substantially increasing the number of branches, or the
inability of Bank to grow its commercial banking business, may
prevent us from realizing our growth objectives.

A significant amount of our business is
concentrated in real estate lending, and most of this lending
involves Florida real estate

In addition to the financial strength and cash
flow characteristics of the borrower in each case, the Bank
often secures its loans with real estate collateral. The real
estate collateral in each case provides an alternate source of
repayment in the event of default by the borrower and may
deteriorate in value during the time the credit is extended. If
we are required to liquidate the collateral securing a loan
during a period of reduced real estate values to satisfy the
debt, our earnings and capital could be adversely affected.

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

An inadequate allowance for loan losses would
reduce our earnings

The risk of credit losses on loans varies with,
among other things, general economic conditions, the type of
loan being made, the creditworthiness of the borrower over the
term of the loan and, in the case of a collateralized loan, the
value and marketability of the collateral for the loan.
Management maintains an allowance for loan losses based upon,
among other things, historical experience, an evaluation of
economic conditions and regular reviews of delinquencies and
loan portfolio quality. Based upon

4



---



##### Table of Contents



such factors, management makes various
assumptions and judgments about the ultimate collectability of
the loan portfolio and provides an allowance for loan losses
based upon a percentage of the outstanding balances and for
specific loans when their ultimate collectability is considered
questionable. If managements assumptions and judgments
prove to be incorrect and the allowance for loan losses is
inadequate to absorb future losses, or if the bank regulatory
authorities require the Bank to increase the allowance for loan
losses as a part of their examination process, the Banks
earnings and capital could be significantly and adversely
affected.


The Bank manages its non-accruing loans in an
effort to minimize credit losses. Although management believes
that its allowance for loan losses is adequate, there can be no
assurance that the allowance will prove sufficient to cover
future loan losses. Further, although management 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 substantially from the assumptions
used or adverse developments arise with respect to the
Banks non-performing or performing loans. Material
additions to the Banks allowance for loan losses would
result in a decrease in the Banks net income and capital,
and could have a material adverse effect on us.

Changes in interest rates affect our
profitability and assets

Changes in prevailing interest rates may hurt our
business. We derive our income mainly from the difference or
spread between the interest earned on loans,
securities and other interest-earning assets, and interest paid
on deposits, borrowings and other interest-bearing liabilities.
In general, the larger the spread, the more we earn. When market
rates of interest change, the interest we receive on our assets
and the interest we pay on our liabilities will fluctuate. This
can cause decreases in our spread and can adversely affect our
income. Changes in market interest rates could reduce the value
of our financial assets. Fixed-rate investments, mortgage-backed
and related securities and mortgage loans generally decrease in
value as interest rates rise. In addition, interest rates affect
how much money we can lend. For example, when interest rates
rise, the cost of borrowing increases and the loan originations
tend to decrease. If we are unsuccessful in managing the effects
of changes in interest rates, our financial condition and
results of operations could suffer.

Regional economic factors may have an adverse
impact on our business

Substantially all of our business is with
customers in our market areas of Orange and Seminole Counties,
Florida. Most of our customers are individuals and medium-sized
businesses which are dependent upon the regional economy.
Adverse changes in economic and business conditions in our
markets could adversely affect our borrowers, their ability to
repay their loans and to borrow additional funds or buy
financial services and products from us, and consequently our
financial condition and performance.

The market value of our investments could
decline

Our investment securities portfolio as of
December 31, 2005 has been designated as available-for-sale
pursuant to Statement of Financial Accounting Standards
No. 115 (SFAS 115) relating to accounting
for investments. SFAS 115 requires that unrealized gains
and losses in the estimated value of the available-for-sale
portfolio be marked to market and reflected as a
separate item in stockholders equity (net of tax) as
accumulated other comprehensive income.

Stockholders equity will continue to
reflect the unrealized gains and losses (net of tax) of these
investments. There can be no assurance that the market value of
our investment portfolio will not decline, causing a
corresponding decline in stockholders equity.

Management believes that several factors will
affect the market values of our investment portfolio. These
include, but are not limited to, changes in interest rates or
expectations of changes, the degree of volatility in the
securities markets, inflation rates or expectations of inflation
and the slope of the interest rate yield curve (the yield curve
refers to the differences between shorter-term and longer-term
interest rates; a positively sloped yield curve means
shorter-term rates are lower than longer-term rates). These and
other factors may impact specific categories of the portfolio
differently, and we cannot predict the effect these factors may
have on any specific category.

We face strong competition from other banks
and financial institutions which can hurt our business

We conduct our banking operations in a number of
competitive local markets. In those markets, we compete against
commercial banks, savings banks, savings and loan associations,
credit unions, mortgage banks, brokerage firms, investment
advisory firms,

5



---



##### Table of Contents



insurance companies and other financial
institutions. Many of these entities are larger organizations
with significantly greater financial, management and other
resources than we have, and they offer the same or similar
banking or financial services that we offer in our markets.
Moreover, new and existing competitors may expand their business
in or into our markets. Increased competition in our markets may
result in a reduction in loans, deposits and other sources of
our revenues. Ultimately, we may not be able to compete
successfully against current and future competitors.


We do not intend to pay dividends

We do not anticipate paying any cash dividends on
our common stock for the foreseeable future. No assurance can be
given that our future earnings will be sufficient to permit the
legal payment of dividends to shareholders at any time in the
future. We are subject to significant regulatory restrictions on
the payment of cash dividends. Even if we may legally declare
dividends, the amount and timing of such dividends will be at
the discretion of the our board of directors. The board may in
its sole discretion decide not to declare dividends. In light of
the regulatory restrictions and the need for the Bank to retain
and build capital for growth and expansion, we intend to
reinvest earnings for the foreseeable future. You should not buy
our common stock if you require dividend income.

Government regulations and policies impose
limitations and may result in higher operating costs and
competitive disadvantages

We are subject to extensive federal government
supervision and regulation that is intended primarily to protect
depositors and the FDICs Bank Insurance Fund, rather than
our shareholders. Existing banking laws subject us to
substantial limitations with respect to loans, the purchase of
securities, the payment of dividends and many other aspects of
our banking business. Some of the banking laws may increase the
cost of doing business or otherwise adversely affect us and
create competitive advantages for non-bank competitors. There
can be no assurance that future legislation or government policy
will not adversely affect the banking industry or our
operations. Federal economic and monetary policy may affect our
ability to attract deposits, make loans and achieve satisfactory
interest spreads.

We cannot predict how changes in technology
will impact our business

We use various technologies in our business,
including telecommunication, data processing, computers,
automation, internet-based banking, and debit cards. Technology
changes rapidly. Our ability to compete successfully with other
banks and non-banks may depend on whether we can exploit
technological changes. We may not be able to exploit
technological changes, and any investment we do make may not
make us more profitable.

We are dependent upon the services of our
management team

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




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.

6



---



##### Table of Contents



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 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, tax-exempt municipal bonds 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

7



---



##### Table of Contents



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.





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 several banks that
specialize in these services. 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.

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

8



---



##### Table of Contents



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
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 financial
affiliations through a holding company structure or a financial
subsidiary. The 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

9



---



##### Table of Contents



performed by banks. In addition, the act amends
the securities laws to include banks within the general
definition of dealer. Regarding 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 Commission (the SEC) has promulgated
certain regulations pursuant to the Sarbanes Act and may propose
additional 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. Continued 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 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 financial
institutions 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                               
| 
| | 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

10



---



##### Table of Contents



that is impermissible for a national bank,
including activities relating to insurance and equity
investments. The Act also recodified the law restricting
extensions of credit to insiders under the Federal Reserve Act.


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, 2005 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 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.

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, 2005, 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

11



---



##### Table of Contents



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.

Bank Secrecy Act/ USA Patriot
Act.Under the Bank Secrecy Act,
financial institutions are obligated to file Suspicious Activity
Reports on suspicious activities involving the institution,
including certain attempted or actual violations of law as well
as certain transactions that do not appear to have a lawful
purpose or are not the sort of transaction in which the
particular customer would normally be expected to engage. The
Bank Secrecy Act was amended by the USA Patriot Act of 2001,
expanding the important role the government expects banks to
play in detecting and reporting suspicious activity. The USA
Patriot Act broadened the application of the anti-money
laundering regulations to apply to additional types of financial
institutions, such as broker-dealers, and strengthened the
ability of the U.S. Government to detect and prosecute
international money laundering and the financing of terrorism.
Failure of a financial institution to comply with the Bank
Secrecy Act, as amended by the USA Patriot Act, could have
serious legal and reputational consequences for the institution.
The Bank has adopted policies, procedures and controls to
address compliance with these regulations and will continue to
revise and update its policies, procedures and controls to
reflect changes required by the USA Patriot Act and all
applicable implementing regulations.

Interstate Banking.The Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1996, provides for nationwide interstate banking and
branching. Under the law, interstate acquisitions of banks or
bank holding companies in any state by bank holding companies in
any other state is permissible. 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

12



---



##### Table of Contents



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, 2005, the Company had
eighty-three full-time employees (including executive officers)
and seven part-time employees. The employees are not represented
by a collective bargaining unit. The Company considers relations
with employees to be good.




Item 1B.     Unresolved Staff
Comments

Not applicable.




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. The administrative offices of the
Company and the Bank are located 640 East State Road 434,
Longwood, Florida 32750. 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 Lake Road, Winter Springs, Florida
32708; 129 East Gore Street, Orlando, Florida 32750 and 1002
South Dillard Street, Winter Garden, Florida 32787. The Company
and the Bank lease their banking offices.




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, 2005.




PART II




Item 5.     Market for Common
Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities

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

13



---



##### Table of Contents



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 2005 and 2004:


|            |  |      |    |     |      |   |    |        |  |  |       |     |  |     |    |  |        |   |    |  |  |  |        | 
|----------- |  | ---- | -- | --- | ---- | - | -- | ------ |  |  | ----- | --- |  | --- | -- |  | ------ | - | -- |  |  |  | ------ | 
|            |  |      |    |    
|            |  | 2005 |    |     | 2004 |  
|            |  |      |    |     |      |  
|            |  | High |    |     | Low  |   |    | Shares |  |  | High  |     |  | Low |    |  | Shares |  
|           
|           
|1st Quarter |  | $    |   |     |      | $ |   |        |  |  |      |     |  | $   | 13 |  |        | $ | 12 |  |  |  | 10,098 | 
|2nd Quarter |  | $    | 10 | (1) |      | $ | 10 | (1)    |  |  | 3,500 | (1) |  | $   | 13 |  |        | $ | 12 |  |  |  | 22,557 | 
|3rd Quarter |  | $    | 15 |     |      | $ | 15 |        |  |  | 100   |     |  | $   | 13 |  |        | $ | 10 |  |  |  | 9,410  | 
|4th Quarter |  | $    |   |     |      | $ |   |        |  |  |      |     |  | $   | 13 |  |        | $ | 13 |  |  |  | 767    | 



---



|    |                                              
|--- | ---------------------------------------------
|(1) | This trade was not an arm-length transaction.

The Company had approximately
889 shareholders of record as of December 31, 2005.

Private Placement Offering

On March 2, 2005, the Company sold
1,537,222 shares of its common stock in a private placement
transaction at $14.00 per share. The Company raised
$21.5 million after deducting related offering costs.

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 from retained 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.

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.

The Company did not repurchase any shares of its
common stock during 2005.

With respect to information regarding the
Companys securities authorized for issuance under equity
incentive plans, the information contained in the section
entitled Equity Compensation Plan Information in the
Companys Definitive Proxy Statement for 2006 Annual
Meeting of Shareholders is incorporated herein by reference.

14



---



##### Table of Contents






Item 6.     Selected Financial
Data

|                                                                                   |                             |                                         |          |       |      |         |         |           |  |           |         |                 |  |      |         |       |   |        |        |      |  
|---------------------------------------------------------------------------------- | --------------------------- | --------------------------------------- | -------- | ----- | ---- | ------- | ------- | --------- |  | --------- | ------- | --------------- |  | ---- | ------- | ----- | - | ------ | ------ | ---- | -
|                                                                                   |                             |                                        
|                                                                                   |                             | At or For the Year Ended December 31,   |         
|                                                                                   |                             |                                         |         
|                                                                                   |                             | 2005                                    |          |       | 2004 |         |         | 2003      |  |           | 2002    |                 |  | 2001 |        
|                                                                                  
|                                                                                  
|                                                                                   |                             |                                        
|                                                                                   |                             | ($ in thousands, except per share data) |         
|Interest income                                                                    |                             | $                                       | 29,282   |       |      |         | 16,655  |           |  |           | 13,553  |                 |  |      | 5,762   |       |   |        | 2,556  |     
|Interest expense                                                                   |                             | $                                       | 12,206   |       |      |         | 5,913   |           |  |           | 5,589   |                 |  |      | 2,321   |       |   |        | 817    |     
|Net interest income before provision for loan
    losses                           |                             | $                                       | 17,076   |       |      |         | 10,742  |           |  |           | 7,964   |                 |  |      | 3,441   |       |   |        | 1,739  |     
|Provision for loan losses                                                          |                             | $                                       | 1,540    |       |      |         | 617     |           |  |           | 784     |                 |  |      | 542     |       |   |        | 492    |     
|Net interest income after provision                                                |                             | $                                       | 15,536   |       |      |         | 10,125  |           |  |           | 7,180   |                 |  |      | 2,899   |       |   |        | 1,247  |     
|Noninterest income                                                                 |                             | $                                       | 801      |       |      |         | 547     |           |  |           | 526     |                 |  |      | 270     |       |   |        | 97     |     
|Noninterest expenses                                                               |                             | $                                       | 11,073   |       |      |         | 7,346   |           |  |           | 6,257   |                 |  |      | 3,301   |       |   |        | 2,407  |     
|Income (loss) before income taxes                                                  |                             | $                                       | 5,264    |       |      |         | 3,326   |           |  |           | 1,449   |                 |  |      | (131    | )     |   |        | (1,063 | )   
|Income tax (benefit)                                                               |                             | $                                       | 1,929    |       |      |         | 1,285   |           |  |           | 568     |                 |  |      | 2       |       |   |        | (460   | )   
|Net income (loss)                                                                  |                             | $                                       | 3,335    |       |      |         | 2,041   |           |  |           | 881     |                 |  |      | (133    | )     |   |        | (603   | )   
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Per share data:                                                                    |                             |                                         |          |       |      |         |         |           |  |           |         |                 |  |      |         |       |   |        |        |     
|                                                                                   | Basic earnings per share    |                                         | $        | .74   |      |         |         | .63       |  |           |         | .28             |  |      |         | (0.07 | ) |        |        | (.30 | )
|                                                                                   | Diluted earnings per share  |                                         | $        | .72   |      |         |         | .61       |  |           |         | .27             |  |      |         | (0.07 | ) |        |        | (.30 | )
|                                                                                   | Cash dividends declared     |                                         | $        |      |      |         |         |          |  |           |         |                |  |      |         |      |   |        |        |     |  
|                                                                                   | Book value at end of period |                                         | $        | 11.86 |      |         |         | 10.35     |  |           |         | 9.73            |  |      |         | 9.73  |   |        |        | 9.55 |  
|Common shares outstanding at end of period                                         |                             |                                         | 4,871,90 |       |      | 83,263, |         | 406 3,256 |  | ,888 2,00 |         | 0,000 2,000,000
|Weighted average common shares outstanding
    (basic) during period               |                             |                                         | 4,512,37 |       |      | 23,258, |         | 687 3,170 |  | ,513 2,00 |         | 0,000 2,000,000
|Weighted average common shares outstanding
    (diluted) during period             |                             |                                         | 4,626,29 |       |      | 73,359, |         | 724 3,231 |  | ,971 2,00 |         | 0,000 2,000,000
|Total assets at end of period                                                      |                             | $                                       | 707,894  |       |      |         | 406,467 |           |  |           | 324,324 |                 |  |      | 138,645 |       |   |        | 79,127 |     
|Cash and cash equivalents                                                          |                             | $                                       | 147,723  |       |      |         | 85,971  |           |  |           | 60,629  |                 |  |      | 24,565  |       |   |        | 14,388 |     
|Securities                                                                         |                             | $                                       | 185,169  |       |      |         | 68,640  |           |  |           | 56,386  |                 |  |      | 29,302  |       |   |        | 23,712 |     
|Loans, net                                                                         |                             | $                                       | 360,425  |       |      |         | 241,214 |           |  |           | 198,480 |                 |  |      | 80,162  |       |   |        | 38,830 |     
|Deposits                                                                           |                             | $                                       | 616,536  |       |      |         | 365,642 |           |  |           | 286,572 |                 |  |      | 118,114 |       |   |        | 57,962 |     
|Borrowings                                                                         |                             | $                                       | 31,884   |       |      |         | 6,009   |           |  |           | 5,174   |                 |  |      | 837     |       |   |        | 1,882  |     
|Stockholders equity                                                               |                             | $                                       | 57,787   |       |      |         | 33,790  |           |  |           | 31,676  |                 |  |      | 19,468  |       |   |        | 19,092 |     
|Total gross loans                                                                  |                             | $                                       | 365,636  |       |      |         | 244,650 |           |  |           | 201,354 |                 |  |      | 81,206  |       |   |        | 39,366 |     
|Allowance for loan losses                                                          |                             | $                                       | 4,580    |       |      |         | 3,077   |           |  |           | 2,526   |                 |  |      | 1,014   |       |   |        | 492    |     
|Nonperforming loans                                                                |                             | $                                       | 44       |       |      |         | 94      |           |  |           | 491     |                 |  |      |        |       |   |        |       |     
|Allowance for loan losses as a percentage of
    period-end total gross loans      |                             |                                         | 1.25     | %     |      |         | 1.26    | %         |  |           | 1.25    | %               |  |      | 1.25    | %     |   |        | 1.25   | %   
|Allowance for loan losses as a percentage of
    nonperforming gross loans         |                             |                                         | 10,409.0 |       |      |         | 9       | %3,27     |  |           | 3.40    | % 51            |  |      | 4.46    | % N   |   | /A N/A
|Total nonperforming loans as a percentage of
    total loans                       |                             |                                         | .01      | %     |      |         | 0.04    | %         |  |           | 0.24    | %               |  |      | N/A     |       |   |        | N/A    |     
|Total nonperforming loans as a percentage of
    total assets                      |                             |                                         | NIL      |       |      |         | 0.02%   |           |  |           | 0.15%   |                 |  |      | N/A     |       |   |        | N/A    |     
|Total nonperforming loans and real estate owned
    as a percentage of total loans |                             |                                         | .01%     |       |      |         | 0.02%   |           |  |           | 0.15%   |                 |  |      | N/A     |       |   |        | N/A    |     



---

15



---



##### Table of Contents






Item 7.     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. This discussion should be read in conjunction
with the consolidated financial statements and related footnotes
of the Company presented elsewhere herein.

General

United Heritage 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.

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 $138.6 million at
December 31, 2005, $63.8 million at December 31,
2004 and $60.1 million at December 31, 2003, 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.

16



---



##### Table of Contents



The following table summarizes the Companys
contractual obligations, including certain on-balance-sheet and
off-balance-sheet obligations, at December 31, 2005 (in
thousands):

|                                            |  |                        |         |         |        |   |         |         |  |         |         |  |      |         |       |  |  |   |       | 
|------------------------------------------- |  | ---------------------- | ------- | ------- | ------ | - | ------- | ------- |  | ------- | ------- |  | ---- | ------- | ----- |  |  | - | ----- | 
|                                            |  |                       
|                                            |  | Payments Due by Period |        
|                                            |  |                        |        
|                                            |  |                        |         | Greater |        |   | Greater |         |  |        
|                                            |  |                        |         | Than    |        |   | Than    |         |  |        
|                                            |  |                        |         | Less    |        |   | 1 Year  |         |  | 3 Years |         |  | More |        
|                                            |  |                        |         | Than    |        |   | Up to   |         |  | Up to   |         |  | Than |        
|Contractual Obligations                     |  | Total                  |         |         | 1 Year |   |         | 3 Years |  |         | 5 Years |  |      | 5 Years |      
|                                           
|                                           
|Time deposit maturities                     |  | $                      | 245,559 |         |        | $ | 110,912 |         |  | $       | 131,702 |  |      | $       | 2,945 |  |  | $ |      | 
|Borrowings                                  |  |                        | 31,884  |         |        |   | 31,884  |         |  |         |        |  |      |         |      |  |  |   |      | 
|Operating leases                            |  |                        | 7,323   |         |        |   | 902     |         |  |         | 1,786   |  |      |         | 1,470 |  |  |   | 3,165 | 
|Loan commitments and unused lines of credit |  |                        | 66,177  |         |        |   | 66,177  |         |  |         |        |  |      |         |      |  |  |   |      | 
|Standby letters of credit                   |  |                        | 6,189   |         |        |   | 6,189   |         |  |         |        |  |      |         |      |  |  |   |      | 
|Undisbursed construction loans in process   |  |                        | 66,222  |         |        |   | 66,222  |         |  |         |        |  |      |         |      |  |  |   |      | 
|                                           
|Total                                       |  | $                      | 423,354 |         |        | $ | 282,286 |         |  | $       | 133,488 |  |      | $       | 4,415 |  |  | $ | 3,165 | 
|                                           

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.

17



---



##### Table of Contents



The following table summarizes the regulatory
capital levels and ratios:

|                         |                                         |              |  |                 |             |  |                   |                   |       |                    |   |   |        |        |  |  |      |   |  |   |        |  |  |  |       |  
|------------------------ | --------------------------------------- | ------------ |  | --------------- | ----------- |  | ----------------- | ----------------- | ----- | ------------------ | - | - | ------ | ------ |  |  | ---- | - |  | - | ------ |  |  |  | ----- | -
|                         |                                         |              |  |                 |             |  |                   |                   |       |                   
|                         |                                         |              |  |                 |             |  |                   |                   |       | Minimum To Be Well |  
|                         |                                         |              |  |                 |             |  |                   | Capitalized Under |      
|                         |                                         |              |  | Minimum Capital |             |  | Prompt Corrective |                  
|                         |                                         | Actual       |  |                 | Requirement |  |                   | Action Provisions |      
|                         |                                         |              |  |                 |             |  |                   |                   |      
|                         |                                         | Amount       |  |                 | %           |  |                   | Amount            |       |                    | % |   |        | Amount |  |  | %    |  
|                        
|                        
|                        
|                        
|                        
|                        
|As of December 31, 2005: |                                         |              |  |                 |             |  |                   |                   |       |                    |   |   |        |        |  |  |      |   |  |   |        |  |  | 
|                        
|                        
|                        
|                        
|                         | Total capital to Risk-Weighted assets:  |              |  |                 |             |  |                   |                   |       |                    |   |   |        |        |  |  |      |   |  |   |        |  |  |  |      
|                         |                                         | Consolidated |  | $               | 63,178      |  |                   |                   | 13.96 | %                  |   | $ | 36,200 |        |  |  | 8.00 | % |  | $ | 45,250 |  |  |  | 10.00 | %
|                         |                                         | Bank         |  | $               | 61,852      |  |                   |                   | 13.59 | %                  |   | $ | 36,416 |        |  |  | 8.00 | % |  | $ | 45,520 |  |  |  | 10.00 | %
|                        
|                        
|                        
|                        
|                         | Tier I Capital to Risk-Weighted Assets: |              |  |                 |             |  |                   |                   |       |                    |   |   |        |        |  |  |      |   |  |   |        |  |  |  |      
|                         |                                         | Consolidated |  | $               | 58,598      |  |                   |                   | 12.95 | %                  |   | $ | 18,100 |        |  |  | 4.00 | % |  | $ | 27,150 |  |  |  | 6.00  | %
|                         |                                         | Bank         |  | $               | 57,272      |  |                   |                   | 12.58 | %                  |   | $ | 18,208 |        |  |  | 4.00 | % |  | $ | 27,312 |  |  |  | 6.00  | %
|                        
|                        
|                        
|                        
|                         | Tier I Capital to Average Assets:       |              |  |                 |             |  |                   |                   |       |                    |   |   |        |        |  |  |      |   |  |   |        |  |  |  |      
|                         |                                         | Consolidated |  | $               | 58,598      |  |                   |                   | 8.97  | %                  |   | $ | 26,140 |        |  |  | 4.00 | % |  | $ | 32,676 |  |  |  | 5.00  | %
|                         |                                         | Bank         |  | $               | 57,272      |  |                   |                   | 8.77  | %                  |   | $ | 26,134 |        |  |  | 4.00 | % |  | $ | 32,668 |  |  |  | 5.00  | %
|                        
|                        
|                        
|                        
|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  | %

Results of Operations

The following table shows selected ratios for the
periods ended or at the dates indicated:

|                                                                                   |  |                         |      |   |      |  |      |      |  |  |       |  
|---------------------------------------------------------------------------------- |  | ----------------------- | ---- | - | ---- |  | ---- | ---- |  |  | ----- | -
|                                                                                   |  |                        
|                                                                                   |  | Year Ended December 31, |     
|                                                                                   |  |                         |     
|                                                                                   |  | 2005                    |      |   | 2004 |  |      | 2003 | 
|                                                                                  
|                                                                                  
|Average equity as a percentage of average assets                                   |  |                         | 9.19 | % |      |  | 8.81 | %    |  |  | 10.34 | %
|Equity to total assets at end of period                                            |  |                         | 8.16 | % |      |  | 8.31 | %    |  |  | 9.77  | %
|Return on average assets                                                           |  |                         | .59  | % |      |  | .56  | %    |  |  | .29   | %
|Return on average equity                                                           |  |                         | 6.45 | % |      |  | 6.38 | %    |  |  | 2.85  | %
|Noninterest expense to average assets                                              |  |                         | 1.97 | % |      |  | 2.02 | %    |  |  | 2.09  | %
|Nonperforming loans and foreclosed real estate as
    a percentage of total assets |  |                         | NIL  | % |      |  | 0.02 | %    |  |  | 0.15  | %

18



---



##### Table of Contents



The rates and yields for the dates indicated were
as follows:

|                                       |  |                         |      |   |      |  |      |      |  |  |      |  
|-------------------------------------- |  | ----------------------- | ---- | - | ---- |  | ---- | ---- |  |  | ---- | -
|                                       |  |                        
|                                       |  | Year Ended December 31, |     
|                                       |  |                         |     
|                                       |  | 2005                    |      |   | 2004 |  |      | 2003 | 
|                                      
|                                      
|Loans                                  |  |                         | 7.10 | % |      |  | 6.46 | %    |  |  | 6.77 | %
|Investment securities                  |  |                         | 3.75 | % |      |  | 3.01 | %    |  |  | 2.39 | %
|Other interest-earning assets          |  |                         | 3.29 | % |      |  | 1.28 | %    |  |  | 1.10 | %
|All interest-earning assets            |  |                         | 5.54 | % |      |  | 4.92 | %    |  |  | 4.85 | %
|Savings, NOW and money-market deposits |  |                         | 2.21 | % |      |  | 1.61 | %    |  |  | 1.68 | %
|Time deposits                          |  |                         | 3.49 | % |      |  | 2.75 | %    |  |  | 3.14 | %
|All interest-bearing liabilities       |  |                         | 2.86 | % |      |  | 2.11 | %    |  |  | 2.39 | %
|Interest-rate spread                   |  |                         | 2.68 | % |      |  | 2.81 | %    |  |  | 2.46 | %

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 $17,076,000 for 2005 compared to
$10,742,000 for 2004 and $7,964,000 for 2003.

19



---



##### 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,                    |       
|                                                                                     |                                        |                                            |       
|                                                                                     |                                        |                                            |        |          |           |  
|                                                                                     |                                        | 2005                                       |        |          | 2004      |   |         | 2003   |       
|                                                                                     |                                        |                                            |        |          |           |   |         |        |       
|                                                                                     |                                        |                                            |        | Interest |           |   | Average |        |        |  |         | Interest |      |           | Average |         |         |   |        | Interest |        |  | Average   |     
|                                                                                     |                                        | Average                                    |        |          | and       |   |         | Yield/ |        |  | Average |          |      | and       |         |         | Yield/  |   |        | Average  |        |  | and       |      |      | Yield/ |       
|                                                                                     |                                        | Balance                                    |        |          | Dividends |   |         | Rate   |        |  | Balance |          |      | Dividends |         |         | Rate    |   |        | Balance  |        |  | Dividends |      |      | Rate   |       
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Interest-earning assets:                                                             |                                        |                                            |        |          |           |   |         |        |        |  |         |          |      |           |         |         |         |   |        |          |        |  |           |      |      |        |        |         |         |   |       |        |        |  |      |     
|                                                                                     | Loans                                  |                                            | $      | 296,699  |           |   | $       | 21,070 |        |  |         | 7.10     | %    |           | $       | 219,946 |         |   | $      | 14,202   |        |  |           | 6.46 | %    |        | $      | 172,178 |         |   | $     | 11,653 |        |  |      | 6.77 | %   
|                                                                                     | Securities                             |                                            |        | 129,166  |           |   |         | 4,849  |        |  |         | 3.75     |      |           |         | 54,277  |         |   |        | 1,633    |        |  |           | 3.01 |      |        |        | 55,684  |         |   |       | 1,330  |        |  |      | 2.39 |     
|                                                                                     | Other (1)                              |                                            |        | 102,280  |           |   |         | 3,363  |        |  |         | 3.29     |      |           |         | 64,017  |         |   |        | 820      |        |  |           | 1.28 |      |        |        | 51,803  |         |   |       | 570    |        |  |      | 1.10 |     
|                                                                                    
|                                                                                     |                                        | Total interest-earning assets              |        |          | 528,145   |   |         |        | 29,282 |  |         |          | 5.54 |           |         |         | 338,240 |   |        |          | 16,655 |  |           |      | 4.92 |        |        |         | 279,665 |   |       |        | 13,553 |  |      |      | 4.85 | 
|                                                                                    
|Noninterest-earning assets                                                           |                                        |                                            | 34,492 |          |           |   |         |        |        |  |         |          |      |           | 25,165  |         |         |   |        |          |        |  |           |      |      |        | 19,131 |         |         |   |       |        |        |  |      |     
|                                                                                    
|                                                                                     |                                        | Total assets                               |        | $        | 562,637   |   |         |        |        |  |         |          |      |           |         | $       | 363,405 |   |        |          |        |  |           |      |      |        |        | $       | 298,796 |   |       |        |        |  |      |      |      | 
|                                                                                    
|Interest-bearing liabilities:                                                        |                                        |                                            |        |          |           |   |         |        |        |  |         |          |      |           |         |         |         |   |        |          |        |  |           |      |      |        |        |         |         |   |       |        |        |  |      |     
|                                                                                     | Savings, NOW and money-market deposits |                                            |        | 208,336  |           |   |         | 4,601  |        |  |         | 2.21     |      |           |         | 151,834 |         |   |        | 2,446    |        |  |           | 1.61 |      |        |        | 117,697 |         |   |       | 1,982  |        |  |      | 1.68 |     
|                                                                                     | Time deposits                          |                                            |        | 211,832  |           |   |         | 7,392  |        |  |         | 3.49     |      |           |         | 125,161 |         |   |        | 3,442    |        |  |           | 2.75 |      |        |        | 114,818 |         |   |       | 3,601  |        |  |      | 3.14 |     
|                                                                                     | Other borrowings (2)                   |                                            |        | 6,729    |           |   |         | 213    |        |  |         | 3.17     |      |           |         | 3,031   |         |   |        | 25       |        |  |           | 0.82 |      |        |        | 1,524   |         |   |       | 6      |        |  |      | 0.52 |     
|                                                                                    
|                                                                                     |                                        | Total interest-bearing liabilities         |        |          | 426,897   |   |         |        | 12,206 |  |         |          | 2.86 |           |         |         | 280,026 |   |        |          | 5,913  |  |           |      | 2.11 |        |        |         | 234,039 |   |       |        | 5,589  |  |      |      | 2.39 | 
|                                                                                    
|Noninterest-bearing deposits                                                         |                                        |                                            | 81,368 |          |           |   |         |        |        |  |         |          |      |           | 49,385  |         |         |   |        |          |        |  |           |      |      |        | 33,285 |         |         |   |       |        |        |  |      |     
|Noninterest-bearing liabilities                                                      |                                        |                                            | 2,679  |          |           |   |         |        |        |  |         |          |      |           | 1,995   |         |         |   |        |          |        |  |           |      |      |        | 583    |         |         |   |       |        |        |  |      |     
|Stockholders equity                                                                 |                                        |                                            | 51,693 |          |           |   |         |        |        |  |         |          |      |           | 31,999  |         |         |   |        |          |        |  |           |      |      |        | 30,889 |         |         |   |       |        |        |  |      |     
|                                                                                    
|                                                                                     |                                        | Total liabilities and stockholders equity |        | $        | 562,637   |   |         |        |        |  |         |          |      |           |         | $       | 363,405 |   |        |          |        |  |           |      |      |        |        | $       | 298,796 |   |       |        |        |  |      |      |      | 
|                                                                                    
|Net interest income                                                                  |                                        |                                            |        |          |           | $ | 17,076  |        |        |  |         |          |      |           |         |         |         | $ | 10,742 |          |        |  |           |      |      |        |        |         |         | $ | 7,964 |        |        |  |      |     
|                                                                                    
|Interest-rate spread (3)                                                             |                                        |                                            |        |          |           |   |         |        |        |  | 2.68    | %        |      |           |         |         |         |   |        |          |        |  | 2.81      | %    |      |        |        |         |         |   |       |        |        |  | 2.46 | %   
|                                                                                    
|Net interest margin (4)                                                              |                                        |                                            |        |          |           |   |         |        |        |  | 3.23    | %        |      |           |         |         |         |   |        |          |        |  | 3.18      | %    |      |        |        |         |         |   |       |        |        |  | 2.85 | %   
|                                                                                    
|Ratio of average interest-earning assets to
    average interest-bearing liabilities |                                        |                                            | 1.24   |          |           |   |         |        |        |  |         |          |      |           | 1.21    |         |         |   |        |          |        |  |           |      |      |        | 1.19   |         |         |   |       |        |        |  |      |     
|                                                                                    



|    |                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                                                       

20



---



##### 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 to             |      
|                                           |            |                                        |      
|                                           |            |                                        |       | Rate/ |        |   |      
|                                           |            | Rate                                   |       |       | Volume |   |       | Volume |       |   | Total |     
|                                           |            |                                        |       |       |        |   |       |       
|                                          
|                                           |           
|                                           |            |                                       
|                                           |            | (In thousands)                         |      
|                                          
|                                          
|                                          
|                                          
|Year Ended December 31, 2005 vs.
    2004: |            |                                        |       |       |        |   |       |        |       |   |       |      |       |   |       |      
|                                          
|                                          
|                                          
|                                          
|Interest-earning assets:                   |            |                                        |       |       |        |   |       |        |       |   |       |      |       |   |       |      
|                                           | Loans      |                                        | $     | 1,417 |        |   | $     | 4,956  |       |   | $     | 495  |       |   | $     | 6,868 |       
|                                           | Securities |                                        |       | 405   |        |   |       | 2,253  |       |   |       | 558  |       |   |       | 3,216 |       
|                                           | Other      |                                        |       | 1,285 |        |   |       | 490    |       |   |       | 768  |       |   |       | 2,543 |       
|                                          
|                                           |            | Total                                  |       |       | 3,107  |   |       |        | 7,699 |   |       |      | 1,821 |   |       |       | 12,627 |  
|                                          
|Interest-bearing liabilities:              |            |                                        |       |       |        |   |       |        |       |   |       |      |       |   |       |      
|                                          
|                                          
|                                          
|                                          
|                                           | Deposits:  |                                        |       |       |        |   |       |        |       |   |       |      |       |   |       |       |       
|                                           |            | Savings, NOW and money-market deposits |       |       | 907    |   |       |        | 910   |   |       |      | 338   |   |       |       | 2,155  |  
|                                           |            | Time deposits                          |       |       | 926    |   |       |        | 2,384 |   |       |      | 641   |   |       |       | 3,950  |  
|                                           | Borrowings |                                        |       | 71    |        |   |       | 31     |       |   |       | 87   |       |   |       | 188   |       
|                                          
|                                           |            | Total                                  |       |       | 1,904  |   |       |        | 3,324 |   |       |      | 1,065 |   |       |       | 6,293  |  
|                                          
|Net change in net interest income          |            | $                                      | 1,203 |       |        | $ | 4,375 |        |       | $ | 756   |      |       | $ | 6,334 |      
|                                          
|Year Ended December 31, 2004 vs.
    2003: |            |                                        |       |       |        |   |       |        |       |   |       |      |       |   |       |      
|                                          
|                                          
|                                          
|                                          
|Interest-earning assets:                   |            |                                        |       |       |        |   |       |        |       |   |       |      |       |   |       |      
|                                           | Loans      |                                        | $     | (535  | )      |   | $     | 3,233  |       |   | $     | (149 | )     |   | $     | 2,549 |       
|                                           | Securities |                                        |       | 345   |        |   |       | (34    | )     |   |       | (8   | )     |   |       | 303   |       
|                                           | Other      |                                        |       | 94    |        |   |       | 134    |       |   |       | 22   |       |   |       | 250   |       
|                                          
|                                           |            | Total                                  |       |       | (96    | ) |       |        | 3,333 |   |       |      | (135  | ) |       |       | 3,102  |  
|                                          
|Interest-bearing liabilities:              |            |                                        |       |       |        |   |       |        |       |   |       |      |       |   |       |      
|                                          
|                                          
|                                          
|                                          
|                                           | Deposits:  |                                        |       |       |        |   |       |        |       |   |       |      |       |   |       |       |       
|                                           |            | Savings, NOW and money-market deposits |       |       | (86    | ) |       |        | 575   |   |       |      | (25   | ) |       |       | 464    |  
|                                           |            | Time deposits                          |       |       | (443   | ) |       |        | 324   |   |       |      | (40   | ) |       |       | (159   | )
|                                           | Borrowings |                                        |       | 7     |        |   |       | 6      |       |   |       | 6    |       |   |       | 19    |       
|                                          
|                                           |            | Total                                  |       |       | (522   | ) |       |        | 905   |   |       |      | (59   | ) |       |       | 324    |  
|                                          
|Net change in net interest income          |            | $                                      | 426   |       |        | $ | 2,428 |        |       | $ | (76   | )    |       | $ | 2,778 |      
|                                          

Comparison of Results of Operations for 2005 to 2004

General

Net income for the year ended December 31,
2005 was $3.3 million or $.74 basic and $.72 diluted
earnings per share compared to $2.0 million or $.63 basic
and $.61 diluted earnings per share for the comparable period in
2004. The increase in the Companys

21



---



##### Table of Contents



net income was primarily due to an increase in
net interest income, partially offset by increases in provision
for loan losses and noninterest expenses.


Interest Income and Expense

Interest income increased to $29.3 million
for the year ended December 31, 2005 from
$16.7 million for the year ended December 31, 2004.
Interest income on loans increased to $21.1 million
primarily due to increases in the average loan portfolio balance
from $220 million for the year ended December 31, 2004
to $297 million for 2005 and in the average yield from
6.46% to 7.10%. Interest income on securities increased to
$4.8 million in 2005 from $1.6 million in 2004
primarily due to a increase in the average balance from
$54 million to $129 million.

Interest income on other interest-earning assets
increased to $3.4 million in 2005 from $820,000 in 2004
primarily due to a increase in the average balance to
$102 million in 2005 from $64 million in 2004 and an
increase in the average yield to 3.29% in 2005 from 1.28% in
2004.

Interest expense on interest-bearing liabilities
was $12.2 million for the year ended December 31, 2005
compared to $5.9 million for 2004. Interest expense
increased due to increases in average interest-bearing
liabilities from $280 million in 2004 to $427 million
in 2005 and in the average rate paid from 2.11% in 2004 to 2.86%
in 2005.

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, 2005 of
$1,540,000 compared to $617,000 in 2004. The allowance for loan
losses was $4.6 million, or 1.25% of total loans, at
December 31, 2005. Management believes the allowance was
adequate at December 31, 2005.

Noninterest Income

Noninterest income increased to $801,000 for the
year ended December 31, 2005 compared to $547,000 for the
year ended December 31, 2004. The increase was primarily
due to a $172,000 increase in service charges and fees and
increases in residential mortgage fees.

Noninterest Expense

Noninterest expense was $11.1 million for
the year ended December 31, 2005 compared to
$7.3 million for the year ended December 31, 2004.
This increase includes increases of approximately
$2.3 million in salary and employee benefits and $770,000
in occupancy and equipment expense associated with the growth of
the Company from 2004 to 2005.

Income Taxes

The income tax expense for the year ended
December 31, 2005 was $1.9 million (an effective rate
of 36.6%, including state income taxes) compared to
approximately $1.3 million (an effective rate of 38.6%,
including state income taxes) for the 2004 period.

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

22



---



##### Table of Contents



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.

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.

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

23



---



##### Table of Contents



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.

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.

24



---



##### 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,
2005 that are estimated to mature or are scheduled to reprice
within the period shown ($ in thousands):

|                                    |                                              |         |         |         |         |   |         |        |  |   |         |         |  |       |         |        |  |   |         |         | 
|----------------------------------- | -------------------------------------------- | ------- | ------- | ------- | ------- | - | ------- | ------ |  | - | ------- | ------- |  | ----- | ------- | ------ |  | - | ------- | ------- | 
|                                    |                                              |         |         |         |         |   |         | Over   |  |   |        
|                                    |                                              | Under 3 |         |         | 3 to 12 |   |         | 1-5    |  |   | Five    |         |  |      
|                                    |                                              | Months  |         |         | Months  |   |         | Years  |  |   | Years   |         |  | Total |        
|                                   
|                                   
|Federal funds sold                  |                                              | $       | 126,119 |         |         | $ |        |        |  | $ |        |         |  | $     |        |        |  | $ | 126,119 |        
|Loans (1)                           |                                              |         | 239,668 |         |         |   | 13,321  |        |  |   | 61,604  |         |  |       | 51,043  |        |  |   | 365,636 |        
|Securities (2)                      |                                              |         | 7,415   |         |         |   | 22,246  |        |  |   | 119,129 |         |  |       | 36,379  |        |  |   | 185,169 |        
|                                   
|                                    | Total rate-sensitive assets (earning assets) |         | $       | 373,202 |         |   | $       | 35,567 |  |   | $       | 180,733 |  |       | $       | 87,422 |  |   | $       | 676,924 | 
|                                   
|Money market (3)                    |                                              | $       | 217,281 |         |         | $ |        |        |  | $ |        |         |  | $     |        |        |  | $ | 217,281 |        
|Savings and NOW deposits (3)        |                                              |         |        |         |         |   |        |        |  |   | 55,614  |         |  |       |        |        |  |   | 55,614  |        
|Time deposits (3)                   |                                              |         | 27,728  |         |         |   | 83,184  |        |  |   | 134,647 |         |  |       |        |        |  |   | 245,559 |        
|Other borrowings                    |                                              |         | 31,884  |         |         |   |        |        |  |   |        |         |  |       |        |        |  |   | 31,884  |        
|                                   
|                                    | Total rate-sensitive liabilities             |         | $       | 276,893 |         |   | $       | 83,184 |  |   | $       | 190,261 |  |       | $       |       |  |   | $       | 550,338 | 
|                                   
|Gap (repricing differences)         |                                              | $       | 96,309  |         |         | $ | (47,617 | )      |  | $ | (9,528  | )       |  | $     | 87,422  |        |  | $ | 126,586 |        
|                                   
|Cumulative Gap                      |                                              | $       | 96,309  |         |         | $ | 48,692  |        |  | $ | 39,164  |         |  | $     | 126,586 |        |  |   |         |        
|                                   
|Cumulative GAP/total assets         |                                              |         | .14     |         |         |   | .07     |        |  |   | .06     |         |  |       | .18     |        |  |   |         |        
|                                   
|Cumulative GAP/total earning assets |                                              |         | .14     |         |         |   | .07     |        |  |   | .06     |         |  |       | .18     |        |  |   |         |        
|                                   
|Total assets                        |                                              |         |         |         |         |   |         |        |  |   |         |         |  |       |         |        |  | $ | 707,894 |        
|                                   
|Total earning assets                |                                              |         |         |         |         |   |         |        |  |   |         |         |  |       |         |        |  | $ | 676,924 |        
|                                   



|    |                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                         

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.

25



---



##### Table of Contents



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.

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, |        
|                                       |                   |                 |        
|                                       |                   |                 |         |         |       |  |    |       
|                                       |                   | 2005            |         |         | 2004  |  |    | 2003   |      |   | 2002    |        
|                                       |                   |                 |         |         |       |  |    |        |      |   |         |        
|                                       |                   |                 |         | % of    |       |  |    |        | % of |   |         |         |   | % of   |    |     |       |   | % of    |        
|                                       |                   | Amount          |         |         | Total |  |    | Amount |      |   | Total   |         |   | Amount |    |     | Total |   |         | Amount  |   |  | Total |    
|                                      
|                                      
|Commercial, financial and agricultural |                   | $               | 69,266  |         |       |  | 19 | %      |      | $ | 44,720  |         |   |        | 18 | %   |       | $ | 42,779  |         |   |  | 21    | %   |   | $ | 25,294 |        |   |  | 31 | %  
|Real estate-mortgage                   |                   |                 | 179,323 |         |       |  | 49 |        |      |   | 133,257 |         |   |        | 54 |     |       |   | 119,887 |         |   |  | 60    |     |   |   | 38,228 |        |   |  | 47 |    
|Construction and land development      |                   |                 | 111,698 |         |       |  | 31 |        |      |   | 60,675  |         |   |        | 25 |     |       |   | 31,934  |         |   |  | 16    |     |   |   | 15,531 |        |   |  | 19 |    
|Installment and consumer lines         |                   |                 | 5,349   |         |       |  | 1  |        |      |   | 5,998   |         |   |        | 3  |     |       |   | 6,754   |         |   |  | 3     |     |   |   | 2,153  |        |   |  | 3  |    
|                                      
|                                       | Total loans       |                 | $       | 365,636 |       |  |    | 100    | %    |   | $       | 244,650 |   |        |    | 100 | %     |   | $       | 201,354 |   |  |       | 100 | % |   | $      | 81,206 |   |  |    | 100 | %
|                                      
|Less: Allowance for loan losses        |                   |                 | (4,580  | )       |       |  |    |        |      |   | (3,077  | )       |   |        |    |     |       |   | (2,526  | )       |   |  |       |     |   |   | (1,014 | )      |   |  |    |    
|                                       | Net deferred fees |                 |         | (631    | )     |  |    |        |      |   |         | (359    | ) |        |    |     |       |   |         | (348    | ) |  |       |     |   |   |        | (30    | ) |  |    |     |  
|                                      
|                                       | Loans, net        |                 | $       | 360,425 |       |  |    |        |      |   | $       | 241,214 |   |        |    |     |       |   | $       | 198,480 |   |  |       |     |   |   | $      | 80,162 |   |  |    |     |  
|                                      

The following table reflects the contractual
principal repayments by period of the Companys loan
portfolio at December 31, 2005 (in thousands):

|                                       |                                        |         |        |         |           |   |        |         |  |   |        |        |  |   |         |         | 
|-------------------------------------- | -------------------------------------- | ------- | ------ | ------- | --------- | - | ------ | ------- |  | - | ------ | ------ |  | - | ------- | ------- | 
|                                       |                                        | 1 Year  |        |         | 1 Through |   |        | After   |  |   |       
|                                       |                                        | or Less |        |         | 5 Years   |   |        | 5 Years |  |   | Total  |       
|                                      
|                                      
|Commercial, financial and agricultural |                                        | $       | 49,652 |         |           | $ | 19,087 |         |  | $ | 527    |        |  | $ | 69,266  |        
|Real estate-mortgage                   |                                        |         | 59,839 |         |           |   | 45,519 |         |  |   | 73,965 |        |  |   | 179,323 |        
|Construction and land development      |                                        |         | 50,078 |         |           |   | 42,652 |         |  |   | 18,968 |        |  |   | 111,698 |        
|Installment and consumer lines         |                                        |         | 3,174  |         |           |   | 2,154  |         |  |   | 21     |        |  |   | 5,349   |        
|                                      
|                                       | Total loans                            |         | $      | 162,743 |           |   | $      | 109,412 |  |   | $      | 93,481 |  |   | $       | 365,636 | 
|                                      
|Loans with maturities over one year:   |                                        |         |        |         |           |   |        |         |  |   |        |        |  |   |         |        
|                                       | Fixed rate                             |         |        |         |           |   |        |         |  |   |        |        |  |   |         | 89,564  | 
|                                       | Variable rate                          |         |        |         |           |   |        |         |  |   |        |        |  |   |         | 113,329 | 
|                                      
|                                       | Total maturities greater than one year |         |        |         |           |   |        |         |  |   |        |        |  |   | $       | 202,893 | 
|                                      

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

26



---



##### Table of Contents



Companys profitability. However, as part of
its loan portfolio management strategy, the Company generally
limits its loans to a maximum 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.

The following summarizes impaired loans (in
thousands):

|                                                 |                          |                 |    |    |      |   |    |      |  |   |      |     |  |      |   |   |  |   |   |   | 
|------------------------------------------------ | ------------------------ | --------------- | -- | -- | ---- | - | -- | ---- |  | - | ---- | --- |  | ---- | - | - |  | - | - | - | 
|                                                 |                          |                
|                                                 |                          | At December 31, |   
|                                                 |                          |                 |   
|                                                 |                          | 2005            |    |    | 2004 |   |    | 2003 |  |   | 2002 |     |  | 2001 |  
|                                                
|                                                
|Impaired loans with a valuation allowance        |                          | $               | 44 |    |      | $ | 83 |      |  | $ | 376  |     |  | $    |  |   |  | $ |  |  
|Impaired loans without a valuation allowance     |                          |                 |   |    |      |   |   |      |  |   |     |     |  |      |  |   |  |   |  |  
|Less  valuation allowance on impaired
    loans |                          |                 | (4 | )  |      |   | (5 | )    |  |   | (97  | )   |  |      |  |   |  |   |  |  
|                                                
|                                                 | Total net impaired loans |                 | $  | 40 |      |   | $  | 78   |  |   | $    | 279 |  |      | $ |  |  |   | $ |  | 
|                                                

27



---



##### Table of Contents



The average net investment in impaired loans and
interest income recognized and received on impaired loans (in
thousands):

|                                             |  |                         |    |  |      |   |     |      |  |   |      |  |  |      |   |  |  |   |   | 
|-------------------------------------------- |  | ----------------------- | -- |  | ---- | - | --- | ---- |  | - | ---- |  |  | ---- | - |  |  | - | - | 
|                                             |  |                        
|                                             |  | Year Ended December 31, |   
|                                             |  |                         |   
|                                             |  | 2005                    |    |  | 2004 |   |     | 2003 |  |   | 2002 |  |  | 2001 |  
|                                            
|                                            
|Average net investment in impaired loans     |  | $                       | 51 |  |      | $ | 349 |      |  | $ | 376  |  |  | $    |  |  |  | $ |  | 
|                                            
|Interest income recognized on impaired loans |  | $                       | 1  |  |      | $ | 3   |      |  | $ |     |  |  | $    |  |  |  | $ |  | 
|                                            
|Interest income received on impaired loans   |  | $                       | 1  |  |      | $ | 3   |      |  | $ |     |  |  | $    |  |  |  | $ |  | 
|                                            

28



---



##### Table of Contents



Loans on non-accrual status and foreclosed assets
and certain other related information was as follows:

|                                              |                                |                                  |   |       |       |  |   |        |        |   |       |    |    |        |     |     |       |   |       |        |     |  |       |       |      |        |   |   |       |  |   |   |      |   |   |   |   |  |   |   |      |  
|--------------------------------------------- | ------------------------------ | -------------------------------- | - | ----- | ----- |  | - | ------ | ------ | - | ----- | -- | -- | ------ | --- | --- | ----- | - | ----- | ------ | --- |  | ----- | ----- | ---- | ------ | - | - | ----- |  | - | - | ---- | - | - | - | - |  | - | - | ---- | -
|                                              |                                |                                 
|                                              |                                | At December 31,                  |  
|                                              |                                |                                  |  
|                                              |                                |                                  |   |       |       |  |   |        |        |  
|                                              |                                | 2005                             |   |       | 2004  |  |   | 2003   |        |   | 2002  |    |    | 2001   |    
|                                              |                                |                                  |   |       |       |  |   |        |        |   |       |    |    |        |    
|                                              |                                |                                  |   |       |       |  |   |        |        |   |       |   
|                                              |                                |                                  |   | % of  |       |  |   |        | % of   |   |       |    |    | % of   |     |     |       |   | % of  |        |     |  |       | % of  |     
|                                              |                                |                                  |   | Total |       |  |   |        | Total  |   |       |    |    | Total  |     |     |       |   | Total |        |     |  |       | Total |     
|                                              |                                | Amount                           |   |       | Loans |  |   | Amount |        |   | Loans |    |    | Amount |     |     | Loans |   |       | Amount |     |  | Loans |       |      | Amount |   |   | Loans | 
|                                             
|                                             
|                                              |                                |                                 
|                                              |                                | ($ in thousands)                 |  
|                                             
|                                             
|                                             
|                                             
|Loans on nonaccrual status:                   |                                |                                  |   |       |       |  |   |        |        |   |       |    |    |        |     |     |       |   |       |        |     |  |       |       |      |        |   |   |       |  |   |   |      |   |   |   |   |  |   |  
|                                              | Real estate loans              |                                  | $ |      |       |  |   |       | %      |   | $     |   |    |        |     |    | %     |   | $     |       |     |  |       |      | %    |        | $ |  |       |  |   |  | %    |   | $ |  |   |  |   |  | %   
|                                              | Commercial                     |                                  |   | 44    |       |  |   | .01    |        |   |       | 50 |    |        |     | .02 |       |   |       | 491    |     |  |       | .24   |      |        |   |  |       |  |   |  |      |   |   |  |   |  |   |  |     
|                                              | Consumer and home equity loans |                                  |   |      |       |  |   |       |        |   |       |   |    |        |     |    |       |   |       |       |     |  |       |      |      |        |   |  |       |  |   |  |      |   |   |  |   |  |   |  |     
|                                             
|                                              |                                | Total loans on nonaccrual status |   |       | 44    |  |   |        | .01    |   |       |    | 50 |        |     |     | .02   |   |       |        | 491 |  |       |       | .24  |        |   |   |      |  |   |   |     |   |   |   |  |  |   |   |     |  
|Accruing loans past due 90 days or more       |                                |                                  |  |       |       |  |  |        |        |   | 44    |    |    |        | .02 |     |       |   |      |        |     |  |      |       |      |        |  |   |       |  |  |   |      |   |  |   |   |  |  |  
|Troubled debt restructuring                   |                                |                                  |  |       |       |  |  |        |        |   |      |    |    |        |    |     |       |   |      |        |     |  |      |       |      |        |  |   |       |  |  |   |      |   |  |   |   |  |  |  
|                                             
|                                              |                                | Total nonperforming loans        |   |       | 44    |  |   |        | .01    |   |       |    | 94 |        |     |     | .04   |   |       |        | 491 |  |       |       | .24  |        |   |   |      |  |   |   |     |   |   |   |  |  |   |   |     |  
|Foreclosed assets                             |                                |                                  |  |       |       |  |  |        |        |   |      |    |    |        |    |     |       |   |      |        |     |  |      |       |      |        |  |   |       |  |  |   |      |   |  |   |   |  |  |  
|                                             
|                                              |                                | Total nonperforming assets       |   | $     | 44    |  |   |        | .01    |   |       | $  | 94 |        |     |     | .04   |   |       | $      | 491 |  |       |       | .24  |        |   | $ |      |  |   |   |      |   |   | $ |  |  |   |   |      |  
|                                             
|As a percentage of total assets:              |                                |                                  |   |       |       |  |   |        |        |   |       |    |    |        |     |     |       |   |       |        |     |  |       |       |      |        |   |   |       |  |   |   |      |   |   |   |   |  |   |  
|                                              |                                | Total nonperforming loans        |   |       |       |  |   |        | .01    | % |       |    |    |        |     |     | .02   | % |       |        |     |  |       |       | .15  | %      |   |   |       |  |   |   | N/A  |   |   |   |   |  |   |   | N/A  |  
|                                             
|                                              |                                | Total nonperforming assets       |   |       |       |  |   |        | .01    | % |       |    |    |        |     |     | .02   | % |       |        |     |  |       |       | .15  | %      |   |   |       |  |   |   | N/A  |   |   |   |   |  |   |   | N/A  |  
|                                             
|Allowance for loan losses as a percentage of: |                                |                                  |   |       |       |  |   |        |        |   |       |    |    |        |     |     |       |   |       |        |     |  |       |       |      |        |   |   |       |  |   |   |      |   |   |   |   |  |   |  
|                                              |                                | Total loans                      |   |       |       |  |   |        | 1.25   | % |       |    |    |        |     |     | 1.26  | % |       |        |     |  |       |       | 1.25 | %      |   |   |       |  |   |   | 1.25 | % |   |   |   |  |   |   | 1.25 | %
|                                             
|                                              |                                | Nonperforming loans              |   |       |       |  |   |        | 10,409 | % |       |    |    |        |     |     | 3,273 | % |       |        |     |  |       |       | 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

29



---



##### Table of Contents



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.


Interest income that would have been recorded
under the original terms of loans on nonaccrual status at
December 31, 2005 and interest income actually recognized
during the year ended December 31, 2005 on these loans was
as follows:

|                                              |  |               |    |  
|--------------------------------------------- |  | ------------- | -- | -
|                                              |  | Amount        |   
|                                             
|                                             
|                                              |  | (In thousands |   
|Interest income that would have been recorded |  | $             | 5  |  
|Less: Interest income recognized              |  |               | (1 | )
|                                             
|Interest income foregone                      |  | $             | 4  |  
|                                             

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 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.

30



---



##### Table of Contents



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, 2005. No loans or
foreclosed assets were classified doubtful or
loss at December 31, 2005.

|                      |                                        |                  |   |   |             |   |     |        |  |  |        |   |  |   |    |    | 
|--------------------- | -------------------------------------- | ---------------- | - | - | ----------- | - | --- | ------ |  |  | ------ | - |  | - | -- | -- | 
|                      |                                        |                  |   |  
|                      |                                        | Special Mention  |   |   | Substandard |  
|                      |                                        |                  |   |   |             |  
|                      |                                        | Number           |   |   | Amount      |   |     | Number |  |  | Amount |  
|                     
|                     
|                      |                                        |                 
|                      |                                        | ($ in thousands) |  
|                     
|                     
|                     
|                     
|At December 31, 2005: |                                        |                  |   |   |             |   |     |        |  |  |        |   |  |   |    |   
|                     
|                     
|                     
|                     
|Loans:                |                                        |                  |   |   |             |   |     |        |  |  |        |   |  |   |    |   
|                      | Commercial, financial and agricultural |                  |   | 5 |             |   | $   | 366    |  |  |        | 1 |  |   | $  | 44 | 
|                      | Real estate mortgage                   |                  |   | 2 |             |   |     | 352    |  |  |        |  |  |   |    |   | 
|                      | Construction and land development      |                  |   |  |             |   |     |       |  |  |        |  |  |   |    |   | 
|                      | Installment and consumer lines         |                  |   | 1 |             |   |     | 2      |  |  |        |  |  |   |    |   | 
|                     
|                      |                                        |                  | 8 |   |             | $ | 720 |        |  |  | 1      |   |  | $ | 44 |   
|                     
|Foreclosed assets     |                                        |                  |  |   |             | $ |    |        |  |  |       |   |  | $ |   |   
|                     

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. The Company assesses its
loan portfolio routinely through its credit administration
function. The Company, as part of its ongoing risk management,
assigns a risk grade to each loan within the portfolio. The risk
grades fall into eight categories based on certain variables,
included but not limited to, collateral, loan performance, and
financial trends of the borrower. The Company establishes a
reserve allocation based upon the assigned risk grade. In
addition the Company establishes an aggregate reserve for loan
loss threshold based upon the entire portfolio. The amount of
the established allowance in excess of the allocation based upon
risk grade is considered a secondary reserve to mitigate the
concentrations that may exist in the portfolio from time to
time. These concentrations include both geographic and
collateral. The Company uses various criteria in determining the
aggregate reserve including peer group comparison, local
economic trends and data provided by the primary regulatory
agencies of the Company. 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, 2005
and 2004.

31



---



##### 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,                |                  
|                                                                                               |                                                                      |                                        |                  
|                                                                                               |                                                                      | 2005                                   |                   |        | 2004 |     |       | 2003  |     |     | 2002  |      |      | 2001 |      
|                                                                                              
|                                                                                              
|Allowance at beginning of period                                                               |                                                                      | $                                      | 3,077             |        |      | $   | 2,526 |       |     | $   | 1,014 |      |      | $    | 492   |      |     | $   |    |     
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Charge-offs:                                                         |                                        |                   |        |      |     |       |       |     |     |       |      |      |      |       |      |     |     |     |      |  
|                                                                                               |                                                                      | Commercial, financial and agricultural |                   |        | (24  | )   |       |       | (88 | )   |       |      | (139 | )    |       |      | (21 | )   |     |      |  |  
|                                                                                               |                                                                      | Real estate mortgage                   |                   |        |     |     |       |       |    |     |       |      | (16  | )    |       |      |    |     |     |      |  |  
|                                                                                               |                                                                      | Installment and consumer lines         |                   |        | (14  | )   |       |       |    |     |       |      | (5   | )    |       |      |    |     |     |      |  |  
|                                                                                              
|                                                                                               |                                                                      |                                        | Total charge-offs |        |      | (38 | )     |       |     | (88 | )     |      |      | (160 | )     |      |     | (21 | )   |      |   |  | 
|                                                                                              
|                                                                                               | Recoveries:                                                          |                                        |                   |        |      |     |       |       |     |     |       |      |      |      |       |      |     |     |     |      |  
|                                                                                               |                                                                      | Commercial, financial and agricultural |                   |        | 1    |     |       |       | 22  |     |       |      | 1    |      |       |      |    |     |     |      |  |  
|                                                                                              
|                                                                                               |                                                                      |                                        | Total recoveries  |        |      | 1   |       |       |     | 22  |       |      |      | 1    |       |      |     |    |     |      |   |  | 
|                                                                                              
|Provision for loan losses charged to earnings                                                  |                                                                      |                                        | 1,540             |        |      |     | 617   |       |     |     | 784   |      |      |      | 543   |      |     |     | 492 |     
|Acquired in purchase transaction                                                               |                                                                      |                                        |                  |        |      |     |      |       |     |     | 887   |      |      |      |      |      |     |     |    |     
|                                                                                              
|Allowance at end of period                                                                     |                                                                      | $                                      | 4,580             |        |      | $   | 3,077 |       |     | $   | 2,526 |      |      | $    | 1,014 |      |     | $   | 492 |     
|                                                                                              
|Ratio of net charges-offs during the period to
    average loans outstanding during the period |                                                                      |                                        | .01               | %      |      |     | .03   | %     |     |     | .09   | %    |      |      | .04   | %    |     |     |    | %   
|                                                                                              
|                                                                                               | Allowance for loan losses as a percentage of
    nonperforming loans |                                        |                   | 10,409 | %    |     |       | 3,273 | %   |     |       | 514  | %    |      |       | N/A  |     |     |     | N/A  |  
|                                                                                              
|                                                                                               | Allowance for loan losses as a percentage of
    total gross loans   |                                        |                   | 1.25   | %    |     |       | 1.26  | %   |     |       | 1.25 | %    |      |       | 1.25 | %   |     |     | 1.25 | %
|                                                                                              

32



---



##### Table of Contents



While no portion of the allowance is in any way
restricted to any individual loan or group of loans, and the
entire allowance is available to absorb losses from any and all
loan, 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, |      
|                                       |                                 |                 |      
|                                       |                                 |                 |       |          |       |  |    |        |          |  
|                                       |                                 | 2005            |       |          | 2004  |  |    | 2003   |          |   | 2002  |       |  | 2001     |   
|                                       |                                 |                 |       |          |       |  |    |        |          |   |       |       |  |          |   
|                                       |                                 |                 |       |          |       |  |    |        |          |   |       |       |  |          |    |     |       |   |          |       
|                                       |                                 |                 |       | % of     |       |  |    |        | % of     |   |       |       |  | % of     |    |     |       |   | % of     |        |  |  |       | % of     |  
|                                       |                                 |                 |       | Loans    |       |  |    |        | Loans    |   |       |       |  | Loans    |    |     |       |   | Loans    |        |  |  |       | Loans    |  
|                                       |                                 |                 |       | to Total |       |  |    |        | to Total |   |       |       |  | to Total |    |     |       |   | to Total |        |  |  |       | to Total |  
|                                       |                                 | Amount          |       |          | Loans |  |    | Amount |          |   | Loans |       |  | Amount   |    |     | Loans |   |          | Amount |  |  | Loans |          |   | Amount |     |       | Loans | 
|                                      
|                                      
|Commercial, financial and agricultural |                                 | $               | 704   |          |       |  | 19 | %      |          | $ | 457   |       |  |          | 18 | %   |       | $ | 428      |        |  |  | 21    | %        |   | $      | 258 |       |       |  | 31 | %   |   | $ | 136 |     |  |  | 34 | %  
|Real estate mortgage                   |                                 |                 | 1,538 |          |       |  | 49 |        |          |   | 1,212 |       |  |          | 54 |     |       |   | 1,091    |        |  |  | 60    |          |   |        | 348 |       |       |  | 47 |     |   |   | 110 |     |  |  | 53 |    
|Construction and land development      |                                 |                 | 1,121 |          |       |  | 31 |        |          |   | 607   |       |  |          | 25 |     |       |   | 319      |        |  |  | 16    |          |   |        | 155 |       |       |  | 19 |     |   |   | 12  |     |  |  | 10 |    
|Installment and consumer lines         |                                 |                 | 53    |          |       |  | 1  |        |          |   | 69    |       |  |          | 3  |     |       |   | 78       |        |  |  | 3     |          |   |        | 22  |       |       |  | 3  |     |   |   | 13  |     |  |  | 3  |    
|Unallocated                            |                                 |                 | 1,164 |          |       |  |   |        |          |   | 732   |       |  |          |   |     |       |   | 610      |        |  |  |      |          |   |        | 231 |       |       |  |   |     |   |   | 221 |     |  |  |   |    
|                                      
|                                       | Total allowance for loan losses |                 | $     | 4,580    |       |  |    | 100    | %        |   | $     | 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,   |                                   
|                                                |                     |                   |                                   
|                                                |                     | 2005              |                                    |       | 2004   |         |         | 2003 |  
|                                               
|                                               
|                                               
|                                               
|                                               
|                                               
|Investment securities:                          |                     |                   |                                    |       |        |         |         |      |   |        |        |  
|                                               
|                                               
|                                               
|                                               
|                                                | Available-for-sale: |                   |                                    |       |        |         |         |      |   |        |        |   |    
|                                               
|                                               
|                                               
|                                               
|                                                |                     | Debt securities:  |                                    |       |        |         |         |      |   |        |        |   |     |       
|                                                |                     |                   | U.S. Government agency obligations |       | $      | 15,743  |         |      | $ | 3,512  |        |   | $   | 493    |       
|                                                |                     |                   | Mortgage-backed securities         |       |        | 148,307 |         |      |   | 65,128 |        |   |     | 55,762 |       
|                                                |                     | Equity securities |                                    |       |       |         |         |      |  |        |        |   | 131 |       
|                                               
|                                                |                     |                   |                                    | Total |        | $       | 164,050 |      |   | $      | 68,640 |   |     | $      | 56,386 | 
|                                               
|                                                | Held-to-maturity:   |                   |                                    |       |        |         |         |      |   |        |        |   |    
|                                               
|                                                |                     | Municipal bonds   |                                    | $     | 21,119 |         |         | $    |  |        |        | $ |    |       
|                                               
|Federal funds sold                              |                     | $                 | 126,119                            |       |        | $       | 63,831  |      |   | $      | 39,927 |  
|                                               
|Interest-earning demand deposits in other banks |                     | $                 |                                   |       |        | $       | 9,857   |      |   | $      | 9,694  |  
|                                               

33



---



##### 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 Years |              |   |   |                 |       
|                   |                                   | One Year or Less |       |                | to Five Years |  |                  | to Ten Years |   |   | After Ten Years |        |  | Total     |    
|                   |                                   |                  |       |                |               |  |                  |              |   |   |                 |        |  |           |    
|                   |                                   | Amortized        |       |                | Average       |  |                  | Amortized    |   |   | Average         |        |  | Amortized |     |     | Average |   |        | Amortized |  |  | Average |     |   | Amortized |       
|                   |                                   | Cost             |       |                | Yield         |  |                  | Cost         |   |   | Yield           |        |  | Cost      |     |     | Yield   |   |        | Cost      |  |  | Yield   |     |   | Cost      |       
|                  
|                  
|                  
|                  
|                  
|                  
|December 31, 2005: |                                   |                  |       |                |               |  |                  |              |   |   |                 |        |  |           |     |     |         |   |        |           |  |  |         |     |   |           |        |        |  |  |     |     |   |   |         |        
|                   | U.S. Government agency securities |                  | $     |               |               |  |                  |             | % |   | $               | 500    |  |           |     | 3.1 | %       |   | $      | 15,463    |  |  |         | 3.9 | % |           | $      |       |  |  |     |    | % |   | $       | 15,963  | 
|                   | Mortgage-backed securities        |                  |       | 7,562          |               |  |                  | 4.2          |   |   |                 | 45,369 |  |           |     | 4.2 |         |   |        | 37,808    |  |  |         | 4.2 |   |           |        | 60,492 |  |  |     | 4.2 |   |   |         | 151,231 | 
|                   | Municipal bonds                   |                  |       |               |               |  |                  |             |   |   |                 |       |  |           |     |    |         |   |        |          |  |  |         |    |   |           |        | 21,119 |  |  |     | 4.2 |   |   |         | 21,119  | 
|                  
|                   |                                   | $                | 7,562 |                |               |  | 4.2              | %            |   | $ | 45,869          |        |  |           | 4.2 | %   |         | $ | 53,271 |           |  |  | 4.1     | %   |   | $         | 81,611 |        |  |  | 4.2 | %   |   | $ | 188,313 |        
|                  
|December 31, 2004: |                                   |                  |       |                |               |  |                  |              |   |   |                 |        |  |           |     |     |         |   |        |           |  |  |         |     |   |           |        |        |  |  |     |     |   |   |         |        
|                   | U.S. Government agency securities |                  | $     |               |               |  |                  |             | % |   | $               | 500    |  |           |     | 3.1 | %       |   | $      | 3,018     |  |  |         | 2.5 | % |           | $      |       |  |  |     |    | % |   | $       | 3,518   | 
|                   | Mortgage-backed securities        |                  |       |               |               |  |                  |             |   |   |                 | 17,329 |  |           |     | 3.6 |         |   |        | 21,648    |  |  |         | 3.6 |   |           |        | 26,573 |  |  |     | 3.6 |   |   |         | 65,550  | 
|                  
|                   |                                   | $                |      |                |               |  |                 | %            |   | $ | 17,829          |        |  |           | 3.6 | %   |         | $ | 24,666 |           |  |  | 3.5     | %   |   | $         | 26,573 |        |  |  | 3.6 | %   |   | $ | 69,068  |        
|                  
|December 31, 2003: |                                   |                  |       |                |               |  |                  |              |   |   |                 |        |  |           |     |     |         |   |        |           |  |  |         |     |   |           |        |        |  |  |     |     |   |   |         |        
|                   | U.S. Government agency securities |                  | $     | 500            |               |  |                  | 3.1          | % |   | $               |       |  |           |     |    | %       |   | $      |          |  |  |         |    | % |           | $      |       |  |  |     |    | % |   | $       | 500     | 
|                   | Mortgage-backed securities        |                  |       |               |               |  |                  |             |   |   |                 | 27,119 |  |           |     | 3.3 |         |   |        | 19,682    |  |  |         | 3.5 |   |           |        | 9,416  |  |  |     | 3.9 |   |   |         | 56,217  | 
|                  
|                   |                                   | $                | 500   |                |               |  | 3.1              | %            |   | $ | 27,119          |        |  |           | 3.3 | %   |         | $ | 19,682 |           |  |  | 3.5     | %   |   | $         | 9,416  |        |  |  | 3.9 | %   |   | $ | 56,717  |        
|                  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                   |                                   |         |     |     |  
|------------------ | --------------------------------- | ------- | --- | --- | -
|                   |                                   |        
|                   |                                   | Total   |    
|                   |                                   |         |    
|                   |                                   | Average |    
|                   |                                   | Yield   |    
|                   |                                   |        
|                   |                                   |        
|                  
|                  
|                  
|                  
|December 31, 2005: |                                   |         |     |    
|                   | U.S. Government agency securities |         |     | 3.8 | %
|                   | Mortgage-backed securities        |         |     | 4.2 |  
|                   | Municipal bonds                   |         |     | 4.2 |  
|                   |                                   |         |     |    
|                   |                                   |         | 4.0 | %  
|                   |                                   |         |     |    
|December 31, 2004: |                                   |         |     |    
|                   | U.S. Government agency securities |         |     | 2.6 | %
|                   | Mortgage-backed securities        |         |     | 3.6 |  
|                   |                                   |         |     |    
|                   |                                   |         | 3.5 | %  
|                   |                                   |         |     |    
|December 31, 2003: |                                   |         |     |    
|                   | U.S. Government agency securities |         |     | 3.1 | %
|                   | Mortgage-backed securities        |         |     | 3.9 |  
|                   |                                   |         |     |    
|                   |                                   |         | 3.9 | %  
|                   |                                   |         |     |    

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 $1,961,000, $267,000 and $289,000 in stockholders
equity at December 31, 2005, 2004 and 2003, respectively.
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, 2005 are not considered
other than temporary.

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.

34



---



##### Table of Contents



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, 2005, the Bank met the definition of a
well capitalized depository institution.

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, |        
|                                    |                         |                 |        
|                                    |                         |                 |         |         |          | 
|                                    |                         | 2005            |         |         | 2004     |  |    | 2003   |     
|                                    |                         |                 |         |         |          |  |    |        |     
|                                    |                         |                 |         | % of    |          |  |    |        | % of |   |          |         |  | % of   |   
|                                    |                         | Amount          |         |         | Deposits |  |    | Amount |      |   | Deposits |         |  | Amount |    |     | Deposits |  
|                                   
|                                   
|Noninterest-bearing demand deposits |                         | $               | 98,082  |         |          |  | 16 | %      |      | $ | 52,472   |         |  |        | 14 | %   |          | $ | 42,348 |         |  |  | 15 | %  
|Savings and NOW deposits            |                         |                 | 55,614  |         |          |  | 9  |        |      |   | 35,620   |         |  |        | 10 |     |          |   | 30,033 |         |  |  | 11 |    
|Money-market deposits               |                         |                 | 217,281 |         |          |  | 35 |        |      |   | 131,131  |         |  |        | 36 |     |          |   | 89,970 |         |  |  | 31 |    
|                                   
|                                    | Subtotal                |                 |         | 370,977 |          |  |    | 60     |      |   |          | 219,223 |  |        |    | 60  |          |   |        | 162,351 |  |  |    | 57  |  
|                                   
|Time deposits:                      |                         |                 |         |         |          |  |    |        |      |   |          |         |  |        |    |     |          |   |        |         |  |  |    |    
|                                    | 1.00% - 1.99%           |                 |         | 656     |          |  |    | 1      |      |   |          | 5,289   |  |        |    | 1   |          |   |        |        |  |  |    |    |  
|                                    | 2.00% - 2.99%           |                 |         |        |          |  |    |       |      |   |          | 70,069  |  |        |    | 19  |          |   |        | 2,301   |  |  |    | 1   |  
|                                    | 3.00% - 3.99%           |                 |         | 117,657 |          |  |    | 19     |      |   |          | 57,002  |  |        |    | 16  |          |   |        | 87,250  |  |  |    | 30  |  
|                                    | 4.00% - 4.99%           |                 |         | 127,246 |          |  |    | 20     |      |   |          | 14,059  |  |        |    | 4   |          |   |        | 33,233  |  |  |    | 11  |  
|                                    | 5.00% - 5.99%           |                 |         |        |          |  |    |       |      |   |          |        |  |        |    |    |          |   |        | 1,437   |  |  |    | 1   |  
|                                   
|                                    | Total time deposits (1) |                 |         | 245,559 |          |  |    | 40     |      |   |          | 146,419 |  |        |    | 40  |          |   |        | 124,221 |  |  |    | 43  |  
|                                   
|                                    | Total deposits          |                 | $       | 616,536 |          |  |    | 100    | %    |   | $        | 365,642 |  |        |    | 100 | %        |   | $      | 286,572 |  |  |    | 100 | %
|                                   



|    |                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Including individual retirement accounts
    (IRAs) of $10,958, $8,695 and $6,998 at
    December 31, 2005, 2004 and 2003, respectively.

35



---



##### 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, |        
|                                 |  |                         |        
|                                 |  |                         |         |  |         | 
|                                 |  | 2005                    |         |  | 2004    |  |      | 2003    | 
|                                 |  |                         |         |  |         |  |      |         | 
|                                 |  | Average                 |         |  | Average |  |      | Average |  |   | Average |  |  | Average |      |   | Average |  
|                                 |  | Balance                 |         |  | Rate    |  |      | Balance |  |   | Rate    |  |  | Balance |      |   | Rate    |  
|                                
|                                
|Money-market deposits            |  | $                       | 161,514 |  |         |  | 2.42 | %       |  | $ | 110,302 |  |  |         | 1.84 | % |         | $ | 96,884  |  |  |  | 1.86 | %
|Savings and NOW deposits         |  |                         | 46,822  |  |         |  | 1.48 |         |  |   | 41,532  |  |  |         | 1.00 |   |         |   | 20,813  |  |  |  | 1.02 |  
|Time deposits                    |  |                         | 211,832 |  |         |  | 3.49 |         |  |   | 125,161 |  |  |         | 2.75 |   |         |   | 114,818 |  |  |  | 3.14 |  
|                                
|Total interest- bearing deposits |  | $                       | 420,168 |  |         |  | 2.85 | %       |  | $ | 276,995 |  |  |         | 2.13 | % |         | $ | 232,515 |  |  |  | 2.40 | %
|                                

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, 2006. 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, 2006, 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, 2005 which mature during the period indicated
(in thousands):

|                    |  |             |        |  |             |   |        |           |  |   |         |  |  |   |         | 
|------------------- |  | ----------- | ------ |  | ----------- | - | ------ | --------- |  | - | ------- |  |  | - | ------- | 
|                    |  | Due         |        |  | Due         |   |        | Due       |  |   |        
|                    |  | Under Three |        |  | 3 Months to |   |        | 1 Year to |  |   |        
|                    |  | Months      |        |  | 12 Months   |   |        | 5 Years   |  |   | Total   | 
|                   
|                   
|1.00% - 1.99%       |  | $           | 656    |  |             | $ |       |           |  | $ |        |  |  | $ | 656     | 
|2.00% - 2.99%       |  |             |       |  |             |   |       |           |  |   |        |  |  |   |        | 
|3.00% - 3.99%       |  |             | 16,931 |  |             |   | 82,452 |           |  |   | 18,274  |  |  |   | 117,657 | 
|4.00% - 4.99%       |  |             |       |  |             |   | 10,873 |           |  |   | 116,373 |  |  |   | 127,246 | 
|                   
|Total time deposits |  | $           | 17,587 |  |             | $ | 93,325 |           |  | $ | 134,647 |  |  | $ | 245,559 | 
|                   

36



---



##### Table of Contents



Jumbo time deposits ($100,000 and over) mature as
follows (in thousands):

|                                     |  |                 |         |  |      |   |        |      |  |   |        | 
|------------------------------------ |  | --------------- | ------- |  | ---- | - | ------ | ---- |  | - | ------ | 
|                                     |  |                
|                                     |  | At December 31, |        
|                                     |  |                 |        
|                                     |  | 2005            |         |  | 2004 |   |        | 2003 | 
|                                    
|                                    
|Due in three months or less          |  | $               | 14,544  |  |      | $ | 9,310  |      |  | $ | 11,023 | 
|Due from three months to one year    |  |                 | 55,925  |  |      |   | 27,432 |      |  |   | 47,229 | 
|Due from twelve months to five years |  |                 | 113,551 |  |      |   | 56,992 |      |  |   | 18,347 | 
|                                    
|                                     |  | $               | 184,020 |  |      | $ | 93,734 |      |  | $ | 76,599 | 
|                                    

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 Ended December 31, |       
|                                      |  |                                       |       
|                                      |  | 2005                                  |        |  | 2004 |   |       | 2003 | 
|                                     
|                                     
|Balance at year-end                   |  | $                                     | 31,884 |  |      | $ | 2,009 |      |  | $ | 5,174 |  
|Average balance during the year       |  | $                                     | 6,707  |  |      | $ | 3,019 |      |  | $ | 1,489 |  
|Interest expense during the year      |  | $                                     | 212    |  |      | $ | 25    |      |  | $ | 7     |  
|Average interest rate during the year |  |                                       | 3.16   |  |      |   | .83   | %    |  |   | .45   | %

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, 2005 or 2003.

Selected Quarterly Results

|                                 |  |                                         |       |  |         |   |       |         |  |   |         |  |  |         |       |  |         |   |       |         |  |   |         |  |  |   |       |  |  |   |       | 
|-------------------------------- |  | --------------------------------------- | ----- |  | ------- | - | ----- | ------- |  | - | ------- |  |  | ------- | ----- |  | ------- | - | ----- | ------- |  | - | ------- |  |  | - | ----- |  |  | - | ----- | 
|                                 |  |                                         |       | 
|                                 |  | 2005                                    |       |  | 2004    |  
|                                 |  |                                         |       |  |         |  
|                                 |  | Fourth                                  |       |  | Third   |   |       | Second  |  |   | First   |  |  | Fourth  |       |  | Third   |   |       | Second  |  |   | First   | 
|                                 |  | Quarter                                 |       |  | Quarter |   |       | Quarter |  |   | Quarter |  |  | Quarter |       |  | Quarter |   |       | Quarter |  |   | Quarter | 
|                                
|                                
|                                 |  |                                        
|                                 |  | (In thousands, except per share amounts |      
|Interest income                  |  | $                                       | 9,411 |  |         | $ | 8,067 |         |  | $ | 6,497   |  |  | $       | 5,307 |  |         | $ | 4,669 |         |  | $ | 4,264   |  |  | $ | 3,898 |  |  | $ | 3,824 | 
|Interest expense                 |  |                                         | 3,936 |  |         |   | 3,443 |         |  |   | 2,741   |  |  |         | 2,086 |  |         |   | 1,675 |         |  |   | 1,518   |  |  |   | 1,401 |  |  |   | 1,319 | 
|Net interest income              |  |                                         | 5,475 |  |         |   | 4,624 |         |  |   | 3,756   |  |  |         | 3,221 |  |         |   | 2,994 |         |  |   | 2,746   |  |  |   | 2,497 |  |  |   | 2,505 | 
|Provision for loan losses        |  |                                         | 378   |  |         |   | 485   |         |  |   | 491     |  |  |         | 186   |  |         |   | 125   |         |  |   | 106     |  |  |   | 226   |  |  |   | 160   | 
|Noninterest income               |  |                                         | 221   |  |         |   | 218   |         |  |   | 205     |  |  |         | 157   |  |         |   | 159   |         |  |   | 139     |  |  |   | 122   |  |  |   | 127   | 
|Noninterest expense              |  |                                         | 3,069 |  |         |   | 2,934 |         |  |   | 2,736   |  |  |         | 2,334 |  |         |   | 2,065 |         |  |   | 1,829   |  |  |   | 1,649 |  |  |   | 1,803 | 
|Earnings before income taxes     |  |                                         | 2,249 |  |         |   | 1,423 |         |  |   | 734     |  |  |         | 858   |  |         |   | 963   |         |  |   | 950     |  |  |   | 744   |  |  |   | 669   | 
|Net earnings                     |  |                                         | 1,455 |  |         |   | 898   |         |  |   | 456     |  |  |         | 526   |  |         |   | 591   |         |  |   | 584     |  |  |   | 467   |  |  |   | 399   | 
|Basic earnings per common share  |  |                                         | .31   |  |         |   | .19   |         |  |   | .09     |  |  |         | .15   |  |         |   | .18   |         |  |   | .18     |  |  |   | .15   |  |  |   | .12   | 
|Diluted earning per common share |  |                                         | .30   |  |         |   | .18   |         |  |   | .09     |  |  |         | .15   |  |         |   | .17   |         |  |   | .18     |  |  |   | .14   |  |  |   | .12   | 
|                                

37



---



##### 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 7A.     Quantitative and
Qualitative Disclosures About Market Risk

Market risk is the risk of loss from adverse
changes in market prices and rates. The Companys market
risk arises primarily from interest-rate risk inherent in its
lending and deposit taking activities. The Company has little or
no risk related to trading accounts, commodities or foreign
exchange.

Management actively monitors and manages its
interest rate risk exposure. The primary objective in managing
interest-rate risk is to limit, within established guidelines,
the adverse impact of changes in interest rates on the
Companys net interest income and capital, while adjusting
the Companys asset-liability structure to obtain the
maximum yield-cost spread on that structure. Management relies
primarily on its asset-liability structure to control interest
rate risk. However, a sudden and substantial increase in
interest rates could adversely impact the Companys
earnings, to the extent that the interest rates borne by assets
and liabilities do not change at the same speed, to the same
extent, or on the same basis.

Disclosure about the fair value of financial
instruments, which reflect changes in market prices and rates,
can be found in Note 18 of the notes to the consolidated
financial statements.




Item 8.     Financial
Statements

The financial statements of the Company as of and
for the years ended December 31, 2005 and 2004 are set
forth in this Form 10-K as Exhibit 13.1.




Item 9.     Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure

Not applicable.




Item 9A.     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.                                                                                                                                                                                                                                                                                                                                                                                                                          

38



---



##### Table of Contents






Item 9B.     Other
Information

Not Applicable.




PART III




Item 10.     Directors,
Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act

The Company has a Code of Ethics that applies to
its principal executive officer and principal financial officer
(who is also its principal accounting officer), which is
included as Exhibit 14.1 to this Form 10-K. The
information contained under the sections captioned
Directors and Executive Officers under
Election of Directors and in the sections captioned
Audit Committee Report and Section 16(a)
Reporting Requirements, in the registrants
definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 5, 2006, 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 11.     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 12.     Security Ownership
of Certain Beneficial Owners and Management and Related
Stockholder Matters

Information contained in the section captioned
Directors and Management and Principal Stock
Ownership under Election of Directors, and
under the table captioned Equity Compensation Plan
Information, in the Proxy Statement, is incorporated
herein by reference.




Item 13.     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.




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.




Item 15.     Exhibits

| |      |  |  |   |  |                                                                                                            
| | ---- |  |  | - |  | -----------------------------------------------------------------------------------------------------------
| | 3.1  |  |  |  |  | Articles of Incorporation of United Heritage
    Bankshares of Florida, Inc. **                            
| | 3.2  |  |  |  |  | Bylaws of United Heritage Bankshares of Florida,
    Inc. ****                                             
| | 4.1  |  |  |  |  | Specimen Stock Certificate of United Heritage
    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 Heritage Bankshares of Florida, Inc.
    Directors Stock Option Plan *                             
| | 10.3 |  |  |  |  | United Heritage 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 Heritage
    Bankshares of Florida, Inc. and Subsidiary                     
| | 14.1 |  |  |  |  | Code of Ethics *                                                                                           
| | 21.1 |  |  |  |  | List of Subsidiaries of United Heritage
    Bankshares of Florida, Inc.                                    
| | 23.1 |  |  |  |  | Consent of Osburn, Henning and Company                                                                     
| | 31.1 |  |  |  |  | Certification of Chief Executive Officer required
    by Rule 13a-14(a)/15d-14(a) under the Exchange Act   
| | 31.2 |  |  |  |  | Certification of Chief Financial Officer required
    by Rule 13a-14(a)/15d-14(a) under the Exchange Act   

39



---



##### Table of Contents



| |      |  |  |   |  |                                                                                                                                                           
| | ---- |  |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | 32.1 |  |  |  |  | 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



---



| |   |                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------
| | * | 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.

40



---



##### 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 6 day of March, 2006.



| |                                       
| | --------------------------------------
| | UNITED HERITAGE BANKSHARES OF         
| | FLORIDA, INC.                         
|
| | /s/David G.
    Powers                
| |                                       
| | President and Chief Executive Officer 
|
| | /s/ Shirley L. Tyler                  
| |                                       
| | Executive Vice President and Treasurer

41



---



##### 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 6, 2006.

|                                           |  |          |  | 
|------------------------------------------ |  | -------- |  | 
|                                           |  |         
|Signature                                  |  | Title   
|                                           |  |          | 
|                                          
|/s/ James L. HewittJames L. Hewitt         |  | Director
|                                          
|/s/ David G. PowersDavid G. Powers         |  | Director
|                                          
|/s/ J. Michael HattawayJ. Michael Hattaway |  | Director
|                                          
|/s/ Vincent S. HughesVincent S. Hughes     |  | Director
|                                          
|/s/ Randy O. BurdenRandy O. Burden         |  | Director

42



---



##### Table of Contents



United Heritage Bankshares of Florida, Inc.

Form 10-K


For Fiscal Year Ending December 31, 2005


EXHIBIT INDEX

|        |      |         |  |                                                                                                         
|------- | ---- | ------- |  | --------------------------------------------------------------------------------------------------------
|Exhibit |      |        
|No.     |      | Exhibit
|       
|       
|        | 13.1 |         |  | Financial Statements of United Heritage
    Bankshares of Florida, Inc. and Subsidiary                  
|        | 21.1 |         |  | Subsidiaries of the Registrant                                                                          
|        | 23.1 |         |  | Consent of Osburn, Henning and Company                                                                  
|        | 31.1 |         |  | Certification of President and Chief Executive
    Officer under §302 of the Sarbanes-Oxley Act of 2002 
|        | 31.2 |         |  | Certification of Executive Vice President and
    Treasurer under §302 of the Sarbanes-Oxley Act of 2002
|        | 32.1 |         |  | Certification of President and Chief Executive
    Officer under §906 of the Sarbanes-Oxley Act of 2002 
|        | 32.2 |         |  | Certification of Executive Vice President and
    Treasurer under §906 of the Sarbanes-Oxley Act of 2002

43