UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-KSB

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(Mark One)

ýANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

 ̈TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number: 0-22911

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SUN AMERICAN BANCORP

(Exact name of small business issuer in its charter)

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|-------------------------------------------------------------- | ------------------------------------
|Delaware                                                       | 65-0325364                          
|(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.)
|3400 Coral Way, Miami, Florida                                 | 33145                               
|(Address of principal executive offices)                       | (Zip Code)                          

Issuers telephone number (305) 421-6800

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.01 par value

Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act  ̈

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No  ̈

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.  ̈

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

The issuers revenues for the most recent fiscal year were $17,138,374.

The aggregate market value of the issuers common stock held by non-affiliates of the issuer, based upon the closing price of $5.38 on the American Stock Exchange, on March 10, 2006, was $63,397,678. Solely for the purpose of this calculation, all directors, officers and holders of more than 5% of the registrants outstanding common stock were deemed to be affiliates.

The number of shares outstanding of each of the issuers classes of common equity, as of March 10, 2006:

18,592,162 shares of common stock.

DOCUMENTS INCORPORATED BY REFERENCE:

Part III of this Form 10-KSB incorporates by reference certain information from the registrant's definitive proxy statement for its annual stockholders meeting to be filed not later than 120 days after the end of the fiscal year covered by this Form 10-KSB.

Transitional Small Business Disclosure Format (check one): Yes  ̈ No ý













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TABLE OF CONTENTS

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|PART  I
Item 1.     Description of Business
3
Item 2.     Description of Property
12
Item 3.     Legal Proceedings
14
Item 4.     Submission of Matters to a Vote of Security Holders
14
PART  II
Item 5.     Market for Common Equity, Related Stockholder Matters and
Small Business Issuer Purchases of Equity Securities
15
Item 6.     Managements Discussion and Analysis or Plan of Operation
16
Item 7.     Financial Statements
39
Item 8.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
67
Item 8A.   Controls and Procedures
67
Item 8B.   Other Information
67
PART  III
Item 9.     Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act
68
Item 10.   Executive Compensation
68
Item 11.   Security Ownership of Certain Beneficial Owners and Management and
Related Stockholders Matters
68
Item 12.   Certain Relationships and Related Transactions
68
Item 13.   Exhibits
68
Item 14.   Principal Accountant Fees and Services
69
SIGNATURES
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FORWARD-LOOKING STATEMENTS

Statements included in this document, or incorporated herein by reference, that do not relate to present or historical conditions are forward looking statements within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Additional oral or written forward looking statements may be made by Sun American Bancorp (the Company) from time to time, and such statements may be included in documents that are filed with the Securities and Exchange Commission. Such forward-looking statements involve risks and uncertainties that could cause results or outcomes to differ materially from those expressed in the forward looking statements. Forward looking statements may include, without limitation, statements relating to the Companys plans, strategies, objectives, expectations and intentions and are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as believes, forecasts, intends, possible, estimates, anticipates, and plans and similar expressions are intended to identify forward looking statements. The Companys ability to predict projected results or the effect of events on the Companys operating results is inherently uncertain. Forward-looking statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those discussed in this document. Factors that could affect the Companys assumptions and predictions include, but are not limited to, the risk that (i) loan losses would have a material adverse effect on the Companys financial condition and operating results; (ii) a decline in the value of the collateral securing the Companys loans could result in an increase in losses on foreclosure; (iii) the Companys growth strategy may not be successful; (iv) the geographical concentration of the Companys business in Florida makes the Company highly susceptible to local economic and business conditions; (v) changes in interest rates may adversely affect the Companys financial condition; and (vi) competition from other financial institutions could adversely affect the Companys profitability and growth. You should not place undue reliance on the Companys forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and the Company undertakes no obligation to update or revise any forward-looking statements.







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PART  I

Item 1.

Description of Business

General

History

The Company is a single bank holding company headquartered in Miami, Florida and organized under the laws of the state of Delaware. The corporate office is located at 3400 Coral Way in Miami, Florida 33021. Its telephone number is (305) 421-6800. Sun American Bancorp is a reporting company and files the following reports and other information with the Securities and Exchange Commission: Form 10-KSB, Form 10-QSB, Form 8-K, and Form 14A. The Companys financial information and reporting history may be accessed through the EDGAR online service.

Sun American Bancorp was originally incorporated in 1992 under the name of PCM Acquisition Group, Inc., for the sole purpose of acquiring Florida First International which was renamed Southern Security Bank Corporation. In 2000, while under a cease and desist order from Federal bank regulators, Southern Security Bank was reorganized and infused with new capital by a group of investors. In 2001, Southern Security Bank Corporation acquired the assets and assumed deposits and certain liabilities of PanAmerican Bank. As part of the transaction, Southern Security Bank adopted the name PanAmerican Bank and the Holding Company was renamed PanAmerican Bancorp. In 2004, PanAmerican Bancorp acquired the assets and assumed deposits and certain liabilities of Gulf Bank and entered into an assignment and sublease agreements for the lease of the three Gulf Banks branches in Miami-Dade County, Florida. On January 12, 2006, the Company changed its name from PanAmerican Bancorp to Sun American Bancorp. The Companys board of directors and stockholders approved the name change. In addition, the trading symbol for the Companys common stock was changed from PNB to SBK. On January 20, 2006, we also changed the name of our bank subsidiary from PanAmerican Bank to Sun American Bank (the Bank).

In 2005, the Company completed several private offerings of equity securities that contributed $35.5 million of net new capital to the Company. In addition to the private placement offerings, $919,000 of new capital was raised through the exercise of warrants and options.

Sun American Bank

The Company owns 99.9% of the issued and outstanding common shares of the Bank. The Bank is chartered by the State of Florida and is engaged in general commercial banking providing a wide range of loan and deposit services. Its deposit accounts are insured by the Federal Deposit Insurance Corporation and it is a member of the Federal Reserve System and the Federal Home Loan Bank. The Banks primary market areas are Miami-Dade, Broward, and Palm Beach County in Florida, where it operated seven branch offices in 2005 at the following locations: 3400 Coral Way, Miami, Florida (this is the Banks and the Companys corporate office); 3475 Sheridan Street, Hollywood, Florida; 1200 N. Federal Highway, Boca Raton, Florida, 3501 West Boynton Beach Boulevard, Boynton Beach, Florida; 2800 SW 8th Street, Miami, Florida; 2500 NW 97th Avenue, Miami, Florida; and 2770 S.W. 27th Avenue, Miami, Florida. On March 13, 2006, the Bank opened its eighth branch at 2000 PGA Boulevard, Palm Beach Gardens, Florida. All locations are full-service branches.

Deposit services for personal and business customers include a variety of checking accounts which include interest-earning, low-cost checking, and senior checking. Savings, money market accounts, and certificates of deposit with a wide variety of terms and rates are also offered. Consumers have access to ATMs, safe deposit boxes, direct deposit and on-line banking services. Management does not believe that the deposits or the business of the Bank in general are seasonal in nature. Deposit levels may, however, vary with local and national economic conditions.

Mortgage lending activities include commercial, industrial, and residential loans secured by real estate. The Banks customers are predominantly small to medium sized businesses, individual investors and consumers. Commercial lending activities include originating secured and unsecured loans and lines of credit, and providing cash management services to a variety of businesses. The Bank also provides a merchant credit card program. The Banks installment loan department makes direct auto, home equity, home improvement, and personal loans to individuals.



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Management is not aware of any environmental liabilities that would have a material adverse effect on the operations or earnings of the Company or the Bank.

Financial Highlights

The Company has experienced significant growth in recent years through select acquisitions and internal generation of new business. Management has focused on growing the loan portfolio by concentrating on origination of high-quality real estate loans, and by competitively pricing deposit products to maintain our interest rate spread. Management has also closely monitored operating expenses in an effort to enhance the financial results. Highlights are noted below:

·

Total assets have grown from $191.5 million at December 31, 2004 to $277.2 million at December 31, 2005, an increase of 45 percent.

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Total loans have grown from $153.7 million at December 31, 2004 to $210.7 million at December 31, 2005, an increase of 37 percent.

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Total deposits have grown from $158.2 million at December 31, 2004 to $193.5 million at December 31, 2005, an increase of 22 percent.

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Shareholders equity has grown from $20.7 million at December 31, 2004 to $59.6 million at December 31, 2005, an increase of 187 percent.

Growth Strategy

The Company intends to continue to expand its business through internal growth as well as through the select acquisition of the assets and assumption of deposits of other banks as opportunities are identified. The Company will also seek to acquire other community banks in South Florida subject to favorable pricing considerations. The Company intends to grow internally by opening new branches, adding to its loan portfolio and bringing in new deposits. The Company also intends to grow its capital base on a continuing basis as it is part of the Companys business strategy of maintaining a well capitalized position. The Company intends to pursue this business strategy while managing asset quality.

Operating Strategy

Focus on increasing net loans.The Company’s lending activities focus primarily on providing local businesses with commercial business loans and loans secured by real estate. The Company is increasing its efforts to develop new business relationships and has increased its marketing efforts. Typically, the Company seeks commercial lending relationships with customers borrowing up to $5.0 million. The Banks legal lending limit for secured and unsecured loans was $13.1 million and $7.8 million, respectively, as of December 31, 2005. In addition, the Company shares participation in loans with other banks for loans generated that exceed its or the other banks legal lending limit.

Attract and retain highly qualified and productive staff across all levels of the organization and focusing on low net overhead.Key to the Company’s growth and profitability is management’s experience in providing community banking services and the ability to create a culture committed to both proactive sales and disciplined credit quality. The Company’s practice of employing highly qualified and productive individuals at all levels of the organization is key to meeting business goals and maintaining lower costs.

Enhance and upgrade our business platform to support business growth.The Company will continue to invest in systems, technology and people to facilitate an administrative infrastructure that is efficient and maintains a satisfactory level of internal control and regulatory compliance.

Maintain the level of earning assets as they relate to operating expenses in order to improve profitability.The Company is pursuing a growth strategy by increasing the level of earning assets, primarily through increases in the loan portfolio, and by increasing the level of capital in support of this growth. At the same time, we are continually analyzing our operating expenses to find areas where costs can be reduced through greater efficiency.



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Increase the Companys capital base to support business growth.The periodic addition of new capital to support business growth is a core component required to permit the Company to achieve growth plans. In 2005, the Company completed several private offerings of equity securities that contributed $35.5 million of net new capital for the Company.

Market Area

The Companys primary market areas for loan and deposit growth are Miami-Dade, Broward, and Palm Beach counties in southeast Florida where the Company operates eight full-service banking offices. This metropolitan area has a large and diverse population. Southeast Florida traditionally has strong tourism and taxable sales. The area experiences high tourism and housing demand both of which benefit from the influx of visitors and residents migrating from the northern states, Canada, other Florida counties, Latin America, the Caribbean, and Europe. The Company has also experienced a growing demand for commercial loans throughout the Companys market areas.

The diverse South Florida region includes a large population of retirees. In addition, many of the Banks customers, due to their Hispanic backgrounds, speak Spanish. In Miami-Dade County, the Bank has four full service banking offices. In Broward County, the Bank has a full service banking branch located in the city of Hollywood. In Palm Beach County, the Bank has three full service branches located in the cities of Boca Raton, Boynton Beach and Palm Beach Gardens which recently opened in March 2006.

Competition

The Company faces substantial competition in all phases of operations from a variety of different competitors. Competition for deposits, loans, and other financial services come from numerous Florida-based and out-of-state banks, savings banks, thrifts, credit unions and other financial institutions as well as other entities that provide financial services, many of which are much larger than the Bank. 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 Bank does not currently provide. In addition, many of the Banks non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks. The Bank competes by offering high levels of attention to its customers, providing personalized services that its larger competitors can not match. In those instances where the Bank is unable to provide services a customer needs, it arranges for those services to be provided by other banks with which it has business relationships.

The Company maintains a strong community orientation by, among other things, supporting active participation of its employees in local business, charitable, civic, school and church activities.

Supervision and Regulation

The Holding Company and the Bank are highly regulated entities, which are governed by various federal state governmental authorities. As explained more fully below, Federal and Florida banking laws and regulations govern all areas of the operations of the Company and the Bank, including reserves, loans, capital, payment of dividends, establishment and closing of branches, the granting of credit under equal and fair conditions, and the disclosure of the cost and terms of such credit. As the Companys primary federal regulator, the Board of Governors of the Federal Reserve System has authority to initiate civil and administrative actions and take other measures against the Bank and its institution-affiliated parties, which include the Banks officers, directors, employees, 10%-or-greater shareholders and (under certain circumstances) the Banks professionals, for any violation of law or any action that constitutes an unsafe or unsound banking practice. Such enforcement actions include the issuance of cease and desist orders, civil money penalties, and the removal of and prohibition against the Banks institution-affiliated parties from actively participating in the conduct of the Banks affairs.

Bank Holding Company Regulation and Supervision

Sun American Bancorp is a one-bank holding company, registered with the Federal Reserve Bank under the Bank Holding Company Act of 1956, as amended. As such, the Holding Company and the Bank are subject to the supervision, examination, and reporting requirements of the Bank Holding Company Act of 1956, and the regulations of the Federal Reserve Bank. The Holding Company is required to file periodic reports with the Federal Reserve Bank and such additional information as the Federal Reserve Bank may require pursuant to the Bank Holding Company Act of 1956. The Federal Reserve Bank may conduct examinations of the Holding Company and



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the Bank. Under Federal Reserve Bank regulations and other Federal Reserve Bank authority, the Holding Company is required to serve as a source of financial and managerial strength to the Bank and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve Banks policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding companys failure to meet its obligations to serve as a source of strength to its subsidiary banks may be considered by the Federal Reserve Bank to be an unsafe and unsound banking practice or a violation of the Federal Reserve Banks regulations or both.

The Bank Holding Company Act of 1956, generally prohibits the 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 Bank 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 Bank must consider whether the performance of such an activity reasonably can 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 interests, or unsound banking practices. For example, factoring accounts receivable, acquiring or servicing loans, leasing personal property, conducting discount 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, all have been determined by the Federal Reserve Bank to be permissible activities of bank holding companies. Despite prior approval, the Federal Reserve Bank has the power to order a bank holding company or its subsidiaries to terminate any activity or to 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.

Change of Holding Company Control.With regard to bank holding companies, the Bank Holding Company Act of 1956 requires that every bank holding company obtain the prior approval of the Federal Reserve before it may acquire all or substantially all of the assets of any bank, or ownership or control of any voting shares of any bank, if after such acquisition it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. In approving bank acquisitions by bank holding companies, the Federal Reserve Bank is required to consider the financial and managerial resources and future prospects of the bank holding company and the banks concerned, the convenience and needs of the communities to be served and various competitive factors.

The Bank Holding Company Act of 1956 further prohibits a person or group of persons from acquiring control of a bank holding company unless the Federal Reserve Bank has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve Bank, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act would, under the circumstances set forth in the presumption, constitute acquisition of control of the bank holding company. In addition, any person or group of persons must obtain the approval of the Federal Reserve under the Bank Holding Company Act of 1956, before acquiring 25% (5% in the case of an acquirer that is already a bank holding company) or more of the outstanding common stock of a bank holding company, or otherwise obtaining control or a controlling influence over the bank holding company.

Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act of 1999 significantly changed the regulatory structure and oversight of the financial services industry. Effective March 12, 2000, the Act, repealed the provisions of the Depression-era Glass-Steagall Act that restricted banks and securities firms from affiliating with one another. It also revised the Bank Holding Company Act to permit a qualifying bank holding company, called a financial holding company, to engage in a full range of financial activities, including banking, insurance, securities, and merchant banking activities. It also permits qualifying bank holding companies to acquire many types of financial firms without the prior approval of the Federal Reserve Bank.

Management does not believe that the Gramm-Leach-Bliley Act of 1999 has or will have an immediate positive or negative material effect on operations. In addition, the Holding Company has not elected to become a financial holding company for purposes of the Act and, therefore, cannot engage in the expanded range of activities afforded to financial holding companies. However, the Act may have the result of increasing the amount of competition that our Bank faces from larger financial service companies, many of whom have substantially more



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financial resources than our Bank, which may now offer banking services in addition to insurance and brokerage services.

Bank Regulation and Supervision.

As a Federal Reserve Bank member state Bank, the principal federal regulator of the Bank is the Federal Reserve Bank and, therefore, the Bank is subject to the regulations and administrative practices of the Federal Reserve Bank. In addition, as a state bank chartered by the State of Florida, the Bank is subject to the Florida Banking Code which is administered by the Office of Financial Regulation as well as the rules and regulations of the Office of Financial Regulation. The deposit obligations of the Bank are insured by the FDIC in the maximum individual amounts of $100,000 each. The Florida Department of Financial Services supervises and regulates all areas of the Banks operations, including, without limitation, its loans, mortgages, issuance of securities, annual shareholders meetings, capital adequacy requirements, payment of dividends and the establishment or termination of branches. As a state-chartered banking institution in the State of Florida, the Bank is empowered by statute, subject to limitations expressed therein, to take savings and time deposits, to accept checking accounts, to pay interest on such deposits, to make loans on residential and other real estate, to make consumer and commercial loans, to invest, with certain limitations, in equity securities and in debt obligations of companies and to undertake other various banking services on behalf of its customers.

As a state-chartered member of the Federal Reserve System, the Bank is subject to capital requirements imposed by the Federal Reserve Bank. The Federal Reserve Bank requires state-chartered member banks to comply with risk-based capital standards and to maintain a minimum leverage ratio. As of December 31, 2005, the Bank was in compliance with both the risk-based capital guidelines and the minimum leverage capital ratio.

Management has entered into agreements with the federal and state regulators to remain well capitalized and improve the policies and procedures in administrative areas affecting internal audit, asset and liability management and compliance. Management has also agreed to periodically report to the regulatory authorities on our progress in these areas.

Change of Bank Control.Florida and federal law restrict the amount of voting stock of 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 by tender offer or similar means than it might be to acquire control of another type of corporation. Consequently, shareholders of financial institutions are less likely to benefit from the rapid increases in stock prices that often result from tender offers or similar efforts to acquire control of other companies.

Under Florida law, no person or group of persons may, directly or indirectly or acting by or through one or more persons, purchase or acquire a controlling interest in any bank which would result in the change in control of that bank unless the Department first shall have approved such proposed acquisition. A person or group will be deemed to have acquired control of a bank (i) if the person or group, directly or indirectly or acting by or through one, or more other persons, owns, controls, or has power to vote 25% or more of any class of voting securities of the bank, or controls in any manner the election of a majority of the directors of the bank, or (ii) if the Department determines that such person exercises a controlling influence over the management or policies of the bank. In any case where a proposed purchase of voting securities would give rise to a presumption of control, the person or group who proposes to purchase the securities must first file written notice of the proposal to the Department for its review and approval. Subsections 658.27(2)(c) and 658.28(3), Florida Statutes, refer to a potential change of control of a financial institution at a 10% or more threshold and rebuttable presumption of control. Accordingly, the name of any subscriber acquiring more than 10% of the voting securities of the Bank must be submitted to the Florida Department of Financial Services for prior approval.

Federal law imposes additional restrictions on acquisitions of stock in banks which are members of the Federal Reserve System. Under the federal Change in Bank Control Act of 1978, as amended, and the regulations thereunder, a person or group must give advance notice to the Federal Reserve Bank before acquiring control of any state member bank. Upon receipt of such notice, the Federal Reserve Bank either may approve or disapprove the acquisition. That statute creates a rebuttable presumption of control if a member or group acquires 10% or more of a banks voting stock and if one or more other control factors as set forth in that statute are present.

Interstate Banking and Branching

Florida banks are permitted by Florida statute to branch statewide. Such branch banking, however, is subject to prior approval by the Office of Financial Regulation, and agreement by the Federal Reserve Bank and the



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Federal Deposit Insurance Corporation. Any approval by the Office of Financial Regulation, Federal Reserve Bank and the Federal Deposit Insurance Corporation of branching by the Bank would take into consideration several factors, including our level of capital, the prospects and economics of the proposed branch office, and other considerations deemed relevant by the Office of Financial Regulation, Federal Reserve Bank and the Federal Deposit Insurance Corporation for purposes of determining whether approval should be granted to open a branch office.

Affiliate and Insider Restrictions

The Banks authority to engage in transactions with affiliates (e.g., any company that controls or is under common control with an institution, including the Company and its non-bank subsidiaries) is limited by federal law. The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the Bank. The aggregate amount of covered transactions with all affiliates is limited to 20% of the Banks capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in federal law. The purchase of low quality assets from affiliates is generally prohibited. The transactions with affiliates must be on terms and under circumstances, that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, we are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies, and we may not purchase the securities of any affiliate other than a subsidiary.

The Banks authority to extend credit to insiders, such as executive officers, directors and 10% shareholders, as well as entities controlled by insiders, is also governed by federal law. Loans to insiders are required to be made on terms substantially the same as those offered to unaffiliated individuals and must not involve more than the normal risk of repayment. An exception exists for loans made to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. The law limits both the individual and aggregate amount of loans the Bank may make to insiders based, in part, on the Banks capital position and requires certain board approval procedures to be followed.

Investment Activities

The Bank is permitted under federal and state law to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies and of state and municipal governments, certificates of deposit of other federally insured institutions, certain bankers acceptances and federal funds. Subject to various restrictions, the Bank may also invest a portion of its assets in commercial paper and corporate debt securities. As a Federal Reserve Bank member bank, the bank is required to maintain an investment in Federal Reserve Bank stock. In addition, the Bank is a member of the Federal Home Loan Bank of Atlanta and is required to maintain an investment in Federal Home Loan Bank stock. The Bank is required under state and federal regulations to maintain a minimum amount of liquid assets.

A committee consisting of Bank Officers and Directors determines appropriate investments in accordance with the Board of Directors approved investment policies and procedures. The Companys investment policies generally limit investments to U.S. Government and U.S. Government agency securities, municipal bonds, certificates of deposits, marketable corporate debt obligations, mortgage-backed securities and certain types of mutual funds. The Companys investment policy does not permit engaging directly in hedging activities or purchasing high risk mortgage derivative products. Investments are made based on certain considerations, which include the interest rate, credit quality, yield, settlement date and maturity of the investment, the Banks liquidity position, and anticipated cash needs and sources (which in turn include outstanding commitments, upcoming maturities, estimated deposit maturities and anticipated loan amortization and repayments). The effect that the proposed investment would have on the Banks credit and interest rate risk, and risk-based capital is also given consideration during the evaluation.

Lending Activities

Community Reinvestment Act; Fair Lending.The Bank is subject to a variety of fair lending laws and reporting obligations involving home mortgage lending operations and Community Reinvestment Act activities. The Community Reinvestment Act generally requires the federal banking agencies to evaluate the record of a bank in meeting the credit needs of its local communities, including low-and moderate-income neighborhoods. Each financial institutions efforts in meeting community credit needs are evaluated as part of the examination process pursuant to twelve assessment factors. A bank can also become subject to substantial penalties and corrective



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measures for a violation of certain fair lending laws. The federal banking agencies may take compliance with such laws and Community Reinvestment Act obligations into account when regulating and supervising other activities or assessing whether to approve certain applications such as mergers, acquisitions and applications to open a branch or facility. At the Banks most recent evaluation during 1999, the Federal Reserve Bank rated the Bank Satisfactory in complying with its Community Reinvestment Act obligations.

Under federal law, federally insured banks are subject, with certain exceptions, to certain restrictions on any extension of credit to 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, such banks are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit or the providing of any property or service.

Federal and Florida law further provide loans-to-one borrower limits. A bank may extend credit to any person, including any related interest of that person, up to an amount of 15% of its capital for loans and lines of credit which are unsecured. A bank may extend credit to any person, including any related interest of that person, up to an amount of 25% of its capital for loans and lines of credit, which are amply and entirely secured. When outstanding loans consist of both secured and unsecured portions, the secured and unsecured portions may not exceed 25% of the capital of the lending bank, and the unsecured portion may not exceed 15% of the capital of the lending bank.

Allowance for Loan Losses.Management believes it has established the existing allowance for loan losses in accordance with accounting principles generally accepted in the United States of America. However, there can be no assurance that regulators, in reviewing the Bank’s loan portfolio, will not request us to increase significantly the allowance for loan losses. Additionally, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that a substantial increase will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect the financial condition and results of operations.

Deposit Activities and Other Sources of Funds

Deposit Insurance.The Bank’s deposit accounts are insured by the FDIC up to a maximum of $100,000 per insured depositor. The FDIC has the authority to terminate insurance of accounts pursuant to procedures established for that purpose.

As a FDIC-insured institution, the Bank is subject to insurance assessments imposed by the FDIC. Under current law the insurance assessment to be paid by insured institutions shall be as specified in a schedule required to be issued by the FDIC that specifies, at semiannual intervals, target reserve ratios designed to increase the FDIC insurance fund reserve ratio as it relates to estimated insured deposits (a ratio as the FDIC may determine in accordance with its statute). Further, the FDIC is authorized to impose one or more special assessments in any amount deemed necessary to enable repayment of amounts borrowed by the FDIC from the United States Department of the Treasury.

The FDIC Insurance is based on a risk-based assessment schedule based on an institutions average assessment base. The actual assessment to be paid by each FDIC-insured institution is based on the institutions assessment risk classification, which is determined based on whether the institution is considered Well-Capitalized, Adequately Capitalized or Undercapitalized, as such terms have been defined in applicable federal regulations adopted implement the prompt corrective action provisions of the Federal Deposit Insurance Corporation Improvement Act, and whether such institution is considered by its supervisory agency to be financially sound or to have supervisory concerns.

Deposit Accounts.Most of the Bank’s depositors are residents of the State of Florida. Deposits are attracted from within the Bank’s market area through the offering of a broad selection of deposit instruments, including NOW accounts, money market deposit accounts, regular checking accounts, regular savings accounts, certificates of deposit and retirement savings plans. Deposit account terms vary, according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of its deposit accounts, the Bank considers current market interest rates, profitability to the Bank, matching deposit and loan products and its customer preferences and concerns. The Bank reviews its deposit mix and pricing weekly.



9



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Borrowings.The Bank has the ability to borrow from correspondent banks to supplement its supply of lendable funds and to meet deposit withdrawal requirements. Advances are made pursuant to limitations on the amount of advances and are based on the financial condition of the member institution as well as the value and acceptability of collateral pledged. We have established a correspondent relationship with Independent Bankers Bank of Lake Mary, Florida with respect to the foregoing services. At December 31, 2005, the Bank maintained an unsecured line of credit of $5.0 million and the Company maintains a $2.0 million revolving credit line, each with Independent Bankers Bank, to meet interim liquidity needs. There were no borrowings outstanding under these unsecured lines of credit as of December 31, 2005.

Equity and Capital Resources.The Bank is subject to various regulatory capital requirements administered by Federal and State banking authorities. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements and operation. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of the Banks assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting policies.

The Banks capital accounts and classifications are also subject to qualitative judgment by the regulators about components, risk weighting, and other factors. Quantitative and qualitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios, set forth in the table later in this document of total and Tier-1 capital, as defined by regulation, to risk weighted assets, and of Tier-1 capital to average assets. Management believes that as of December 31, 2005, the Company has met the capital adequacy requirements as defined by these definitions, and were well capitalized.

Dividends.There are various limitations under law on the ability of the Bank to pay dividends. The Federal Reserve Bank and the Florida Department of Financial Services also have the general authority to limit the dividends paid by insured banks if such payment may be deemed to constitute an unsafe and unsound practice. Under Florida law applicable to banks and subject to certain limitations, after charging off bad debts, depreciation and other worthless assets, if any, and making provisions for 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 shall deem to be appropriate and, with the approval of the Florida Department of Financial Services, may declare a dividend from retained earnings for prior years. Before declaring a dividend, a bank must carry 20% of its net profits for any preceding period as is covered by the dividend to its surplus fund, until the surplus fund is at least equal to the amount of its common stock then issued and outstanding. No dividends may be paid at any time when a banks net income 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 or any written statement with the Department or a federal regulatory agency.

Anti-Money Laundering and Anti-Terrorism Legislation.On October 26, 2001, the President of the United States signed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001. Under the USA PATRIOT Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and know your customer standards in their dealings with foreign financial institutions and domestic and foreign customers. For example, the enhanced due diligence policies, procedures and controls generally require financial institutions to take reasonable steps:

·

to conduct enhanced scrutiny of certain account relationships to guard against money laundering and report any suspicious transaction;

·

to ascertain the identity of the nominal and beneficial owners of, and the source of funds deposited into, certain accounts as needed to guard against money laundering and report any suspicious transactions;

·

to ascertain with respect to any foreign correspondent bank customer, the shares of which are not publicly traded, the identity of the owners of the foreign bank and the nature and extent of the ownership interest of each such owner; and

·

to ascertain whether any foreign bank provides correspondent accounts to other foreign banks and, if so, the identity of those foreign banks and related due diligence information.



10



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On September 26, 2002, the United States Department of the Treasury adopted final rules pursuant to Section 314(a) and 314(b) of the USA PATRIOT Act designed to increase the cooperation and information sharing between financial institutions, regulators and law enforcement authorities regarding individuals, entities and organizations engaged in, or reasonably suspected based on credible evidence of engaging in, terrorist acts or money laundering activities. Under the new rules, a financial institution is required to:

·

expeditiously search its records to determine whether it maintains or has maintained accounts, or engaged in transactions with individuals or entities, listed in an information request submitted by the Financial Crimes Enforcement Network;

·

notify Financial Crimes Enforcement Network if an account or transaction is identified;

·

designate a contact person to receive information requests;

·

limit use of information provided by Financial Crimes Enforcement Network to: (1) reporting to Financial Crimes Enforcement Network, (2) determining whether to establish or maintain an account or engage in a transaction, and (3) assisting the financial institution in complying with the Bank Secrecy Act; and

·

maintain adequate procedures to protect the security and confidentiality of Financial Crimes Enforcement Network requests.

·

Under the new rules, a financial institution under certain circumstances may also share with other financial institutions, information regarding individuals, entities, organizations and countries for purposes of identifying and, where appropriate, reporting activities that it suspects may involve possible terrorist activity or money laundering.

On September 26, 2002, the United States Department of the Treasury also adopted a new rule under the authority of Sections 313 and 319(b) of the USA PATRIOT Act intended to prevent money laundering and terrorist financing through correspondent accounts maintained by U.S. financial institutions on behalf of foreign banks. Under the new rule, financial institutions:

·

are prohibited from providing correspondent accounts to foreign shell banks;

·

are required to obtain a certification from foreign banks for which they maintain a correspondent account stating the foreign bank is not a shell bank and that it will not permit a foreign shell bank to have access to the U.S. account;

·

must maintain records identifying the owner of the foreign bank for which they may maintain a correspondent account and its agent in the Unites States designated to accept services of legal process;

·

must terminate correspondent accounts of foreign banks that fail to comply with or fail to contest a lawful request of the Secretary of the Treasury or the Attorney General of the United States, after being notified by the Secretary or Attorney General.

At December 31, 2005, the Bank did not maintain any correspondent accounts for non-U.S. banking institutions.

On April 30, 2003, the United States Department of the Treasury issued final regulations under Section 326 of the USA PATRIOT Act that require banks to adopt written customer identification programs that will require them to:

·

verify the identify of any person seeking to open an account;

·

maintain records of the information used to verify identity; and

·

consult government known or suspected terrorist lists to determine whether the customer appears on any such list.

The foregoing requirements were included in the Bank’s anti-money laundering program as of December 31, 2005 as required by this act.

Proposed Legislation and Regulatory Action.New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of the nations



11



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financial institutions. Management cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

Effect of Governmental Monetary Polices.The Company’s earnings will be affected by the monetary and fiscal policies of the United States government and its agencies, as well as general domestic economic conditions. The Federal Reserve Board’s power to implement national monetary policy has had, and is likely to continue to have, an important impact on the operating results of commercial banks. The Federal Reserve Board affects the levels of bank loans, investments and deposits through its control over the issuance of United States government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies.

Federal and State Taxation

The Company reports the income of the Holding Company and the Bank on a fiscal year, consolidated basis and the accrual method of accounting, and is subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Banks reserve for bad debts discussed below.

The following discussion of state tax matters is intended only as a summary and does not purport to be a comprehensive description of the state tax rules applicable to the Bank or the Company. Neither the Holding Corporation nor the Bank has been audited by the IRS in the last five years.

State Taxation Florida.The Bank, as a Florida-based corporation is subject to a state corporation and emergency excise tax which is based on income. Florida also has a tangible tax based on the value of tangible personal property.

State Taxation Delaware.As a Delaware corporation not earning income in Delaware, the Company is exempted from Delaware corporate income tax, but is required to file an annual report with, and pay an annual franchise tax to the State of Delaware.

Employees

At December 31, 2005, there were 74 full time employees at the Bank level. A portion of three employees salaries is charged to the Company. The employees are provided with group life, health, major medical, dental and vision insurance, and long term disability. None of the employees of the Company or the Bank are represented by any collective bargaining units. The Company considers its employee relations to be good.

Item 2.

Description of Property

The Bank owns one parcel of real property which is located at 2770 S.W. 27th Avenue, Miami, Florida, which houses a branch of the Bank. As of December 31, 2005, the book value of this property was $903,000 less accumulated depreciation of $54,000 resulting in a net book value of $849,000.

As of December 31, 2005, the Company has leased 11 facilities and the material terms of these leases are as follows:

a.

Banks main office, full service branch office and the Companys corporate office

1.

3400 Coral Way, Miami, Florida

2.

11,464 square feet

3.

3 year term, expiring February 16, 2007 with option to renew lease for one 3 year period.

4

The rent (including CAM and other costs) is approximately $34 per square foot at December 31, 2005, resulting in total annual base rent of approximately $387,400.

b.

Full service branch office

1.

3475 Sheridan Street, Hollywood, Florida

2.

4,800 square feet

3.

10 year term, option to renew lease was exercised at December 31, 2003 to extend term to December 31, 2013.

4

The rent (including CAM and other costs) is approximately $40 per square foot at December 31, 2005, resulting in total annual base rent of approximately $192,000.



12



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c.

Full service branch office

1.

1200 N. Federal Highway, Boca Raton, Florida

2.

5,388 square feet

3.

10 year term, expiring September 2012

4.

The base rent (including CAM and other costs) is $30 per square foot at December 31, 2005 resulting in total annual rent of approximately $160,000.

d.

Full service branch office

1.

2500 N.W. 97th Avenue, Miami, Florida

2.

2,986 square feet

3.

Assumption of 10 year term, expiring August 14, 2009 with 2 options to renew for 2 five year periods.

4.

The base rent (including CAM and other costs) is $25 per square foot at December 31, 2005 resulting in total annual rent of approximately $74,000.

e.

Full service branch office

1.

2800 S.W. 8th Street, Miami, Florida

2.

2,284 square feet

3.

3 year term, expiring February 16, 2007 with option to renew for one 3 year period.

4.

The base rent (including CAM and other costs) is $44 per square foot at December 31, 2005 resulting in total annual rent of approximately $100,000.

f.

Full service branch office

1.

3501 West Boynton Beach Boulevard, Boynton Beach, Florida

2.

1,600 square feet

3.

5 year term, expiring August 31, 2010

4.

The base rent (including CAM and other costs) is $29 per square foot at December 31, 2005 resulting in total annual rent of approximately $46,000.

g.

Full service branch office  Opened March 13, 2006.

1.

2000 PGA Boulevard, Palm Beach Gardens, Florida

2.

3,648 square feet

3.

10 year term, expiring November 30, 2015

4.

The base rent (including CAM and other costs) is $39 per square foot at December 31, 2005 resulting in total annual rent of approximately $144,000.

h.

Full service branch office  Scheduled to open June, 2006

1.

221 Miracle Mile, Coral Gables, Florida

2.

4,000 square feet

3.

5 year term, expiring October 31, 2010

4.

The base rent (including CAM and other costs) is $50 per square foot at December 31, 2005 resulting in total annual rent of approximately $201,000.

i.

Full service branch office  Scheduled to open July, 2006.

1.

350 SE 2nd Street, Ft. Lauderdale, Florida

2.

3,500 square feet

3.

10 year term, expiring May 31, 2016.

4.

The base rent (including CAM and other costs) will be $61 per square foot as of the lease commencement date resulting in total annual rent of approximately $213,000.

j.

Full service branch office  Scheduled to open July 2006

1.

2160 West Atlantic Ave, Delray Beach, Florida

2.

3,816 square feet

3.

10 year term, expiring February 29, 2016

4.

The base rent (including CAM and other costs) will be $43 per square foot as of the lease commencement date resulting in total annual rent of approximately $162,000.

k.

Bank Operations Center  Scheduled to open June 2006



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1.

7300 Corporate Center Drive, Miami, Florida

2.

14,973 square feet

3.

5 year term, expiring January 31, 2011.

4.

The base rent (including CAM and other costs) will be $25 per square foot as of the lease commencement date resulting in total annual rent of approximately $373,000.

Management believes that each of our current facilities is adequate and well suited to our current operations.

Item 3.

Legal Proceedings

The Company and the Bank are periodically parties 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 the Companys business. Management does not believe that there is any pending proceeding against the Company or the Bank which, if determined adversely, would have a material effect on the Companys business or financial position other than the item described below.

On May 12, 2004, Fausto Marquez commenced an action against Sun American Bank, Case No. 03-21466 20, Miami-Dade County Circuit Court. Mr. Marquez alleged that the Bank had interfered with his efforts to purchase Gulf Bank. The trial court has dismissed the claims, with prejudice. Mr. Marquez has filed an appeal, which is pending. The possible outcome of the appeal is uncertain and the amount sought by Marquez is unknown.

Item 4.

Submission of Matters to a Vote of Security Holders

A Special Meeting of Stockholders (the Special Meeting) was held on December 16, 2005 at corporate headquarters located at 3400 Coral Way, Miami, Florida. At the Special Meeting, the stockholders approved the Amended and Restated Certificate of Incorporation to change our name to Sun American Bancorp by the following votes:

|           |  |         |  |         |  | 
|---------- |  | ------- |  | ------- |  | 
|For        |  | Against |  | Abstain |  | 
|10,356,107 |  | 96,575  |  | 4,774   |  | 

The stockholders also approved the 2005 Stock Option and Stock Incentive Plan by the following votes:

|          |  |         |  |         |  | 
|--------- |  | ------- |  | ------- |  | 
|For       |  | Against |  | Abstain |  | 
|7,373,615 |  | 589,146 |  | 80,921  |  | 

The stockholders also approved warrants to purchase 250,000 shares of common stock to be issued from time to time to the Companys officers, directors, and consultants by the following votes:

|          |  |         |  |         |  | 
|--------- |  | ------- |  | ------- |  | 
|For       |  | Against |  | Abstain |  | 
|7,371,630 |  | 588,131 |  | 83,921  |  | 



14



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PART  II

Item 5.

Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities

The Companys common stock is traded on the American Stock Exchange under the symbol SBK. During 2005 the high and low trades respectively were $5.13 on August 5, 2005, and $3.50 on April 6, 2005. The Companys common stock closed trading on December 30, 2005 at a price of $4.40 per share.

The following table shows the Companys quarterly high and low sales prices for the fiscal years ended December 31, 2005 and December 31, 2004.

|               |  |        |  |       |  |        |  |      
|-------------- |  | ------ |  | ----- |  | ------ |  | -----
|               |  | 2005   |  | 2004 
|               |  | High $ |  | Low $ |  | High $ |  | Low $
|First quarter  |  | 4.25   |  | 3.82  |  | 4.70   |  | 2.50 
|Second quarter |  | 4.25   |  | 3.50  |  | 4.85   |  | 3.25 
|Third quarter  |  | 5.13   |  | 3.90  |  | 3.38   |  | 2.50 
|Fourth quarter |  | 5.05   |  | 3.98  |  | 4.11   |  | 3.04 

The Company is subject to legal limitations under federal and state laws affecting the frequency and amount of dividends that may be paid to its stockholders. Banking regulators may restrict the ability of any bank holding company subject to their jurisdiction to pay dividends if the payments would constitute an unsafe or unsound banking practice. As a Delaware corporation, the Company may not declare and pay dividends on its capital stock if the amount paid exceeds an amount equal to the surplus which represents the excess of the Companys net assets over pain-in-capital or, if there is no surplus, the Companys net profits for the current and/or immediately preceding fiscal year. Under applicable Delaware case law, dividends may not be paid on the Companys common stock if the Company becomes insolvent or the payment of dividends will render it insolvent. The Company does not pay, and does not anticipate paying, any cash dividends on the common stock in the foreseeable future.

As of March 10, 2006, 18,592,162 shares were issued and outstanding and were held by approximately 900 shareholders of record.

During the fiscal year ended December 31, 2005, the Company sold the following securities without registration under the Securities Act of 1933, as amended (the Securities Act).

On March 18, 2005, the Company completed a private offering of units to accredited investors, each unit consisting of one share of common stock and one Class E Warrant. The Class E Warrants are for a five year term and provide the holder with the right to purchase one share of common stock at $4.25. The Company issued 1,586,000 units with an offering price of $4.00 for each unit. The Company received net proceeds of $5.7 million from this offering.

On August 2, 2005, the Company raised $17.4 million by selling 4,350,000 units, consisting of, in aggregate, 4,350,000 shares of common stock and Series F Warrants to purchase 2,175,000 shares of Common Stock, at a purchase price of $4.00 per unit, to investors in a private placement. In addition, the Company issued warrants to purchase, in aggregate, 391,500 shares of common stock to the placement agents, as part of compensation for their services related to the private placement. The Company paid, in aggregate, fees and commission of approximately $1.5 millionto the placement agents.

In addition, on October 27, 2005, the Company raised $12.6 million by selling 3,150,000 units consisting of, in aggregate, 3,150,000 shares of common stock and Series F Warrants to purchase 1,575,000 shares of common stock at a purchase price of $4.00 per unit to a group of investors, collectively referred to as the York Entities, in the private placement. The Company issued warrants to purchase, in aggregate, 283,500 shares of common stock to the placement agents, as part of compensation for their services related to the private placement. The Company paid in aggregate, fees and commission of approximately $1.0 million to the placement agents.

On December 14, 2005, the Company raised $2.9 million by selling 728,750 units, consisting of, in aggregate, 728,750 shares of common stock and Series F Warrants to purchase 364,375 shares of common stock, at a purchase price of $4.00 per unit, to investors in a private placement. In addition, the Company issued common stock purchase warrants to purchase, in aggregate, 65,587.5 shares of common stock to the placement agents, as part



15



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of compensation for their services related to the private placement. The Company paid, in aggregate, fees and commission of approximately $247,775 to the placement agents.

The Company offered and sold all of its shares of common stock, Class E Warrants, Series F Warrants, and warrants issued to the placement agents in the foregoing private placements to accredited investors, as such term is defined in Rule 501 of Regulation D, without general solicitation or general advertising, and as a result, the Company relied on the exemption from the registration requirements of the Securities Act provided by Rule 506 of Regulation D.

The information about these private placements and the terms of Series F Warrants and warrants issued to the placement agents was previously disclosed in the Companys Current Reports on Form 8-K filed with the SEC on August 5, 2005, November 1, 2005, and December 14, 2005, respectively. For further details about these private placements see the foregoing Forms 8-K.

Information regarding the Companys equity compensation plans required to be included in this Item 5 is incorporated by reference to certain information from the Companys definitive proxy statement for the Companys 2006 Annual Meeting of Stockholders to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this report.

Item 6.

Managements Discussion and Analysis or Plan of Operation

Overview

The Companys primary market and service area is Broward, Miami-Dade and Palm Beach counties where the Company operated seven full service banking offices during 2005. The Company has grown significantly in recent years due to the acquisition of certain assets, and assumption of certain liabilities, of PanAmerican Bank in December 2001 and Gulf Bank in February 2004. Since these transactions, the Company has pursued a growth strategy, increasing its level of earning assets, primarily through increases in the loan portfolio by concentrating on the origination of commercial loan products, by competitively pricing deposit products to maintain the interest rate spread, and by increasing the level of capital in support of this growth. The periodic addition of new capital to support business growth is a core component required to permit the Company to realize growth plans.

During 2005, the Company completed several private offerings to investors which added $35.5 million of net new capital. The first private placement in March involved the sale of 1,586,000 units at an offering price of $4.00 for each unit, each unit consisting of one share of common stock and one Class E Warrant. The Class E Warrants are for a five year term and provide the holder with the right to purchase one share of common stock at $4.25. The Company received net proceeds of $5.7 million from this offering. The other private placement involved the sale of 8,228,750 units at an offering price of $4.00 for each unit which consisted of one share of common stock and one Series F Warrant. Each Series F Warrant is for a five year term and provides the holder with the right to purchase 0.5 share of common stock at $4.00. The Company received net proceeds of $29.8 million from this offering. The Company is committed to raising additional capital as required to meet business growth requirements and maintain the Banks status as a well capitalized financial institution. The Banks capital exceeded statutory guidelines at December 31, 2005. There were no dividends declared in the years ended December 31, 2005 and 2004.

The Company intends to continue to expand its business through internal growth as well as through the select acquisition of the assets and assumption of deposits of other banks if and when opportunities are identified. The Company will also seek to acquire other community banks in South Florida subject to favorable pricing considerations. The Company intends to grow internally by opening new branches, adding to its loan portfolio and bringing in new deposits. The Company also intends to grow its capital base on a continuing basis as it is part of the Companys business strategy of maintaining a well capitalized position. The Company intends to pursue this business strategy while managing asset quality.

As of December 31, 2005, the Company had total assets of $277.2 million, net loans of $210.7 million, deposits of $193.5 million and shareholders equity of $59.6 million. Average total assets increased in 2005 by $74.4 million from 2004 due to managements efforts to grow the Bank. Capital growth corresponded with the overall growth of the Bank. The average equity to average assets ratio increased to 14.62% in 2005 from 10.68 % in 2004.

The Companys results of operations are primarily dependent upon the results of operations of the Bank. The Bank conducts a commercial banking business which generally consists of attracting deposits from the general



16



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public, supplemented by Federal Home Loan Advances and capital infusions from the Company, and applying a majority of these funds (typically 75% to 90%) to the origination of commercial loans to small businesses, consumer loans, and secured real estate loans in its local trade area of South Florida. The balance of the banks portfolio (approximately 10% to 25%) was generally held in cash and invested in government backed investment grade securities.

The Companys profitability depends primarily on generating sufficient net interest income (the difference between interest income received from loans and investments and the interest expense incurred on deposits and borrowings) to offset operating expenses. Any excess thereof is pre-tax profit earned by the Bank. The careful balance sought between the interest rate earned, frequency of rate changes, and interest rate paid to the Banks deposit base, determines the nature and extent to which the Bank may be profitable. For example, if the income generated by net interest income plus non-interest income is in excess of operating expenses and loan loss reserves, the Bank should be operating profitably. Noninterest income consists primarily of service charges and fees on deposit accounts. Noninterest expenses consist primarily of personnel compensation and benefits, occupancy and related expenses, data processing costs, deposit insurance premiums paid the FDIC, as well as other operating expenses.

One of the strategies to maintain current profits of the Bank is to control operating expenses. Managements goal is to control the growth of operating expenses at a slower rate than the rate at which we grow our revenues. To accomplish this goal, management continues to analyze our operations to find areas where costs can be reduced through greater efficiency or through renegotiated contracts. The Company has improved profitability since 2001. Net income was $2.9 million for 2005 as compared to net losses of $228,000, and $443,000 for 2004, and 2003, respectively. Earnings in 2005 were driven by a 61% increase in average net loans resulting in higher net interest income and loan fees, coupled with a strong focus on credit quality which resulted in lower provision for loan losses. This improvement in revenues and provision for loan losses more than offset the increases in noninterest expenses.

Critical Accounting Policies

The Companys accounting policies are fundamental to understanding managements discussion and analysis of results of operations and financial condition. The Company has identified five policies as being critical because they require management to make judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions.

Allowance for Loan Losses:The Company’s accounting for the allowance for loan losses is a critical policy that is discussed in detail in this section (see EARNING ASSETS).

Goodwill and Intangible Assets:The Company tests goodwill and other intangible assets for impairment annually. The test requires the company to determine the fair value of its reporting unit and compare the reporting units fair value to its carrying value. The fair value of the reporting unit is estimated using management valuation models. While management believes the sources utilized to arrive at the fair value estimates are reliable, different sources or methods could have yielded different fair value estimates. These fair value estimates require a significant amount of judgment. Changes in managements valuation of its reporting unit may affect future earnings through the recognition of a goodwill impairment charge. At December 31, 2005, (the goodwill impairment testing date) the fair value of its reporting unit was greater than its carrying value; therefore, goodwill was not impaired. If the fair value of reporting unit declines below the carrying amount, the Company would have to perform the second step of the impairment test. This step requires the Company to fair value all assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation.

Acquisitions:The Company accounts for its business combinations based on the purchase method of accounting. The purchase method of accounting requires the Company to fair value the tangible net assets and identifiable intangible assets acquired. The fair values are based on available information and current economic conditions at the date of acquisition. The fair values may be obtained from independent appraisers, discounted cash flow present value techniques, management valuation models, quoted prices on national markets or quoted market prices from brokers. These fair values estimates will affect future earnings through the disposition or amortization of the underlying assets and liabilities. While management believes the sources utilized to arrive at the fair value estimates are reliable, different sources or methods could have yielded different fair value estimates. Such different



17



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fair value estimates could affect future earnings through different values being utilized for the disposition or amortization of the underlying assets and liabilities acquired.

Investment Securities:The Company records its securities available for sale in its statement of financial condition at fair value. The Company uses market price quotes for valuation. Equity securities available for sale trade daily on various stock exchanges. The fair value of these securities in the Companys statement of financial condition was based on the closing price quotations at period end. The closing quotation represents inter-dealer quotations without retail markups, markdowns or commissions and do not necessarily represent actual transactions. The number of shares that the Company owns in some of these equity securities may be in excess of the securities average daily trading volume. As a consequence, the Company may not be able to realize the quoted market price upon sale. The Company adjusts its equity securities available for sale to fair value monthly with a corresponding increase or decrease to other comprehensive income. Declines in the fair value of individual securities available for sale below their cost that are other than temporary result in write-downs of the individual securities to their fair value through the income statement.

Income Taxes:The Company files a consolidated federal income tax return. The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. A valuation allowance, if needed, reduces deferred tax amounts to the amount expected to be realized.

The Companys management, in consultation with the Audit Committee of the Board of Directors of the Company, has reviewed and approved these critical accounting policies.

Selected Consolidated Financial Data

|                                               |  |                        |         |      |   |         |    |   |        |   
|---------------------------------------------- |  | ---------------------- | ------- | ---- | - | ------- | -- | - | ------ | --
|                                               |  | 2005                   |         | 2004 |   | 2003    |   
|                                               |  | (Dollars in Thousands) |        
|Selected Consolidated Balance Sheet Data:      |  |                        |         |      |   |         |    |   |        |   
|Cash and cash equivalents                      |  | $                      | 27,581  |      | $ | 6,214   |    | $ | 3,190  |   
|Investments                                    |  |                        | 26,369  |      |   | 22,574  |    |   | 19,572 |   
|Loans, net                                     |  |                        | 210,665 |      |   | 153,730 |    |   | 66,197 |   
|Total assets                                   |  |                        | 277,151 |      |   | 191,467 |    |   | 94,100 |   
|Total deposits                                 |  |                        | 193,465 |      |   | 158,158 |    |   | 80,133 |   
|Total shareholders equity                     |  |                        | 59,625  |      |   | 20,746  |    |   | 9,847  |   
|Book value per common share                    |  |                        | 3.22    |      |   | 2.44    |    |   | 1.73   |   
|Selected Consolidated Statements of Operations |  |                        |         |      |   |         |    |   |        |   
|Data:                                          |  |                        |         |      |   |         |    |   |        |   
|Net interest income                            |  | $                      | 11,303  |      | $ | 6,519   |    | $ | 3,735  |   
|Provision for loan losses                      |  |                        | 475     |      |   | 1,397   |    |   | 978    |   
|Noninterest income                             |  |                        | 1,075   |      |   | 969     |    |   | 654    |   
|Noninterest expense                            |  |                        | 8,982   |      |   | 6,319   |    |   | 3,854  |   
|Minority Interest                              |  |                        | (2      | )    |   |        |    |   |       |   
|Net income (loss)                              |  | $                      | 2,919   |      | $ | (228    | )  | $ | (443   | ) 
|Basic earnings (loss) per share                |  | $                      | 0.24    |      | $ | (0.05   | )  | $ | (0.08  | ) 
|Diluted earnings (loss) per share              |  |                        | 0.21    |      |   | (0.05   | )  |   | (0.08  | ) 
|Selected Financial Ratios:                     |  |                        |         |      |   |         |    |   |        |   
|Return on average assets                       |  |                        | 1.24    | %    |   | (0.14   | )% |   | (0.47  | )%
|Return on average equity                       |  |                        | 8.50    | %    |   | (1.33   | )% |   | (4.65  | )%
|Ratio of average equity to average assets      |  |                        | 14.62   | %    |   | 10.68   | %  |   | 10.16  | % 

Earning Assets

A primary strategy of the Company continues to be to increase the level of earning assets as they relate to operating expenses in order to improve profitability. The Company is pursuing a growth strategy by increasing the level of earning assets, primarily through increases in loan origination in the communities the Company serves and by increasing the level of capital in support of this growth. Interest-earning assets, which consist of loans,



18



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investments, Federal Funds Sold, Federal Home Loan Bank Stock, and Federal Reserve Bank Stock, totaled $261.0 million at December 31, 2005, an $84.7 million, or 48%, increase from $176.3 million at December 31, 2004.

Lending Activities

The Companys principal lending areas have been defined as all census tracts within the tri-county area of Palm Beach, Broward and Miami-Dade Counties, Florida. The Banks customers are predominantly small to medium-sized businesses, individual investors and consumers. Collateralized loans, the most common of which follow, are extended on similar terms to all of the Banks customers and have an inherent degree of risk:

·

Cash-secured loans as well as loans guaranteed by agencies of the United States Government represent a nominal level of risk.

·

Loans secured by marketable securities represent a low degree of risk.

·

Commercial and residential real estate loans, including construction and land development loans, represent a moderate degree of risk.

·

Loans secured by automobiles, boats and equipment represent a moderate to medium level of risk to the Bank.

·

Unsecured loans represent a high level of risk to the Bank.

As a significant part of the Companys growth strategy, it is increasing its efforts to develop new business relationships and is increasing its marketing efforts. Typically, the Company seeks commercial lending relationships with customers borrowing up to $5 million. The Banks legal lending limit for secured and unsecured loans was $13.1 million and $7.8 million as of December 31, 2005 and $4.1 million and $2.5 million as of December 31, 2004, respectively. During 2005, the Company raised $35.5 million of net new capital through several share offerings thus increasing the Banks legal lending limit and allowing it to meet the loan needs of larger customers. The Bank also has approximately 16 participating loans with other banks, which totaled approximately $5.0 million as of December 31, 2005.

Scheduled contractual principal repayments of loans do not reflect the actual life of such assets. The average life of a loan is substantially less than its contractual terms because of prepayments. In addition, due-on-sale clauses on mortgage loans generally give us the right to declare loans immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of loans tends to increase, however, when current loan market rates are substantially higher than rates on existing loans and, conversely, decrease when rates on existing loans are substantially higher than current loan market rates.

The Bank extends credit with terms, rates and fees commensurate with those in its market place for like types of credit. Loan maturities may positively or negatively impact the Banks GAP position and, ultimately, its profitability.

Loan Solicitation and Processing.Loan applicants come primarily through the efforts of the Bank’s loan officers who seek out existing customers, referrals by realtors, previous and present customers of the Bank, business acquaintances, and walk-ins. Upon receipt of a loan application from a prospective borrower, a credit report and other data are obtained to verify specific information relating to the loan applicants employment, income and credit standing. On mortgage loans, an appraisal of the real estate offered as collateral generally is undertaken by an independent fee appraiser certified by the State of Florida.

Commercial Real Estate Loans.The Bank’s primary lending focus is making commercial mortgage loans to finance the purchase of real property, which generally consists of developed real estate. Commercial mortgage loans are generally secured by first liens on real estate, and typically have variable rates and amortize over a 15 to 25 year period, with balloon payments due at the end of five to ten years. At December 31, 2005 commercial mortgage loans represented 64% of the total loan portfolio compared to 70% at December 31, 2004. The average balance of commercial mortgage loans was $123.1 million for 2005 and $79.3 million for 2004. Income from these loans totaled $9.7 million and $5.5 million for 2005 and 2004.

Commercial Loans.Another lending focus of the Bank is to small and medium-sized businesses in a variety of industries. The Company makes a broad range of short- and medium-term commercial lending products



19



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available to businesses, including working capital lines, purchases of machinery, and business expansion (including acquisition of real estate and improvements). At December 31, 2005, commercial loans represented 12% of the total loan portfolio compared to 13% at December 31, 2004. The average balance of commercial loans was $26.9 million for 2005 and $25.5 million for 2004. Income from these loans totaled $2.2 million and $1.6 million for 2005 and 2004.

Consumer Lending.The Bank offers a variety of loan and deposit products and services to retail customers through its branch network. Loans to retail customers include residential mortgage loans, home equity loans and lines of credit, automobile loans, and other personal loans. At December 31, 2005, residential mortgage loans represented 23% of the total loan portfolio compared to 15% at December 31, 2004. The average balance of residential mortgage loans was $34.5 million for 2005 and $8.1 million for 2004. Income from these loans totaled $2.7 million and $484,000 for 2005 and 2004. At December 31, 2005, consumer, home equity, installment, and other loans represented 1% of the total loan portfolio compared to 2% at December 31, 2004. The average balance of consumer, home equity and installment loans was $3.6 million for 2005 and $3.9 million for 2004. Income from these loans totaled $276,000 for 2005 and $310,000 for 2004.

Loan Portfolio Summary.Major categories of loans included in the portfolio at December 31 are as follows (in thousands):

|                          |  |      |         |      |  |         |   |      |        |      |  |        |   |  |        |  
|------------------------- |  | ---- | ------- | ---- |  | ------- | - | ---- | ------ | ---- |  | ------ | - |  | ------ | -
|                          |  | 2005 |         | 2004 |  | 2003    |   | 2002 |        | 2001 | 
|Commercial                |  |      | 25,563  |      |  | 19,509  |   |      | 22,585 |      |  | 17,411 |   |  | 11,269 |  
|Commercial real estate    |  |      | 136,096 |      |  | 109,145 |   |      | 37,608 |      |  | 31,340 |   |  | 21,780 |  
|Residential real estate   |  |      | 48,254  |      |  | 23,623  |   |      | 2,466  |      |  | 8,959  |   |  | 7,411  |  
|Consumer and home equity  |  |      | 2,595   |      |  | 3,220   |   |      | 4,283  |      |  | 2,915  |   |  | 4,599  |  
|Other                     |  |      | 801     |      |  | 269     |   |      | 129    |      |  | 251    |   |  | 5      |  
|                          |  |      | 213,309 |      |  | 155,766 |   |      | 67,071 |      |  | 60,876 |   |  | 45,064 |  
|Deferred loan costs       |  |      | (525    | )    |  | (358    | ) |      | (136)  |      |  | (92    | ) |  | (29    | )
|Allowance for Loan Losses |  |      | (2,119  | )    |  | (1,678  | ) |      | (738   | )    |  | (748   | ) |  | (514   | )
|Net Loans                 |  |      | 210,665 |      |  | 153,730 |   |      | 66,197 |      |  | 60,036 |   |  | 44,521 |  

Loan Maturity Schedule. The following schedule sets forth the time to contractual maturity of our loan portfolio at December 31, 2005. Loans which have adjustable rates and fixed rates are all shown in the period of contractual maturity. Demand loans, loans having no contractual maturity and overdrafts are reported as due in one year or less.

|                         |  |                |         |                  |   |                         |  |                 |        |  |   |        | 
|------------------------ |  | -------------- | ------- | ---------------- | - | ----------------------- |  | --------------- | ------ |  | - | ------ | 
|                         |  | Total          |         | One Year
Or Less |   | One 
through
Five
Years |  | Over Five
Years |       
|                         |  | (In Thousands) |        
|Commercial               |  | $              | 25,563  |                  | $ | 18,014                  |  | $               | 6,607  |  | $ | 942    | 
|Commercial real estate   |  |                | 136,096 |                  |   | 49,784                  |  |                 | 38,646 |  |   | 47,666 | 
|Residential real estate  |  |                | 48,254  |                  |   | 19,767                  |  |                 | 11,583 |  |   | 16,904 | 
|Consumer and home equity |  |                | 2,595   |                  |   | 704                     |  |                 | 608    |  |   | 1,283  | 
|Other                    |  |                | 801     |                  |   | 801                     |  |                 |       |  |   |       | 
|                         |  |                | 213,309 |                  | $ | 89,070                  |  | $               | 57,444 |  | $ | 66,795 | 
|Net Deferred Loan Fees   |  |                | (525    | )                |   |                         |  |                 |        |  |   |        | 
|                         |  | $              | 212,784 |                  |   |                         |  |                 |        |  |   |        | 

At December 31, 2005 fixed rate loans due after one year are approximately $28.2 million and adjustable rate loans due after one year are approximately $96.0 million.

Asset Quality.Management seeks to maintain a high quality of assets through conservative underwriting and sound lending practices. The earning asset portfolio (exclusive of investment securities) is generally split into five categories, four of which are types of loans, and the fifth is other which includes overdrafts. Loan concentrations are defined as loans outstanding that are segregated into similar collateral types and/or nature of cash-flow income generation, which may cause a correspondingly similar impact with a particular economic or other condition. We routinely monitor these concentrations in order to make necessary adjustments in its lending practices that most clearly reflect the economic conditions and trends, loan ratios, loan covenants, asset valuations, and industry trends.



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Displayed below are the percentages of the gross loan portfolio as of December 31, 2005 and 2004:

|                                 |  |      |   |  |      |  
|-------------------------------- |  | ---- | - |  | ---- | -
|Loan Distribution                |  | 2005 |   |  | 2004 |  
|Commercial                       |  | 12   | % |  | 13   | %
|Commercial real estate           |  | 64   | % |  | 70   | %
|Residential real estate          |  | 23   | % |  | 15   | %
|Consumer, home equity, and other |  | 1    | % |  | 2    | %

In an effort to maintain the quality of the loan portfolio, management seeks to minimize higher risk loans. In view of the relative significance of real estate related loans, a downturn in the value of real estate property could have an adverse impact on profitability. As part of the Banks loan policy and loan management strategy, we typically limit our loan-to-value ratio to a maximum of 50% to 80% depending on the type of real property being secured. The use of qualified third party state certified appraisers for property valuations, and property inspections by knowledgeable bank officials helps mitigate real property loan risks.

The Loan and Discount Committee of the Board of Directors of the Bank concentrates its efforts and resources and that of its senior management and lending officers on loan review and underwriting procedures and standards. Internal controls include ongoing reviews of loans made to monitor documentation and ensure the existence and valuations of collateral, early detection of loan degradation, and regional economic conditions.

Regulatory Classification of Assets.Generally, interest on loans is accrued and credited to income based on the outstanding balance of the contract obligations of each loan or receivable contract. It is the Bank’s policy to discontinue the accrual of interest income and classify loans or assets as non-accrual when principal or interest is past due 90 days or more and/or the loan is not properly and/or adequately collateralized, or if in the belief of the Banks management, principal and/or interest is not likely to be paid in accordance with the terms of the obligation and/or documentation. As of December 31, 2005 and 2004, delinquent loans greater than 30 and less than 90 days totaled $1,301,300 and $544,000; and impaired loans totaled $2.3 million and $2.1 million.

Foreclosed Assets.Assets acquired as a result of foreclosure or by deed-in-lieu of foreclosure are classified as other real estate owned, or OREO, if real estate, or in other assets, if other property, until they are sold. When property is acquired, it is initially recorded at fair value at date of acquisition. Subsequent to foreclosure, foreclosed assets are carried at the lower of the carrying amount or fair value, less estimated selling costs. The Bank held no other real estate owned and repossessions at December 31, 2005 and 2004.

Non-performing Assets.Non-performing assets consist of loans that are past due 90 days or more which are still accruing interest, loans on nonaccrual status and other real estate owned and other foreclosed assets. The following table sets forth information with respect to nonperforming assets identified by the Bank for the years ended December 31:

|                                          |  |                        |     |      |   |      |  |      |     |      |   |    |  |   |     | 
|----------------------------------------- |  | ---------------------- | --- | ---- | - | ---- |  | ---- | --- | ---- | - | -- |  | - | --- | 
|                                          |  | 2005                   |     | 2004 |   | 2003 |  | 2002 |     | 2001 |  
|                                          |  | (Dollars in thousands) |    
|Nonaccrual loans                          |  |                        |     |      |   |      |  |      |     |      |   |    |  |   |     | 
|Commercial and residential real estate    |  | $                      |    |      | $ | 20   |  |      | 798 |      | $ |   |  | $ |    | 
|Commercial                                |  |                        | 290 |      |   | 121  |  |      |    |      |   | 28 |  |   |    | 
|Accrual loans  past due 90 days or more  |  |                        |    |      |   |     |  |      |    |      |   |   |  |   |    | 
|Commercial and residential real estate    |  |                        |    |      |   |     |  |      |    |      |   |   |  |   |    | 
|Installment                               |  |                        |    |      |   |     |  |      |    |      |   | 7  |  |   | 26  | 
|Restructured loans                        |  |                        |    |      |   |     |  |      | 20  |      |   |   |  |   |    | 
|Other real estate owned and repossessions |  |                        | —   |      |   | —    |  |      | —   |      |   | —  |  |   | 348 | 
|Total nonperforming assets                |  | $                      | 290 |      | $ | 141  |  | $    | 818 |      | $ | 35 |  | $ | 374 | 

Allowance for Loan Losses.The allowance for loan losses represents management’s estimate of probable losses inherent in the loan portfolio at the balance sheet date. Allocation of the allowance is made for analytical purposes only, and the entire allowance is available to absorb probable and estimable credit losses inherent in the portfolio. Additions to the allowance may result from recording provision for loan losses or loan recoveries, while charge-offs are deducted from the allowance. Management estimates the allowance for loan loss balance required by using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. For analytical purposes, the allowance consists of two components, Non-Specific and Specific.



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Non-Specific Allowance:The methodology used in establishing non-specific allowances is based on a broad risk analysis of the portfolio. All significant portfolio segments, including concentrations, are analyzed. The amount of the non-specific allowance is based upon a statistical analysis that derives appropriate formulas, which are adjusted by managements subjective assessment of current and future conditions. The determination includes an analysis of loss and recovery experience in the various portfolio segments over at least the last three fiscal years. Results of the historical loss analysis are adjusted to reflect current and anticipated conditions.

Specific Allowance:All significant commercial and industrial loans classified as either “substandard” or “doubtful” are reviewed at the end of each period to determine if a specific reserve is needed for that credit. The determination of a specific reserve for an impaired asset is evaluated in accordance with Statement of Financial Accounting Standards No. 114, and a specific reserve is very common for significant credits classified as either substandard or doubtful. The establishment of a specific reserve does not necessarily mean that the credit with the specific reserve will definitely incur loss at the reserve level. It is only an estimation of potential loss based upon anticipated events.

Allowance for Loan Loss Activity.The allowance for loan loss as of December 31, 2005 was $2.1 million as compared to $1.7 million at December 31, 2004. Activity in the allowance for loan losses for the years ended December 31, are as follows:

|                                                                                     |  |      |           |      |   |            |    |      |          |      |   |         |   |   |         |  
|------------------------------------------------------------------------------------ |  | ---- | --------- | ---- | - | ---------- | -- | ---- | -------- | ---- | - | ------- | - | - | ------- | -
|                                                                                     |  | 2005 |           | 2004 |   | 2003       |    | 2002 |          | 2001 |  
|Balance, beginning                                                                   |  | $    | 1,678,191 |      | $ | 738,147    |    | $    | 747,750  |      | $ | 513,601 |   | $ | 398,992 |  
|Amounts charged off:                                                                 |  |      |           |      |   |            |    |      |          |      |   |         |   |   |         |  
|Commercial loans                                                                     |  |      | (57,266   | )    |   | (1,083,848 | )  |      | (823,479 | )    |   | (588    | ) |   | (72,000 | )
|Consumer loans                                                                       |  |      | (20,953   | )    |   | (11,908    | )  |      | (72,835  | )    |   | (23,695 | ) |   | (67,999 | )
|Commercial and residential real estate                                               |  |      |          |      |   |           |    |      | (154,543 | )    |   |        |   |   |        |  
|Recoveries of amounts charged off:                                                   |  |      |           |      |   |            |    |      |          |      |   |         |   |   |         |  
|Commercial loans                                                                     |  |      | 107,403   |      |   | 159,609    |    |      | 47,784   |      |   | 17,774  |   |   | 39,628  |  
|Consumer loans                                                                       |  |      | 5,819     |      |   | 21,191     |    |      | 10,913   |      |   | 7,658   |   |   | 14,980  |  
|Commercial and residential real estate                                               |  |      |          |      |   |           |    |      | 4,491    |      |   |        |   |   |        |  
|Net (charge-offs) recoveries                                                         |  |      | 35,003    |      |   | (914,956   | )  |      | (987,669 | )    |   | 1,149   |   |   | (85,391 | )
|Provision for loan losses                                                            |  |      | 475,350   |      |   | 1,397,000  |    |      | 978,066  |      |   | 233,000 |   |   |        |  
|Reallocation of reserve for unfunded                                                 |  |      | (69,148   | )    |   |           |    |      |         |      |   |        |   |   |        |  
|commitments                                                                          |  |      |           |      |   |            |    |      |          |      |   |         |   |   |         |  
|Acquisition related adjustment (1)                                                   |  |      |          |      |   | 458,000    |    |      |         |      |   |        |   |   | 200,000 |  
|Balance, ending                                                                      |  | $    | 2,119,396 |      | $ | 1,678,191  |    | $    | 738,147  |      | $ | 747,750 |   | $ | 513,601 |  
|Ratio of net (charge-offs) recoveries to average loans outstanding during the period |  |      | 0.00      | %    |   | (0.06      | )% |      | (1.51    | )%   |   | 0.02    | % |   | 0.40    | %



(1)

The adjustment in 2004 and in 2001 is the allowance required on acquisition of loans from the Gulf Bank transaction and from the PanAmerican Bank transaction, respectively.

Through the normal review of the allowance for loan losses, management determined additional provision was required due to a growth of the loan portfolio during 2005. In 2004, management discontinued the Business Manager product as it had determined that the product did not fit well with the current product mix. Phase out of the product was completed in the first quarter of 2004, and the Company charged off approximately $582,000 of Business Manager loans in 2004. In addition, management charged off an additional $514,000 of loans for which it was determined that the borrower had insufficient ability to repay. Impaired loans totaled $2.3 million at December 31, 2005 compared to $2.1 million at December 31, 2004. Non-performing assets totaled $290,000 at December 31, 2005 as compared to $141,000 at December 31, 2004. Due to the extensive review and actions taken in 2004, management believes that the asset quality in the loan portfolio at December 31, 2005 was high and that the allowance for loan loss was adequate in relation to the overall loan portfolio.



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The allowance is allocated to specific categories of loans for statistical purposes only, and may be applied to loan losses incurred in any loan category. The allocation of the allowance for loan losses as of December 31, is as follows:

|                                |  |      |           |      |   |           |  |      |         |      |   |         |  |   |         | 
|------------------------------- |  | ---- | --------- | ---- | - | --------- |  | ---- | ------- | ---- | - | ------- |  | - | ------- | 
|                                |  | 2005 |           | 2004 |   | 2003      |  | 2002 |         | 2001 |  
|Commercial loans                |  | $    | 254,328   |      | $ | 218,164   |  | $    | 250,970 |      | $ | 209,370 |  | $ | 128,375 | 
|Commercial real estate loans    |  |      | 1,356,413 |      |   | 1,174,734 |  |      | 413,362 |      |   | 388,830 |  |   | 246,580 | 
|Residential real estate loans   |  |      | 487,461   |      |   | 251,729   |  |      | 29,526  |      |   | 112,163 |  |   | 87,295  | 
|Consumer loans                  |  |      | 21,194    |      |   | 33,564    |  |      | 44,289  |      |   | 37,387  |  |   | 51,351  | 
|Total allowance for loan losses |  | $    | 2,119,396 |      | $ | 1,678,191 |  | $    | 738,147 |      | $ | 747,750 |  | $ | 513,601 | 

The percentage of loans in each category to total loans as of December 31, is as follows:

|                                |  |      |   |  |      |   |  |      |   |  |      |   |  |      |  
|------------------------------- |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | -
|                                |  | 2005 |   |  | 2004 |   |  | 2003 |   |  | 2002 |   |  | 2001 |  
|Commercial loans                |  | 12   | % |  | 13   | % |  | 34   | % |  | 29   | % |  | 25   | %
|Commercial real estate loans    |  | 64   | % |  | 70   | % |  | 56   | % |  | 51   | % |  | 48   | %
|Residential real estate loans   |  | 23   | % |  | 15   | % |  | 4    | % |  | 15   | % |  | 17   | %
|Consumer loans                  |  | 1    | % |  | 2    | % |  | 6    | % |  | 5    | % |  | 10   | %
|Total allowance for loan losses |  | 100  | % |  | 100  | % |  | 100  | % |  | 100  | % |  | 100  | %

Certain Relationships and Related Transactions.At December 31, 2005, the Bank extended two lines of credit to business entities affiliated with one of its directors, who also serves as a director for the Company, in the aggregate amount of $5.9 million. Accrued interest on these loans amounted to $1,144 at December 31, 2005. The loans are secured by real estate and are believed to be collectible. All loans to officers and directors are made in accordance with Regulation O, under the same terms available to the general public without preferential treatment.

Investment Activities

The Bank is permitted under federal and state law to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies and of state and municipal governments, deposits at the Federal Home Loan Bank, certificates of deposit of federally insured institutions, certain bankers acceptances and federal funds. Subject to various restrictions, we may also invest a portion of our assets in commercial paper and corporate debt securities. As a Federal Reserve Bank member bank, we are required to maintain an investment in Federal Reserve Bank stock. The Bank is also a member of the Federal Home Loan Bank and is required to maintain an investment in Federal Home Loan Bank stock. Under state and federal regulations, a certain amount of the investments must be liquid in nature.

SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, requires the investments be categorized as held to maturity, trading securities or available for sale, based on managements intent as to the ultimate disposition of each security. SFAS No. 115 allows debt securities to be classified as held to maturity and reported in financial statements at amortized cost only if the reporting entity has the positive intent and ability to hold those securities to maturity. Securities that might be sold in response to changes in market interest rates, changes in the securitys prepayment risk, increases in loan demand, or other similar factors cannot be classified as held to maturity. Debt and equity securities held for current resale are classified as trading securities. Such securities are reported at fair value, and unrealized gains and losses on such securities would be included in earnings. Debt and equity securities not classified as either held to maturity or trading securities are classified as available for sale. Such securities are reported at fair value, and unrealized gains and losses on such securities are excluded from earnings and reported as a net amount in a separate component of equity.

A committee consisting of Bank officers and Directors determines appropriate investments in accordance with the Board of Directors approved investment policies and procedures. The Banks investment policies generally limit investments to U.S. Government and agency securities, municipal bonds, certificates of deposits, marketable corporate debt obligations, mortgage-backed securities and certain types of mutual funds. The Banks investment policy does not permit engaging directly in hedging activities or purchasing high risk mortgage derivative products. Investments are made based on certain considerations, which include the interest rate, yield, settlement date and maturity of the investment, the liquidity position, and anticipated cash needs and sources (which in turn include outstanding commitments, upcoming maturities, estimated deposits and anticipated loan amortization and repayments). The effect that the proposed investment would have on our credit and interest rate risk, and risk-based capital is also given consideration during the evaluation.



23



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Mortgage-backed securities (which also are known as mortgage participation certificates or pass-through certificates) typically represent a participation interest in a pool of single-family or multi-family mortgages. The principal and interest payments on these mortgages are passed from the mortgage originators, through intermediaries (generally U.S. Government agencies and government sponsored enterprises) that pool and resell the participation interests in the form of securities, to investors such as the Company. Such U.S. Government agencies and government sponsored enterprises, which guarantee the payment of principal and interest to investors, primarily include Freddie Mac, Fannie Mae and the Government National Mortgage Association. Mortgage-backed securities typically are issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with interest rates that fall within a specific range and have varying maturities. Mortgage-backed securities generally yield less than the loans that underlie such securities because of the cost of payment guarantees and credit enhancements. In addition, mortgage-backed securities are usually more liquid than individual mortgage loans and may be used to collateralize certain of the Banks liabilities and obligations. These types of securities also permit the Bank to improve its regulatory capital because they have a low risk capital weighting.

Investment Portfolio.The Companys investment securities portfolio consists of high quality securities. The maturity distribution of the securities portfolio is reflected in the following table (except for the U.S. Government Mortgage Fund which has no fixed maturity date). The average yield for our investment portfolio increased to 4.08% at December 31, 2005 from 3.89% at December 31, 2004 as market interest rates climbed incrementally during the year.

|                                    |  |                                                          |       |                        |      |                   |   |                        |  |                |   |                        |       |                |   |                        |   |                |       |   |                        |   |       |        |  |      |      |  
|----------------------------------- |  | -------------------------------------------------------- | ----- | ---------------------- | ---- | ----------------- | - | ---------------------- |  | -------------- | - | ---------------------- | ----- | -------------- | - | ---------------------- | - | -------------- | ----- | - | ---------------------- | - | ----- | ------ |  | ---- | ---- | -
|                                    |  | Maturities of Investment Securities at December 31, 2005 |      
|                                    |  | One Year
Or Less                                         |       | Through
Five Years     |      | Through
Ten Years |   | After
Ten Years        |  | Total          |  
|                                    |  | Carrying
Value                                           |       | Weighted
Average
Yield |      | Carrying
Value    |   | Weighted
Average
Yield |  | Carrying
Value |   | Weighted
Average
Yield |       | Carrying
Value |   | Weighted
Average
Yield |   | Carrying
Value |       |   | Weighted
Average
Yield |  
|                                    |  | (Dollars in Thousands)                                   |      
|Corporate Bonds, Preferreds & REITs |  |                                                          |       |                        |      |                   |   |                        |  |                |   |                        |       |                |   |                        |   |                |       |   |                        |   |       |        |  |      |      |  
|Held to maturity                    |  | $                                                        | 251   |                        | 5.30 | %                 | $ |                       |  |               | % | $                      |      |                |   |                       | % | $              |      |   |                       | % | $     | 251    |  |      | 5.30 | %
|Available for sale                  |  |                                                          |      |                        |     |                   |   |                       |  |               |   |                        |      |                |   |                       |   |                |      |   |                       |   |       |       |  |      |     |  
|Mortgage-backed Securities:         |  |                                                          |       |                        |      |                   |   |                        |  |                |   |                        |       |                |   |                        |   |                |       |   |                        |   |       |        |  |      |      |  
|Held to maturity                    |  |                                                          |      |                        |     |                   |   |                       |  |               |   |                        |       |                |   |                        |   |                | 1,859 |   | 3.23                   | % |       | 1,859  |  |      | 3.23 | %
|Available for Sale                  |  |                                                          |      |                        |     |                   |   |                       |  |               |   |                        | 14    |                |   | 6.53                   | % |                | 1     |   | 3.12                   | % |       | 15     |  |      | 6.32 | %
|U.S. government agencies:           |  |                                                          |       |                        |      |                   |   |                        |  |                |   |                        |       |                |   |                        |   |                |       |   |                        |   |       |        |  |      |      |  
|Held to Maturity                    |  |                                                          | 5,010 |                        | 3.01 | %                 |   | 11,053                 |  | 4.38           | % |                        | 2,988 |                |   | 3.80                   | % |                |      |   |                       |   |       | 19,051 |  |      | 3.89 | %
|Available for sale                  |  |                                                          |      |                        |     |                   |   |                       |  |               |   |                        |      |                |   |                       |   |                |      |   |                       |   |       |        |  |      |     |  
|U.S. Govt Mortgage Fund             |  |                                                          |      |                        |     |                   |   |                       |  |               |   |                        |      |                |  |                        |   |               |       |  |                        |   | 5,193 |        |  | 4.81 | %   
|Total                               |  | $                                                        | 5,261 |                        | 3.14 | %                 | $ | 11,053                 |  | 4.38           | % | $                      | 3,002 |                |   | 3.84                   | % | $              | 1,860 |   | 3.23                   | % | $     | 26,369 |  |      | 4.08 | %

Carrying Value of Investment Securities.Major categories of investment securities and their accounting treatment included in the portfolio at December 31 are as follows (in thousands):

|                            |  |                     |       |                   |   |                     |  |                   |       |                     |   |                   |  |   |       |  |   |        | 
|--------------------------- |  | ------------------- | ----- | ----------------- | - | ------------------- |  | ----------------- | ----- | ------------------- | - | ----------------- |  | - | ----- |  | - | ------ | 
|                            |  | 2005                |       | 2004              |   | 2003                | 
|                            |  | Available-
for-Sale |       | Held-to-
Maturity |   | Available-
for-Sale |  | Held-to-
Maturity |       | Available-
for-Sale |   | Held-to-
Maturity | 
|U.S. Government agencies    |  | $                   |      |                   | $ | 19,051              |  | $                 |      |                     | $ | 13,132            |  | $ |      |  | $ | 8,166  | 
|Mortgage-backed             |  |                     | 15    |                   |   | 1,859               |  |                   | 269   |                     |   | 2,401             |  |   | 32    |  |   | 2,964  | 
|Corporate                   |  |                     |      |                   |   | 251                 |  |                   |      |                     |   | 257               |  |   |      |  |   | 264    | 
|U.S. Govt Mortgage Fund     |  |                     | 5,193 |                   |   |                    |  |                   | 5,356 |                     |   |                  |  |   | 7,851 |  |   |       | 
|Total Investment Securities |  | $                   | 5,208 |                   | $ | 21,161              |  | $                 | 5,625 |                     | $ | 15,790            |  | $ | 7,883 |  | $ | 11,394 | 

Valuation of Securities.The Company records securities available for sale in its statement of financial condition at fair value. The Company uses market price quotes for valuation. Equity securities available for sale trade daily on various stock exchanges. The fair value of these securities in the Companys statement of financial condition was based on the closing price quotations at period end. The closing quotation represents inter-dealer quotations without retail markups, markdowns or commissions and do not necessarily represent actual transactions.



24



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The number of shares that the Company owns in some of these equity securities may be in excess of the securities average daily trading volume. As a consequence, the Company may not be able to realize the quoted market price upon sale. Equity securities available for sale are adjusted to fair value monthly with a corresponding increase or decrease to other comprehensive income. Declines in the fair value of individual securities available for sale below their cost that are other than temporary result in write-downs of the individual securities to their fair value.

At December 31, 2005, the fair value and net unrealized loss associated with our securities available for sale was $5.2 million and $306,000, respectively.

Liquidity.Regulatory agencies require that the Bank maintain sufficient liquidity to operate in a sound and safe manner. The principal sources of liquidity and funding are generated by the operations the Bank through its diverse deposit base, loan participations and other asset/liability measures. For banks, liquidity represents the ability to meet loan commitments, withdrawals of deposit funds, and operating expenses. The level and maturity of deposits necessary to support the lending and investment activities is determined through monitoring loan demand and through its asset/liability management process. Considerations in managing the liquidity position include scheduled cash flows from existing assets, contingencies and liabilities, as well as projected liquidity conducive to efficient operations and are continuously evaluated as part of the asset/liability management process. Historically, the Bank has increased its level of deposits to allow for its planned asset growth. The level of deposits is influenced by general interest rates, economic conditions and competition, among other things. South Florida is a fast growing area with intense competition from other financial service providers. Management has found that adjusting pricing, or introducing new products, produces increased deposit growth. Adjusting the rate paid on money market accounts can quickly adjust the level of deposits. Management believes that the Bank is currently operating in a stable environment.

In 2004 the Bank became a member of the Federal Home Loan Bank of Atlanta. The Bank has begun to access this vehicle to add a new source of liquidity to its business. At December 31, 2005, the Bank had $21,000,000 of Federal Home Loan Bank fixed rate advances to assist in funding its loan portfolio growth. The Bank has pledged a security interest in its real estate loan portfolio to the FHLB as collateral for borrowings obtained from the FHLB. See notes to the Companys Consolidated Financial Statements for additional information regarding these advances. Liquidity at December 31, 2005, consisted of $27.6 million in cash and cash equivalents and $5.2 million in available-for-sale investments, for a total of $32.8 million, compared to a total of $11.8 million at year-end 2004.

If additional liquidity is needed, the Bank has established a correspondent banking relationship with Independent Bankers Bank of Lake Mary, Florida. This relationship provides the Bank with the ability to borrow from an unsecured line-of-credit to supplement liquidity up to the amount of $5.0 million. Interest is calculated on any outstanding balance at the prevailing market federal funds rate. The Bank also has the ability to sell investments from the portfolio under a repurchase agreement with this correspondent bank. Similarly, the Company maintains a separate secured line-of-credit of $2.0 million with Independent Bankers Bank. See notes to the Companys Consolidated Financial Statements for additional information regarding these lines of credit.

Liabilities and Stockholders Equity

The liability side of the balance sheet has great significance to the profitable operation of a bank. Deposits are the major source of the Banks funds for lending and other investment activities. Deposits are attracted principally from within the Banks primary market area through the offering of a broad variety of deposit instruments including checking accounts, money market accounts, regular savings accounts and certificates of deposits (known as CDs). Maturity terms, service fees and withdrawal penalties are established by the Bank 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.

Deposits and loan repayments are the major sources of funds for lending and other investment purposes. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by general interest rates and money market conditions. The Bank may use borrowings through correspondent banks on a short-term basis to compensate for reductions in the availability of funds from other sources. The Bank maintains a membership with the Federal Home Loan Bank which acts as an alternate source for borrowing as needed. Periodically the Bank may purchase broker deposits to supplement deposits gathered through the branch network in order to fund loans as required.



25



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Deposit Accounts

Deposits are attracted from within the Banks market area and substantially all of the depositors are residents of the State of Florida. Deposit services for personal and business customers include a variety of checking accounts which include interest-earning, low-cost checking, and senior checking. Savings accounts are also offered. Low cost demand and savings deposits represent an important part of the deposit mix for the Bank which has historically maintained satisfactory levels of this type of deposits, because of the Banks policy of relationship banking. Money market accounts are priced competitively within the Banks market area of Palm Beach, Broward, and Miami-Dade counties. Management can attract new deposits or reduce deposit levels as needed by adjusting the interest paid on such accounts, which are very liquid. The Bank also offers a wide variety of terms and rates for certificates of deposit as needed to attract funds and match competitors. The primary factors in the competition for deposits are interest rates, personalized services, the quality and range of financial services, convenience of office locations and office hours. Competition for deposits comes primarily from other commercial banks, savings associations, credit unions, money market mutual funds and other investment alternatives. Consumers have access to ATMs, safe deposit boxes, direct deposit and on-line banking services. In addition, businesses can use the Banks merchant credit card program.

In determining the terms of the deposit accounts, management considers current market interest rates, profitability to the Bank, matching deposit and loan products and customer preferences and concerns. The Bank currently offers certificates of deposit for terms not exceeding 60 months. As a result, management believes that it is better able to match the repricing of liabilities to the repricing of the loan portfolio. Management reviews the Banks deposit mix and pricing weekly. From time to time management will supplement the level of CDs by purchasing them through a brokerage facility. At December 31, 2005, the Bank had $13.0 million of deposits outstanding that had been facilitated through brokerage relationships.

Deposit Insurance. Deposit accounts are insured by the FDIC up to a maximum of $100,000 per insured depositor. The FDIC issues regulations, conducts periodic examinations, requires the filing of reports and generally supervises the operation of its insured banks. Any insured bank which is not operated in accordance with or does not conform to FDIC regulations, policies and directives may be sanctioned for non-compliance. Proceedings may be instituted against any insured bank or any director, officer, or employee of such bank engaging in unsafe and unsound practices, including the violation of applicable laws and regulations. The FDIC has the authority to terminate insurance of accounts pursuant to procedures established for that purpose.

As a FDIC-insured institution, the Bank is subject to insurance assessments imposed by the FDIC. Under current law, the insurance assessment to be paid by insured institutions shall be as specified in a schedule required to be issued by the FDIC that specifies, at semiannual intervals, target reserve ratios designed to increase the FDIC insurance funds reserve ratio as it relates to estimated insured deposits (a ratio as the FDIC may determine in accordance with the statute). Further, the FDIC is authorized to impose one or more special assessments in any amount deemed necessary to enable repayment of amounts borrowed by the FDIC from the United States Department of the Treasury.

The FDIC Insurance is based on a risk-based assessment schedule based on an institutions average assessment base. The actual assessment to be paid by each FDIC-insured institution is based on the institutions assessment risk classification, which is determined based on whether the institution is considered Well-Capitalized, Adequately Capitalized or Undercapitalized, as such terms have been defined in applicable federal regulations adopted to implement the prompt corrective action provisions of the Federal Deposit Insurance Corporation Insurance Act (FDICIA), and whether such institution is considered by its supervisory agency to be financially sound or to have supervisory concerns. The Bank is considered Well-Capitalized.



26



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Deposit Balances and Rates.The following table sets forth the average balances of the deposit portfolio of the Bank for the years ending December 31, 2005, 2004 and 2003. Management views the deposit base as a good core deposit base that is stable and improving. Non-interest bearing transaction accounts are on a demand basis, and as such, balances continually fluctuate.

|                             |  |                              |         |                       |       |               |     |                              |   |                       |  |               |  |     | 
|---------------------------- |  | ---------------------------- | ------- | --------------------- | ----- | ------------- | --- | ---------------------------- | - | --------------------- |  | ------------- |  | --- | 
|                             |  |                              |         | 2005                  |       |               |     |                              |   | 2004                  |  |               | 
|                             |  | Average Balance for the Year |         | Weighted Average Rate |       | % of Deposits |     | Average Balance for the Year |   | Weighted Average Rate |  | % of
Deposits | 
|                             |  | (Dollars in Thousands)       |        
|Noninterest bearing accounts |  | $                            | 41,437  |                       | 0.00% |               | 23% |                              | $ | 36,006                |  | 0.00%         |  | 26% | 
|Interest bearing accounts:   |  |                              |         |                       |       |               |     |                              |   |                       |  |               |  |     | 
|NOW accounts                 |  |                              | 11,446  |                       | 1.14% |               | 6%  |                              |   | 7,877                 |  | 0.60%         |  | 6%  | 
|Money market deposit         |  |                              | 20,297  |                       | 1.91% |               | 11% |                              |   | 18,513                |  | 1.18%         |  | 14% | 
|Savings accounts             |  |                              | 4,644   |                       | 1.08% |               | 3%  |                              |   | 5,770                 |  | 0.88%         |  | 4%  | 
|Time deposits                |  |                              | 101,339 |                       | 3.32% |               | 57% |                              |   | 68,977                |  | 2.57%         |  | 50% | 
|Total deposits               |  | $                            | 179,162 |                       |       |               |     |                              | $ | 137,143               |  |               |  |     | 



|                             |  |                              |        |                       |       |               |    
|---------------------------- |  | ---------------------------- | ------ | --------------------- | ----- | ------------- | ---
|                             |  |                              |        | 2003                  |       |              
|                             |  | Average Balance for the Year |        | Weighted Average Rate |       | % of Deposits
|                             |  | (Dollars in Thousands)      
|Noninterest bearing accounts |  | $                            | 17,328 |                       | 0.00% |               | 21%
|Interest bearing accounts:   |  |                              |        |                       |       |               |    
|NOW accounts                 |  |                              | 5,308  |                       | 0.66% |               | 7% 
|Money market deposit         |  |                              | 28,490 |                       | 0.98% |               | 35%
|Savings accounts             |  |                              | 1,747  |                       | 0.50% |               | 2% 
|Time deposits                |  |                              | 28,578 |                       | 2.49% |               | 35%
|Total deposits               |  | $                            | 81,451 |                       |       |               |    

The time remaining to maturity of certificates of deposit in amounts of $100,000 or more as of December 31, 2005 and 2004, is as follows:

|                               |  |                      |        |                      |   |        | 
|------------------------------ |  | -------------------- | ------ | -------------------- | - | ------ | 
|                               |  | At December 31,
2005 |        | At December 31,
2004 |  
|                               |  | (In thousands)       |       
|Three months or less           |  | $                    | 8,908  |                      | $ | 17,023 | 
|Over three through six months  |  |                      | 11,706 |                      |   | 7,391  | 
|Over six through twelve months |  |                      | 12,413 |                      |   | 11,701 | 
|Over twelve months             |  |                      | 6,941  |                      |   | 10,459 | 
|                               |  | $                    | 39,968 |                      | $ | 46,574 | 

Correspondent Relationships.Correspondent banking involves one bank providing services to another bank which cannot provide that service itself for economic or organizational reasons. The Bank purchases correspondent services offered by larger banks, including check collections, purchase of federal funds, security safekeeping, investment service, coin and currency supplies, overline and liquidity loan participations, and sales of loans to or loan participation with correspondent banks. The Bank also sells loan participations to correspondent banks with respect to loans which exceed the Banks lending limit.

The Bank has an established correspondent relationship with Independent Bankers Bank of Lake Mary, Florida with respect to the foregoing services. As compensation for services provided by a correspondent, the Bank maintains certain balances with the correspondent in non-interest bearing accounts. Such compensating balances are not considered significant to the operations of the Bank.

Borrowings. The Bank has the ability to borrow from its correspondent banks to supplement the supply of lendable funds and to meet deposit withdrawal requirements. Advances are made pursuant to limitations on the amount of advances and are based on the financial condition of the member institution as well as the value and acceptability of collateral pledged.



27



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In addition, we pledge securities to secure repurchase agreements. Additional details regarding securities sold under agreements to repurchase for 2005 and 2004 are as follows:

|                                            |  |                        |       |      |  |   |       |  
|------------------------------------------- |  | ---------------------- | ----- | ---- |  | - | ----- | -
|                                            |  | 2005                   |       | 2004 | 
|                                            |  | (Dollars in thousands)
|Maximum amount outstanding at any month-end |  | $                      | 1,241 |      |  | $ | 2,466 |  
|Average balance for the year                |  |                        | 625   |      |  |   | 2,453 |  
|Average interest rate                       |  |                        | 2.59  | %    |  |   | 0.73  | %
|Average interest rate paid at year end      |  |                        | 3.45  | %    |  |   | 1.68  | %

Federal Home Loan Bank Advances. In August 2004 the Bank was accepted into membership of the Federal Home Loan Bank of Atlanta. At that time the Bank assumed $3.0 million of advances previously issued to Gulf Bank. These advances carry a fixed rate of interest and were $21,000,000 and $8,000,000 at December 31, 2005 and 2004, respectively. The Bank has pledged a security interest in its real estate loan portfolio to the FHLB as collateral for borrowings obtained from the FHLB. Please refer to Note 8 of the Notes to the Consolidated Financial Statements for additional information.

Equity and Capital Resources. The Company is subject to various regulatory capital requirements administered by Federal and State banking authorities. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if not undertaken, could have a direct material effect on the financial statements and operation. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting policies.

The capital accounts and classifications are also subject to qualitative judgment by the regulators about components, risk weighting, and other factors. Quantitative and qualitative measures established by regulation toensure capital adequacy require the Bank to maintain minimum amounts and ratios, set forth in the table as of December 31, 2005 below, of total and Tier-1 capital, as defined by regulation, to risk weighted assets, and of Tier-1 capital to average assets. Management believes that as of December 31, 2005 it has met the capital adequacy requirements as defined by these definitions.

The column below with the heading Bank presents the capital ratios for the Bank at December 31, 2005. The column below with the heading Corp presents the capital ratios for the consolidated business at December 31, 2005. The column below with the indication Adequately is that regulatory definition for an Adequately Capitalized banking institution. The right column below with the indication Well is that regulatory definition for a Well Capitalized banking institution.

|                                                    |  |                                       |  |       |  |            |  |      |  |       | 
|--------------------------------------------------- |  | ------------------------------------- |  | ----- |  | ---------- |  | ---- |  | ----- | 
|Regulator Definition for each Capital Tier Category |  | Corp                                  |  | Bank  |  | Adequately |  | Well
|Tier-2 Capital                                      |  | = Tier-2 Cap/Risk Weighted Assets     |  | 23.3% |  | 21.8%      |  | 8.0% |  | 10.0% | 
|Tier-1 Risk                                         |  | = Tier-1 Cap/Risk Weighted Assets     |  | 22.4% |  | 20.9%      |  | 4.0% |  | 6.0%  | 
|Tier-1 Leverage                                     |  | = Tier-1 Cap/Average Quarterly Assets |  | 21.0% |  | 19.6%      |  | 4.0% |  | 5.0%  | 



28



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Average Balance Sheet. The following table contains for the periods indicated information regarding the total dollar amounts of interest income from interest-earning assets and the resulting average yields, the total dollar amount of interest expense on interest-bearing liabilities and the resulting average costs, net interest income, and the net yield on interest-earning assets.

|                                                                               |  |                                  |         |          |     |                    |  |                 |      |          |     |                    |  |   |       |  |  |      |  
|------------------------------------------------------------------------------ |  | -------------------------------- | ------- | -------- | --- | ------------------ |  | --------------- | ---- | -------- | --- | ------------------ |  | - | ----- |  |  | ---- | -
|                                                                               |  | For the years ended December 31, |        
|                                                                               |  | 2005                             |         | 2004     |    
|                                                                               |  | Average
Balance                  |         | Interest | (3) | Average
Yield/Rate |  | Average
Balance |      | Interest | (3) | Average
Yield/Rate | 
|                                                                               |  | (Dollars in Thousands)           |        
|Assets:                                                                        |  |                                  |         |          |     |                    |  |                 |      |          |     |                    |  |   |       |  |  |      |  
|Interest-earning assets:                                                       |  |                                  |         |          |     |                    |  |                 |      |          |     |                    |  |   |       |  |  |      |  
|Investments (1)                                                                |  | $                                | 23,587  |          |     | 947                |  |                 | 4.02 | %        | $   | 19,741             |  | $ | 762   |  |  | 3.86 | %
|Federal funds sold                                                             |  |                                  | 7,598   |          |     | 251                |  |                 | 3.31 |          |     | 7,917              |  |   | 85    |  |  | 1.07 |  
|Loans :                                                                        |  |                                  |         |          |     |                    |  |                 |      |          |     |                    |  |   |       |  |  |      |  
|Commercial loans (2)                                                           |  |                                  | 26,865  |          |     | 2,201              |  |                 | 8.19 |          |     | 25,521             |  |   | 1,605 |  |  | 6.42 |  
|Commercial real estate loans (2)                                               |  |                                  | 123,133 |          |     | 9,693              |  |                 | 7.87 |          |     | 79,276             |  |   | 5,507 |  |  | 7.03 |  
|Consumer loans (2)                                                             |  |                                  | 2,232   |          |     | 167                |  |                 | 7.47 |          |     | 2,239              |  |   | 143   |  |  | 6.40 |  
|Residential real estate loans (2)                                              |  |                                  | 34,475  |          |     | 2,675              |  |                 | 7.76 |          |     | 8,062              |  |   | 484   |  |  | 6.01 |  
|Home equity and other loans (2)                                                |  |                                  | 1,356   |          |     | 109                |  |                 | 8.01 |          |     | 1,673              |  |   | 167   |  |  | 9.94 |  
|Total loans (2)                                                                |  |                                  | 188,061 |          |     | 14,845             |  |                 | 7.89 |          |     | 116,771            |  |   | 8,002 |  |  | 6.85 |  
|Total interest earning assets                                                  |  |                                  | 219,246 |          |     | 16,043             |  |                 | 7.32 |          |     | 144,429            |  |   | 8,849 |  |  | 6.13 |  
|Noninterest-earning assets                                                     |  |                                  | 15,580  |          |     |                    |  |                 |      |          |     | 15,973             |  |   |       |  |  |      |  
|Total assets                                                                   |  | $                                | 234,826 |          |     |                    |  |                 |      |          | $   | 160,402            |  |   |       |  |  |      |  
|Liabilities and Stockholders Equity:                                          |  |                                  |         |          |     |                    |  |                 |      |          |     |                    |  |   |       |  |  |      |  
|Interest-bearing liabilities:                                                  |  |                                  |         |          |     |                    |  |                 |      |          |     |                    |  |   |       |  |  |      |  
|Deposits                                                                       |  |                                  |         |          |     |                    |  |                 |      |          |     |                    |  |   |       |  |  |      |  
|NOW and money market accounts                                                  |  | $                                | 31,743  |          |     | 517                |  |                 | 1.63 | %        | $   | 26,390             |  |   | 267   |  |  | 1.01 | %
|Savings accounts                                                               |  |                                  | 4,644   |          |     | 50                 |  |                 | 1.08 |          |     | 5,770              |  |   | 51    |  |  | 0.88 |  
|Certificates of deposit                                                        |  |                                  | 101,339 |          |     | 3,365              |  |                 | 3.32 |          |     | 68,977             |  |   | 1,770 |  |  | 2.57 |  
|Total interest-bearing deposits                                                |  |                                  | 137,726 |          |     | 3,932              |  |                 | 2.85 |          |     | 101,137            |  |   | 2,088 |  |  | 2.06 |  
|Federal funds purchased, securities sold under repurchase agreements and other |  |                                  | 946     |          |     | 38                 |  |                 | 4.00 |          |     | 3,016              |  |   | 53    |  |  | 1.76 |  
|Federal Home Loan Bank advances                                                |  |                                  | 20,463  |          |     | 770                |  |                 | 3.76 |          |     | 3,114              |  |   | 188   |  |  | 6.04 |  
|Total interest-bearing liabilities                                             |  |                                  | 159,135 |          |     | 4,740              |  |                 | 2.98 |          |     | 107,267            |  |   | 2,329 |  |  | 2.17 |  
|Noninterest bearing liabilities                                                |  |                                  | 41,366  |          |     |                    |  |                 |      |          |     | 36,006             |  |   |       |  |  |      |  
|Stockholders equity                                                           |  |                                  | 34,325  |          |     |                    |  |                 |      |          |     | 17,129             |  |   |       |  |  |      |  
|Total liabilities and stockholders equity                                     |  | $                                | 234,826 |          |     |                    |  |                 |      |          | $   | 160,402            |  |   |       |  |  |      |  
|Net interest income and net yield on interest-earning assets                   |  |                                  |         |          |     | 11,303             |  |                 | 5.16 | %        |     |                    |  | $ | 6,520 |  |  | 4.51 | %

(continued)



29



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|                                                                               |  |                              |        |          |     |                    |  |  |      |  
|------------------------------------------------------------------------------ |  | ---------------------------- | ------ | -------- | --- | ------------------ |  |  | ---- | -
|                                                                               |  | Year Ended December 31, 2003 |       
|                                                                               |  | Average
Balance              |        | Interest | (3) | Average
Yield/Rate | 
|                                                                               |  | (Dollars in Thousands)       |       
|Assets:                                                                        |  |                              |        |          |     |                    |  |  |      |  
|Interest-earning assets:                                                       |  |                              |        |          |     |                    |  |  |      |  
|Investments (1)                                                                |  | $                            | 16,656 |          | $   | 539                |  |  | 3.24 | %
|Federal funds sold                                                             |  |                              | 4,481  |          |     | 48                 |  |  | 1.07 |  
|Loans:                                                                         |  |                              |        |          |     |                    |  |  |      |  
|Commercial loans (2)                                                           |  |                              | 18,549 |          |     | 1,100              |  |  | 5.93 |  
|Commercial real estate loans (2)                                               |  |                              | 36,442 |          |     | 2,483              |  |  | 6.81 |  
|Consumer loans (2)                                                             |  |                              | 2,456  |          |     | 188                |  |  | 7.65 |  
|Residential real estate loans (2)                                              |  |                              | 2,927  |          |     | 207                |  |  | 7.07 |  
|Business Manager                                                               |  |                              |        |          |     | 238                |  |  | 9.29 |  
|Home equity and other loans (2)                                                |  |                              | 2,485  |          |     | 129                |  |  | 5.19 |  
|Total loans (2)                                                                |  |                              | 65,420 |          |     | 4,345              |  |  | 6.64 |  
|Total interest earning assets                                                  |  |                              | 86,557 |          |     | 4,932              |  |  | 5.70 |  
|Noninterest-earning assets                                                     |  |                              | 7,114  |          |     |                    |  |  |      |  
|Total assets                                                                   |  | $                            | 93,671 |          |     |                    |  |  |      |  
|Liabilities and Stockholders Equity:                                          |  |                              |        |          |     |                    |  |  |      |  
|Interest-bearing liabilities:                                                  |  |                              |        |          |     |                    |  |  |      |  
|Deposits                                                                       |  |                              |        |          |     |                    |  |  |      |  
|NOW and money market accounts                                                  |  | $                            | 33,798 |          | $   | 445                |  |  | 1.32 | %
|Savings accounts                                                               |  |                              | 1,747  |          |     | 9                  |  |  | 0.52 |  
|Certificates of deposit                                                        |  |                              | 28,578 |          |     | 726                |  |  | 2.54 |  
|Total interest-bearing deposits                                                |  |                              | 64,123 |          |     | 1,180              |  |  | 1.84 |  
|Federal funds purchased, securities
sold under repurchase agreements
and other |  |                              | 2,705  |          |     | 17                 |  |  | 0.63 |  
|Total interest-bearing liabilities                                             |  |                              | 66,828 |          |     | 1,197              |  |  | 1.79 |  
|Noninterest bearing liabilities                                                |  |                              | 17,328 |          |     |                    |  |  |      |  
|Stockholders equity                                                           |  |                              | 9,515  |          |     |                    |  |  |      |  
|Total liabilities and stockholders equity                                     |  | $                            | 93,671 |          |     |                    |  |  |      |  
|Net interest income and net yield on interest-earning assets                   |  |                              |        |          | $   | 3,735              |  |  | 4.32 | %



(1)

Includes investment securities and Federal Reserve Bank stock and Federal Home Loan Bank stock.

(2)

Includes loans for which the accrual of interest has been suspended.

(3)

Includes Fee Income on Loans



30



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Rate/Volume Analysis.The impact of managements strategies can be seen in the Analysis of Changes in Interest Income and Interest Expense table which follows. The table indicates changes in net interest income resulting either from changes in average balances or to changes in average rates for earning assets and interest-bearing liabilities. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (i) change in volume (change in volume multiplied by prior year rate); (ii) change in rate (change in rate multiplied by prior year volume); (iii) change in rate/volume (change in rate multiplied by change in volume); and (iv) total change in rate and volume.

|                                                             |  |                                                   |       |                                                   |   |              |   |     |      |        |   |       |   |              |       |     |   |      |   |   |      |   |   |       |  
|------------------------------------------------------------ |  | ------------------------------------------------- | ----- | ------------------------------------------------- | - | ------------ | - | --- | ---- | ------ | - | ----- | - | ------------ | ----- | --- | - | ---- | - | - | ---- | - | - | ----- | -
|                                                             |  | 2005 vs. 2004
Increase (Decrease) Attributable to |       | 2004 vs. 2003
Increase (Decrease) Attributable to |  
|                                                             |  | Volume                                            |       | Rate                                              |   | Rate/
Volume |   | Net |      | Volume |   | Rate  |   | Rate/
Volume |       | Net |  
|                                                             |  | (Dollars in Thousands)                            |      
|Interest income on:                                          |  |                                                   |       |                                                   |   |              |   |     |      |        |   |       |   |              |       |     |   |      |   |   |      |   |   |       |  
|Investments                                                  |  | $                                                 | 148   |                                                   | $ | 31           |   | $   | 6    |        | $ | 185   |   | $            | 100   |     | $ | 103  |   | $ | 20   |   | $ | 223   |  
|Federal funds sold                                           |  |                                                   | (3    | )                                                 |   | 177          |   |     | (8   | )      |   | 166   |   |              | 37    |     |   |     |   |   |     |   |   | 37    |  
|Loans receivable                                             |  |                                                   | 4,883 |                                                   |   | 1,218        |   |     | 742  |        |   | 6,843 |   |              | 3,410 |     |   | 139  |   |   | 109  |   |   | 3,658 |  
|Total interest income from interest-earning assets           |  |                                                   | 5,028 |                                                   |   | 1,426        |   |     | 740  |        |   | 7,194 |   |              | 3,547 |     |   | 242  |   |   | 129  |   |   | 3,918 |  
|Interest expense on:                                         |  |                                                   |       |                                                   |   |              |   |     |      |        |   |       |   |              |       |     |   |      |   |   |      |   |   |       |  
|NOW and money market accounts                                |  |                                                   | 54    |                                                   |   | 163          |   |     | 33   |        |   | 250   |   |              | (98   | )   |   | (104 | ) |   | 24   |   |   | (178  | )
|Savings accounts                                             |  |                                                   | (10   | )                                                 |   | 11           |   |     | (2   | )      |   | (1    | ) |              | 21    |     |   | 6    |   |   | 15   |   |   | 42    |  
|Certificates of deposit                                      |  |                                                   | 832   |                                                   |   | 517          |   |     | 246  |        |   | 1,595 |   |              | 1,026 |     |   | 8    |   |   | 10   |   |   | 1,044 |  
|Federal funds purchased under repurchase agreement and other |  |                                                   | (36   | )                                                 |   | 67           |   |     | (46  | )      |   | (15   | ) |              | 2     |     |   | 31   |   |   | 3    |   |   | 36    |  
|Federal Home Loan Bank advances                              |  |                                                   | 1,048 |                                                   |   | (71          | ) |     | (395 | )      |   | 582   |   |              |      |     |   |     |   |   | 188  |   |   | 188   |  
|Total interest expense from interest-bearing liabilities     |  |                                                   | 1,888 |                                                   |   | 687          |   |     | (164 | )      |   | 2,411 |   |              | 951   |     |   | (59  | ) |   | 240  |   |   | 1,132 |  
|Increase (decrease) in net interest income                   |  | $                                                 | 3,140 |                                                   |   | 739          |   |     | 904  |        |   | 4,783 |   | $            | 2,596 |     | $ | 301  |   | $ | (111 | ) | $ | 2,786 |  

Discussion of Changes in Financial Condition from December 31, 2004 to December 31, 2005

General.Total assets increased by $85.7 million, or 45%, from $191.5 million at December 31, 2004, to $277.2 million at December 31, 2005, with the increase invested principally in loans, securities held to maturity, and Federal Funds Sold. Total loans receivable increased by $57.0 million or 37%, to $210.7 million at December 31, 2005, from $153.7 million at December 31, 2004. The increase in these earning assets was the result of additional net loan activity from the Banks branch network. Securities increased $5.0 million or 23.1% to $26.4 million at December 31, 2005 from $21.4 million at December 31, 2004. The increases in loans and securities were funded by an increase in deposits in 2005 of $35.3 million, additional Federal Home Loan Bank advances of $13.0 million. This growth was further supplemented by the addition of $36.4 million of new capital.

The Company is committed to expanding its business through internal growth as well as through purchase opportunities, while maintaining strong asset quality and continuing strong capital growth. Managements strategy for achieving these objectives includes continuing our primary focus of increasing originations of high-quality commercial real estate, land acquisition, and construction loans at appropriate yields for enhancing interest income, and improving our efficiency and controlling operating costs. The following is a discussion of the significant fluctuations between the December 31, 2005 and December 31, 2004 balance sheets.

Cash and Cash Equivalents.Cash and cash equivalents were $27.6 million at December 31, 2005 compared to $6.2 million at December 31, 2004. The increase of $21.4 million was primarily due to higher Federal Funds sold levels at the end of 2005 in anticipation of funding needs for new loans. Management added additional liquidity in 2005 through deposit taking, capital injections and Federal Home Loan Bank borrowing activities to respond to higher loan demand.

Securities Available for Sale and Held to Maturity.The securities portfolio increased $5.0 million, or 23.1% to $26.4 million at December 31, 2005 from $21.4 million at December 31, 2004. New securities were purchased during 2005 using available excess cash. As part of the current investment strategy, the Company



31



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attempted to earn more income from the investment portfolio by balancing the assets against the liquidity needed for loan funding. The investment strategy for 2005 was to focus on the acquisition of high quality fixed income investments with terms to maturity that does not exceed seven years. Management believes that laddered investment purchases within this time frame provided the best opportunities to maximize investment yield while maintaining a defensive position in a rising interest rate environment.

Loans Receivable. Total loans were $210.7 million at December 31, 2005, an increase of $57 million or 37% from $153.7 million at December 31, 2004. This increase resulted primarily from net increases in residential and commercial real estate loan production through internal growth.

Asset Quality and Non-Performing Assets.In the normal course of business, the Company has recognized and will continue to recognize losses resulting from the inability of certain borrowers to repay loans and the insufficient realizable value of collateral securing such loans. Accordingly, the Company has established an allowance for loan losses, which totaled $2.1 million at December 31, 2005. The allowance for loan losses is maintained at a level believed adequate by management to absorb estimated credit losses. Managements periodic evaluation of the adequacy of the allowance is based on the Banks past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires estimates of material factors including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The Companys allowance for loan and credit losses was analyzed and deemed to be adequate by management at December 31, 2005 for incurred losses.

Impaired loans as a percentage of total loans decreased from 1.32%, or $2.1 million at December 31, 2004, to 1.09% of total loans, or $2.3 million at December 31, 2005. Assets which are classified are those deemed by management as inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets which are classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.

There was no other real estate owned at December 31, 2005 and December 31, 2004.

|                                          |  |                 |                        |      |   |         |  
|----------------------------------------- |  | --------------- | ---------------------- | ---- | - | ------- | -
|                                          |  | At December 31, |                       
|                                          |  | 2005            |                        | 2004 |  
|                                          |  |                 | (Dollars in Thousands) |     
|Classified loans and discount             |  | $               | 2,319                  |      | $ | 2,057   |  
|Other real estate owned and repossessions |  |                 |                       |      |   |        |  
|Total classified and other                |  | $               | 2,319                  |      | $ | 2,057   |  
|Percent classified and other/total loans  |  |                 | 1.09                   | %    |   | 1.32    | %
|Gross loans                               |  | $               | 212,785                |      | $ | 155,408 |  

Non-performing assets consist of loans that are past due 90 days or more which are still accruing interest, loans on nonaccrual status and OREO and other foreclosed assets.

Total nonperforming assets have increased $149,000 to $290,000 at December 31, 2005 from $141,000 at December 31, 2004. Of the total nonperforming loans at December 31, 2005, $41,000 consists of commercial loans and are secured by equipment and $249,000 consists of loans secured by real estate. Accrual loans over 90 days were zero at December 31, 2005. In managements best judgment, all non-performing assets are either fully collateralized or appropriately reserved based on circumstances known at this time.

Premises and Equipment.Premises and equipment totaled $2.0 million at December 31, 2005 compared to $1.9 million at December 31, 2004. The increase of 5% during 2005 is primarily due to the acquisition of select fixed assets.



32



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Liabilities

Deposits. Deposits increased $35.3 million at December 31, 2005 from December 31, 2004. In the South Florida market, the Bank is able to attract new deposits or reduce deposit levels as needed by adjusting the interest paid on deposit accounts, primarily money market and NOW accounts. When additional funds are needed to fulfill lending commitments, the Bank can, by means of marketing efforts and by adjusting the interest paid on deposits accounts, attract new deposits and retain existing accounts. In addition, the Bank can utilize institutional (broker) deposits on a limited basis. At December 31, 2005, brokered deposits were $13.0 million.

|                                          |  |                          |         |      |   |        
|----------------------------------------- |  | ------------------------ | ------- | ---- | - | -------
|                                          |  | Deposits at December 31,
|                                          |  | 2005                     |         | 2004
|                                          |  | (Dollars in Thousands)  
|                                          |  |                          |         |      |   |        
|Noninterest-bearing accounts              |  | $                        | 32,971  |      | $ | 36,231 
|Interest-bearing accounts:                |  |                          |         |      |   |        
|NOW accounts                              |  |                          | 35,561  |      |   | 9,542  
|Money market accounts                     |  |                          | 18,068  |      |   | 21,029 
|Savings accounts                          |  |                          | 3,737   |      |   | 4,910  
|Certificates of deposit under $100,000    |  |                          | 63,160  |      |   | 40,183 
|Certificates of deposit $100,000 and more |  |                          | 39,968  |      |   | 46,263 
|Total interest-bearing deposits           |  |                          | 160,494 |      |   | 121,927
|Total deposits                            |  | $                        | 193,465 |      | $ | 158,158

Debt:The Bank maintains an unsecured line of credit of $5.0 million and the Company maintains a $2.0 million revolving credit line, each with Independent Bankers Bank, to meet interim liquidity needs. There were no borrowings outstanding under these unsecured lines of credit as of December 31, 2005, compared to $2.5 million outstanding at December 31, 2004 under the Banks unsecured line of credit.

Federal Home Loan Bank Advances. Federal Home Loan Bank (FHLB) advances at December 31, 2005 amounted to $21.0 million compared to $8.0 million at December 31, 2004. In August 2004 the bank was accepted into membership of the Federal Home Loan Bank of Atlanta. The Bank has pledged a security interest in its real estate loan portfolio to the FHLB as collateral for borrowings obtained from the FHLB.

Securities Sold Under Repurchase Agreements. Securities sold under repurchase agreements were $1.0 million at December 31, 2005 compared to $1.3 million at December 31, 2004. The decrease was due to a reduction of client participation in the program in 2005.

Capital

Total stockholders equity was $59.6 million at December 31, 2005, an increase of $38.9 million or 187%, from $20.7 million at December 31, 2004. The increase was due primarily to the net proceeds from two private placements during 2005 amounting to approximately $35.5 million and comprehensive income of $2.8 million. In addition, the Company raised another $0.9 million of capital through the exercise of warrants and options. In the first quarter of 2005, the Company redeemed 315 preferred shares with a par value of $315,000.

In accordance with risk-based capital guidelines issued by the Federal Reserve Board, the Bank is required to maintain a minimum ratio of total capital to weighted risk assets as well as maintaining minimum leverage ratios. The Banks risk-weighted, Tier 1 risk-weighted, and Tier 1 leverage capital ratios were 21.83%, 20.89% and 19.63% at December 31, 2005 and 10.03%, 9.00% and 8.37% at December 31, 2004. Based on these ratios, the Bank is considered to be well capitalized. Management expects the Bank to continue to be well capitalized.

Discussion of Changes in Financial Condition from December 31, 2003 to December 31, 2004

General.Total assets increased by $97.4 million, or 104%, from $94.1 million at December 31, 2003, to $191.5 million at December 31, 2004, with the increase invested principally in loans and securities available for sale. Total loans receivable increased by $87.5 million or 132%, to $153.7 million at December 31, 2004, from $66.2 million at December 31, 2003. The increase in these earning assets was the result of additional net loan activity from the branches of $45.5 million and the acquisition of $42.0 million of new loans as part of the Gulf Bank transaction. Securities increased $2.1 million or 10.8% to $21.4 million at December 31, 2004 from $19.3 million at December 31, 2003. The increases in loans and securities were funded by an increase in deposits in 2004 of $78.1 million ($67.0 million of which was assumed in the Gulf Bank transaction) as well as the addition of



33



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Federal Home Loan Bank advances of $8.0 million in 2004. This growth was further supplemented by the addition of $10.9 million of new capital, most of which was obtained in a May 2004 public offering.

Cash and Cash Equivalents.Cash and cash equivalents were $6.2 million at December 31, 2004 compared to $3.2 million at December 31, 2003. The increase of $3.0 million or 94% was primarily due to higher Federal Funds purchase levels at the end of 2004. Management added additional liquidity in 2004 through deposit taking, capital injections and Federal Home Loan Bank borrowing activities to respond to higher loan demand.

Securities Available for Sale and Held to Maturity.The securities portfolio increased $2.1 million, or 10.8% to $21.4 million at December 31, 2004 from $19.3 million at December 31, 2003. New securities were purchased during 2003 using available excess cash. As part of the Companys investment strategy in 2004, management attempted to earn more income from the investment portfolio by balancing the assets against the liquidity needed for loan funding. The investment strategy for 2004 was to focus on the acquisition of high quality fixed income investments with terms to maturity that does not exceed five years. Management believes that laddered investment purchases within this time frame provided the best opportunities to maximize investment yield while maintaining a defensive position in a rising interest rate environment.

Loans Receivable. Total loans were $153.7 million at December 31, 2004, an increase of $87.5 million or 132% from $66.2 million at December 31, 2003. This increase resulted primarily from net increases in commercial and commercial real estate loan production of $45.5 million through internal growth as well as the acquisition of $42.0 million of new loans as part of the Gulf Bank transaction.

Asset Quality And Non-Performing Assets.In the normal course of business, the Company has recognized and will continue to recognize losses resulting from the inability of certain borrowers to repay loans and the insufficient realizable value of collateral securing such loans. Accordingly, the Company has established an allowance for loan losses, which totaled $1.7 million at December 31, 2004. The allowance for loan losses is maintained at a level believed adequate by management to absorb estimated credit losses. Managements periodic evaluation of the adequacy of the allowance is based on the Banks past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires estimates of material factors including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The Companys allowance for loan and credit losses was analyzed and deemed to be adequate by management at December 31, 2004 for incurred losses.

The impaired loans increased from $1.7 million at December 31, 2003, or 2.56% of total loans, to $2.1 million at December 31, 2004, or 1.3% of total loans. Assets which are classified are those deemed by management as inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets which are classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

There was no other real estate owned at December 31, 2004 and 2003.

|                                          |  |                 |                        |      |   |        |  
|----------------------------------------- |  | --------------- | ---------------------- | ---- | - | ------ | -
|                                          |  | At December 31, |                       
|                                          |  | 2004            |                        | 2003 |  
|                                          |  |                 | (Dollars in Thousands) |     
|                                          |  |                 |                        |      |   |        |  
|Classified loans and discount             |  | $               | 2,057                  |      | $ | 1,720  |  
|Other real estate owned and repossessions |  |                 |                       |      |   |       |  
|Total classified and other                |  | $               | 2,057                  |      | $ | 1,720  |  
|Percent classified and other/total loans  |  |                 | 1.32                   | %    |   | 2.56   | %
|Gross loans                               |  | $               | 155,408                |      | $ | 67,071 |  

Non-performing assets consist of loans that are past due 90 days or more which are still accruing interest, loans on nonaccrual status and OREO and other foreclosed assets.

Total nonperforming assets have decreased $677,000 to $141,000 at December 31, 2004 from $818,000 at December 31, 2003. Of the total nonperforming loans at December 31, 2004, $121,000 consists of commercial and are secured by equipment and $20,000 consists of loans secured by real estate. Accrual loans over 90 days decreased



34



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by $705,000. In managements best judgment, all non-performing assets are either fully collateralized or appropriately reserved based on circumstances known at this time.

Premises and Equipment.Premises and equipment totaled $1.9 million at December 31, 2004 compared to $1.7 million at December 31, 2003. The increase of 11.7% during 2004 is primarily due to the acquisition of select fixed assets in conjunction with the Gulf Bank transaction. Also, as part of the Gulf Bank transaction, we acquired leases on three new branch locations in the greater Miami area during 2004.

Liabilities

Deposits. Deposits increased $78 million at December 31, 2004 from 2003. In the South Florida market, management is able to attract new deposits or reduce deposit levels as needed by adjusting the interest paid on deposit accounts, primarily money market accounts. When additional funds are needed to fulfill lending commitments, management can, by means of marketing efforts and by adjusting the interest paid on deposits accounts, attract new deposits and retain existing accounts. The Bank acquired $67.0 million of new deposit liabilities as part of the Gulf bank transaction. In addition the Bank added $13.0 million of institutional (broker) deposits in 2004.

|                                          |  |                          |         |      |   |        | 
|----------------------------------------- |  | ------------------------ | ------- | ---- | - | ------ | 
|                                          |  | Deposits at December 31, |        
|                                          |  | 2004                     |         | 2003 |  
|                                          |  | (Dollars in Thousands)   |        
|Noninterest-bearing accounts              |  | $                        | 36,231  |      | $ | 17,054 | 
|Interest-bearing accounts:                |  |                          |         |      |   |        | 
|NOW accounts                              |  |                          | 9,542   |      |   | 4,076  | 
|Money market accounts                     |  |                          | 21,029  |      |   | 18,935 | 
|Savings accounts                          |  |                          | 4,910   |      |   | 1,605  | 
|Certificates of deposit under $100,000    |  |                          | 40,183  |      |   | 15,007 | 
|Certificates of deposit $100,000 and more |  |                          | 46,263  |      |   | 23,456 | 
|Total interest-bearing deposits           |  |                          | 121,927 |      |   | 63,079 | 
|Total deposits                            |  | $                        | 158,158 |      | $ | 80,133 | 

Federal Home Loan Bank Advances. In August 2004 the bank was accepted into membership of the Federal Home Loan Bank of Atlanta. At that time we assumed $3.0 million of advances previously issued to Gulf Bank. The Bank had increased the outstanding borrowings from Federal Home Loan Bank to $8.0 million at year end. No amounts were due to the Federal Home Loan Bank in 2003.

Securities Sold Under Repurchase Agreements. Securities sold under repurchase agreements were $1.3 million at December 31, 2004 compared to $2.4 million at December 31, 2003. The decrease was due to a reduction of client participation in the program in 2004.

Capital

Total stockholders equity was $20.7 million at December 31, 2004, an increase of $10.9 million or 111%, from $9.8 million at December 31, 2003. The increase is due primarily to a capital infusion from a public offering in May 2004. During January 2004, the Holding Company issued 3,100 shares of preferred stock totaling $3.1 million in a private placement which partially funded the purchase of certain of the assets Gulf Bank. At December 31, 2004, 315 preferred shares with a par value of $315,000 remain issued and outstanding.

In accordance with risk-based capital guidelines issued by the Federal Reserve Board, the Bank is required to maintain a minimum ratio of total capital to weighted risk assets as well as maintaining minimum leverage ratios. The Banks risk-weighted, Tier 1 risk-weighted, and Tier 1 leverage capital ratios were 10.03%, 9.00% and 8.37% at December 31, 2004 and 10.67%, 9.71% and 8.01% at December 31, 2003. Based on these ratios, the Bank is considered to be well capitalized. Management expects the Bank to continue to be well capitalized.



35



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Results of Operations from December 31, 2004 to December 31, 2005

Comparison of results in this section is for the years ended December 31, 2005 and 2004. Net income for 2005 was $2.9 million compared to a net loss of $228,000 for 2004. This represents a positive change of $3.1 million. Earnings for 2005 as compared to 2004 were primarily impacted by a $4.8 million increase in net interest income, a decrease in the provision for loan loss of $0.9 million, partially offset by a $2.7 million increase in operating expenses. The increased size of the business was due to organic growth of the loan and deposit portfolio in 2005 and the full year impact of the growth initiatives taken in 2004.

Net Interest Income.Net interest income before provision for loan losses for 2005 was $11.3 million as compared to $6.5 million for 2004, an increase of $4.8 million or 73%. Income from interest earning deposits, securities (available-for-sale and held-to-maturity), federal funds sold, Federal Home Loan Bank stock and Federal Reserve Bank stock increased by $352,000 from $846,000 for 2004, due primarily to a $3.5 million, or 13% increase in average volume of investments during the period. In addition, the average interest yield on investments increased to 4.02% in 2005 from 3.86% in 2004, and the average interest yield on federal funds sold increased to 3.31% in 2005 from 1.07% in 2004. Interest income and fees on loans increased by $6.9 million, or 86%, in 2005 as compared to 2004. The increase in loan income resulted from an increase in total average loan balances outstanding to $188.1 million for 2005 from $116.8 million for 2004. The largest increases were $43.9 million and $26.4 million in commercial real estate and residential real estate loans, respectively. These increases related to volume were enhanced by significantly higher average interest yields experienced by the Bank on the overall loan portfolio in 2005 of 7.89% compared to 6.85% in 2004. The yield on total interest-earning assets was 7.32% for 2005, a 119 basis point increase from 6.13% for 2004, primarily as a result of improved yields in the loan portfolio due to increasing market interest rates.

Total interest expense increased $2.4 million, or 107%, from $2.3 million for 2004 to $4.7 million for 2005. The increase in interest expense was primarily the result of an increase in average interest bearing deposit account balances to $137.7 million for 2005 from $101.1 million for 2004. The average balance of NOW and money market accounts increased $5.3 million in 2005. Average balances of certificate of deposits increased $32.4 million during 2005. When additional funds were needed to fulfill lending commitments and securities purchases, management increased deposits by promoting and adjusting the interest rate paid on deposit accounts. In addition funding was obtained through the FHLB. The average balance of FHLB borrowings increased $17.3 million in 2005. In addition to the increase in the average balance of deposits there was an increase in the yield paid on interest-bearing deposits and liabilities to 2.97% for 2005 from 2.17% for 2004.

Provision for Loan Losses. Although management uses its best judgment in underwriting each loan, industry experience indicates that a portion of our loans will become delinquent. Regardless of the underwriting criteria utilized by financial institutions, they may experience losses as a result of many factors beyond their control including among other things, changes in market conditions affecting the value of security and unrelated problems affecting the credit of the borrower. Due to the concentration of loans in South Florida, adverse economic conditions in this area could result in a decrease in the value of a significant portion of the Banks collateral securing the loans.

The allowance for loan loss as of December 31, 2005 was $2.1 million as compared to $1.7 million at December 31, 2004. Through the normal review of the allowance for loan losses, management determined additional provision was required due to the increase in loan balances in the year.

Management had further identified its Business Manager relationships as a principle area of concern and eliminated the product line by taking a write off of $582,000 in the first quarter of 2004. In addition, management charged off a further $514,000 in 2004 of loans for which it was determined that the borrower had insufficient ability to repay.

NonInterest Income.Total noninterest income increased $106,000, or 11%, from $969,000 for 2004 to $1.1 million for 2005.

Service charges on deposit accounts increased to $1.1 million in 2005 from $1.0 million in 2004 an increase of 7%. Fees were higher due to a larger client base. Also included in noninterest income was an $8,000 gain on the sale of a security classified as available for sale during 2005. There was a sale of an investment security classified as available for sale in 2004 that resulted in loss of $33,000 in 2004.



36



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NonInterest Expense.Total noninterest expense for the year increased by $2.7 million, or 42%, from $6.3 million for 2004 to $9.0 million for 2005. The increase in noninterest expenses reflects the impact of the growth of the Bank in 2005 both from the Gulf Bank transaction as well as from internal growth.

Salaries and benefits increased to $4.2 million in 2005 from $2.8 million in 2004. This is an increase of $1.4 million, or 50%. The increase was due to the addition of 19 people in 2005 to service a larger banking operation. Occupancy and equipment expense increased to $1.7 million in 2005 from $1.5 million in 2004, an increase of $269,000, or 18%. This increase was due to the cost of operating three new branches in the Miami-Dade area acquired as part of the Gulf Bank transaction for the full year of 2005 versus only 10 months in 2004. In addition, the Banks Boynton Beach branch in Palm Beach County commenced operations in April 2005. Data and item processing costs decreased by $23,000, or 4%, to $498,000 for 2005 from $520,000 for 2004. Excluding $222,000 of integration costs incurred in 2004 to combine the former Gulf Bank operations into our Bank systems, data and item processing costs increased by $199,000, mostly the result of a larger customer and deposit base of the Bank in 2005.

Other expenses increased to $2.5 million in 2005 from $1.5 million in 2004. This is an increase of $1.0 million, or 67%, and reflects the larger size of the Bank. Professional fees increased by $562,000 due primarily to increased costs for general counsel, Sarbanes-Oxley compliance, recruiting, and investor relations. Advertising expenses increased by $162,000 in 2005 as a result of a various special rate promotions in local media as well as costs associated with changing of the Banks name to Sun American Bank. Directors fees of $120,000 were paid in 2005 but were not paid in 2004. Internal and External audit costs increased by $113,000 due to the growing complexity and size of the Bank. In the current environment in which the Bank operates, there is a continued need to allocate more resources to meet regulatory compliance requirements particularly for the new Bank Secrecy and Patriot Acts and the Sarbanes-Oxley Act. Management expects to experience higher expenses in future years to meet compliance requirements.

Provision for Income Taxes. The Company recorded no income taxes in 2005 as a result of decreasing the valuation allowance for the realizable portion of deferred tax assets. The valuation allowance decreased $1.2 million in 2005 eliminating the need to provide for income tax expense. In 2004, the Corporation recorded a valuation allowance in an amount equal to its net deferred tax assets.

Results of Operations from December 31, 2003 to December 31, 2004

Comparison of results in this section is for the years ended December 31, 2004 and 2003. The net loss recognized for 2004 was $228,000 compared to a loss of $443,000 for 2003. This was a positive change of $215,000. Earnings for 2004 as compared to 2003 were primarily impacted by a $2.8 million increase in net interest income, offset by a $2.5 million increase in operating expenses and a $419,000 increase in the provision for loan losses. The increased size of the business is due to the acquisition of certain assets and liabilities of Gulf Bank in February 2004 and due to internal growth of the loan and deposit portfolio in 2004.

Net Interest Income.Net interest income before provision for loan losses for 2004 was $6.5 million as compared to $3.7 million for 2003, an increase of $2.8 million, or 76%. Income from interest earning deposits, securities and mortgage-backed related securities (available-for-sale and held-to-maturity) federal funds sold, Federal Home Loan Bank stock and Federal Reserve Bank stock increased by $258,000 from $588,000 for 2003, due primarily to a $6.5 million, or 31% increase in average volume of investments during the period. Management used funds invested in lower-yielding federal funds at December 31, 2003 to purchase investments with higher yields during 2004. Interest and fees on loans increased by $3.7 million, or 84% in 2004 as compared to 2003. The increase in loan income resulted from an increase in total average loan balances outstanding to $116.7 million for 2004 from $65.4 million for 2003. The largest increases were $7.0 million and $42.9 million in commercial loans and commercial real estate loans. These increases related to volume were enhanced by modestly higher average interest yields experienced by the Bank on the overall loan portfolio in 2004 of 6.85% compared to 6.64% in 2003. The yield on total interest-earning assets was 6.13% for 2004, a 43 basis point increase from 5.70% for 2003, primarily as a result of improved yields in the loan portfolio.

Total interest expense increased $1.1 million or 92% from $1.2 million for 2003 to $2.3 million for 2004. The increase in interest expense was primarily the result of an increase in average interest bearing deposit account balances to $101.1 million for 2003 from $64.1 million for 2003. The average balance of NOW and money market accounts decreased $7.4 million in 2004. Average balances of certificate of deposits increased $40.4 million during 2004. When additional funds were needed to fulfill lending commitments and securities purchases, management used liquidity of $28 million that was received in the Gulf Bank transaction plus increased deposits by adjusting the



37



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interest paid on deposits accounts. In addition funding was obtained through the FHLB. In addition to the increase in the average balance of deposits there was an increase in the yield paid on interest-bearing deposits to 2.17% for 2004 from 1.79% for 2003.

Provision for Loan Losses. Although management uses its best judgment in underwriting each loan, industry experience indicates that a portion of our loans will become delinquent. Regardless of the underwriting criteria utilized by financial institutions, they may experience losses as a result of many factors beyond their control including among other things, changes in market conditions affecting the value of security and unrelated problems affecting the credit of the borrower. Due to the concentration of loans in South Florida, adverse economic conditions in this area could result in a decrease in the value of a significant portion of the Banks collateral securing the loans.

The allowance for loan loss as of December 31, 2004 was $1.7 million as compared to $738,000 at December 31, 2003. Through the normal review of the allowance for loan losses, management determined additional provision was required due to the increase in loan balances in the year.

Management had further identified its Business Manager relationships as a principal area of concern and eliminated the product line by taking a write off of $582,000 in the first quarter of 2004. In addition, management charged off a further $514,000 in 2004 of loans for which it was determined that the borrower had insufficient ability to repay.

NonInterest Income.Total noninterest income increased $315,000, or 48%, from $654,000 for 2003 to $969,000 for 2004. The increase of total other income was the result of the increased size of the Bank in 2004 due to the Gulf Bank transaction.

Service charges on deposit accounts increased to $1.0 million in 2004 from $601,000 in 2003 an increase of 66%. Fees were higher due to a larger client base and due to efforts by management to improve fee collection processes in 2004. Also included in noninterest income was a $33,000 loss on the sale of a security classified as available for sale during 2004. There were sales of investments classified as held to maturity that resulted in a net gain of $38,000 in 2003. This was an isolated transaction that was required upon discovery that purchase of the investment exceeded investment guidelines at the time of purchase.

NonInterest Expense.Total noninterest expense for the year increased by $2.4 million, or 61.5% from $3.9 million for 2003 to $6.3 million for 2004. The increase in noninterest expenses reflects the impact of the growth of the Bank in 2004 both from the Gulf Bank transaction as well as from internal growth.

Salaries and benefits increased to $2.8 million in 2004 from $1.7 million in 2003. This is an increase of $1.1 million or 65%. The increase was due to the addition of 26 people in 2004 to service a larger banking operation. Occupancy and equipment expense increased to $1.5 million in 2004 from $667,000 in 2003, an increase of $788,000 or 118%. This increase was due to the added space required to house the larger banking operations in our new Coral Way Corporate office. It is also due to the cost of operation of three new branches in the Miami-Dade area acquired as part of the Gulf Bank transaction. Data and item processing costs increased by $155,000, or 42.4% to $520,000 for 2004 from $365,000 for 2003, primarily due to $222,000 of integration costs to combine former Gulf Bank operations into our Bank systems and offset by operational efficiencies.

Other expense increased to $1.5 million in 2004 from $1.1 million in 2003. This is an increase of $400,000 or 36% and reflects the larger size of the Bank subsequent to the Gulf Bank transaction. Professional fees increased by $77,000 and insurance costs (general liability and FDIC) increased by $94,000 due to higher asset values. Communication expenses (telephone and computer) increased by $170,000 in 2004. In the current environment that the Bank operates in there is a continued need to allocate more resources to meet regulatory compliance requirement particularly for the new Bank Secret and Patriot Acts and the Sarbanes-Oxley Act. Management expects to experience higher expenses in future years to meet compliance requirements.

Provision for Income Taxes.The Company has recorded a valuation allowance on the deferred tax assets to reduce the total to an amount that management believes is more likely than not to be realized. Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and carry forwards are expected to be available to reduce taxable income. No income tax benefits have been provided for the years ended December 31, 2004 and 2003 because there was not sufficient evidence to support the position that the losses generated would be utilized in the future. As the Corporation becomes profitable management expects to realize some substantial benefits from a reduction of Federal income tax expense.



38



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Item 7.

Financial Statements

The Financial Statements are included at page 42 in this document.

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk. The Banks primary market risk exposure is interest rate risk. Interest rate risk is the exposure of financial condition to adverse movements in interest rates. The Banks income is derived primarily from the excess of interest collected on interest-earning assets over the interest paid on interest-bearing liabilities. The rates of interest earned on assets and owed on liabilities generally are established contractually for a period of time. Since market interest rates change over time, the Bank is exposed to lower profitability if it can not adapt to interest rate changes. Accepting interest rate risk can be an important source of profitability and stockholder value; however, excessive levels of interest rate risk could pose a significant threat to the Banks earnings and capital base. Accordingly, effective risk management that maintains interest rate risk at prudent levels is essential to the Banks safety and soundness. The Banks interest rate risk is monitored using its GAP analysis on a monthly basis.

The Company does not currently engage in trading activities or use derivative instruments to control interest rate risk. Even though such activities may be permitted with the approval of the Board of Directors, management does not intend to engage in such activities in the immediate future.

Asset/Liability Management. A principal objective of the Banks asset/liability management strategy is to minimize the Banks 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 of the Bank that establishes policies and monitors results to control interest rate sensitivity.

The Asset and Liability Committee examines the extent to which the Banks assets and liabilities are interest rate sensitive and monitors our interest rate sensitivity GAP. An asset or liability is considered to be interest rate-sensitive if it will be repriced 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 periods. During a period of rising interest rates, a positive GAP would tend to result in an increase in net interest income; and a negative GAP would tend to adversely affect net interest income. Conversely, 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 the Banks assets and liabilities were equally flexible and moved concurrently, the impact of any increases or decreases in interest rates on net interest income would be minimal. However, as commercial banking companies generally have a significant quantity of their earning assets in Rate-Over-Prime, rate-adjusted-day-of- change earning assets, GAP management is critical, as very few, if any, rate-sensitive liabilities (deposit accounts) adjust at such a rapid frequency.

The Asset and Liability Committee evaluates the Banks GAP position, and stratifies these results according to how often the repayment of particular assets and liabilities are impacted by changes in interest rates. Additionally, income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates; thus, 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 periods 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 of assets and liabilities may lag behind changes in general market rates. Additionally, certain types of earning assets (variable rate mortgage loans, for example) may have interest caps which may limit the level of rate increases, even though general market interest rates increase. GAP management is further complicated by asset (loan) prepayment and/or early withdrawal of liabilities (deposits). In volatile interest rate markets, the level of assets and liabilities assumed by the Bank may not have accounted for the deviation that has occurred in the unpredictable interest rate environment.

Therefore, Managements and the Asset and Liability Committees strategy is to maintain a balanced interest rate risk position to protect the Banks net interest margin from market fluctuations. They review, on at least a monthly basis, the maturity and repricing of assets and liabilities for the various time periods considered.



39



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The following table represents the Banks cumulative GAP position as of December 31, 2005.

|                                                              |  |                        |          |                       |   |                     |  |                    |          |                 |   |          |  |   |          |  |   |         | 
|------------------------------------------------------------- |  | ---------------------- | -------- | --------------------- | - | ------------------- |  | ------------------ | -------- | --------------- | - | -------- |  | - | -------- |  | - | ------- | 
|                                                              |  | Within
Three
Months    |          | Zero to
Twelve
Months |   | Zero to
Three
Years |  | Zero to
Five
Years |          | Over
Five
Years |   | Total    | 
|                                                              |  | (Dollars in Thousands) |         
|ASSETS:                                                       |  |                        |          |                       |   |                     |  |                    |          |                 |   |          |  |   |          |  |   |         | 
|Immediately repricing investments                             |  | $                      | 27,581   |                       | $ | 27,581              |  | $                  | 27,581   |                 | $ | 27,581   |  | $ | 27,581   |  | $ | 27,581  | 
|Fixed investments                                             |  |                        | 5,444    |                       |   | 10,454              |  |                    | 15,012   |                 |   | 21,057   |  |   | 28,954   |  |   | 28,954  | 
|Loans                                                         |  |                        | 119,742  |                       |   | 138,744             |  |                    | 171,154  |                 |   | 190,628  |  |   | 212,785  |  |   | 212,785 | 
|Total repricing assets                                        |  |                        | 152,767  |                       |   | 176,779             |  |                    | 213,747  |                 |   | 239,716  |  |   | 269,320  |  |   | 269,320 | 
|Nonearning assets                                             |  |                        |          |                       |   |                     |  |                    |          |                 |   |          |  |   |          |  |   | 7,831   | 
|Total assets                                                  |  | $                      | 152,767  |                       | $ | 176,779             |  | $                  | 213,747  |                 | $ | 239,716  |  | $ | 269,320  |  | $ | 277,151 | 
|LIABILITIES:                                                  |  |                        |          |                       |   |                     |  |                    |          |                 |   |          |  |   |          |  |   |         | 
|NOW accounts                                                  |  | $                      | 35,562   |                       | $ | 35,562              |  | $                  | 35,562   |                 | $ | 35,562   |  | $ | 35,562   |  | $ | 35,562  | 
|Money market accounts                                         |  |                        | 18,068   |                       |   | 18,068              |  |                    | 18,068   |                 |   | 18,068   |  |   | 18,068   |  |   | 18,068  | 
|Savings accounts                                              |  |                        | 3,737    |                       |   | 3,737               |  |                    | 3,737    |                 |   | 3,737    |  |   | 3,737    |  |   | 3,737   | 
|Total core deposits                                           |  |                        | 57,367   |                       |   | 57,367              |  |                    | 57,367   |                 |   | 57,367   |  |   | 57,367   |  |   | 57,367  | 
|Certificates of deposit                                       |  |                        | 19,683   |                       |   | 77,277              |  |                    | 99,887   |                 |   | 103,120  |  |   | 103,121  |  |   | 103,121 | 
|Other borrowed funds                                          |  |                        | 11,026   |                       |   | 11,026              |  |                    | 22,026   |                 |   | 22,026   |  |   | 22,026   |  |   | 22,026  | 
|Total repricing liabilities                                   |  |                        | 88,076   |                       |   | 145,670             |  |                    | 179,280  |                 |   | 182,513  |  |   | 182,514  |  |   | 182,514 | 
|Demand deposits                                               |  |                        |          |                       |   |                     |  |                    |          |                 |   |          |  |   |          |  |   | 32,971  | 
|Other liabilities                                             |  |                        |          |                       |   |                     |  |                    |          |                 |   |          |  |   |          |  |   | 2,041   | 
|Stockholders equity                                          |  |                        |          |                       |   |                     |  |                    |          |                 |   |          |  |   |          |  |   | 59,625  | 
|Total liabilities and equity                                  |  | $                      | 88,076   |                       | $ | 145,670             |  | $                  | 179,280  |                 | $ | 182,513  |  | $ | 182,514  |  | $ | 277,151 | 
|Asset/liability GAP, cumulative                               |  |                        | 64,691   |                       |   | 31,109              |  |                    | 34,467   |                 |   | 57,203   |  |   | 86,806   |  |   |         | 
|Rate sensitive assets /rate sensitive liabilities, cumulative |  |                        | 1.73     |                       |   | 1.21                |  |                    | 1.19     |                 |   | 1.31     |  |   | 1.48     |  |   |         | 
|Target                                                        |  |                        | .80-2.00 |                       |   | .80-1.50            |  |                    | .80-1.50 |                 |   | .80-1.50 |  |   | .80-1.50 |  |   |         | 

Effect of Government Policy, Future Legislation and Changing Financial Markets

One of the primary determinants of the Companys future success and profitability is the interest rate differentials obtained by its affiliate banking institution. The Banks earning capacity will be largely controlled by the difference between the interest rate paid on its deposits and other borrowings and the interest rates received on loans to customers and securities held in its investment portfolio. The value and yields of its assets and the rate paid on its liabilities are sensitive to changes in prevailing rates of interest. Consequently, the earnings and growth of the Company will be influenced by general economic conditions, the monetary and fiscal policies of the federal government and policies of regulatory agencies which implement national monetary policy. The nature and impact of any future changes in monetary policies cannot be predicted. The entire regulatory environment which controls the banking industry in the United States is undergoing significant change, both as to the banking industry itself and the permissible competition between banks and non-banking financial institutions. There have been significant regulatory changes in the areas of bank mergers and acquisitions, the products and services offered by banks and the non-banking activities in which bank and financial service holding companies may engage. Partly as a result of such changes, banks are now actively competing with other types of depository institutions and with non-bank financial institutions such as money market funds, brokerage firms, insurance companies and other financial services organizations. It is not possible at this time to assess what impact these changes will ultimately have on the Company and its operations. Certain legislative and regulatory proposals that could affect the Company are pending, or may be introduced, in the United States Congress, the Florida legislature and various other governmental agencies. These proposals could further alter the structure, regulation and competitive relationship of financial institutions and may subject the Company to increased regulation, disclosure and reporting requirements. In addition, the various banking regulatory agencies frequently propose rules and regulations to implement and enforce already existing legislation. It cannot be predicted whether or in what form any future legislation or regulations will be enacted or to the extent to which the business of the Company will be affected by such matters.



40



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Impact of Inflation and Changing Prices

The financial statements and accompanying footnotes have been prepared in accordance with generally accepted accounting principles (GAAP), which require the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The assets and liabilities of the Company are primarily monetary in nature and management believes that changes in market interest rates have a greater impact on its performance than do the effects of inflation in the current environment.



41



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SUN AMERICAN BANCORP

Miami, Florida

CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005 and 2004

CONTENTS

|                                                                                                                                                                                                                                                                                                                     
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
43
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
44
CONSOLIDATED STATEMENTS OF INCOME
45
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
46
CONSOLIDATED STATEMENTS OF CASH FLOWS
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
48



42



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Sun American Bancorp

Miami, Florida

We have audited the accompanying consolidated balance sheets of Sun American Bancorp as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in shareholders equity and cash flows for the years then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2005 and 2004, and the results of its operations and its cash flows for the years then ended in conformity with U. S. generally accepted accounting principles.



| |                             
| | ----------------------------
| | CROWE CHIZEKANDCOMPANYLLC   
| | /s/ CROWECHIZEKANDCOMPANYLLC

Fort Lauderdale, Florida

February 23, 2006



43



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SUN AMERICAN BANCORP

CONSOLIDATED BALANCE SHEETS

December 31, 2005 and 2004

|                                                                                                                                      |  |      |             |      |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- | - | ----------- | -
|                                                                                                                                      |  | 2005 |             | 2004 |  
|                                                                                                                                      |  |      |             |      |   |             |  
|ASSETS                                                                                                                                |  |      |             |      |   |             |  
|Cash and due from financial institutions                                                                                              |  | $    | 6,201,079   |      | $ | 6,213,556   |  
|Federal funds sold                                                                                                                    |  |      | 21,380,000  |      |   |            |  
|Total cash and cash equivalents                                                                                                       |  |      | 27,581,079  |      |   | 6,213,556   |  
|Securities available for sale                                                                                                         |  |      | 5,208,159   |      |   | 5,625,361   |  
|Securities held to maturity (fair value 2005 - $20,832,067, 2004 - $ 15,696,981)                                                      |  |      | 21,160,886  |      |   | 15,790,233  |  
|Loans, net (of allowance for loan losses of $2,119,396 and $1,678,191)                                                                |  |      | 210,665,319 |      |   | 153,729,571 |  
|Federal Reserve Bank stock                                                                                                            |  |      | 1,257,400   |      |   | 610,050     |  
|Federal Home Loan Bank stock                                                                                                          |  |      | 1,328,000   |      |   | 548,100     |  
|Accrued interest receivable                                                                                                           |  |      | 1,235,797   |      |   | 604,053     |  
|Premises and equipment, net                                                                                                           |  |      | 2,014,340   |      |   | 1,925,697   |  
|Goodwill and other identified intangibles                                                                                             |  |      | 5,963,596   |      |   | 5,892,060   |  
|Other assets                                                                                                                          |  |      | 736,269     |      |   | 528,335     |  
|                                                                                                                                      |  | $    | 277,150,845 |      | $ | 191,467,016 |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                  |  |      |             |      |   |             |  
|Deposits                                                                                                                              |  |      |             |      |   |             |  
|Non-interest bearing                                                                                                                  |  | $    | 32,971,081  |      | $ | 36,231,663  |  
|Interest bearing                                                                                                                      |  |      | 160,493,718 |      |   | 121,926,811 |  
|Total deposits                                                                                                                        |  |      | 193,464,799 |      |   | 158,158,474 |  
|Federal funds purchased                                                                                                               |  |      |            |      |   | 2,500,000   |  
|Repurchase agreements                                                                                                                 |  |      | 1,020,710   |      |   | 1,257,119   |  
|Federal Home Loan Bank advances                                                                                                       |  |      | 21,000,000  |      |   | 8,000,000   |  
|Accrued expense and other liabilities                                                                                                 |  |      | 2,014,942   |      |   | 781,578     |  
|Total liabilities                                                                                                                     |  |      | 217,500,451 |      |   | 170,697,171 |  
|Minority interest                                                                                                                     |  |      | 25,386      |      |   | 23,735      |  
|Shareholders equity                                                                                                                  |  |      |             |      |   |             |  
|Preferred stock, $1,000 par value; 5,000,000 shares authorized;
2005  none outstanding; 2004  315 outstanding                       |  |      |            |      |   | 315,000     |  
|Common stock, $.01 par value; 40,000,000 shares authorized;
2005  18,500,912 shares outstanding, 2004  8,406,966 shares outstanding |  |      | 412,333     |      |   | 311,394     |  
|Capital surplus                                                                                                                       |  |      | 65,299,226  |      |   | 29,001,264  |  
|Accumulated deficit                                                                                                                   |  |      | (5,895,750  | )    |   | (8,800,189  | )
|Accumulated other comprehensive income (loss)                                                                                         |  |      | (190,801    | )    |   | (81,359     | )
|Total shareholders equity                                                                                                            |  |      | 59,625,008  |      |   | 20,746,110  |  
|                                                                                                                                      |  | $    | 277,150,845 |      | $ | 191,467,016 |  



See accompanying notes



44



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SUN AMERICAN BANCORP

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 2005 and 2004

|                                                    |  |      |            |      |   |           |  
|--------------------------------------------------- |  | ---- | ---------- | ---- | - | --------- | -
|                                                    |  | 2005 |            | 2004 |  
|                                                    |  |      |            |      |   |           |  
|Interest and dividend income                        |  |      |            |      |   |           |  
|Loans, including fees                               |  | $    | 14,844,430 |      | $ | 8,002,103 |  
|Securities                                          |  |      | 947,144    |      |   | 761,455   |  
|Federal funds sold and other                        |  |      | 251,437    |      |   | 85,032    |  
|                                                    |  |      | 16,043,011 |      |   | 8,848,590 |  
|Interest expense                                    |  |      |            |      |   |           |  
|Deposits                                            |  |      | 3,931,409  |      |   | 2,088,266 |  
|Other                                               |  |      | 808,187    |      |   | 240,887   |  
|                                                    |  |      | 4,739,596  |      |   | 2,329,153 |  
|Net interest income                                 |  |      | 11,303,415 |      |   | 6,519,437 |  
|                                                    |  |      |            |      |   |           |  
|Provision for loan losses                           |  |      | 475,350    |      |   | 1,397,000 |  
|                                                    |  |      |            |      |   |           |  
|Net interest income after provision for loan losses |  |      | 10,828,065 |      |   | 5,122,437 |  
|                                                    |  |      |            |      |   |           |  
|Noninterest income                                  |  |      |            |      |   |           |  
|Service charges on deposit accounts                 |  |      | 1,066,704  |      |   | 1,001,164 |  
|Net gains (losses) on sales of securities           |  |      | 7,930      |      |   | (32,664   | )
|                                                    |  |      | 1,074,634  |      |   | 968,500   |  
|Noninterest expense                                 |  |      |            |      |   |           |  
|Salaries and employee benefits                      |  |      | 4,247,490  |      |   | 2,837,972 |  
|Occupancy and equipment                             |  |      | 1,724,182  |      |   | 1,455,371 |  
|Data processing                                     |  |      | 497,618    |      |   | 520,131   |  
|Professional services                               |  |      | 824,568    |      |   | 262,120   |  
|Insurance                                           |  |      | 215,961    |      |   | 243,967   |  
|Other                                               |  |      | 1,472,418  |      |   | 999,103   |  
|                                                    |  |      | 8,982,237  |      |   | 6,318,664 |  
|Income (loss) before taxes and minority interest    |  |      | 2,920,462  |      |   | (227,727  | )
|Income tax expense                                  |  |      |           |      |   |          |  
|Income (loss) before minority interest              |  |      | 2,920,462  |      |   | (227,727  | )
|Minority interest in net income of subsidiary       |  |      | (1,662     | )    |   | (308      | )
|Net income (loss)                                   |  | $    | 2,918,800  |      | $ | (228,035  | )
|Basic earnings (loss) per share:                    |  | $    | 0.24       |      | $ | (0.05     | )
|Diluted earnings (loss) per share:                  |  | $    | 0.21       |      | $ | (0.05     | )





See accompanying notes



45



---

SUN AMERICAN BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

Years ended December 31, 2005 and 2004

|                                                                                                               |  |                 |            |              |   |                 |  |                          |            |                     |   |                                               |   |                            |            |   |   |          |   |   |            |  
|-------------------------------------------------------------------------------------------------------------- |  | --------------- | ---------- | ------------ | - | --------------- |  | ------------------------ | ---------- | ------------------- | - | --------------------------------------------- | - | -------------------------- | ---------- | - | - | -------- | - | - | ---------- | -
|                                                                                                               |  | Preferred
Stock |            | Common
Stock |   | Capital
Surplus |  | Subscriptions
Receivable |            | Accumulated
Deficit |   | Accumulated
Other
Comprehensive
Income (Loss) |   | Total
Shareholders
Equity |           
|                                                                                                               |  |                 |            |              |   |                 |  |                          |            |                     |   |                                               |   |                            |            |   |   |          |   |   |            |  
|Balance at January 1, 2004                                                                                     |  | $               |           |              | $ | 294,593         |  | $                        | 19,085,454 |                     | $ | (1,000,000                                    | ) | $                          | (8,448,430 | ) | $ | (84,521  | ) | $ | 9,847,096  |  
|                                                                                                               |  |                 |            |              |   |                 |  |                          |            |                     |   |                                               |   |                            |            |   |   |          |   |   |            |  
|Comprehensive income:                                                                                          |  |                 |            |              |   |                 |  |                          |            |                     |   |                                               |   |                            |            |   |   |          |   |   |            |  
|Net loss                                                                                                       |  |                 |           |              |   |                |  |                          |           |                     |   |                                              |   |                            | (228,035   | ) |   |         |   |   | (228,035   | )
|Change in net unrealized gain (loss) on securities available for sale, net of reclassification and tax effects |  |                 |           |              |   |                |  |                          |           |                     |   |                                              |   |                            |           |   |   | 3,162    |   |   | 3,162      |  
|Total comprehensive loss                                                                                       |  |                 |           |              |   |                |  |                          |           |                     |   |                                              |   |                            |           |   |   |         |   |   | (224,873   | )
|Issuance of 2,840,000 shares of common stock                                                                   |  |                 |           |              |   | 16,801          |  |                          | 9,920,810  |                     |   | 1,000,000                                     |   |                            |           |   |   |         |   |   | 10,937,611 |  
|Issuance of 3,100 shares of preferred stock                                                                    |  |                 | 3,100,000  |              |   |                |  |                          | (5,000     | )                   |   |                                              |   |                            |           |   |   |         |   |   | 3,095,000  |  
|Redemption of 2,785 shares of preferred stock                                                                  |  |                 | (2,785,000 | )            |   |                |  |                          |           |                     |   |                                              |   |                            |           |   |   |         |   |   | (2,785,000 | )
|Dividends paid on Preferred shares                                                                             |  |                 |           |              |   |                |  |                          |           |                     |   |                                              |   |                            | (123,724   | ) |   |         |   |   | (123,724   | )
|Balance at December 31, 2004                                                                                   |  |                 | 315,000    |              |   | 311,394         |  |                          | 29,001,264 |                     |   |                                              |   |                            | (8,800,189 | ) |   | (81,359  | ) |   | 20,746,110 |  
|                                                                                                               |  |                 |            |              |   |                 |  |                          |            |                     |   |                                               |   |                            |            |   |   |          |   |   |            |  
|Comprehensive income:                                                                                          |  |                 |            |              |   |                 |  |                          |            |                     |   |                                               |   |                            |            |   |   |          |   |   |            |  
|Net income                                                                                                     |  |                 |           |              |   |                |  |                          |           |                     |   |                                              |   |                            | 2,918,800  |   |   |         |   |   | 2,918,800  |  
|Change in net unrealized gain (loss) on securities available for sale, net of reclassification and tax effects |  |                 |           |              |   |                |  |                          |           |                     |   |                                              |   |                            |           |   |   | (109,442 | ) |   | (109,442   | )
|Total comprehensive income                                                                                     |  |                 |            |              |   |                 |  |                          |            |                     |   |                                               |   |                            |            |   |   |          |   |   | 2,809,358  |  
|Issuance of 9,814,750 shares of common stock                                                                   |  |                 |           |              |   | 98,147          |  |                          | 35,381,481 |                     |   |                                              |   |                            |           |   |   |         |   |   | 35,479,628 |  
|Exercise of warrants                                                                                           |  |                 |           |              |   | 2,480           |  |                          | 868,020    |                     |   |                                              |   |                            |           |   |   |         |   |   | 870,500    |  
|Exercise of stock options                                                                                      |  |                 |           |              |   | 312             |  |                          | 48,461     |                     |   |                                              |   |                            |           |   |   |         |   |   | 48,773     |  
|Redemption of 315 shares of preferred stock                                                                    |  |                 | (315,000   | )            |   |                |  |                          |           |                     |   |                                              |   |                            |           |   |   |         |   |   | (315,000   | )
|Dividends paid on preferred shares                                                                             |  |                 |           |              |   |                |  |                          |           |                     |   |                                              |   |                            | (14,361    | ) |   |         |   |   | (14,361    | )
|Balance at December 31, 2005                                                                                   |  | $               |           |              | $ | 412,333         |  | $                        | 65,299,226 |                     | $ |                                              |   | $                          | (5,895,750 | ) | $ | (190,801 | ) | $ | 59,625,008 |  





See accompanying notes



46



---

SUN AMERICAN BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2005 and 2004

|                                                                                                   |  |      |             |      |   |             |  
|-------------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- | - | ----------- | -
|                                                                                                   |  | 2005 |             | 2004 |  
|Cash flows from operating activities:                                                              |  |      |             |      |   |             |  
|Net income (loss)                                                                                  |  | $    | 2,918,800   |      | $ | (228,035    | )
|Adjustments to reconcile net income (loss) to net cash used in operating activities:               |  |      |             |      |   |             |  
|Net amortization on securities                                                                     |  |      | 49,055      |      |   | 62,882      |  
|Provision for loan and lease losses                                                                |  |      | 475,350     |      |   | 1,397,000   |  
|Depreciation                                                                                       |  |      | 479,546     |      |   | 432,123     |  
|(Gain) loss on sale of securities                                                                  |  |      | (7,930      | )    |   | 32,664      |  
|Minority interest in net income of subsidiary                                                      |  |      | 1,662       |      |   | 308         |  
|(Increase) decrease in other assets                                                                |  |      | (731,858    | )    |   | 721,342     |  
|Increase in other liabilities                                                                      |  |      | 1,233,364   |      |   | 122,202     |  
|Net cash provided by operating activities                                                          |  |      | 4,417,989   |      |   | 2,540,486   |  
|                                                                                                   |  |      |             |      |   |             |  
|Cash flows from investing activities:                                                              |  |      |             |      |   |             |  
|Purchases of available for sale securities                                                         |  |      |            |      |   | (185,346    | )
|Maturities and pay-downs of available for sale securities                                          |  |      | 5,003       |      |   | 11,609      |  
|Proceeds from sales of available for sale securities                                               |  |      | 243,276     |      |   | 2,454,006   |  
|Purchases of held to maturity securities                                                           |  |      | (7,929,470  | )    |   | (5,035,152  | )
|Maturities and pay-downs of held to maturity securities                                            |  |      | 2,509,762   |      |   | 526,125     |  
|Purchase of assets and assumption of liabilities of Gulf Bank                                      |  |      |            |      |   | 23,583,212  |  
|Purchases of Federal Reserve Bank and Federal Home Loan Bank stock                                 |  |      | (1,427,250  | )    |   | (863,400    | )
|Loan originations, net                                                                             |  |      | (57,377,413 | )    |   | (47,180,037 | )
|Purchases of premises and equipment, net                                                           |  |      | (441,576    | )    |   | (284,867    | )
|Net cash used in investing activities                                                              |  |      | (64,417,668 | )    |   | (26,973,850 | )
|                                                                                                   |  |      |             |      |   |             |  
|Cash flows from financing activities:                                                              |  |      |             |      |   |             |  
|Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements |  |      | (2,736,409  | )    |   | 320,535     |  
|Net change in Federal Home Loan Bank advances                                                      |  |      | 13,000,000  |      |   | 5,000,000   |  
|Net increase in deposits                                                                           |  |      | 35,034,071  |      |   | 11,012,074  |  
|Proceeds from issuance of common stock                                                             |  |      | 35,479,628  |      |   | 10,937,611  |  
|Proceeds from exercise of warrants                                                                 |  |      | 870,500     |      |   |            |  
|Proceeds from exercise of stock options                                                            |  |      | 48,773      |      |   |            |  
|Proceeds from issuance of preferred stock                                                          |  |      |            |      |   | 3,095,000   |  
|Repayment of preferred shares                                                                      |  |      | (315,000    | )    |   | (2,785,000  | )
|Preferred share dividends                                                                          |  |      | (14,361     | )    |   | (123,724    | )
|Net cash provided by financing activities                                                          |  |      | 81,367,202  |      |   | 27,456,496  |  
|Net change in cash and cash equivalents                                                            |  |      | 21,367,523  |      |   | 3,023,132   |  
|Cash and cash equivalents at beginning of year                                                     |  |      | 6,213,556   |      |   | 3,190,424   |  
|                                                                                                   |  |      |             |      |   |             |  
|Cash and cash equivalents at end of year                                                           |  | $    | 27,581,079  |      | $ | 6,213,556   |  
|Supplemental cash flow information:                                                                |  |      |             |      |   |             |  
|Interest paid                                                                                      |  | $    | 4,517,636   |      | $ | 2,381,937   |  
|Income taxes paid                                                                                  |  | $    |            |      | $ |            |  





See accompanying notes



47



---





SUN AMERICAN BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005 and 2004



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Principles of Consolidation: The consolidated financial statements include Sun American Bancorp and its subsidiary, Sun American Bank (the Bank), which 99.9% is owned by Sun American Bancorp, together referred to as the Corporation. Intercompany transactions and balances are eliminated in consolidation.

The Corporation provides financial services through its offices in Southeast Florida. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential and commercial mortgages, commercial and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. Other financial instruments, which potentially represent concentrations of credit risk, include deposit accounts in other financial institutions, federal funds sold, and investment securities.

Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, determination of purchase accounting adjustments and the resulting amortization thereof, goodwill impairment, deferred taxes, and fair values of financial instruments are particularly subject to change.

Cash Flows: Cash and cash equivalents include cash, deposits with other financial institutions under 90 days, and federal funds sold. Net cash flows are reported for loan and deposit transactions.

Securities: Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax. Other securities such as Federal Reserve Bank stock and Federal Home Loan Bank stock are carried at cost.

Interest income includes amortization of purchase premium or discount on a method that approximates the level yield method. Gains and losses on sales are based on the amortized cost of the security sold. Gains and losses on sales are recorded on the trade date and determined using the specific identification method. Securities are written down to fair value when a decline in fair value is not temporary. Declines in the fair values of securities below their cost that are other than temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers: (1) the length of time and extent that the fair values have been less than cost, (2) the financial condition and near term prospects of the issuer, and (3) the Corporations ability and intent to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.

Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses.

Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Consumer loans are typically charged off no later than 120 days past due. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.



48



---

SUN AMERICAN BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2005 and 2004





NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in managements judgment, should be charged-off.

The allowance consists of specific and non-specific components. The specific component relates to loans that are individually classified as impaired. The non-specific component covers pools of other loans and is based on historical loss experience adjusted for current factors.

A loan is impaired when full payment under the loan terms is not expected. Commercial and commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loans existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment and, accordingly, they are not separately identified for impairment disclosures.

Foreclosed Assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value when acquired, establishing a new cost basis. If fair value declines, a valuation allowance is recorded through expense. Costs after acquisition are expensed.

Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 15 to 39 years.Furniture, fixtures and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 7 years.

Goodwill and Other Intangible Assets: Goodwill results from prior business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed annually for impairment and any such impairment will be recognized in the period identified.

Other intangible assets consist of core deposit intangible assets arising from bank and branch acquisitions. They are initially measured at fair value and then are amortized on a straight line or an accelerated method over their estimated useful lives.

Long-Term Assets: Premises and equipment, core deposit and other intangible assets, and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are adjusted to their fair value.

Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Instruments, such as standby letters of credit, that are considered financial guarantees in accordance with FASB Interpretation No. 45, are recorded at fair value if significant.

Repurchase Agreements: Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance.

Stock Compensation: Compensation expense under stock options is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. The following table



49



---

SUN AMERICAN BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2005 and 2004





NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

illustrates the effect on net income (loss) per share for 2005 and 2004 if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation.

|                                                                          |  |      |            |   |      |   |          |  
|------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | -------- | -
|                                                                          |  | 2005 |            |   | 2004 |  
|                                                                          |  |      |            |   |      |   |          |  
|Net income (loss) as reported                                             |  | $    | 2,918,800  |   |      | $ | (228,035 | )
|Deduct:                                                                   |  |      |            |   |      |   |          |  
|Dividends paid on preferred shares                                        |  |      | (14,361    | ) |      |   | (123,724 | )
|Stock-based compensation expense
determined under fair value based method |  |      | (2,202,770 | ) |      |   | (61,283  | )
|Pro forma net income (loss)                                               |  | $    | 701,669    |   |      | $ | (413,042 | )
|                                                                          |  |      |            |   |      |   |          |  
|Basic earnings (loss) per share as reported                               |  | $    | 0.24       |   |      | $ | (0.05    | )
|Diluted earnings (loss) per share as reported                             |  | $    | 0.21       |   |      | $ | (0.05    | )
|Pro forma basic earnings (loss) per share                                 |  | $    | 0.06       |   |      | $ | (0.06    | )
|Pro forma diluted earnings (loss) per share                               |  | $    | 0.05       |   |      | $ | (0.06    | )

On December 16, 2005, the Board of Directors of Sun American Bancorp approved the acceleration of the vesting of all currently unvested stock options awarded to existing Directors of the Company under its Amended and Restated Directors Stock Option Plan and its Amended and Restated Incentive Stock Option. As a result of this action, options to purchase approximately 1,034,280 shares of common stock became exercisable effective December 16, 2005, representing approximately 55% of the Companys total current outstanding options. All other terms and conditions applicable to such options, including the exercise prices, remain unchanged.

The decision to accelerate vesting of these options, which the Company believes is in the best interest of its stockholders, was made primarily to reduce non-cash compensation expense that would have been recorded in its income statement in future periods upon the adoption of Financial Accounting Standards Boards Statement No. 123R Share-Based Payment (SFAS 123R). Adoption of SFAS 123R is required on January 1, 2006, and will require that compensation expense associated with stock options unvested at December 31, 2005 be recognized in the Companys consolidated statement of income as they become vested. It is anticipated that the accelerated vesting of these options will eliminate pre-tax compensation expense recognition in future periods beginning January 1, 2006 of approximately $1.8 million, of which approximately $431,000 would have been incurred during the year ending December 31, 2006.

The pro forma effects are computed with option pricing models, using the following weighted-average assumptions as of the grant date.

|                                                               |  |           |  |          
|-------------------------------------------------------------- |  | --------- |  | ---------
|                                                               |  | 2005      |  | 2004     
|                                                               |  |           |  |          
|Risk-free interest rate                                        |  | 4.23%     |  | 4.50%    
|Expected option life                                           |  | 6.5 years |  | 6.5 years
|Expected stock price volatility                                |  | 50%       |  | 19%      
|Dividend yield                                                 |  | 0%        |  | 0%       
|Weighted Average fair value of options granted during the year |  | $1.53     |  | $1.99    

Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.



50



---

SUN AMERICAN BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2005 and 2004





NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Earnings (Loss) Per Common Share: Basic earnings (loss) per common share is net income (loss), less preferred stock dividends, divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options and stock warrants. Earnings and dividends per share are restated for all stock splits and dividends through the date of issue of the financial statements.

Comprehensive Income (Loss): Comprehensive income (loss) consists of net income (loss) and other comprehensive income. Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale which are also recognized as separate component of equity.

Adoption of New Accounting Standards:

Share-Based Payment

FASB Statement No. 123R, Accounting for Stock-Based Compensation, requires all public companies to record compensation cost for stock options provided to employees in return for employment service. The cost is measured at the fair value of the options when granted, and this cost is expensed over the employment service period, which is normally the vesting period of the options. This will apply to awards granted or modified in fiscal years beginning in 2006. Compensation cost will also be recorded for prior option grants that vest after the date of adoption. The effect on results of operations will depend on the level of future option grants and the calculation of the fair value of the options granted at such future date, as well as the vesting periods provided, and so cannot currently be predicted. Existing options that will vest after adoption date are expected to result in additional compensation expense of approximately $200,000 in 2006.

Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.

Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank of $1,951,000 was required to meet regulatory reserve and clearing requirements at year-end 2005. These balances do not earn interest.

Common Share Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the bank to its parent holding company or by the holding company to shareholders. No common share dividends may be paid at this time, as the Bank and its parent holding company have a deficit in retained earnings.

Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate financial statement note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Operating Segments: While management monitors the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation.



51



---

SUN AMERICAN BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2005 and 2004





NOTE 2  SECURITIES

The fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) at year-end were as follows:

|                            |  |            |           |                        |   |                         |  |   |          |  
|--------------------------- |  | ---------- | --------- | ---------------------- | - | ----------------------- |  | - | -------- | -
|                            |  | Fair
Value |           | Gross Unrealized
Gains |   | Gross Unrealized
Losses | 
|2005                        |  |            |           |                        |   |                         |  |   |          |  
|Mortgage-backed and other   |  | $          | 14,733    |                        |   | 504                     |  |   | (21      | )
|US Government Mortgage Fund |  |            | 5,193,426 |                        |   |                        |  |   | (306,574 | )
|                            |  | $          | 5,208,159 |                        |   | 504                     |  |   | (306,595 | )
|2004                        |  |            |           |                        |   |                         |  |   |          |  
|Mortgage-backed             |  | $          | 269,164   |                        | $ | 16,264                  |  | $ | (1,700   | )
|US Government Mortgage Fund |  |            | 5,356,197 |                        |   |                        |  |   | (143,803 | )
|                            |  | $          | 5,625,361 |                        | $ | 16,264                  |  | $ | (145,503 | )

The carrying amount, unrecognized gains and losses, and fair value of securities held to maturity at year-end were as follows:

|                               |  |                 |            |                        |   |                         |  |   |            |   |  |   |            | 
|------------------------------ |  | --------------- | ---------- | ---------------------- | - | ----------------------- |  | - | ---------- | - |  | - | ---------- | 
|                               |  | Carrying
Amount |            | Gross
Unrealized
Gains |   | Gross
Unrealized
Losses |  |   | Fair
Value |  
|2005                           |  |                 |            |                        |   |                         |  |   |            |   |  |   |            | 
|U.S. Government federal agency |  | $               | 19,050,808 |                        | $ | 7,532                   |  | $ | (254,259   | ) |  | $ | 18,804,081 | 
|Corporate                      |  |                 | 250,586    |                        |   |                        |  |   | (1,236     | ) |  |   | 249,350    | 
|Mortgage-backed                |  |                 | 1,859,492  |                        |   |                        |  |   | (80,856    | ) |  |   | 1,778,636  | 
|                               |  |                 | 21,160,886 |                        |   | 7,532                   |  |   | (336,351   | ) |  |   | 20,832,067 | 
|2004                           |  |                 |            |                        |   |                         |  |   |            |   |  |   |            | 
|U.S. Government federal agency |  | $               | 13,131,509 |                        | $ | 44,016                  |  | $ | (81,196    | ) |  | $ | 13,094,329 | 
|Corporate                      |  |                 | 257,528    |                        |   |                        |  |   | (3         | ) |  |   | 257,525    | 
|Mortgage-backed                |  |                 | 2,401,196  |                        |   |                        |  |   | (56,069    | ) |  |   | 2,345,127  | 
|                               |  | $               | 15,790,233 |                        | $ | 44,016                  |  | $ | (137,268   | ) |  | $ | 15,696,981 | 

Sales of available for sale securities were as follows:

|             |  |      |         |      |   |           | 
|------------ |  | ---- | ------- | ---- | - | --------- | 
|             |  | 2005 |         | 2004 |  
|Proceeds     |  | $    | 243,276 |      | $ | 2,454,006 | 
|Gross gains  |  |      | 7,930   |      |   |          | 
|Gross losses |  |      |        |      |   | 32,664    | 

The fair value of debt securities and carrying amount, if different, at year-end 2005 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities and mutual funds, are shown separately.

|                            |  |                  |            |  |                               |   |            |  |  |   |           | 
|--------------------------- |  | ---------------- | ---------- |  | ----------------------------- | - | ---------- |  |  | - | --------- | 
|                            |  | Held to Maturity |            |  | Available
for Sale
Fair
Value |  
|Carrying Amount             |  |                  | Fair
Value
|Due in one year or less     |  | $                | 5,260,162  |  |                               | $ | 5,207,050  |  |  |   |          | 
|Due from one to five years  |  |                  | 11,053,381 |  |                               |   | 10,879,081 |  |  |   |          | 
|Due from five to ten years  |  |                  | 2,987,851  |  |                               |   | 2,967,300  |  |  |   |          | 
|US Government Mortgage Fund |  |                  |           |  |                               |   |           |  |  |   | 5,193,426 | 
|Mortgage-backed             |  |                  | 1,859,492  |  |                               |   | 1,778,636  |  |  |   | 14,733    | 
|                            |  | $                | 21,160,886 |  |                               | $ | 20,832,067 |  |  | $ | 5,208,159 | 



52



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SUN AMERICAN BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2005 and 2004





NOTE 2  SECURITIES (Continued)

Held to Maturity securities pledged at year-end 2005 and 2004 had a carrying amount of $1,995,847 and $5,542,931. In 2005 $1,995,847 was pledged to secure repurchase agreements. In 2004 $3,499,563 was pledged to secure Federal Home Loan Bank advances of $3,000,000 and $2,043,368 and was pledged to secure repurchase agreements.

Securities with unrealized losses at year-end 2005, aggregated by investment category and the length of time that the securities have been in an unrealized loss position, are as follows:

|                          |  |                     |           |  |                     |        |        |             |           |   |                 |         |  |             |            |  |                 |         |            |  |  |  |        
|------------------------- |  | ------------------- | --------- |  | ------------------- | ------ | ------ | ----------- | --------- | - | --------------- | ------- |  | ----------- | ---------- |  | --------------- | ------- | ---------- |  |  |  | -------
|                          |  | Less than 12 Months |           |  | More than 12 Months |        |        | Total      
|Description of Securities |  | Fair 
Value         |           |  | Unrealized
Loss     |        |        | Fair 
Value |           |   | Unrealized
Loss |         |  | Fair 
Value |            |  | Unrealized
Loss
|U.S. Govt federal agency  |  | $                   | 6,897,000 |  |                     | 45,358 |        |             | 7,912,080 |   |                 | 208,901 |  | $           | 14,809,080 |  |                 | 254,259
|U.S. Govt Mortgage Fund   |  |                     |           |  |                     |        |        |             |           |   | 5,193,426       |         |  |             | 306,574    |  |                 |         | 5,193,426  |  |  |  | 306,574
|Mortgage-backed           |  |                     |           |  |                     |        |        |             |           |   | 1,779,498       |         |  |             | 80,877     |  |                 |         | 1,779,498  |  |  |  | 80,877 
|Corporate                 |  |                     |           |  |                     |        |        |             |           |   | 249,350         |         |  |             | 1,236      |  |                 |         | 249,350    |  |  |  | 1,236  
|                          |  | $                   | 6,897,000 |  |                     | $      | 45,358 |             |           | $ | 15,134,354      |         |  | $           | 597,588    |  |                 | $       | 22,031,354 |  |  |  | 642,946

Securities with unrealized losses at year-end 2004, aggregated by investment category are as follows:

|                          |  |                     |            |                 |                     |             |         |                 |   |             |           |                 |  |   |           |  |   |        |            |  |  |   |        
|------------------------- |  | ------------------- | ---------- | --------------- | ------------------- | ----------- | ------- | --------------- | - | ----------- | --------- | --------------- |  | - | --------- |  | - | ------ | ---------- |  |  | - | -------
|                          |  | Less than 12 Months |            |                 | More than 12 Months |             |         | Total          
|Description of Securities |  | Fair 
Value         |            | Unrealized
Loss |                     | Fair 
Value |         | Unrealized
Loss |   | Fair 
Value |           | Unrealized
Loss
|U.S. Govt federal agency  |  | $                   | 8,062,630  |                 | $                   | 81,196      |         | $               |  |             | $         |                |  | $ | 8,062,630 |  | $ | 81,196
|U.S. Govt Mortgage Fund   |  |                     |           |                 |                     |             |        |                 |   |             | 5,356,197 |                 |  |   | 143,803   |  |   |        | 5,356,197  |  |  |   | 143,803
|Mortgage-backed           |  |                     | 2,346,392  |                 |                     |             | 56,090  |                 |   |             |          |                 |  |   |          |  |   |        | 2,346,392  |  |  |   | 56,090 
|Corporate                 |  |                     | 305,845    |                 |                     |             | 1,683   |                 |   |             |          |                 |  |   |          |  |   |        | 305,845    |  |  |   | 1,683  
|                          |  | $                   | 10,714,867 |                 |                     | $           | 138,969 |                 |   | $           | 5,356,197 |                 |  | $ | 143,803   |  |   | $      | 16,071,064 |  |  | $ | 282,772

Unrealized losses on securities have not been recognized into income because the issuers are of high credit quality (government agencies and sponsored entities) and management has the intent and ability to hold for the foreseeable future, and the decline in fair value is largely due to changes in market interest rates. The fair value is expected to recover as the securities approach their maturity date or market interest rates change. The unrealized loss on below investment grade corporate securities was not recognized into income because final maturity was scheduled for February 2006 and full principal was received. At year-end 2005 and 2004, there were no holdings of securities of any one issuer, other than the U.S Government and its agencies, in an amount greater than 10% of shareholders equity.

NOTE 3  LOANS

Loans at year-end were as follows:

|                                |  |      |             |   |      |  |             |  
|------------------------------- |  | ---- | ----------- | - | ---- |  | ----------- | -
|                                |  | 2005 |             |   | 2004 | 
|Commercial                      |  | $    | 25,563,003  |   |      |  | 19,508,761  |  
|Real estate:                    |  |      |             |   |      |  |             |  
|Residential                     |  |      | 48,253,995  |   |      |  | 23,623,553  |  
|Commercial                      |  |      | 136,095,967 |   |      |  | 109,145,228 |  
|Consumer and home equity        |  |      | 2,595,088   |   |      |  | 3,219,604   |  
|Other                           |  |      | 801,589     |   |      |  | 268,928     |  
|                                |  |      | 213,309,642 |   |      |  | 155,766,074 |  
|Less: allowance for loan losses |  |      | (2,119,396  | ) |      |  | (1,678,191  | )
|Net deferred loan fees          |  |      | (524,927    | ) |      |  | (358,312    | )
|Loans, net                      |  | $    | 210,665,319 |   |      |  | 153,729,571 |  



53



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SUN AMERICAN BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2005 and 2004





NOTE 3  LOANS (Continued)

Activity in the allowance for loan losses was as follows.

|                                                                          |  |      |           |   |      |  |            |  
|------------------------------------------------------------------------- |  | ---- | --------- | - | ---- |  | ---------- | -
|                                                                          |  | 2005 |           |   | 2004 | 
|Beginning balance                                                         |  | $    | 1,678,191 |   |      |  | 738,147    |  
|Provision for loan losses                                                 |  |      | 475,350   |   |      |  | 1,397,000  |  
|Loans charged  off                                                       |  |      | (78,219   | ) |      |  | (1,095,756 | )
|Recoveries                                                                |  |      | 113,222   |   |      |  | 180,800    |  
|Reclassification of reserve for unfunded commitments to other liabilities |  |      | (69,148   | ) |      |  |           |  
|Acquisition related adjustment                                            |  |      |          |   |      |  | 458,000    |  
|Ending balance                                                            |  | $    | 2,119,396 |   |      |  | 1,678,191  |  

Impaired loans were as follows:

|                                                             |  |      |           |  |      |   |           | 
|------------------------------------------------------------ |  | ---- | --------- |  | ---- | - | --------- | 
|                                                             |  | 2005 |           |  | 2004 |  
|Year  end loans with no allocated allowance for loan losses |  | $    |          |  |      |   |          | 
|Year  end loans with allocated allowance for loan losses    |  |      | 2,318,668 |  |      |   | 2,057,250 | 
|                                                             |  | $    | 2,318,668 |  |      |   | 2,057,250 | 
|                                                             |  |      |           |  |      |   |           | 
|Amount of the allowance for loan losses allocated            |  | $    | 56,057    |  |      |   | 84,296    | 
|Average of impaired loans during the year                    |  |      | 2,194,395 |  |      | $ | 1,410,603 | 
|Interest income recognized during impairment                 |  |      | 161,723   |  |      |   | 25,487    | 
|Cash  basis interest income recognized                      |  |      | 161,723   |  |      |   | 25,487    | 

Nonperforming loans were as follows:

|                                             |  |      |         |  |      |  |         | 
|-------------------------------------------- |  | ---- | ------- |  | ---- |  | ------- | 
|                                             |  | 2005 |         |  | 2004 | 
|Loans past due over 90 days still on accrual |  | $    |        |  |      |  |        | 
|Nonaccrual loans                             |  |      | 289,804 |  |      |  | 141,208 | 
|                                             |  | $    | 289,804 |  |      |  | 141,208 | 

Nonperforming loans includes both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

NOTE 4  PREMISES AND EQUIPMENT

Year-end premises and equipment were as follows.

|                                  |  |   |           |  |  |      |           |  | 
|--------------------------------- |  | - | --------- |  |  | ---- | --------- |  | 
|                                  |  |   | 2005      |  |  | 2004 |          
|                                  |  |   |           |  |  |      |           | 
|Land                              |  | $ | 478,375   |  |  | $    | 478,375   | 
|Buildings and improvements        |  |   | 429,157   |  |  |      | 429,157   | 
|Leasehold improvements            |  |   | 1,706,957 |  |  |      | 1,630,824 | 
|Furniture, fixtures and equipment |  |   | 2,738,714 |  |  |      | 2,112,055 | 
|                                  |  |   | 5,353,203 |  |  |      | 4,650,411 | 
|Less: Accumulated depreciation    |  |   | 3,338,863 |  |  |      | 2,724,714 | 
|                                  |  | $ | 2,014,340 |  |  | $    | 1,925,697 | 

Depreciation expense was $479,546 and $432,123 in 2005 and 2004.



54



---

SUN AMERICAN BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2005 and 2004





NOTE 4  PREMISES AND EQUIPMENT (Continued)

Rent expense was $1,036,304 and $825,512 in 2005 and 2004. Rent commitments under non-cancelable operating leases were as follows, before considering renewal options that generally are present.

|           |  |   |            | 
|---------- |  | - | ---------- | 
|2006       |  | $ | 1,958,217  | 
|2007       |  |   | 1,737,566  | 
|2008       |  |   | 1,706,475  | 
|2009       |  |   | 1,698,373  | 
|2010       |  |   | 1,673,870  | 
|Thereafter |  |   | 4,465,283  | 
|           |  | $ | 13,239,784 | 

NOTE 5  GOODWILL AND INTANGIBLE ASSETS

Acquired Identifiable Intangible Assets

Acquired intangible assets were as follows as of year-end:

|                         |  |                       |           |                                    |   |                       |   |                          |           |  |   |          |  
|------------------------ |  | --------------------- | --------- | ---------------------------------- | - | --------------------- | - | ------------------------ | --------- |  | - | -------- | -
|                         |  | 2005                  |           | 2004                               |  
|                         |  | Gross Carrying
Amount |           | Accumulated
Amortization
Accretion |   | Gross
Carrying
Amount |   | Accumulated
Amortization |          
|Core deposit intangibles |  | $                     | 1,028,587 |                                    | $ | (352,341              | ) | $                        | 1,028,587 |  | $ | (185,307 | )

Aggregate amortization expense was $167,035 and $154,757 for 2005 and 2004.

Estimated amortization expense for each of the next five years:

|     |  |   |        
|---- |  | - | -------
|2006 |  | $ | 148,620
|2007 |  |   | 130,212
|2008 |  |   | 111,794
|2009 |  |   | 93,384 
|2010 |  |   | 74,966 
|     |  | $ | 558,976

Goodwill was $5,287,350 at December 31, 2005 and December 31, 2004. There was no impairment of goodwill at December 31, 2005 or 2004.

NOTE 6  DEPOSITS

NOW, savings, and money market account deposits totaled $57,366,731 and $35,481,190 at December 31, 2005 and 2004.

Time deposits of $100,000 or more were $39,967,950 and $46,573,652 at year-end 2005 and 2004. Brokered deposits totaled $12,993,000 and $12,895,000 at December 31, 2005 and December 31, 2004, respectively.

Scheduled maturities of all time deposits for the next five years were as follows.

|     |  |   |            
|---- |  | - | -----------
|2006 |  | $ | 77,181,805 
|2007 |  |   | 15,130,748 
|2008 |  |   | 7,580,952  
|2009 |  |   | 1,050,278  
|2010 |  |   | 2,183,204  
|     |  | $ | 103,126,987



55



---

SUN AMERICAN BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2005 and 2004





NOTE 7  SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase are secured by securities with a carrying amount of $1,995,847 at year-end 2005.

Securities sold under agreements to repurchase are financing arrangements that mature within two years. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance. Information concerning securities sold under agreements to repurchase is summarized as follows:

|                                           |  |      |           |   |      |   |           |  
|------------------------------------------ |  | ---- | --------- | - | ---- | - | --------- | -
|                                           |  | 2005 |           |   | 2004 |  
|Average daily balance during the year      |  | $    | 625,000   |   |      | $ | 2,453,000 |  
|Average interest rate during the year      |  |      | 2.59      | % |      |   | 0.73      | %
|Maximum month-end balance during the year  |  | $    | 1,241,000 |   |      | $ | 2,466,000 |  
|Weighted average interest rate at year-end |  |      | 3.45      | % |      |   | 1.68      | %

NOTE 8  FEDERAL HOME LOAN BANK ADVANCES

In August 2004 the Bank was accepted into membership of the Federal Home Loan Bank of Atlanta. At that time the Bank assumed $3.0 million of advances previously issued to Gulf Bank. These advances carry a fixed rate of interest and were $21,000,000 and $8,000,000 at December 31, 2005 and 2004, respectively. The Bank has pledged a security interest in its real estate loan portfolio to the FHLB as collateral for borrowings obtained from the FHLB.

The details of FHLB borrowings at December 31, 2005 and 2004 were as follows:

|     |            |      |   |               |  |                   |  |      |  
|---- | ---------- | ---- | - | ------------- |  | ----------------- |  | ---- | -
|2005 |            | 2004 |   | Maturity Date |  | Interest Rate    
|$    |           |      | $ | 2,000,000     |  | March 7, 2005     |  | 7.44 | %
|     | 5,000,000  |      |   |              |  | January 30, 2006  |  | 4.51 |  
|     | 5,000,000  |      |   |              |  | March 29, 2006    |  | 4.64 |  
|     | 5,000,000  |      |   |              |  | January 22, 2007  |  | 3.69 |  
|     | 3,000,000  |      |   | 3,000,000     |  | December 10, 2007 |  | 3.59 |  
|     | 1,000,000  |      |   | 1,000,000     |  | March 26, 2008    |  | 5.51 |  
|     | 2,000,000  |      |   | 2,000,000     |  | December 8, 2008  |  | 3.87 |  
|$    | 21,000,000 |      | $ | 8,000,000     |  |                   |  |      |  

The Bank maintains an unsecured line of credit of $5.0 million and the Company maintains a $2.0 million revolving credit line, each with Independent Bankers Bank, to meet interim liquidity needs. There were no borrowings outstanding under these unsecured lines of credit as of December 31, 2005, compared to $2.5 million outstanding at December 31, 2004 under the Banks unsecured line of credit. The interest rate in effect at December 31, 2004 was 2.85%.

NOTE 9  INCOME TAXES

The components of income tax expense are as follows:

|                                           |  |      |          |      |   |         |  
|------------------------------------------ |  | ---- | -------- | ---- | - | ------- | -
|                                           |  | 2005 |          | 2004 |  
|Current                                    |  | $    |         |      | $ |        |  
|Deferred                                   |  |      | 961,749  |      |   | (77,532 | )
|Increase (Decrease) in valuation allowance |  |      | (961,749 | )    |   | 77,532  |  
|                                           |  | $    |         |      | $ |        |  

The Corporation recorded no income taxes in 2005 as a result of decreasing the valuation allowance for the realizable portion of deferred tax assets. In 2005 and in 2004, the Corporation recorded a valuation allowance in an amount equal to its net deferred tax assets exclusive of unrealized loss on securities available for sale.



56



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SUN AMERICAN BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2005 and 2004





NOTE 9  INCOME TAXES (Continued)

The details of the net deferred tax asset are as follows:

|                                                 |  |      |            |      |   |            |  
|------------------------------------------------ |  | ---- | ---------- | ---- | - | ---------- | -
|                                                 |  | 2005 |            | 2004 |  
|Deferred tax assets:                             |  |      |            |      |   |            |  
|Net operating loss carryforwards (expires 2023)  |  | $    | 1,533,515  |      | $ | 2,763,737  |  
|Allowance for loan losses                        |  |      | 571,879    |      |   | 331,555    |  
|Unrealized loss on securities available for sale |  |      | 115,290    |      |   | 47,800     |  
|Depreciation                                     |  |      | 138,191    |      |   | 119,078    |  
|Loan fee income                                  |  |      | 197,530    |      |   | 134,833    |  
|Other                                            |  |      | 91,566     |      |   | 50,287     |  
|Deferred tax liabilities:                        |  |      |            |      |   |            |  
|Intangibles                                      |  |      | (274,377   | )    |   | (178,785   | )
|Accrual to cash basis reporting for tax purposes |  |      | (70,271    | )    |   | (70,923    | )
|Net deferred tax asset                           |  |      | 2,303,323  |      |   | 3,197,582  |  
|Valuation allowance for deferred tax assets      |  |      | (2,188,033 | )    |   | (3,149,782 | )
|Net deferred tax asset after valuation allowance |  | $    | 115,290    |      | $ | 47,800     |  

The Corporation has recorded a valuation allowance on the deferred tax assets to reduce the total to an amount that management believes is more likely than not to be realized. The valuation allowance decreased $961,749 during the year ended December 31, 2005 and increased by $77,532 during the year ended December 31, 2004. Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and carryforwards are expected to be available to reduce taxable income. No income tax benefits have been provided for the years ended December 31, 2005 and 2004, because the results of operations do not provide sufficient evidence that the net operating losses available for carryforward will be utilized in the future.

The Corporation has available federal net operating loss carryforwards approximating the following at December 31, 2005:

|                      |  |  |   |          
|--------------------- |  |  | - | ---------
|Expiring December 31, |  |  |   |          
|2005                  |  |  | $ |         
|2006                  |  |  |   | 53,630   
|2007                  |  |  |   | 53,630   
|2008                  |  |  |   | 53,630   
|2009                  |  |  |   |         
|2010                  |  |  |   | 487,427  
|2011                  |  |  |   | 288,430  
|2012                  |  |  |   | 844,454  
|2018                  |  |  |   | 307,695  
|2019                  |  |  |   | 590,608  
|2020                  |  |  |   | 316,904  
|2021                  |  |  |   | 314,424  
|2022                  |  |  |   | 322,064  
|2023                  |  |  |   | 442,350  
|                      |  |  | $ | 4,075,246

As a result of changes in ownership of the Company in excess of 50% in 1993 and 2000, the net operating loss carryforwards expiring in periods prior to 2020 are shown at the limited amount that may be used in any year.



57



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SUN AMERICAN BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2005 and 2004





NOTE 10  RELATED PARTY TRANSACTIONS

Loans to principal officers, directors, and their affiliates in 2005 and 2004 were as follows.

|                      |  |      |            |      |   |            |  
|--------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|                      |  | 2005 |            | 2004 |  
|                      |  |      |            |      |   |            |  
|Beginning balance     |  | $    | 695,000    |      | $ | 2,370,932  |  
|New and renewed loans |  |      | 7,717,177  |      |   | 695,000    |  
|Payments and renewals |  |      | (2,550,829 | )    |   | (2,370,932 | )
|Ending balance        |  | $    | 5,861,348  |      | $ | 695,000    |  

Deposits from principal officers, directors, and their affiliates at year-end 2005 and 2004 were $3,087,147 and $1,564,900.

NOTE 11  STOCK OPTIONS

The Corporation has granted stock options for the purchase of shares of common stock of the Corporation to directors, former directors and employees of the Corporation under the Amended and Restated Directors Stock Option Plan and the Amended and Restated Incentive Stock Option Plan (the Plans) and various compensation agreements and actions of the Board of Directors. All options for the purchase of common stock of the Corporation expire 10 years from the date of issue. The Plans allow for a maximum of one million shares of common stock to be issued under each plan as performance awards. As of December 31, 2004, the Amended and Restated Directors Stock Option Plan and the Amended and Restated Incentive Stock Option Plan had options to purchase 71,500 and 58,800 shares of common stock available for future grants, respectively. As of December 31, 2005, the Amended and Restated Directors Stock Option Plan had options to purchase 222,300 shares of common stock available for future grants and 17,800 options were available under the Amended and Restated Incentive Stock Option Plan.

A summary of the options for the purchase of common stock of the Corporation as of December 31, 2005 and 2004, and changes during the years then ended is presented below.

|                                                           |  |           |   |                                 |      |        |           |                                 |   |     
|---------------------------------------------------------- |  | --------- | - | ------------------------------- | ---- | ------ | --------- | ------------------------------- | - | ----
|                                                           |  | 2005      |   | 2004                           
|                                                           |  | Shares    |   | Weighted
Average
Exercise
Price |      | Shares |           | Weighted
Average
Exercise
Price
|                                                           |  |           |   |                                 |      |        |           |                                 |   |     
|Outstanding at beginning of year                           |  | 1,193,823 |   | $                               | 2.57 |        | 297,517   |                                 | $ | 2.18
|Granted                                                    |  | 980,860   |   |                                 | 4.21 |        | 921,500   |                                 |   | 2.63
|Exercised                                                  |  | (37,690   | ) |                                 | 1.99 |        | (27       | )                               |   | 3.75
|Forfeited or expired                                       |  | (71,963   | ) |                                 | 3.08 |        | (25,167   | )                               |   | 1.56
|Outstanding at end of year                                 |  | 2,065,030 |   | $                               | 3.34 |        | 1,193,823 |                                 | $ | 2.57
|Options exercisable at year-end                            |  | 1,364,058 |   | $                               | 3.14 |        | 159,600   |                                 | $ | 2.31
|Weighted average fair value of options granted during year |  |           |   | $                               | 1.53 |        |           |                                 | $ | 1.99





58



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SUN AMERICAN BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2005 and 2004





NOTE 11  STOCK OPTIONS (Continued)

Options outstanding at year-end 2005 were as follows.

|                        |  |             |  |                                             |  |                                 |      |        |           |                                 |   |      | 
|----------------------- |  | ----------- |  | ------------------------------------------- |  | ------------------------------- | ---- | ------ | --------- | ------------------------------- | - | ---- | 
|                        |  | Outstanding |  | Exercisable                                 | 
|Exercise Prices         |  | Number      |  | Weighted
Average
Remaining
Contractual
Life |  | Weighted
Average
Exercise
Price |      | Number |           | Weighted
Average
Exercise
Price |  
|$1.50                   |  | 1,557       |  | 0.1 years                                   |  | $                               | 1.50 |        | 1,557     |                                 | $ | 1.50 | 
|$1.75                   |  | 50,000      |  | 4.3                                         |  |                                 | 1.75 |        | 50,000    |                                 |   | 1.75 | 
|$2.35                   |  | 168,800     |  | 6.1                                         |  |                                 | 2.35 |        | 131,560   |                                 |   | 2.35 | 
|$2.63                   |  | 852,240     |  | 8.0                                         |  |                                 | 2.63 |        | 694,448   |                                 |   | 2.63 | 
|$3.75                   |  | 11,573      |  | 2.5                                         |  |                                 | 3.75 |        | 6,493     |                                 |   | 3.75 | 
|$4.00                   |  | 140,000     |  | 10.0                                        |  |                                 | 4.00 |        |          |                                 |   |     | 
|$4.21                   |  | 98,500      |  | 10.0                                        |  |                                 | 4.21 |        |          |                                 |   |     | 
|$4.25                   |  | 742,360     |  | 9.6                                         |  |                                 | 4.25 |        | 480,000   |                                 |   | 4.25 | 
|Outstanding at year-end |  | 2,065,030   |  | 8.5                                         |  | $                               | 3.34 |        | 1,364,058 |                                 | $ | 3.14 | 

On December 16, 2005, the stockholders of the Corporation approved the 2005 Stock Option and Stock Incentive Plan (the 2005 Plan). Pursuant to the terms of the 2005 Plan, 2,000,000 shares of common stock were reserved for issuance upon the exercise of options or in the form of awards of restricted stock granted under the 2005 Plan. Of this amount, up to 1,000,000 shares of common stock may be issued upon the exercise of Incentive Stock Options. As of December 31, 2005, 215,000 options have been granted under the 2005 Plan.

NOTE 12  STOCK WARRANTS

As of December 31, 2005, the Company had outstanding warrants to purchase 14,244,583 shares of common stock, including Class A, B, C, D, E, F and G warrants.

A summary of the warrants to purchase shares of common stock of the Company as of December 31, 2005 and December 31, 2004, is presented below.

|                     |  |                   |  |                  
|-------------------- |  | ----------------- |  | -----------------
|                     |  | December 31, 2005 |  | December 31, 2004
|Class A Warrants     |  | 937,625           |  | 942,625          
|Class B Warrants     |  | 574,625           |  | 942,625          
|Class C Warrants     |  | 180,000           |  | 180,000          
|Class D Warrants     |  | 4,960,000         |  | 4,960,000        
|Class E Warrants     |  | 1,586,000         |  |                 
|Class F Warrants     |  | 8,228,750         |  |                 
|Class G Warrants     |  | 50,000            |  |                 
|Other Warrants       |  | 1,607,958         |  | 689,800          
|Warrants Outstanding |  | 18,124,958        |  | 7,715,050        

Class A Warrants

Each warrant entitles the holder to purchase one share of common stock at an exercise price of $4.00, subject to adjustment for stock splits, reverse stock splits and other events of recapitalization. The Company may redeem the Class A warrants at any time if the following conditions have been satisfied: (i) the Company has registered for resale the common stock issuable upon exercise of the Class A warrants; (ii) the common stock, as publicly traded in the over-the-counter market or on a national securities exchange, has closed at a price of at least $8.50 for 20 continuous trading days; and (iii) the Company pays $4.00 per outstanding warrant, subject to adjustment. If not earlier redeemed, the Class A warrants will expire no later than April, 2008.



59



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SUN AMERICAN BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2005 and 2004





NOTE 12  STOCK WARRANTS (Continued)

Class B Warrants

Each warrant entitles the holder to purchase one share of common stock at an exercise price of $3.50, subject to adjustment for stock splits, reverse stock splits and other events of recapitalization. The Class B warrants will expire in April, 2006.

Class C Warrants

Each warrant entitles the holder to purchase 2.3 shares of common stock at an exercise price of $3.75 per share, subject to adjustment for stock splits, reverse stock splits and other events of recapitalization. The Company may redeem the Class C warrants at any time if the following conditions have been satisfied: (i) the Company has registered for resale the common stock issuable upon exercise of the Class C warrants; (ii) the common stock, as publicly traded in the over-the-counter market or on a national securities exchange, has closed at a price of at least $8.50 for 20 continuous trading days; and (iii) the Company pays $8.65 per outstanding warrant, subject to adjustment. If not earlier redeemed, the Class C warrants will expire no later than May 15, 2007.

Class D Warrants

Each Class D warrant entitles the holder to purchase one share of the Companys common stock at an exercise price per share of $4.00. The exercise price is subject to adjustment upon the occurrence of certain events as provided in the Class D warrant certificate. The Companys Class D warrants may be exercised at any time until May 13, 2009, at which time they will expire.

The Company has the right to redeem the Class D warrants at a redemption price of $0.50 per warrant (subject to adjustment in the event of a stock split, reverse stock split, stock dividend on the common stock or the like) after providing 30 days prior written notice to the Class D warrant holders at any time after the closing price of the Companys common stock equals or exceeds $5.60, for five consecutive trading days. If the Company calls the Class D warrants for redemption, they will be exercisable until the close of business on the business day next preceding the specified redemption date.

Class E Warrants

Each warrant entitles the holder to purchase one share of common stock at an exercise price of $4.25, subject to adjustment for stock splits, reverse stock splits and other events of recapitalization. The Class E warrants will expire no later than March, 2010.

Class F Warrants

Each warrant entitles the holder to purchase 0.5 shares of common stock at an exercise price of $4.00 per share, subject to adjustment for stock splits, reverse stock splits and other events of recapitalization. The Class F warrants will expire no later than August 2010.

The Company has the right to redeem the Class F warrants at a redemption price of $0.50 per warrant (subject to adjustment in the event of a stock split, reverse stock split, stock dividend on the common stock or the like) after providing written notice to the Class F warrant holders at any time after the closing price of the Companys common stock equals or exceeds $5.60, for twenty consecutive trading days. If the Company calls the Class F warrants for redemption, they will be exercisable until the close of business of the specified redemption date. The holders of Class F warrants may satisfy their obligation to pay the aggregate Exercise Price through a cashless exercise, in which event the Company will issue to the holders the number of shares determined by the cashless exercise formula.

Class G Warrants

Each warrant entitles the holder to purchase one share of common stock at an exercise price of $4.00 per share, subject to adjustment for stock splits, reverse stock splits and other events of recapitalization. The Class G warrants will expire no later than May 2009. The holders of Class G warrants may satisfy their obligation to pay the



60



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SUN AMERICAN BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2005 and 2004





NOTE 12  STOCK WARRANTS (Continued)

aggregate Exercise Price through a cashless exercise, in which event the Company will issue to the holders the number of shares determined by the cashless exercise formula.

Other Warrants

An aggregate of 1,607,958 warrants have been issued to various underwriters for compensation for certain private and public offerings of the Companys common stock. The exercise prices of these warrants range from $1.35 to $5.00 and have expiration dates between 2006 and 2010.

On November 1, 2005, the Companys board of directors approved a reserve of class G common stock purchase warrants to purchase up to 250,000 shares of common stock to be issued from time to time to the Companys officers, directors, and consultants (the Warrant Plan), which may be below the market price of the common stock on the grant date. The Warrant Plan was approved by the stockholders at a special meeting held on December 16, 2005.

NOTE 13  CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can result in regulatory action. The Corporation has agreed with Bank regulators to keep the Bank well capitalized.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. As of December 31, 2005 and 2004, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.

The Banks actual and required capital amounts and ratios (in thousands of dollars) at year-end are presented below.

|     |                                        |  |        |        |                               |       |                                                                  |        |   |        |       |  |        |   |   |        |  |  |      |  
|---- | -------------------------------------- |  | ------ | ------ | ----------------------------- | ----- | ---------------------------------------------------------------- | ------ | - | ------ | ----- |  | ------ | - | - | ------ |  |  | ---- | -
|     |                                        |  | Actual |        | For Capital
Adequacy Purposes |       | To Be Well
Capitalized Under
Prompt Corrective
Action Provisions |       
|     |                                        |  | Amount |        |                               | Ratio |                                                                  | Amount |   |        | Ratio |  | Amount |   |   | Ratio  | 
|     |                                        |  |        |        |                               |       |                                                                  |        |   |        |       |  |        |   |   |        |  |  |      |  
|2005 |                                        |  |        |        |                               |       |                                                                  |        |   |        |       |  |        |   |   |        |  |  |     
|     | Total Capital to risk weighted assets  |  | $      | 52,270 |                               |       | 21.83                                                            | %      | $ | 19,152 |       |  | 8.0    | % | $ | 23,940 |  |  | 10.0 | %
|     | Tier 1 Capital to risk weighted assets |  |        | 50,000 |                               |       | 20.89                                                            |        |   | 9,576  |       |  | 4.0    |   |   | 14,364 |  |  | 6.0  |  
|     | Tier 1 Capital to average assets       |  |        | 50,000 |                               |       | 19.63                                                            |        |   | 10,190 |       |  | 4.0    |   |   | 12,738 |  |  | 5.0  |  
|2004 |                                        |  |        |        |                               |       |                                                                  |        |   |        |       |  |        |   |   |        |  |  |     
|     | Total Capital to risk weighted assets  |  | $      | 16,377 |                               |       | 10.03                                                            | %      | $ | 13,065 |       |  | 8.0    | % | $ | 16,332 |  |  | 10.0 | %
|     | Tier 1 Capital to risk weighted assets |  |        | 14,699 |                               |       | 9.00                                                             |        |   | 6,533  |       |  | 4.0    |   |   | 9,799  |  |  | 6.0  |  
|     | Tier 1 Capital to average assets       |  |        | 14,699 |                               |       | 8.37                                                             |        |   | 6,868  |       |  | 4.0    |   |   | 8,585  |  |  | 5.0  |  



61



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SUN AMERICAN BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2005 and 2004





NOTE 13  CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (Continued)

The holding companys capital amounts and ratios (in thousands of dollars) at year-end are presented below.

|     |                                        |  |        |        |                               |  |        |   |       |        |  |  |     |  
|---- | -------------------------------------- |  | ------ | ------ | ----------------------------- |  | ------ | - | ----- | ------ |  |  | --- | -
|     |                                        |  | Actual |        | For Capital Adequacy Purposes | 
|     |                                        |  | Amount |        | Ratio                         |  | Amount |   | Ratio |       
|2005 |                                        |  |        |        |                               |  |        |   |       |        |  |  |    
|     | Total Capital to risk weighted assets  |  | $      | 55,816 |                               |  | 23.31  | % | $     | 19,160 |  |  | 8.0 | %
|     | Tier 1 Capital to risk weighted assets |  |        | 53,546 |                               |  | 22.36  |   |       | 9,580  |  |  | 4.0 |  
|     | Tier 1 Capital to average assets       |  |        | 53,546 |                               |  | 21.02  |   |       | 10,190 |  |  | 4.0 |  



|     |                                        |  |        |        |                               |       |       |        |   |        |       |  |     |  
|---- | -------------------------------------- |  | ------ | ------ | ----------------------------- | ----- | ----- | ------ | - | ------ | ----- |  | --- | -
|     |                                        |  | Actual |        | For Capital Adequacy Purposes |      
|     |                                        |  | Amount |        |                               | Ratio |       | Amount |   |        | Ratio | 
|2004 |                                        |  |        |        |                               |       |       |        |   |        |       |  |    
|     | Total Capital to risk weighted assets  |  | $      | 16,474 |                               |       | 10.09 | %      | $ | 13,065 |       |  | 8.0 | %
|     | Tier 1 Capital to risk weighted assets |  |        | 14,481 |                               |       | 8.87  |        |   | 6,533  |       |  | 4.0 |  
|     | Tier 1 Capital to average assets       |  |        | 14,481 |                               |       | 8.24  |        |   | 7,028  |       |  | 4.0 |  

NOTE 14  COMMITMENTS AND CONTINGENCIES

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.

The contractual amount of financial instruments with off-balance-sheet risk was as follows at year-end.

|                                  |  |      |            |      |   |           
|--------------------------------- |  | ---- | ---------- | ---- | - | ----------
|                                  |  | 2005 |            | 2004
|Commitments to make loans  fixed |  | $    | 1,551,812  |      | $ | 319,891   
| variable                        |  |      | 81,682,848 |      |   | 37,183,015
|Standby Letters of credit         |  |      | 1,658,689  |      |   | 1,779,991 
|                                  |  | $    | 84,893,349 |      | $ | 39,282,897

Commitments to make loans are generally made for periods of 60 days or less. Fixed rate loan commitments have interest rates generally ranging from 3.55% to 9.50% and maturities ranging from one year to three years.

Employment Agreements: The Company has employment agreements with the Chairman and the President of the Bank. Under terms of the agreement, the Company agreed to pay a minimum base salary of $130,000 per year, to grant options, and to provide certain other benefits and compensation. The employment agreements also included a provision requiring certain payments upon the occurrence of certain events leading to the termination of employment such as a change in control, death, or disability. The 2003 agreements were automatically renewed and remain in effect.



62



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SUN AMERICAN BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2005 and 2004





NOTE 15  FAIR VALUES OF FINANCIAL INSTRUMENTS

Carrying amount and estimated fair values of financial instruments were as follows at year-end:

|                                         |  |  |                 |             |  |      |             |   |             |                  |  |   |             |  |  |   |             | 
|---------------------------------------- |  |  | --------------- | ----------- |  | ---- | ----------- | - | ----------- | ---------------- |  | - | ----------- |  |  | - | ----------- | 
|                                         |  |  | 2005            |             |  | 2004 |            
|                                         |  |  | Carrying
Amount |             |  |      | Fair 
Value |   |             | Carrying 
Amount |  |   | Fair
Value  | 
|Financial assets                         |  |  |                 |             |  |      |             |   |             |                  |  |   |             |  |  |   |             | 
|Cash and due from financial institutions |  |  | $               | 6,201,079   |  |      |             | $ | 6,201,079   |                  |  | $ | 6,213,556   |  |  | $ | 6,213,556   | 
|Federal Funds Sold                       |  |  |                 | 21,380,000  |  |      |             |   | 21,380,000  |                  |  |   |            |  |  |   |            | 
|Securities available for sale            |  |  |                 | 5,208,159   |  |      |             |   | 5,208,159   |                  |  |   | 5,625,361   |  |  |   | 5,625,361   | 
|Securities held to maturity              |  |  |                 | 21,160,886  |  |      |             |   | 20,832,067  |                  |  |   | 15,790,233  |  |  |   | 15,696,981  | 
|Loans, net                               |  |  |                 | 210,665,319 |  |      |             |   | 209,583,116 |                  |  |   | 153,729,571 |  |  |   | 153,340,401 | 
|Federal Reserve Bank stock               |  |  |                 | 1,257,400   |  |      |             |   | 1,257,400   |                  |  |   | 610,050     |  |  |   | 610,050     | 
|Federal Home Loan Bank stock             |  |  |                 | 1,328,000   |  |      |             |   | 1,328,000   |                  |  |   | 548,100     |  |  |   | 548,100     | 
|Accrued interest receivable              |  |  |                 | 1,235,797   |  |      |             |   | 1,235,797   |                  |  |   | 604,053     |  |  |   | 604,053     | 
|Financial liabilities                    |  |  |                 |             |  |      |             |   |             |                  |  |   |             |  |  |   |             | 
|Deposits                                 |  |  | $               | 193,464,799 |  |      |             | $ | 193,369,177 |                  |  | $ | 158,158,474 |  |  | $ | 158,052,889 | 
|Federal funds purchased                  |  |  |                 |            |  |      |             |   |            |                  |  |   | 2,500,000   |  |  |   | 2,500,000   | 
|Repurchase agreements                    |  |  |                 | 1,020,710   |  |      |             |   | 1,020,710   |                  |  |   | 1,257,119   |  |  |   | 1,257,119   | 
|Federal Home Loan Bank advances          |  |  |                 | 21,000,000  |  |      |             |   | 20,805,895  |                  |  |   | 8,000,000   |  |  |   | 8,013,644   | 
|Accrued interest payable                 |  |  |                 | 596,814     |  |      |             |   | 596,814     |                  |  |   | 293,346     |  |  |   | 293,346     | 

The methods and assumptions used to estimate fair value are described as follows.

Carrying amount is the estimated fair value for cash and cash equivalents, shortterm borrowings, accrued interest receivable and payable, demand deposits, shortterm debt, and variable rate loans or deposits that reprice frequently and fully. Security fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of debt is based on current rates for similar financing. The fair value of offbalancesheet items is not significant.

NOTE 16  PARENT CORPORATION ONLY CONDENSED FINANCIAL INFORMATION

Condensed financial information of Sun American Bancorp follows.

CONDENSED BALANCE SHEETS

December 31,

|                                           |  |      |            |  |      |   |            | 
|------------------------------------------ |  | ---- | ---------- |  | ---- | - | ---------- | 
|                                           |  | 2005 |            |  | 2004 |  
|ASSETS                                     |  |      |            |  |      |   |           
|Cash and cash equivalents                  |  | $    | 3,638,856  |  |      | $ | 178,289    | 
|Investment in Bank subsidiary              |  |      | 56,053,649 |  |      |   | 20,625,593 | 
|Other assets                               |  |      | 103,666    |  |      |   | 2,743      | 
|Total assets                               |  | $    | 59,796,171 |  |      | $ | 20,806,625 | 
|                                           |  |      |            |  |      |   |            | 
|LIABILITIES AND SHAREHOLDERS EQUITY       |  |      |            |  |      |   |            | 
|Liabilities                                |  | $    | 171,163    |  |      | $ | 60,515     | 
|Shareholders equity                       |  |      | 59,625,008 |  |      |   | 20,746,110 | 
|Total liabilities and shareholders equity |  | $    | 59,796,171 |  |      | $ | 20,806,625 | 



63



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SUN AMERICAN BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2005 and 2004





NOTE 16  PARENT CORPORATION ONLY CONDENSED FINANCIAL INFORMATION (Continued)

CONDENSED STATEMENTS OF INCOME

December 31,

|                             |  |      |           |  |      |   |          |  
|---------------------------- |  | ---- | --------- |  | ---- | - | -------- | -
|                             |  | 2005 |           |  | 2004 |  
|                             |  |      |           |  |      |   |          |  
|Equity in net income of Bank |  | $    | 3,537,499 |  |      | $ | 134,238  |  
|Less:                        |  |      |           |  |      |   |          |  
|Interest expense             |  |      | 10,728    |  |      |   | 24,835   |  
|Salaries and benefits        |  |      | 147,622   |  |      |   | 134,347  |  
|Other expense                |  |      | 460,349   |  |      |   | 203,091  |  
|Net income (loss)            |  | $    | 2,918,800 |  |      | $ | (228,035 | )

CONDENSED STATEMENTS OF CASH FLOWS

Years ended December 31,

|                                              |  |      |             |   |      |          |             |  
|--------------------------------------------- |  | ---- | ----------- | - | ---- | -------- | ----------- | -
|                                              |  | 2005 |             |   | 2004 |         
|Cash flows from operating activities          |  |      |             |   |      |          |             |  
|Net Income (loss)                             |  | $    | 2,918,800   |   | $    | (228,035 | )          
|Adjustments:                                  |  |      |             |   |      |          |             |  
|Equity in undistributed (income) loss of Bank |  |      | (3,537,499  | ) |      |          | (134,238    | )
|Change in other assets and other liabilities  |  |      | 9,726       |   |      |          | 115,096     |  
|Net cash from operating activities            |  |      | (608,973    | ) |      |          | (247,177    | )
|Cash flows from investing activities          |  |      |             |   |      |          |             |  
|Investment in Bank                            |  |      | (32,000,000 | ) |      |          | (10,753,337 | )
|Net cash from investing activities            |  |      | (32,000,000 | ) |      |          | (10,753,337 | )
|Cash flows from financing activities          |  |      |             |   |      |          |             |  
|Increase in note payable                      |  |      | 2,000,000   |   |      |          | 1,000,000   |  
|Repayment of note payable                     |  |      | (2,000,000  | ) |      |          | (1,000,000  | )
|Issuance of preferred shares                  |  |      |            |   |      |          | 3,095,000   |  
|Redemption of preferred shares                |  |      | (315,000    | ) |      |          | (2,785,000  | )
|Proceeds from stock issuance                  |  |      | 36,398,901  |   |      |          | 10,937,611  |  
|Dividends paid                                |  |      | (14,361     | ) |      |          | (123,724    | )
|Net cash from financing activities            |  |      | 36,069,540  |   |      |          | 11,123,887  |  
|Net change in cash and cash equivalents       |  |      | 3,460,567   |   |      |          | 123,373     |  
|Beginning cash and cash equivalents           |  |      | 178,289     |   |      |          | 54,916      |  
|Ending cash and cash equivalents              |  | $    | 3,638,856   |   |      | $        | 178,289     |  



64



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SUN AMERICAN BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2005 and 2004





NOTE 17  EARNINGS (LOSS) PER SHARE

The factors used in the earnings (loss) per share computation follow.

|                                                      |  |      |            |   |      |   |           |  
|----------------------------------------------------- |  | ---- | ---------- | - | ---- | - | --------- | -
|                                                      |  | 2005 |            |   | 2004 |  
|Basic earnings (loss) per share                       |  |      |            |   |      |   |           |  
|Net income (loss)                                     |  | $    | 2,918,800  |   |      | $ | (228,035  | )
|Less: dividends paid on preferred shares              |  |      | (14,361    | ) |      |   | (123,724  | )
|Net income (loss) attributable to common shareholders |  |      | 2,904,439  |   |      | $ | $(351,759 | )
|Weighted average common shares outstanding, basic     |  |      | 12,122,945 |   |      |   | 7,402,509 |  
|Basic earnings (loss) per common share                |  | $    | 0.24       |   |      | $ | (0.05     | )
|                                                      |  | 2005 |            |   | 2004 |  
|Diluted earnings (loss) per share                     |  |      |            |   |      |   |           |  
|Net income (loss)                                     |  | $    | 2,918,800  |   |      | $ | (228,035  | )
|Less: dividends paid on preferred shares              |  |      | (14,361    | ) |      |   | (123,724  | )
|Net income (loss) attributable to common shareholders |  |      | 2,904,439  |   |      | $ | $(351,759 | )
|Weighted average common shares outstanding, diluted   |  |      | 13,604,345 |   |      |   | 7,402,509 |  
|Diluted earnings (loss) per common share              |  | $    | 0.21       |   |      | $ | (0.05     | )

Stock warrants for 600,000 shares of common stock were not considered in computing diluted earnings per common share for 2005, and stock options and stock warrants for 1,218,290 and 7,249,050 shares of common stock were not considered in computing diluted earnings per common share for 2004, because they were antidilutive.

NOTE 18  OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss) components and related taxes were as follows.

|                                                                                 |  |      |          |   |      |         |         |  
|-------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | ------- | ------- | -
|                                                                                 |  | 2005 |          |   | 2004 |        
|Unrealized holding losses on available-for-sale securities                       |  | $    | (184,782 | ) | $    | (27,609 | )      
|Less: reclassification adjustments for gains
(losses) later recognized in income |  |      | 7,930    |   |      |         | (32,664 | )
|Net unrealized gains (losses)                                                    |  |      | (176,852 | ) |      |         | 5,055   |  
|Tax effect                                                                       |  |      | 67,400   |   |      |         | (1,890  | )
|Other comprehensive income (loss) before minority interest                       |  |      | (109,452 | ) |      |         | 3,165   |  
|Minority interest in other comprehensive (income) loss of subsidiary             |  |      | 10       |   |      |         | (3      | )
|Other comprehensive income (loss)                                                |  | $    | (109,442 | ) |      | $       | 3,162   |  

NOTE 19  PURCHASE OF ASSETS AND ASSUMPTION OF SELECTED LIABILITIES OF GULF BANK IN 2004

In order to expand its banking presence in Miami Dade County, the Bank executed the Gulf Bank Asset Purchase Agreement that closed on February 17, 2004 for $3.7 million. This transaction caused the transfer of all of Gulf Banks loans, totaling $42 million, to the Bank along with certain contracts of Gulf Bank and the books and records of Gulf Bank relating to the transferred assets. In addition, the Bank received a cash payment of approximately $28 million and fixed assets valued at approximately $508,000. The Bank assumed all of the deposits totaling $67 million of Gulf Bank and Federal Home Loan Bank Advances totaling $3 million and entered into an assignment and sublease agreements for the lease of the three Gulf Bank branches in Miami-Dade County, Florida.



65



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SUN AMERICAN BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2005 and 2004





NOTE 19  PURCHASE OF ASSETS AND ASSUMPTION OF SELECTED LIABILITIES OF GULF BANK IN 2004 (Continued)

The Bank accounted for the transaction as a business combination under the purchase accounting method. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands of dollars).

|                                                |  |   |       
|----------------------------------------------- |  | - | ------
|Cash                                            |  | $ | 27,317
|Loans, net of allowance for loan losses of $458 |  |   | 41,750
|Fixed Assets                                    |  |   | 508   
|Goodwill                                        |  |   | 3,344 
|Core deposit intangible                         |  |   | 828   
|Total assets acquired                           |  |   | 73,747
|Deposits                                        |  |   | 67,013
|Federal Home Loan Bank borrowings               |  |   | 3,000 
|Total liabilities assumed                       |  |   | 70,013
|Net assets acquired                             |  | $ | 3,734 

The following table summarizes selected pro forma financial information but does not include amounts related to acquisition costs that were incurred to complete implementation of the acquisition.

The selected pro forma combined financial information, while helpful in illustrating the financial characteristics of the acquisition under one set of assumptions, does not reflect the impact of possible revenue enhancements, expense efficiencies and other factors that may result as a consequence of the acquisition and, accordingly, does not attempt to predict or suggest future results. It also does not necessarily reflect what the historical results of the combined business would have been had our companies been combined during the period presented.

SELECT PROFORMA COMBINED FINANCIAL INFORMATION

|                                            |  |                                                             |           |   |                                             |         |         |                                  |    |   |                                                              |           |  |  |         |  
|------------------------------------------- |  | ----------------------------------------------------------- | --------- | - | ------------------------------------------- | ------- | ------- | -------------------------------- | -- | - | ------------------------------------------------------------ | --------- |  |  | ------- | -
|                                            |  | Sun American Bancorp for the 
year ended  December 31, 2004 |           |   | Gulf for the period ended February 17, 2004 |         |         | Acquisition Proforma Adjustments |    |   | Proforma
Sun American 
for the year ended  December 31, 2004 |          
|Net interest income                         |  | $                                                           | 6,519,437 |   | $                                           | 284,537 |         | $                                | (8 | ) | $                                                            | 6,803,966 | 
|Net (loss) income                           |  |                                                             | (228,035  | ) |                                             |         | 158,183 | (1)                              |    |   | (8                                                           | )         |  |  | (69,860 | )
|Basic and diluted earnings (loss) per share |  |                                                             | (0.05     | ) |                                             |         |        |                                  |    |   |                                                             |           |  |  | (0.02   | )



(1)

Includes Gulf Bank net gains on sales of securities of $184,000

NOTE 20  QUARTERLY FINANCIAL DATA (UNAUDITED)

|               |  |                 |               |  |                     |   |           |                   |  |   |                            |   |  |   |       |   |  |   |       |  
|-------------- |  | --------------- | ------------- |  | ------------------- | - | --------- | ----------------- |  | - | -------------------------- | - |  | - | ----- | - |  | - | ----- | -
|               |  | Interest Income |               |  | Net Interest Income |   |           | Net Income (Loss) |  |   | Earnings (loss) 
Per Share |  
|Basic          |  |                 | Fully Diluted | 
|2005           |  |                 |               |  |                     |   |           |                   |  |   |                            |   |  |   |       |  
|First quarter  |  | $               | 3,206,801     |  |                     | $ | 2,303,281 |                   |  | $ | 601,958                    |   |  | $ | 0.07  |   |  | $ | 0.06  |  
|Second quarter |  |                 | 3,724,247     |  |                     |   | 2,607,836 |                   |  |   | 513,637                    |   |  |   | 0.05  |   |  |   | 0.05  |  
|Third quarter  |  |                 | 4,305,492     |  |                     |   | 2,956,108 |                   |  |   | 780,972                    |   |  |   | 0.06  |   |  |   | 0.05  |  
|Fourth quarter |  |                 | 4,827,200     |  |                     |   | 3,436,189 |                   |  |   | 1,022,233                  |   |  |   | 0.06  |   |  |   | 0.05  |  
|2004           |  |                 |               |  |                     |   |           |                   |  |   |                            |   |  |   |       |   |  |   |       |  
|First quarter  |  | $               | 1,565,332     |  |                     | $ | 1,082,459 |                   |  | $ | (566,583                   | ) |  | $ | (0.10 | ) |  | $ | (0.10 | )
|Second quarter |  |                 | 2,059,873     |  |                     |   | 1,483,586 |                   |  |   | (55,561)                   |   |  |   | (0.01 | ) |  |   | (0.01 | )
|Third quarter  |  |                 | 2,378,823     |  |                     |   | 1,817,218 |                   |  |   | 158,684                    |   |  |   | 0.00  |   |  |   | (0.00 | )
|Fourth quarter |  |                 | 2,844,562     |  |                     |   | 2,136,174 |                   |  |   | 235,425                    |   |  |   | 0.03  |   |  |   | 0.03  |  



66



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Item 8.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 8A.

Controls and Procedures

The Company, under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the principal executive officer and principal financial officer concluded that the Companys disclosure controls and procedures are effective in reaching a reasonable level of assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated, recorded, processed, summarized, and communicated to the Companys management , including its principal executive officer and principal financial officer, to allow timely decisions regarding the required disclosure, and reported within the time period specified in the Securities and Exchange Commissions rules and forms.

The Companys principal executive officer and principal financial officer note that, due to human performance error, not a process deficiency, during the quarter ended December 31, 2005, the Company did not timely file Current Reports on Form 8-K to disclose the following items: 1) The acceleration of vesting of options for the Companys directors approved on December 16, 2005. The Form 8-K disclosing such information was filed with the Securities and Exchange Commission on January 17, 2006; 2) The issuance of a bridge loan to the Companys Chief Financial Officer on October 3, 2005. The Form 8-K disclosing such information was filed with the Securities and Exchange Commission on November 21, 2005; and 3) The issuance of the Companys press release announcing the Companys unaudited financial information for the third quarter. The Form 8-K disclosing such information was filed with the Securities and Exchange Commission on March 14, 2006.

The principal executive officer and principal financial officer also conducted an evaluation of internal control over financial reporting (Internal Control) to determine whether any changes in Internal Control occurred during the quarter (the Companys fourth fiscal quarter in the case of an annual report) that have materially affected or which are reasonably likely to materially affect Internal Control. Based on that evaluation, there have been no such changes during the quarter covered by this report.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The Company conducts periodic evaluations to enhance, where necessary, its procedures and controls.

Item 8B.

Other Information

On December 16, 2005, the board of directors of Sun American Bancorp (the Company) approved the acceleration of the vesting of all currently unvested stock options awarded to directors of the Company under its Amended and Restated Directors Stock Option Plan and its Amended and Restated Incentive Stock Option. As a result of this action, options to purchase approximately 1,034,280 shares of common stock became exercisable effective December 16, 2005, representing approximately 50% of the Companys total current outstanding options. All other terms and conditions applicable to such options, including the exercise prices, remain unchanged. The information about this action was previously disclosed in the Companys Current Reports on Form 8-K filed with the Securities and Exchange Commission on January 17, 2006. For further details see the foregoing Form 8-K.

On October 27, 2005, the Company issued a press release, announcing the Companys unaudited financial information for the third quarter ended September 30, 2005. The Form 8-K disclosing such information was filed with the Securities and Exchange Commission on March 14, 2006.



67



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PART III

Item 9.

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

Information required to be included in this Item 9 is incorporated by reference to certain information from the Companys definitive proxy statement for the Companys 2006 Annual Meeting of Stockholders to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this report.

The Companys Board of Directors has adopted a Code of Ethics that applies to all of our employees, officers and directors. The Code covers compliance with law; fair and honest dealings with the Company, with competitors and with others; fair and honest disclosure to the public; and procedures for compliance with the Code.

Item 10.

Executive Compensation

Information required to be included in this Item 10 is incorporated by reference to certain information from the Companys definitive proxy statement for the Companys 2006 Annual Meeting of Stockholders to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this report.

Item 11.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters

Information required to be included in this Item 11 is incorporated by reference to certain information from the Companys definitive proxy statement for the Companys 2006 Annual Meeting of Stockholders to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this report.

Item 12.

Certain Relationships and Related Transactions

Information required to be included in this Item 12 is incorporated by reference to certain information from the Companys definitive proxy statement for the Companys 2006 Annual Meeting of Stockholders to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this report.

Item 13.

Exhibits

Exhibits

The following exhibits are filed as part of this report:

2.1

Agreement and Plan of Merger by and between Southern Security Financial Corporation and Southern Security Bank Corporation, dated October 31, 1997 (1)

2.2

Certificate of Merger of Southern Security Bank Corporation into Southern Security Financial Corporation, under Florida law, dated November 10, 1997 (1)

2.3

Articles of Merger of Southern Security Bank Corporation into Southern Security Financial Corporation, under Florida law, dated November 12, 1997 (1)

3.1

Amended and Restated Certificate of Incorporation (incorporated by reference to the Companys proxy statement filed with the SEC on November 17, 2005)

3.2

Amended and Restated By-Laws (incorporated by reference to the Companys Current Report on Form 8-K filed with the SEC on August 2, 2005)

4.1

Stock Certificate for Common Stock (2)

4.2

Form of Class A Warrant Certificate to Purchase Shares of Common Stock

4.3

Form of Class B Warrant Certificate to Purchase Shares of Common Stock

4.4

Form of Class C Warrant Certificate to Purchase Shares of Common Stock

4.5

Form of Class D Warrant Certificate to Purchase Shares of Common Stock

4.6

Form of Class E Warrant Certificate to Purchase Shares of Common Stock

4.7

Form of Series F Common Stock Purchase Warrant (incorporated herein by reference to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on December 14, 2005).

4.8

Form of Common Stock Purchase Warrant issued to Placement Agents. (incorporated herein by reference to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on December 14, 2005).



68



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4.9

Form of Series G Common Stock Purchase Warrant. (incorporated herein by reference to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on December 20, 2005).

10.1

Asset Purchase Agreement between PanAmerican Bank and Southern Security Bank Corp. and Southern security Bank, dated May 15, 2001. (5)

10.2

Executive Employment Agreement dated January 1, 2003 between Michael E. Golden and the Company* (4)

10.3

Executive Employment Agreement dated January 1, 2003 between Hugo Castro and the Company* (4)

10.4

Asset Purchase Agreement between PanAmerican Bank and Gulf Bank dated October 9, 2003. (3)

10.5

Company Promissory Note for a $2,000,000 revolving line of credit dated February 25, 2005 (4)

10.6

Bank $5,000,000 unsecured credit facility dated May 16, 2005 (4)

10.7

Amended and Restated Incentive Stock Option Plan (incorporated by reference to the Companys proxy statement filed with the SEC on May 18, 2005)*

10.8

Amended and Restated Directors Stock Option Plan (incorporated by reference to the Companys proxy statement filed with the SEC on May 18, 2005)*

10.9

Non-Qualified Stock Options granted to outside directors and Incentive Stock Options granted to executive officers on July 21, 2005 (incorporated by reference to the Companys Current Report on Form 8-K filed with the SEC on September 23, 2005).*

10.10

2005 Stock Option and Stock Incentive Plan (incorporated by reference to Appendix A to the Companys definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on November 17, 2005)*

10.11

Loan agreement with Robert Nichols, dated as of October 3, 2005 (incorporated herein by reference to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on January 6, 2006).*

10.12

Loan agreement with Michael E. Golden, dated as of November 15, 2005 (incorporated herein by reference to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on January 6, 2006).*

10.13

Form of Securities Purchase Agreement dated as of December 14, 2005, by and among the Company and the Investors (incorporated herein by reference to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on August 5, 2005, November 11, 2005, and December 14, 2005).

10.14

Form of Registration Rights Agreement dated as of December 14, 2005, by and among the Company and the Investors (incorporated herein by reference to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on August 5, 2005, November 11, 2005, and December 14, 2005).

10.15

Board resolution adopting Warrant Plan. (incorporated herein by reference to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on December 20, 2005).*

11.0

Statement Regarding Computation of Per Share Earnings (incorporated by reference to Note 17 to consolidated financial statements included in this Form 10-KSB).

14.1

Code of Ethics (4)

21.0

Subsidiaries of the Small Business Issuer  N/A

23.1

Consent of Independent Registered Public Accounting Firm

31.1

Rule 13a-14(a)/15d-14(a) Certification

31.2

Rule 13a-14(a)/15d-14(a) Certification

32.1

Section 1350 Certification

32.2

Section 1350 Certification



(1)

Filed as an exhibit to Form 8-K of the registrant on November 25, 1997.

(2)

Filed as an exhibit to Form 10-KSB of the registrant on April 3, 2002.

(3)

Filed as an exhibit to Form 8-K of the registrant on October 28, 2003.

(4)

Filed as an exhibit to Form 10-QSB of the registrant on August 15, 2005.

(5)

Filed as an exhibit to Form 10-QSB of the registrant on August 14, 2001.

*

Management compensation plan or arrangement.

Item 14.

Principal Accountant Fees and Services

Information required to be included in this Item 14 is incorporated by reference to certain information from the Companys definitive proxy statement for the Companys 2006 Annual Meeting of Stockholders to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this report.



69



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SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

| |     |                                                        | 
| | --- | ------------------------------------------------------ | 
| |     | SUN AMERICAN BANCORP                                   | 
| |     |                                                        | 
| | By: | s/MICHAELE. GOLDEN                                     | 
| |     | Name: Michael E. Golden
Title: Chief Executive Officer | 

March 29, 2006

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 the dates indicated:

|                                               |  |  |                            |  |                | 
|---------------------------------------------- |  |  | -------------------------- |  | -------------- | 
|Signature                                      |  |  | Title                      |  | Date           | 
|                                               |  |  |                            |  |                | 
|(i) Principal Executive Officer:               |  |  |                            |  |                | 
|                                               |  |  |                            |  |                | 
|/s/MICHAELE. GOLDEN                            |  |  | Chief Executive Officer    |  | March 29, 2006 | 
|Michael E. Golden                              |  |  |                            |  |                | 
|                                               |  |  |                            |  |                | 
|(ii) Principal Accounting & Financial Officer: |  |  |                            |  |                | 
|                                               |  |  |                            |  |                | 
|/s/ROBERTL. NICHOLS                            |  |  | Chief Financial Officer    |  | March 29, 2006 | 
|Robert L. Nichols                              |  |  |                            |  |                | 
|                                               |  |  |                            |  |                | 
|(iii) Directors:                               |  |  |                            |  |                | 
|                                               |  |  |                            |  |                | 
|/s/JAMESF. PARTRIDGE                           |  |  | Chairman of the Board      |  | March 29, 2006 | 
|James F. Partridge                             |  |  |                            |  |                | 
|                                               |  |  |                            |  |                | 
|/s/MICHAELE. GOLDEN                            |  |  | President, CEO, Director   |  | March 29, 2006 | 
|Michael E. Golden                              |  |  |                            |  |                | 
|                                               |  |  |                            |  |                | 
|/s/HUGOA. CASTRO                               |  |  | Director and Secretary     |  | March 29, 2006 | 
|Hugo A. Castro                                 |  |  |                            |  |                | 
|                                               |  |  |                            |  |                | 
|/s/NELSONFAMADAS                               |  |  | Director and Vice Chairman |  | March 29, 2006 | 
|Nelson Famadas                                 |  |  | of the Board               |  |                | 
|                                               |  |  |                            |  |                | 
|/s/LEONARDF. MARINELLO                         |  |  | Director                   |  | March 29, 2006 | 
|Leonard F. Marinello                           |  |  |                            |  |                | 
|                                               |  |  |                            |  |                | 
|/s/STEPHENL. PERRONE                           |  |  | Director                   |  | March 29, 2006 | 
|Stephen L. Perrone                             |  |  |                            |  |                | 
|                                               |  |  |                            |  |                | 
|/s/ALBERTOVALLE                                |  |  | Director                   |  | March 29, 2006 | 
|Alberto Valle                                  |  |  |                            |  |                | 
|                                               |  |  |                            |  |                | 
|/s/ MICHAEL FROSINUS                           |  |  | Director                   |  | March 29, 2006 | 
|Michael F Rosinus                              |  |  |                            |  |                | 



70



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EXHIBIT INDEX





|            |  |                                                                       
|----------- |  | ----------------------------------------------------------------------
|Exhibit
No. |  | Description                                                           
|4.2         |  | Form of Class A Warrant Certificate to Purchase Shares of Common Stock
|4.3         |  | Form of Class B Warrant Certificate to Purchase Shares of Common Stock
|4.4         |  | Form of Class C Warrant Certificate to Purchase Shares of Common Stock
|4.5         |  | Form of Class D Warrant Certificate to Purchase Shares of Common Stock
|4.6         |  | Form of Class E Warrant Certificate to Purchase Shares of Common Stock
|23.1        |  | Consent of Independent Registered Public Accounting Firm              
|31.1        |  | Rule 13a-14(a)/15d-14(a) Certification                                
|31.2        |  | Rule 13a-14(a)/15d-14(a) Certification                                
|32.1        |  | Section 1350 Certification                                            
|32.2        |  | Section 1350 Certification